<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
ELOYALTY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C>
DELAWARE 36-4304577
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
205 NORTH MICHIGAN AVENUE
SUITE 1500
CHICAGO, ILLINOIS 60601
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code:
(312) 228-4500
Securities to be registered pursuant to Section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN
REGISTRATION STATEMENT ON FORM 10 BY REFERENCE
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
ITEM NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
- -------- ------------ ---------------------------------
<C> <S> <C>
1. Business "Summary;" "Summary -- Questions and Answers about
eLoyalty and the Spin-Off;" "eLoyalty's Business;"
"Management's Discussion and Analysis of Financial
Condition and Results of Operations"
2. Financial Information "Summary -- Summary Financial Data;" "Management's
Discussion and Analysis of Financial Condition and
Results of Operations;" "eLoyalty Selected Financial
Data"
3. Properties "eLoyalty's Business -- Intellectual Property
Rights;" "eLoyalty's Business -- Facilities"
4. Security Ownership of "eLoyalty's Management -- Stock Ownership of
Certain Beneficial Owners Directors and Executive Officers;" "Ownership of
and Management eLoyalty Common Stock by Certain Beneficial Owners"
5. Directors and Executive "eLoyalty's Management -- Directors, Executive
Officers Officers and Key Employees"
6. Executive Compensation "eLoyalty's Management"
7. Certain Relationships and "eLoyalty's Relationship with Technology Solutions
Related Transactions Company After the Spin-Off;" "Certain Transactions"
8. Legal Proceedings "eLoyalty's Business -- Legal Proceedings"
9. Market Price of and "Summary -- Questions and Answers about eLoyalty and
Dividends on the the Spin-Off;" "Description of eLoyalty Capital
Registrant's Common Equity Stock" "eLoyalty Business -- Dividend Policy"
and Related Stockholder
Matters
10. Recent Sales of "Certain Transactions"
Unregistered Securities
11. Description of Registrant's "Description of eLoyalty Capital Stock"
Securities to be Registered
12. Indemnification of "Description of eLoyalty Capital Stock -- Limitation
Directors and Officers of Liability and Indemnification Matters"
13. Financial Statements and "Summary -- Summary Financial Data;" "Management's
Supplementary Data Discussion and Analysis of Financial Condition and
Results of Operations;" "Index to eLoyalty Financial
Statements and Schedule;" "eLoyalty Financial
Statements"
14. Changes in and Not Applicable
Disagreements With
Accountants on Accounting
and Financial Disclosure
15. Financial Statements and "Index to Financial Statements and Schedule;"
Exhibits "eLoyalty Financial Statements."
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
2.1* Form of Reorganization Agreement between TSC and eLoyalty
3.1 Form of Certificate of Incorporation of eLoyalty
3.2 Bylaws of eLoyalty
4.1* Form of Rights Agreement between eLoyalty and ChaseMellon
Shareholder Services, L.L.C. as Rights Agent
10.1* Form of 1999 Stock Incentive Plan
10.2 Form of 1999 Employee Stock Purchase Plan
10.3 Common Stock Purchase and Sale Agreement dated August 13,
1999 among TSC, eLoyalty, Sutter Hill Ventures, TCV III
(GP), TCV III, L.P., TCV III (Q), L.P. and TCV III Strategic
Partners, L.P.
10.4 Registration Rights Agreement dated August 13, 1999 among
TSC, Sutter Hill Ventures, TCV III (GP), TCV III, L.P., TCV
III (Q), L.P. and TCV III Strategic Partners, L.P.
10.5* Form of Shared Services Agreement between TSC and eLoyalty
10.6* Form of Tax Sharing and Disaffiliation Agreement between TSC
and eLoyalty
10.7* TSC Intellectual Property License Agreement
10.8* eLoyalty Intellectual Property License Agreement
10.9* Employment Agreement of Kelly D. Conway
10.10* Employment Agreement of Timothy J. Cunningham
10.11* Employment Agreement of Craig Lashmet
21* Subsidiaries of eLoyalty
27 Financial Data Schedule
99.1 Information Statement dated as of November 5, 1999
99.2* Form of fairness opinion of Credit Suisse First Boston
99.3* Form of viability opinion of Credit Suisse First Boston
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 4
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
eLOYALTY CORPORATION
By: /s/ KELLY D. CONWAY
----------------------------------
Kelly D. Conway
President and
Chief Executive Officer
Date: November 5, 1999
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
TSC/ECM INC.
ARTICLE I
The name of the corporation (which is hereinafter referred to as the
"Corporation") is:
TSC/ECM INC.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is The Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of the Corporation's registered agent
at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware.
ARTICLE IV
(A) Authorized Capital Stock. The total number of shares of capital
stock which the Corporation shall have authority to issue is 5,500, consisting
of 5,000 shares of common stock, with the par value of $.01 per share ("Common
Stock"), and 500 shares of preferred stock, with the par value of $.01 per share
("Preferred Stock").
(B) Preferred Stock. The Preferred Stock may be issued from time to
time in one or more series. The Board of Directors is hereby authorized to
create and provide for the issuance of shares of Preferred Stock in series and,
by filing a certificate pursuant to the applicable law of the State of Delaware
(hereinafter referred to as a "Preferred Stock Designation"), to establish from
time to time the number of shares to be included in each such series, and to fix
the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
(i) The designation of the series, which may be by
distinguishing number, letter or title;
(ii) The number of shares of the series, which number the
Board of Directors may thereafter (except where otherwise provided in
the Preferred Stock
<PAGE> 2
Designation) increase or decrease (but not below the number of shares
thereof then outstanding);
(iii) Whether dividends, if any, shall be cumulative or
noncumulative and the dividend rate of the series;
(iv) The dates at which dividends, if any, shall be payable;
(v) The redemption rights and price or prices, if any, for
shares of the series;
(vi) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series;
(vii) The amounts payable on, and the preferences, if any, of
shares of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
Corporation;
(viii) Whether the shares of the series shall be convertible
into shares of any other class or series, or any other security, of the
Corporation or any other corporation, and, if so, the specification of
such other class or series of such other security, the conversion price
or prices or rate or rates, any adjustments thereof, the date or dates
at which such shares shall be convertible and all other terms and
conditions upon which such conversion may be made;
(ix) Restrictions on the issuance of shares of the same series
or of any other class or series;
(x) The voting rights, if any, of the holders of shares of the
series; and
(xi) Such other powers, preferences and relative,
participating, optional and other special rights, and the
qualifications, limitations and restrictions thereof as the Board of
Directors shall determine.
(C) Common Stock. The Common Stock shall be subject to the express
terms of the Preferred Stock and any series thereof. Each share of Common Stock
shall be equal to each other share of Common Stock. The holders of shares of
Common Stock shall be entitled to one vote for each such share upon all
questions presented to the stockholders.
(D) Vote. Except as may be provided in this Certificate of
Incorporation or in a Preferred Stock Designation, or as may be required by
applicable law, the Common Stock shall have the exclusive right to vote for the
election of directors and for all other purposes, and holders of shares of
Preferred Stock shall not be entitled to receive notice of any meeting of
stockholders at which they are not entitled to vote.
-2-
<PAGE> 3
(E) Record Holders. The Corporation shall be entitled to treat the
person in whose name any share of its stock is registered on the stock transfer
books of the Corporation as the owner thereof for all purposes and shall not be
bound to recognize any equitable or other claim to, or interest in, such share
on the part of any other person, whether or not the Corporation shall have
notice thereof, except as expressly provided by applicable law.
ARTICLE V
The name and mailing address of the incorporator is as follows:
Name Mailing Address
---- ---------------
Jessie Couch Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
ARTICLE VI
The Board of Directors is hereby authorized to create and issue,
whether or not in connection with the issuance and sale of any of its stock or
other securities or property, rights entitling the holders thereof to purchase
from the Corporation shares of stock or other securities of the Corporation or
any other corporation. The times at which and the terms upon which such rights
are to be issued will be determined by the Board of Directors and set forth in
the contracts or instruments that evidence such rights. The authority of the
Board of Directors with respect to such rights shall include, but not be limited
to, determination of the following:
(A) The initial purchase price per share or other unit of the stock or
other securities or property to be purchased upon exercise of such rights;
(B) Provisions relating to the times at which and the circumstances
under which such rights may be exercised or sold or otherwise transferred,
either together with or separately from, any other stock or other securities of
the Corporation;
(C) Provisions which adjust the number or exercise price of such rights
or amount or nature of the stock or other securities or property receivable upon
exercise of such rights in the event of a combination, split or recapitalization
of any stock of the Corporation, a change in ownership of the Corporation's
stock or other securities or a reorganization, merger, consolidation, sale of
assets or other occurrence relating to the Corporation or any stock of the
Corporation, and provisions restricting the ability of the Corporation to enter
into any such transaction absent an assumption by the other party or parties
thereto of the obligations of the Corporation under such rights;
(D) Provisions which deny the holder of a specified percentage of the
outstanding stock or other securities of the Corporation the right to exercise
such rights and/or cause the rights held by such holder to become void;
-3-
<PAGE> 4
(E) Provisions which permit the Corporation to redeem or exchange such
rights; and
(F) The appointment of a rights agent with respect to such rights.
ARTICLE VII
(A) In furtherance and not in limitation of the powers conferred by
law, the Board of Directors is expressly authorized and empowered:
(i) to adopt, amend or repeal the By-Laws of the Corporation,
provided, however, that the By-Laws may also be altered, amended or
repealed by the affirmative vote of the holders of at least 80 percent
of the voting power of the then outstanding Voting Stock (as defined
below), voting together as a single class; and
(ii) from time to time to determine whether and to what
extent, and at what times and places, and under what conditions and
regulations, the accounts and books of the Corporation, or any of them,
shall be open to inspection of stockholders; and, except as so
determined, or as expressly provided in this Certificate of
Incorporation or in any Preferred Stock Designation, no stockholder
shall have any right to inspect any account, book or document of the
Corporation other than such rights as may be conferred by applicable
law.
(B) In addition to any other considerations which the Board of
Directors may lawfully take into account, in determining whether to take or to
refrain from taking corporate action on any matter, including proposing any
matter to the stockholders of the Corporation, the Board of Directors may take
into account the long-term as well as short-term interests of the Corporation
and its stockholders (including the possibility that these interests may be best
served by the continued independence of the Corporation), and the interests of
creditors, customers, employees and other constituencies of the Corporation and
its subsidiaries, including the effect upon communities in which the Corporation
and its subsidiaries do business.
(C) The Corporation may in its By-Laws confer powers upon the Board of
Directors in addition to the foregoing and in addition to the powers and
authorities expressly conferred upon the Board of Directors by law.
ARTICLE VIII
Effective from and after the date upon which the Corporation shall be
subject to the reporting requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, subject to the rights of the holders of any
series of Preferred Stock to elect additional directors under specific
circumstances or to consent to specific actions taken by the Corporation, any
action required or permitted to be taken by the stockholders of the Corporation
must be effected at a duly called annual or special meeting of stockholders of
the Corporation and may not be effected by any consent in writing in lieu of a
meeting of such stockholders.
-4-
<PAGE> 5
ARTICLE IX
(A) Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specific circumstances, the number of
directors that shall constitute the whole Board of Directors of the Corporation
shall be the number from time to time fixed by the Board of Directors.
(B) Subject to the rights of the holders of any series of Preferred
Stock to fill any newly created directorships or vacancies, any vacancy on the
Board of Directors that results from an increase in the number of directors or
for any other reason may be filled by a majority of the directors then in
office, although less than a quorum, or by a sole remaining director.
(C) Unless and except to the extent that the By-Laws of the Corporation
shall so require, the election of directors of the Corporation need not be by
written ballot.
(D) The directors, other than those who may be elected by the holders
of any series of Preferred Stock, shall be divided into three classes, as nearly
equal in number as possible, and designated as Class I, Class II and Class III.
Class I directors shall be initially elected for a term expiring at the 2000
annual meeting of stockholders, Class II directors shall be initially elected
for a term expiring at the 2001 annual meeting of stockholders, and Class III
directors shall be initially elected for a term expiring at the 2002 annual
meeting of stockholders. Members of each class shall hold office until their
successors are duly elected and qualified. At each succeeding annual meeting of
the stockholders of the Corporation, the successors of the class of directors
whose term expires at that meeting shall be elected by a plurality of the votes
of the shares of Voting Stock present in person or represented by proxy at such
meeting and entitled to vote on the election of directors and shall hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election, and until their successors are duly
elected and qualified, subject to death, resignation or removal from office.
(E) Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of Preferred Stock issued by the Corporation shall have
the right, voting separately by class or series, to elect directors at an annual
or special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation applicable thereto, and such
directors shall not be divided into classes pursuant to this Article IX unless
expressly provided by such terms.
(F) Subject to the rights of the holders of any series of Preferred
Stock, any director may be removed from office at any time, but only for cause
and only by the affirmative vote of the holders of at least 80 percent of the
voting power of the then outstanding Voting Stock, voting together as a single
class.
ARTICLE X
Notwithstanding anything contained in this Certificate of Incorporation
to the contrary, the affirmative vote of at least 80 percent of the voting power
of the then outstanding Voting
-5-
<PAGE> 6
Stock, voting together as a single class, shall be required to amend or repeal,
or adopt any provisions inconsistent with, Article VI, subparagraph (i) of
paragraph (A) of Article VII, Article VIII, Article IX or this Article X of this
Certificate of Incorporation. For the purposes of this Certificate of
Incorporation, "Voting Stock" shall mean the outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of directors.
ARTICLE XI
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which the director derived
an improper personal benefit. Any amendment or repeal of this Article XI by the
stockholders shall not adversely affect any right or protection of a director of
the Corporation existing hereunder in respect of any act or omission occurring
prior to such amendment or repeal.
ARTICLE XII
Each person who is or was or had agreed to become a director or officer
of the Corporation, or each person who is or was serving or who had agreed to
serve at the request of the Board of Directors or an officer of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise (including the heirs, executors,
administrators of estate of such person), shall be indemnified by the
Corporation in accordance with and pursuant to the By-Laws of the Corporation.
The Corporation may provide indemnification to employees and agents of the
Corporation to the extent provided by action of the Board of Directors pursuant
to the By-Laws. Without limiting the generality or the effect of the foregoing,
the Corporation may enter into one or more agreements with any person which
provide for indemnification greater or different than that provided in this
Article XII. Any amendment or repeal of this Article XII shall not adversely
affect any right or protection existing hereunder in respect of any act or
omission occurring prior to such amendment or repeal.
ARTICLE XIII
In furtherance and not in limitation of the powers conferred by law or
in this Certificate of Incorporation, the Board of Directors (and any committee
of the Board of Directors) is expressly authorized, to the extent permitted by
law, to take such action or actions as the Board of Directors or such committee
may determine to be reasonably necessary or desirable to (A) encourage any
individual, limited partnership, general partnership, corporation or other firm
or entity (a "person") to enter into negotiations with the Board of Directors
and management of the Corporation with respect to any transaction which may
result in a change in control of the Corporation which is proposed or initiated
by such person or (B) contest or oppose any such transaction which the Board of
Directors or such committee determines to be unfair, abusive or otherwise
undesirable with respect to the Corporation and its business, assets or
properties or the
-6-
<PAGE> 7
stockholders of the Corporation, including, without limitation, the adoption of
such plans or the issuance of such rights, options, capital stock, notes,
debentures or other evidences of indebtedness or other securities of the
Corporation, which rights, options, capital stock, notes, debentures or other
evidences of indebtedness and other securities (i) may be exchangeable for or
convertible into cash or other securities on such terms and conditions as may be
determined by the Board of Directors or such committee and (ii) may provide for
the treatment of any holder or class of holders thereof designated by the Board
of Directors or any such committee in respect of the terms, conditions,
provisions and rights of such securities which is different from, and unequal
to, the terms, conditions, provisions and rights applicable to all other holders
thereof.
ARTICLE XIV
The Corporation reserves the right at any time and from time to time to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, or any Preferred Stock Designation, and any other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted, in the manner now or hereafter prescribed herein or by law;
and all rights, preferences and privileges of whatsoever nature conferred upon
stockholders, directors or any other persons whomsoever by and pursuant to this
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the right reserved in this Article XIV; provided, however,
that any amendment or repeal of Article XI or Article XII of this Certificate of
Incorporation shall not adversely affect any right or protection existing
hereunder in respect of any act or omission occurring prior to such amendment or
repeal; and provided further that no Preferred Stock Designation shall be
amended after the issuance of any shares of the series of Preferred Stock
created thereby, except in accordance with the terms of such Preferred Stock
Designation and the requirements of applicable law.
ARTICLE XV
In accordance with Section 203(b)(1) of the General Corporation Law of
the State of Delaware, the Corporation expressly elects not to be governed by
Section 203 of the General Corporation Law of the State of Delaware.
THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, does make this certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 10th day of May, 1999.
/s/ Jessie J. Couch
---------------------------------
Jessie J. Couch, Incorporator
-7-
<PAGE> 8
TSC/ECM INC.
(A DELAWARE CORPORATION)
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
TSC/ECM INC.
TSC/ECM INC., a Delaware corporation (the "Corporation"),
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, DOES HEREBY CERTIFY:
1. That Article I of the Certificate of Incorporation of the
Corporation is hereby amended to read in its entirety as follows:
"The name of the corporation (which is hereinafter referred
to as the "Corporation") is:
eLoyalty Corporation."
2. That Article IV paragraph (A) of the Certificate of
Incorporation of the Corporation is hereby amended to read in its
entirety as follows:
"The total number of shares of capital stock which
the Corporation shall have authority to issue is
110,000,000, consisting of 100,000,000 shares of
common stock, with the par value of $.01 per share
("Common Stock"), and 10,000,000 shares of preferred
stock, with the par value of $.01 per share
("Preferred Stock")."
3. That, in accordance with the applicable provisions of
Sections 141(f), 228(a) and 242 of the General Corporation Law of the
State of Delaware, the aforesaid Amendments were duly adopted by the
unanimous written consent of the Board of Directors and the sole
stockholder of the Corporation.
<PAGE> 9
IN WITNESS WHEREOF, TSC/ECM INC. has caused this Certificate
of Amendment to be executed on its behalf by its Secretary Paul R. Peterson and
to be attested by its Treasurer Timothy P. Dimond, this 7th day of July, 1999.
TSC/ECM INC.
By: /s/ Paul R. Peterson
----------------------
Paul R. Peterson
Secretary
ATTEST: /s/ Timothy P. Dimond
----------------------------
Timothy P. Dimond
Treasurer
-2-
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
ELOYALTY CORPORATION
i
<PAGE> 2
BY-LAWS
OF
ELOYALTY CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I - OFFICES AND RECORDS.................................................................................-1-
Section 1.1. Delaware Office......................................................................-1-
Section 1.2. Other Offices........................................................................-1-
Section 1.3. Books and Records....................................................................-1-
ARTICLE II - STOCKHOLDERS.......................................................................................-1-
Section 2.1. Annual Meeting.......................................................................-1-
Section 2.2. Special Meeting......................................................................-2-
Section 2.3. Place of Meeting.....................................................................-2-
Section 2.4. Notice of Meeting....................................................................-2-
Section 2.5. Quorum and Adjournment...............................................................-2-
Section 2.6. Voting and Proxies...................................................................-3-
Section 2.7. Notice of Stockholder Business and Nominations.......................................-4-
Section 2.8. Stockholder Vote Required............................................................-6-
Section 2.9. Inspectors of Elections; Opening and Closing the Polls...............................-6-
Section 2.10. Fixing Date of Determination of Stockholders of Record...............................-7-
Section 2.11. List of Stockholders Entitled to Vote................................................-7-
ARTICLE III - BOARD OF DIRECTORS................................................................................-8-
Section 3.1. General Powers.......................................................................-8-
Section 3.2. Regular Meetings.....................................................................-8-
Section 3.3. Special Meetings.....................................................................-8-
Section 3.4. Notice...............................................................................-8-
Section 3.5. Quorum...............................................................................-9-
Section 3.6. Vacancies............................................................................-9-
Section 3.7. Executive and Other Committees.......................................................-9-
Section 3.8. Removal.............................................................................-10-
Section 3.9. Telephonic Meetings.................................................................-10-
Section 3.10. Informal Action by Directors........................................................-10-
Section 3.11. Reliance upon Records...............................................................-10-
Section 3.12. Interested Directors................................................................-11-
Section 3.13. Compensation........................................................................-11-
Section 3.14. Presumption of Assent...............................................................-11-
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE IV - OFFICERS..........................................................................................-12-
Section 4.1. Elected Officers....................................................................-12-
Section 4.2. Other Officers......................................................................-12-
Section 4.3. Resignation and Removal.............................................................-12-
Section 4.4. Vacancies...........................................................................-12-
Section 4.5. Chairman............................................................................-12-
Section 4.6. President...........................................................................-13-
Section 4.7. Vice Presidents and Assistant Vice Presidents.......................................-13-
Section 4.8. Secretary...........................................................................-13-
Section 4.9. Treasurer...........................................................................-13-
Section 4.10. Assistant Officers..................................................................-13-
Section 4.11. Compensation........................................................................-14-
ARTICLE V - CONTRACTS AND PROXIES..............................................................................-14-
Section 5.1. Contracts...........................................................................-14-
Section 5.2. Proxies.............................................................................-14-
ARTICLE VI - INDEMNIFICATION AND INSURANCE.....................................................................-15-
ARTICLE VII - STOCK CERTIFICATES AND TRANSFERS.................................................................-17-
ARTICLE VIII - MISCELLANEOUS PROVISIONS........................................................................-17-
Section 8.1. Fiscal Year.........................................................................-17-
Section 8.2. Dividends...........................................................................-17-
Section 8.3. Seal................................................................................-17-
ARTICLE IX - AMENDMENTS........................................................................................-18-
</TABLE>
iii
<PAGE> 4
BY-LAWS
OF
ELOYALTY CORPORATION
(June 22, 1999)
Incorporated under the Laws of the State of Delaware
ARTICLE I
OFFICES AND RECORDS
SECTION 1.1. DELAWARE OFFICE
The principal office of eLoyalty Corporation (the "Corporation") in the
State of Delaware shall be located in the City of Wilmington, County of New
Castle, and the name and address of its registered agent is The Corporation
Trust Company, 1209 Orange Street, Wilmington, Delaware.
SECTION 1.2. OTHER OFFICES
The Corporation may have such other offices, either within or without
the State of Delaware, as the Board of Directors may from time to time designate
or as the business of the Corporation may from time to time require.
SECTION 1.3. BOOKS AND RECORDS
The books and records of the Corporation may be kept outside the State
of Delaware at such place or places as may from time to time be designated by
the Board of Directors.
ARTICLE II
STOCKHOLDERS
SECTION 2.1. ANNUAL MEETING
The annual meeting of stockholders of the Corporation shall be held at
such place, either within or without the State of Delaware, and at such time and
date as the Board of Directors, by resolution, shall determine for the purpose
of electing directors and for the transaction of such other business as may be
properly brought before the meeting. If the Board fails to determine the time,
date and place of meeting, the annual meeting of stockholders shall be held at
the principal office of the Corporation on the first Thursday in May commencing
in 2000. If the date of the annual meeting shall fall upon a weekend or legal
holiday, the meeting shall be held on the next succeeding business day.
<PAGE> 5
SECTION 2.2. SPECIAL MEETING
Subject to the rights of the holders of any Preferred Stock (as defined
in the Certificate of Incorporation of the Corporation) to elect additional
directors under specific circumstances, special meetings of the stockholders may
be called only by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of directors which the Corporation would have if
there were no vacancies (the "Whole Board").
SECTION 2.3. PLACE OF MEETING
The Board of Directors may designate the place of meeting for any
meeting of the stockholders. If no designation is made by the Board, the place
of meeting shall be the principal office of the Corporation.
SECTION 2.4. NOTICE OF MEETING
Written or printed notice, stating the place, day and hour of a meeting
and the purpose or purposes for which the meeting is called, shall be prepared
and delivered by the Corporation not less than ten days nor more than sixty days
before the date of the meeting, either personally or by mail, to each
stockholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail with
postage thereon prepaid, addressed to the stockholder at such stockholder's
address as it appears on the stock transfer books of the Corporation. Only such
business shall be conducted at a special meeting of stockholders as shall have
been brought before the meeting pursuant to the Corporation's notice of meeting.
Any previously scheduled meeting of the stockholders may be postponed by
resolution of the Board of Directors upon public notice given prior to the time
previously scheduled for such meeting of stockholders.
SECTION 2.5. QUORUM AND ADJOURNMENT
Except as otherwise provided by law or by the Certificate of
Incorporation, the holders of a majority of the voting power of the outstanding
shares of the Corporation entitled to vote generally in the election of
directors (the "Voting Stock"), represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders, except that when specified
business is to be voted on by a class or series voting as a class, the holders
of a majority of the voting power of the shares of such class or series shall
constitute a quorum for the transaction of such business. The chairman of the
meeting or a majority of the shares of Voting Stock so represented may adjourn
the meeting from time to time, whether or not there is such a quorum (or, in the
case of specified business to be voted on by a class or series, the chairman or
a majority of the shares of such class or series so represented may adjourn the
meeting with respect to such specified business). Notice need not be given of
any such adjourned meeting if the date, time and place thereof are announced at
the meeting at which the adjournment is taken. At the adjourned meeting any
business may be transacted which might have been transacted at the original
meeting. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the adjourned meeting in accordance with Section 2.4 of these By-Laws.
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The stockholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 2.6. VOTING AND PROXIES
(A) Voting Rights of other Corporations. Voting Stock standing in the
name of another corporation and entitled to vote may be voted by such officer,
agent or proxy as the By-Laws or other internal regulations of such other
corporation may prescribe or, in the absence of such provision, as the Board of
Directors or comparable body of such other corporation may determine.
(B) Voting Rights of Fiduciaries. Voting Stock standing in the name of
a deceased person, a minor, an incompetent or a debtor in a case under Title 11,
United States Code, and entitled to vote may be voted by an administrator,
executor, guardian, conservator, debtor-in-possession or trustee, as the case
may be, either in person or by proxy, without transfer of such shares into the
name of the official or other person so voting.
(C) Voting Rights of Pledgors. A stockholder whose Voting Stock is
pledged shall be entitled to vote such stock unless on the transfer records of
the Corporation the pledgor has expressly empowered the pledgee to vote such
shares, in which case only the pledgee, or such pledgee's proxy, may represent
such shares and vote thereon.
(D) Voting Rights of Joint Owners. If Voting Stock is held of record in
the names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or if
two or more persons have the same fiduciary relationship respecting the same
shares, unless the Secretary is given written notice to the contrary and is
furnished with a copy of the instrument or order appointing them or creating the
relationship wherein it is so provided, their acts with respect to voting shall
have the following effect: (i) if only one votes, such act binds all; (ii) if
more than one votes, the act of the majority so voting binds all; and (iii) if
more than one votes, but the vote is evenly split on any particular matter, each
faction may vote such Voting Stock proportionally, or any person voting the
shares, or a beneficiary, if any, may apply to the Court of Chancery of the
State of Delaware or such other court as may have jurisdiction to appoint an
additional person to act with the persons so voting such Voting Stock, which
shall then be voted as determined by a majority of such persons and the person
appointed by the Court. If the instrument so filed shows that any such tenancy
is held in unequal interests, a majority or even split for the purpose of this
subsection shall be a majority or even split in interest.
(E) The Corporation's Rights Respecting the Voting Stock. Voting Stock
belonging to the Corporation, or to another corporation a majority of the shares
entitled to vote in the election of directors of such other corporation of which
are held by the Corporation, shall not be voted at any meeting of stockholders
and shall not be counted in the total number of outstanding shares for the
purpose of determining whether a quorum is present. Nothing in this Section 2.6
shall limit the right of the Corporation to vote shares of Voting Stock held by
it in a fiduciary capacity.
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(F) Proxies. At all meetings of stockholders, a stockholder may vote by
proxy executed in writing by the stockholder or as may be permitted by law, or
by such stockholder's duly authorized attorney-in-fact. Such proxy must be filed
with the Secretary of the Corporation or such stockholder's representative at or
before the time of the meeting. No such proxy shall be voted or acted upon after
three years from its date, unless the proxy provides for a longer period. A duly
executed proxy shall be irrevocable if it states that it is irrevocable and if,
and only as long as, it is coupled with an interest sufficient in law to support
an irrevocable power. A stockholder may revoke any proxy which is not
irrevocable by attending the meeting and voting in person or by filing with the
Secretary an instrument in writing revoking the proxy or another duly executed
proxy bearing a later date.
SECTION 2.7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS
(A) Annual Meetings of Stockholders. (1) Nominations of persons for
election to the Board of Directors of the Corporation and the proposal of
business to be considered by the stockholders may be made at an annual meeting
of stockholders (a) pursuant to the Corporation's notice of meeting delivered
pursuant to Section 2.4 of these By-Laws, (b) by or at the direction of the
Board of Directors or (c) by any stockholder of the Corporation who is entitled
to vote at the meeting, who complied with the notice procedures set forth in
clauses (2) and (3) of this paragraph (A) of this By-Law and who was a
stockholder of record at the time such notice was delivered to the Secretary of
the Corporation.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this By-Law, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal office of the Corporation not
earlier than the close of business on the 100th calendar day nor later than the
close of business on the 75th calendar day prior to the date of the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of an annual meeting is more than 30 calendar days
before or more than 75 calendar days after the date of the first anniversary of
the preceding year's annual meeting, notice by the stockholder to be timely must
be so delivered not earlier than the close of business on the 100th calendar day
prior to such annual meeting and not later than the close of business on the
later of (i) the 75th calendar day prior to such annual meeting and (ii) the
10th calendar day after the day on which public announcement of the date of such
annual meeting is first made by the Corporation. For the purpose of determining
whether a stockholder's notice shall have been delivered in a timely manner for
the 2000 annual meeting, the date of the first anniversary of the preceding
year's meeting shall be deemed to be May 6, 2000. Such stockholder's notice
shall set forth (a) as to each person whom the stockholder proposes to nominate
for election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the regulations promulgated thereunder, including such person's written consent
to being named in the proxy statement as a nominee and to serving as a director
if elected; (b) as to any other business that the stockholder proposes to bring
before the
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meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; and (c) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (i) the name and address of such stockholder, as
they appear on the Corporation's stock transfer books, and of such beneficial
owner and (ii) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2)
of this By-Law to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
Corporation at least 80 calendar days prior to the date of the first anniversary
of the preceding year's annual meeting, a stockholder's notice required by this
By-Law shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to the
Secretary at the principal office of the Corporation not later than the close of
business on the 10th calendar day after the day on which such public
announcement is first made by the Corporation. For the purpose of determining
whether a stockholder's notice shall have been delivered in a timely manner for
the 2000 meeting, the first anniversary of the preceding year's meeting shall be
deemed to be May 6, 2000.
(B) Special Meetings of Stockholders. Subject to the rights of the
holders of any Preferred Stock, only such business shall be conducted at a
special meeting of stockholders as shall have been brought before the meeting
pursuant to the Corporation's notice of meeting pursuant to Section 2.4 of these
By-Laws. Subject to the rights of the holders of any Preferred Stock,
nominations of persons for election to the Board of Directors may be made at a
special meeting of stockholders at which directors are to be elected pursuant to
the Corporation's notice of meeting (1) by or at the direction of the Board or
(2) by any stockholder of the Corporation who is entitled to vote at the
meeting, who complies with the notice procedures set forth in this By-Law and
who is a stockholder of record at the time such notice is delivered to the
Secretary of the Corporation. Nominations by stockholders of persons for
election to the Board may be made at such a special meeting of stockholders if
the stockholder's notice as required by paragraph (A)(2) of this By-Law shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the close of business on the 100th calendar day prior to such
special meeting and not later than the close of business on the later of (i) the
75th calendar day prior to such special meeting and (ii) the 10th calendar day
after the day on which public announcement is first made of the date of such
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
(C) General. (1) Subject to the rights of the holders of any Preferred
Stock, only persons who are nominated in accordance with the procedures set
forth in this By-Law shall be eligible to serve as directors and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
By-Law. Except as otherwise provided by law, the Certificate of Incorporation or
these By-Laws, the
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chairman of the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was made or
proposed in accordance with the procedures set forth in this By-Law and, if any
proposed nomination or business is not in compliance with this By-Law, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this By-Law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this By-Law. So long as a stockholder proponent otherwise complies with
the requirements of this By-Law, nothing in this By-Law shall be deemed to
affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
SECTION 2.8. STOCKHOLDER VOTE REQUIRED
Election of directors at all meetings of the stockholders at which
directors are to be elected shall be by written ballot. Subject to the rights of
the holders of any series of Preferred Stock to elect additional directors under
specific circumstances, directors shall be elected by a plurality of the votes
of the shares of Voting Stock present in person or represented by proxy at the
meeting and entitled to vote on the election of directors. Except as otherwise
provided by law, the Certificate of Incorporation or these By-Laws, in all
matters other than the election of directors, the affirmative vote of the
majority of the shares of Voting Stock present in person or represented by proxy
at the meeting and entitled to vote on the subject matter shall be the act of
the stockholders.
SECTION 2.9. INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS
(A) Inspectors of Election. The Board of Directors by resolution shall
appoint one or more inspectors, which inspector or inspectors may include
individuals who serve the Corporation in other capacities, including, without
limitation, as officers, employees, agents or representatives of the
Corporation, to act at a meeting of stockholders and make a written report
thereof. One or more persons may be designated as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate has been
appointed to act, or if all inspectors or alternates who have been appointed are
unable to act at a meeting of stockholders, the chairman of the meeting shall
appoint one or more inspectors to act at the meeting. Each inspector, before
discharging his or her duties, shall take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and according to the best of
his or her ability.
(B) Duties. The inspectors shall (i) ascertain the number of shares of
Voting Stock outstanding and the voting power of each, (ii) determine the number
of shares of Voting Stock
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present in person or by proxy at such meeting and the validity of proxies and
ballots, (iii) count all votes and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors and (v) certify their determination of the
number of such shares present in person or by proxy at such meeting and their
count of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist them in the performance of their duties.
(C) Opening and Closing the Polls. The chairman or secretary of the
meeting shall announce at the meeting the date and time of the opening and the
closing of the polls for each matter upon which the stockholders will vote at a
meeting. No ballots, proxies or votes, nor any revocations thereof or changes
thereto, shall be accepted by the inspectors after the closing of the polls
unless the Court of Chancery of the State of Delaware upon application by any
stockholder shall determine otherwise.
SECTION 2.10. FIXING DATE OF DETERMINATION OF STOCKHOLDERS OF RECORD
(A) Fixing the Record Date. In order that the Corporation may determine
the stockholders entitled (i) to notice of or to vote at any meeting of
stockholders or any adjournment thereof, (ii) to receive payment of any dividend
or other distribution or allotment of any rights, (iii) to exercise any rights
in respect of any change, conversion or exchange of stock or (iv) to take,
receive or participate in any other action, the Board of Directors may fix a
record date, which shall not be earlier than the date upon which the resolution
fixing the record date is adopted by the Board and which (1) in the case of a
determination of stockholders entitled to notice of or to vote at any meeting of
stockholders or adjournment thereof, shall, unless otherwise required by law, be
not more than 60 nor less than ten days before the date of such meeting; and (2)
in the case of any other action, shall be not more than 60 days before such
action.
(B) If Record Date is Not Fixed. If no record date is fixed, (i) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, and (ii) the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
(C) Adjourned Meetings. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting, but the Board of Directors may fix a new record date
for the adjourned meeting.
SECTION 2.11. LIST OF STOCKHOLDERS ENTITLED TO VOTE
The Secretary shall prepare, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in
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the notice of meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof and may be inspected by any
stockholder who is present. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list of
stockholders or the books of the corporation, or to vote in person or by proxy
at any meeting of stockholders.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1. GENERAL POWERS
The business and affairs of the Corporation shall be managed by or
under the direction of its Board of Directors. In addition to the powers and
authorities expressly conferred upon them by these By-Laws, the Board may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by law or by the Certificate of Incorporation or by these
By-Laws required to be exercised or done by the stockholders.
SECTION 3.2. REGULAR MEETINGS
A regular meeting of the Board of Directors may be held without other
notice than this By-Law immediately after, and at the same place as, each annual
meeting of stockholders. The Board may, by resolution, provide the time and
place for the holding of additional regular meetings without other notice than
such resolution.
SECTION 3.3. SPECIAL MEETINGS
Special meetings of the Board of Directors may be called by the
Chairman, the Secretary or two or more directors. The person or persons
authorized to call special meetings of the Board of Directors may fix the place
and time of the meetings.
SECTION 3.4. NOTICE
Notice of each special meeting of the Board shall be given by the
Secretary. Notice of each such meeting shall state the date, time and place of
the meeting, and shall be delivered to each director either personally or by
telephone, telegraph, cable, or similar means, at least twenty-four hours before
the time at which such meeting is to be held or mailed by first-class mail,
postage prepaid, addressed to the director at his residence or usual place of
business, at least five days before the day on which such meeting is to be held.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board need be specified in the notice of such meeting,
except for amendments to these By-Laws as provided under Article IX hereof. A
meeting may be held at any time without notice if all of the directors are
present or if those not present waive notice of the meeting in writing, either
before or after such meeting.
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SECTION 3.5. QUORUM
A whole number of directors equal to at a majority of the Whole Board
shall constitute a quorum for the transaction of business, but if at any meeting
of the Board there shall be less than a quorum present, a majority of the
directors present may adjourn the meeting from time to time without further
notice. The act of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors. The directors
present at a duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough directors to leave less
than a quorum.
SECTION 3.6. VACANCIES
Subject to the rights of the holders of any series of Preferred Stock
to elect additional directors under specific circumstances, and unless the Board
of Directors otherwise determines, vacancies resulting from death, resignation,
retirement, disqualification, removal from office or other cause, and newly
created directorships resulting from any increase in the authorized number of
directors, may be filled only by the affirmative vote of a majority of the
remaining directors, though less than a quorum of the Board, and each director
so chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of office of the class to which he or she has
been elected expires and until his or her successor has been duly elected and
qualified or until his or her earlier death, resignation or removal from office.
No decrease in the number of authorized directors constituting the Whole Board
shall shorten the term of any incumbent director.
SECTION 3.7. EXECUTIVE AND OTHER COMMITTEES
The Board of Directors may, by resolution adopted by a majority of the
Whole Board, designate an Executive Committee to exercise, subject to applicable
provisions of law, all of the powers of the Board in the management of the
business and affairs of the Corporation when the Board is not in session,
including without limitation the power to declare dividends, to authorize the
issuance of the Corporation's capital stock and to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law of
the State of Delaware, and may, by resolution similarly adopted, designate one
or more other committees. The Executive Committee and each such other committee
shall consist of two or more directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee may to the extent permitted by law exercise such powers and shall
have such responsibilities as shall be specified in the designating resolution.
In the absence or disqualification of any member of such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not constituting a quorum, may unanimously
appoint another member of the Board to act at the meeting in the place of any
such absent or disqualified member. Each committee shall keep written minutes of
its proceedings and shall report such proceedings to the Board when required.
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A majority of any committee may determine its action and fix the time
and place of its meetings, unless the Board shall otherwise provide. Notice of
such meetings shall be given to each member of the committee in the manner
provided for in Section 3.4 of these By-Laws. The Board shall have power at any
time to fill vacancies in, to change the membership of or to dissolve any such
committee. Nothing herein shall be deemed to prevent the Board from appointing
one or more committees consisting in whole or in part of persons who are not
directors of the Corporation; provided, however, that no such committee shall
have or may exercise any authority of the Board of Directors.
SECTION 3.8. REMOVAL
Subject to the rights of the holders of any series of Preferred Stock
to elect additional directors under specific circumstances, any director, or the
entire Board of Directors, may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at least 80 percent of
the voting power of the then outstanding Voting Stock, voting together as a
single class.
SECTION 3.9. TELEPHONIC MEETINGS
Directors, or any committee of directors designated by the Board, may
participate in a meeting of the Board or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
pursuant to this Section 3.9 shall constitute presence in person at such
meeting.
SECTION 3.10. INFORMAL ACTION BY DIRECTORS
Unless otherwise provided in the Certificate of Incorporation or these
By-Laws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the Board or such committee, as the case may be, consent
thereto in writing (which may be in counterparts), and the written consent or
consents are filed with the minutes of proceedings of the Board or such
committee.
SECTION 3.11. RELIANCE UPON RECORDS
Every director, and every member of any committee of the Board of
Directors, shall, in the performance of his or her duties, be fully protected in
relying in good faith upon the records of the Corporation and upon such
information, opinions, reports or statements presented to the Corporation by any
of its officers or employees, or committees of the Board, or by any other person
as to matters the director or member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation, including, but not limited
to, such records, information, opinions, reports or statements as to the value
and amount of the assets, liabilities and/or net profits of the Corporation, or
any other facts pertinent to the existence and amount of surplus or other funds
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from which dividends might properly be declared and paid, or with which the
Corporation's capital stock might properly be purchased or redeemed.
SECTION 3.12. INTERESTED DIRECTORS
A director who is directly or indirectly a party to a contract or
transaction with the Corporation, or is a director or officer of or has a
financial interest in any other corporation, partnership, association or other
organization which is a party to a contract or transaction with the Corporation,
may be counted in determining whether a quorum is present at any meeting of the
Board or a committee thereof at which such contract or transaction is considered
or authorized, and such director may participate in such meeting and vote on
such authorization if the material facts as to such director's relationship or
interest and as to the contract or transaction are disclosed or are known to the
Board or the committee, and the Board or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors are less than a
quorum.
SECTION 3.13. COMPENSATION
The Board of Directors shall have the authority to fix the
compensation, including fees and reimbursement of expenses, of directors for
services to the Corporation in any capacity, provided that no such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
SECTION 3.14. PRESUMPTION OF ASSENT
Unless otherwise provided by the laws of the State of Delaware, a
director who is present at a meeting of the Board of Directors or a committee
thereof at which action is taken on any matter shall be presumed to have
assented to the action taken unless his or her dissent shall be entered in the
minutes of such meeting or unless he or she shall file his or her written
dissent to such action with the person acting as secretary of such meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the Secretary immediately after the adjournment of such meeting. Such right
to dissent shall not apply to a director who voted in favor of such action.
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ARTICLE IV
OFFICERS
SECTION 4.1. ELECTED OFFICERS
Unless otherwise determined by the Board of Directors, the officers of
the Corporation may consist of the Chairman, the President, one or more Vice
Presidents, the Secretary and the Treasurer. Any two or more offices may be held
by the same person. The Board may designate the Chairman or the President as the
Chief Executive Officer of the Corporation. Such officers shall be elected from
time to time by the Board to hold office until their respective successors shall
have been duly elected and qualified, or until death, resignation or removal, as
hereafter provided in these By-Laws.
SECTION 4.2. OTHER OFFICERS
The Board may from time to time elect, or the Chairman may appoint,
such other officers (including one or more Assistant Vice Presidents, Assistant
Secretaries and Assistant Treasurers) and such agents, as may be necessary or
desirable for the conduct of the business of the Corporation. Such other
officers and agents shall have such duties and shall hold their offices for such
terms as shall be provided in these By-Laws or as may be prescribed by the Board
or by the Chairman.
SECTION 4.3. RESIGNATION AND REMOVAL
Any officer or agent of the Corporation may resign at any time by
giving a written notice of resignation to the Board of Directors, the Chairman,
the President or the Secretary. Any such resignation shall take effect at the
time specified therein or, if the time when it shall become effective shall not
be specified therein, immediately upon its receipt. Unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective. Any officer or agent of the Corporation may be removed, either with
or without cause, at any time, by a vote of the majority of the Whole Board, or,
except in the case of an officer or agent elected by the Board, by the Chairman.
Such removal shall be without prejudice to the contractual rights, if any, of
the person so removed.
SECTION 4.4. VACANCIES
A vacancy in any office, whether arising from death, resignation,
removal or any other cause, may be filled for the unexpired portion of the term
of the office which shall be vacant in the manner prescribed in these By-Laws
for the regular election or appointment of such office.
SECTION 4.5. CHAIRMAN
The Chairman shall have the general control and management of the
business and affairs of the Corporation, under the direction of the Board of
Directors. He shall have power: (i) to select
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and appoint all necessary officers and employees of the Corporation except such
officers as under these By-Laws are to be elected by the Board; (ii) to remove
all appointed officers or employees whenever he shall deem it necessary, and to
make new appointments to fill the vacancies; and (iii) to suspend from office
for cause any elected officer, which shall be forthwith declared in writing to
the Board. The Chairman shall have such other authority and shall perform such
other duties as may be determined by the Board.
SECTION 4.6. PRESIDENT
The President shall have such authority and perform such duties
relative to the business and affairs of the Corporation as may be determined by
the Board of Directors or the Chairman. In the absence of the Chairman, the
President shall preside at meetings of the stockholders and of the directors. If
the Board shall not have elected a Chairman, the President shall have such
authority and shall perform such additional duties as in these By-Laws is
provided for the office of Chairman.
SECTION 4.7. VICE PRESIDENTS AND ASSISTANT VICE PRESIDENTS
Each Vice President and each Assistant Vice President shall have such
powers and perform all such duties as from time to time may be determined by the
Board of Directors, the Chairman, the President or the senior officer to whom
such officer reports.
SECTION 4.8. SECRETARY
The Secretary shall record the proceedings of all meetings of the Board
of Directors, the committees of the Board and the stockholders; shall see that
all notices are duly given in accordance with the provisions of these By-Laws
and as required by law; shall be custodian of the records and the seal of the
Corporation and, if necessary or appropriate, affix and attest the seal to all
documents to be executed on behalf of the Corporation under its seal; shall see
that the books, reports, statements, certificates and other documents and
records required by law to be kept and filed are properly kept and filed; and in
general, shall perform all the duties incident to the office of Secretary and
such other duties as from time to time may be determined by the Board, the
Chairman or the President.
SECTION 4.9. TREASURER
The Treasurer shall exercise general supervision over the receipt,
custody and disbursement of corporate funds. The Treasurer shall have such
further powers and duties as may be determined from time to time by the Board of
Directors, the Chairman or the President.
SECTION 4.10. ASSISTANT OFFICERS
Any Assistant Secretary or Assistant Treasurer elected or appointed as
heretofore provided shall perform the duties and exercise the powers of the
Secretary and Treasurer, respectively, in their absence or inability to act, and
shall perform such other duties and have such
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other powers as the Board of Directors, the Chairman, the President, the
Secretary or the Treasurer (as the case may be) may from time to time prescribe.
SECTION 4.11. COMPENSATION
The compensation of the officers of the Corporation for their services
as such officers shall be fixed from time to time by the Board of Directors;
provided, however, that the Board may by resolution delegate to the Chairman the
power to fix compensation of non-elected officers and agents appointed by the
Chairman. An officer of the Corporation shall not be prevented from receiving
compensation by reason of the fact that such officer is also a director of the
Corporation, but any such officer who shall also be a director shall not have
any vote in the determination of such officer's compensation.
ARTICLE V
CONTRACTS AND PROXIES
SECTION 5.1. CONTRACTS
Except as otherwise required by law, the Certificate of Incorporation
or these By-Laws, any contracts or other instruments may be executed and
delivered in the name and on behalf of the Corporation by such officer or
officers (including any assistant officer) of the Corporation as the Board of
Directors may from time to time direct. Such authority may be general or
confined to specific instances as the Board of Directors may determine. The
Chairman, the President or any Vice President may execute bonds, contracts,
deeds, leases and other instruments to be made or executed for or on behalf of
the Corporation. Subject to any restrictions imposed by the Board, the Chairman,
the President or any Vice President of the Corporation may delegate contractual
power to others under his jurisdiction, it being understood, however, that any
such delegation of power shall not relieve such officer of responsibility with
respect to the exercise of such delegated power.
SECTION 5.2. PROXIES
Unless otherwise provided by resolution adopted by the Board of
Directors, the Chairman, the President or any Vice President may from time to
time appoint an attorney or attorneys or agent or agents of the Corporation, in
the name and on behalf of the Corporation, to cast the votes which the
Corporation may be entitled to cast as the holder of stock or other securities
or interests in any other corporation or entity, any of whose stock or other
securities or interests may be held by the Corporation, at meetings of the
holders of the stock or other securities or interests, of such other corporation
or entity, or to consent in writing, in the name of the Corporation as such
holder, to any action by such other corporation or entity, and may instruct the
person or persons so appointed as to the manner of casting such votes or giving
such consent, and may execute or cause to be executed in the name and on behalf
of the Corporation and under its
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corporate seal or otherwise, all such written proxies or other instruments as he
may deem necessary or proper in the premises.
ARTICLE VI
INDEMNIFICATION AND INSURANCE
(A) Right to Indemnification. Each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit, or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she or a person
of whom he or she is the legal representative is or was a director or officer of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of any other corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the General Corporation Law of the State of Delaware as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including, without limitation, attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred by such person in connection therewith, and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that except as provided in paragraph (B) of
this Article VI with respect to proceedings seeking to enforce rights to
indemnification, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) initiated by such person
was authorized by the Board of Directors of the Corporation. The Corporation
may, by action of its Board of Directors, provide indemnification to employees
and agents of the Corporation with the same scope and effect as the
indemnification of directors and officers provided for in this paragraph (A).
(B) Recovery of Unpaid Indemnification. If a claim under paragraph (A)
of this By-Law is not paid in full by the Corporation within 30 days after a
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant also shall be
entitled to be paid the expense of prosecuting such claim. It shall be a defense
to any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the General Corporation Law of the State of Delaware for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of
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Directors, independent legal counsel or stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the General Corporation Law of the
State of Delaware, nor an actual determination by the Corporation (including the
Board of Directors, independent legal counsel or stockholders) that the claimant
has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the claimant has not met the applicable
standard of conduct.
(C) Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this By-Law shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or
disinterested directors or otherwise.
(D) Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the General Corporation Law of the State of Delaware.
(E) Contractual Right. The right to indemnification conferred in this
By-Law shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that if the General Corporation Law of
the State of Delaware requires, the payment of such expenses incurred by a
director or officer in his or her capacity as a director or officer (and not in
any other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan), in advance of the final disposition of a proceeding, shall be
made only upon delivery to the Corporation of an undertaking by or on behalf of
such director or officer to repay all amounts so advanced if it shall ultimately
be determined that such director or officer is not entitled to be indemnified
under this By-Law or otherwise.
(F) Amendment or Repeal. Any amendment or repeal of this Article VI
shall not adversely affect any right or protection existing hereunder in respect
of any act or omission occurring prior to such amendment or repeal.
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ARTICLE VII
STOCK CERTIFICATES AND TRANSFERS
(A) Certificated Shares and Transfers. The interest of each stockholder
of the Corporation shall be evidenced by certificates for shares of stock in
such form as the appropriate officers of the Corporation may from time to time
prescribe, unless it shall be determined by, or pursuant to, a resolution
adopted by the Board of Directors that the shares representing such interest be
uncertificated. The shares of the stock of the Corporation shall be transferred
on the books of the Corporation by the holder thereof in person or by such
person's attorney, upon surrender for cancellation of certificates for the same
number of shares, with an assignment and power of transfer endorsed thereon or
attached thereto, duly executed, with such proof of the authenticity of the
signature as the Corporation or its agents may reasonably require.
(B) Accepted Signatures. The certificates of stock shall be signed,
countersigned and registered in such manner as the Board of Directors may by
resolution prescribe, which resolution may permit all or any of the signatures
on such certificates to be in facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
SECTION 8.1. FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year, unless
otherwise determined by resolution of the Board of Directors.
SECTION 8.2. DIVIDENDS
The Board of Directors may from time to time declare, and the
Corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law and its Certificate of Incorporation.
SECTION 8.3. SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation and the words "Corporate Seal, Delaware". The seal may be used by
causing it, or a facsimile thereof, to be impressed or affixed or reproduced or
otherwise.
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ARTICLE IX
AMENDMENTS
These By-Laws may be amended, added to, rescinded or repealed at any
meeting of the Board of Directors or of the stockholders, provided notice of the
proposed change was given in the notice of the meeting and, in the case of a
meeting of the Board of Directors, in a notice given no less than twenty-four
hours prior to the meeting; provided, however, that, in the case of amendments
by stockholders, notwithstanding any other provisions of these By-Laws or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the stock required by law, the Certificate of Incorporation or these
By-Laws, the affirmative vote of the holders of at least 80 percent of the
voting power of the then outstanding Voting Stock, voting together as a single
class, shall be required to alter, amend or repeal any provision of these
By-Laws.
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<PAGE> 1
EXHIBIT 10.2
eLOYALTY CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the eLoyalty Corporation 1999
Employee Stock Purchase Plan (the "Plan") is to provide employees of eLoyalty
Corporation, a Delaware corporation (the "Company"), and its Subsidiary
Companies (as defined in Section 15) added incentive to remain employed by such
companies and to encourage increased efforts to promote the best interests of
such companies by permitting eligible employees to purchase shares of the common
stock, par value $.01, of the Company ("Common Stock") at below-market prices.
The Plan is intended to qualify as an "employee stock purchase plan" under
section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The
Company and its Subsidiary Companies are sometimes hereinafter called
individually a "Participating Company" or collectively the "Participating
Companies."
2. Eligibility. Participation in the Plan shall be open to
each employee of the Participating Companies (a) who has been continuously
employed by the Participating Companies for at least three months, (b) whose
customary employment by the Participating Companies is greater than 20 hours per
week; and (c) whose customary employment by the Participating Companies is more
than five months in any calendar year (each an "Eligible Employee") or any of
its subsidiaries. For purposes of the preceding sentence, employment with
Technology Solutions Company ("TSC") or any of its subsidiaries immediately
prior to the Effective Date shall be treated as employment by a Participating
Company. No right to purchase Common Stock hereunder shall accrue under the Plan
in favor of any person who is not an Eligible Employee as of the first day of a
Purchase Period (as defined in Section 3). Notwithstanding anything contained in
the Plan to the contrary, no Eligible Employee shall acquire a right to purchase
Common Stock hereunder (i) if, immediately after receiving such right, such
employee would own
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5% or more of the total combined voting power or value of all classes of stock
of the Company or any Subsidiary Company (including any stock attributable to
such employee under section 424(d) of the Code), or (ii) if for a given calendar
year such right would permit such employee's aggregate rights to purchase stock
under all employee stock purchase plans of the Company and its Subsidiary
Companies or Parent Corporation (which aggregate rights are exercisable during
such calendar year) to accrue at a rate which exceeds $25,000 of fair market
value of such stock for such calendar year, all determined in the manner
provided by section 423(b)(8) of the Code and the rules and regulations
thereunder. In addition, the number of shares of Common Stock which may be
purchased by any Eligible Employee during any Purchase Period shall not exceed
[1,500], subject to adjustment pursuant to Section 14.
3. Effective Date of Plan. The Plan shall become effective one
day after the record date of the pro rata distribution by TSC to its
stockholders of all of the shares of Common Stock then owned by TSC (the
"Spin-off") or on such later date as may be specified by the Board of Directors
(the "Board") of the Company or the Committee (as defined in Section 12) (the
"Effective Date"). The Plan shall cease to be effective unless, within 12 months
before or after the date of its adoption by the Board, it has been approved by
the stockholders of the Company in accordance with the General Corporation Law
of the State of Delaware and section 423 of the Code.
4. Purchase Periods. The first "Purchase Period" shall be the
period beginning on the Effective Date and ending on the last business day of
the calendar quarter in which the Effective Date occurs (or the last business
day of the first calendar quarter beginning after the Effective Date, if so
determined by the Committee prior to the Effective Date in its sole discretion),
and shall be followed thereafter by successive three-month Purchase Periods,
each of which shall begin on the first business day of the following calendar
quarter and end on the last business day of such calendar quarter.
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5. Basis of Participation.
(a) Each Eligible Employee shall be entitled to enroll in the Plan as
of the first day of any Purchase Period which begins on or after such employee
becomes an Eligible Employee and shall be considered a Participant in the Plan
thereafter (a "Participant").
(i) To enroll in the Plan, an Eligible Employee shall execute
and deliver a payroll deduction authorization (the "Authorization") to
the Participating Company which is the employee's employer, or its
designated agent, in the time and manner specified by the Committee.
The Authorization shall become effective on the first day of the
Purchase Period commencing after the execution and delivery of such
Authorization. Each Authorization shall direct that payroll deductions
be made by the Participating Company which is the employee's employer
for each payroll period during which the employee is a Participant in
the Plan. The amount of each payroll deduction specified in an
Authorization for each such payroll period shall be a whole percentage
amount or a whole dollar amount, as determined by the Committee, in
either case not to exceed 15%, or such lesser percentage as may be
determined by the Committee, of the Participant's current regular wage
or salary (before withholding or other deductions) paid to him or her
by any of the Participating Companies.
(ii) Payroll deductions (and any other amount paid under the
Plan) shall be made for each Participant in accordance with his or her
or her Authorization until his or her or her participation in the Plan
terminates or the Plan terminates, all as hereinafter provided.
(iii) A Participant may change the amount of his or her
payroll deduction by filing a new Authorization with the Company or its
designated agent, which shall become effective on the first day of the
Purchase Period commencing after the execution and delivery of such
Authorization. No other changes shall be permitted, except that a
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Participant may elect to terminate his or her participation in the Plan
as provided in Section 8.
(iv) Payroll deductions shall be credited to a purchase
account established on the books of the Company on behalf of each
Participant (a "Purchase Account"). At the end of each Purchase Period,
the amount in each Participant's Purchase Account will be applied to
the purchase from the Company of the number of shares of Common Stock
determined by dividing such amount by the Purchase Price (as defined in
Section 6) for such Purchase Period. (b) The Committee may, in its
discretion, establish additional procedures whereby Eligible Employees
may participate in the Plan by means other than payroll deduction,
including, but not limited to, delivery of funds by Participants in a
lump sum or automatic charges to Participants' bank accounts. Such
other methods of participating shall be subject to such rules and
conditions as the Committee may establish. The Committee may at any
time amend, suspend to terminate any participation procedures
established pursuant to this paragraph without prior notice to any
Participant or Eligible Employee.
6. Purchase Price. The purchase price (the "Purchase Price")
per share of Common Stock hereunder for any Purchase Period shall be 85% of the
lesser of (i) the fair market value of a share of Common Stock on the first day
of such Purchase Period and (ii) the fair market value of a share of Common
Stock on the last day of such Purchase Period, unless, prior to the beginning of
such Purchase Period, the Committee shall determine otherwise (subject to the
limitations contained in clause (iii) of Section 9(c)). If such determination
results in a fraction of one cent, the Purchase Price shall be increased to the
next higher full cent. The fair market value of a share of Common Stock on a
given day shall be the average of the high and low transaction prices of a share
of Common Stock as reported on The Nasdaq Stock Market(SM) on the date as of
which such value is being determined or, if there shall be no reported
transactions on such date,
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<PAGE> 5
on the next preceding date for which transactions were reported. In no event,
however, shall the Purchase Price be less than the par value of the Common
Stock.
7. Issuance of Shares.
(a) The Common Stock purchased by each Participant shall be considered
to be issued and outstanding to his or her credit as of the close of business on
the last day of each Purchase Period. The total number of shares of Common Stock
purchased by all Participants during each Purchase Period shall be issued, as of
the last day in such Purchase Period, to a nominee or agent for the benefit of
the Participants. A Participant will be issued a certificate for his or her
shares upon the request of the Participant in accordance with procedures
established by the Company.
(b) No interest shall accrue at any time for any amount credited to a
Purchase Account of a Participant. After the close of each Purchase Period, a
report will be sent to each Participant stating the entries made to his or her
Purchase Account, the number of shares of Common Stock purchased and the
applicable Purchase Price.
8. Termination of Participation.
(a) A Participant may elect at any time to terminate his or her
participation in the Plan, provided such termination is received by the Company
in writing prior to the last business day of the Purchase Period for which such
termination is to be effective. Upon any such termination, the Company shall
promptly deliver to such Participant cash in an amount equal to the balance to
his or her credit in his or her Purchase Account on the date of such
termination. At any time after such termination, the Participant may request the
delivery to such Participant of one or more certificates for the number of whole
shares of Common Stock held for his or her benefit, and the cash equivalent for
any fractional share so held. Such cash equivalent shall be determined by
multiplying the fractional share by the fair market value of a share of Common
Stock on the last day of the Purchase Period immediately preceding such
termination, determined as provided in Section 6.
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<PAGE> 6
(b) If the Participant dies, terminates his or her employment with the
Participating Companies for any reason, or otherwise ceases to be an Eligible
Employee (including, without limitation, as a result of a Participating Company
ceasing to be a Subsidiary Company), his or her participation in the Plan shall
immediately terminate. Upon such terminating event, the Company shall promptly
deliver to such Participant or his or her legal representative, as the case may
be, cash in an amount equal to the balance to his or her credit in his or her
Purchase Account on the date of such termination.
9. Termination or Amendment of the Plan.
(a) The Company, by action of the Board or the Committee, may terminate
the Plan at any time. Notice of termination shall be given to all Participants,
but any failure to give such notice shall not impair the effectiveness of the
termination.
(b) Without any action being required, the Plan will terminate in any
event when the maximum number of shares of Common Stock to be sold under the
Plan (as provided in Section 13) has been purchased. Such termination shall not
impair any rights which under the Plan shall have vested on or prior to the date
of such termination. If at any time the number of shares remaining available for
purchase under the Plan are not sufficient to satisfy all then-outstanding
purchase rights, the Board may determine an equitable basis of apportioning
available shares among all Participants consistent with Section 423 of the Code.
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<PAGE> 7
(c) The Board or the Committee may amend the Plan from time to time in
any respect for any reason; provided, however, no such amendment shall (i)
materially adversely affect any purchase rights outstanding under the Plan
during the Purchase Period in which such amendment is to be effected, (ii)
unless approved by the stockholders of the Company, increase the maximum number
of shares of Common Stock which may be purchased under the Plan, (iii) decrease
the Purchase Price of the shares of Common Stock for any Purchase Period below
the lesser of 85% of the fair market value thereof on the first day of such
Purchase Period and 85% of the fair market value thereof on the last day of such
Purchase Period, (iv) unless approved by the stockholders of the Company, change
the class of employees eligible to participate in the Plan or (v) adversely
affect the qualification of the Plan under section 423 of the Code.
(d) Upon termination of the Plan, the respective cash balance, if any,
to the credit of each Participant in his or her Purchase Account, one or more
certificates for the number of whole shares of Common Stock held for his or her
benefit, and the cash equivalent of any fractional share so held, determined as
provided in Section 8(a), shall be promptly distributed to such Participant.
10. Non-Transferability. Rights acquired under the Plan are
not transferable and may be exercised only by a Participant.
11. Stockholder's Rights. No Eligible Employee or Participant
shall by reason of the Plan have any rights of a stockholder of the Company
until and to the extent he or she shall acquire shares of Common Stock as herein
provided.
12. Administration of the Plan.
(a) The Plan shall be administered by the Compensation Committee of the
Board (the "Committee"), provided that the Board may otherwise appoint (i) the
entire Board or (ii) a committee consisting of two or more members of the Board,
to act as the Committee. In addition
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<PAGE> 8
to the power to amend or terminate the Plan pursuant to Section 9, the Committee
shall have full power and authority to: (A) interpret and administer the Plan
and any instrument or agreement entered into under the Plan; (B) establish such
rules and regulations and appoint such agents as it shall deem appropriate for
the proper administration of the Plan; and (C) make any other determination and
take any other action that the Committee deems necessary or desirable for
administration of the Plan. Decisions of the Committee shall be final,
conclusive and binding upon all persons, including the Company, any Participant
and any other employee of the Company. A majority of the members of the
Committee may determine its actions and fix the time and place of its meetings.
(b) The Plan shall be administered so as to ensure all Participants
have the same rights and privileges as required by section 423(b)(5) of the
Code.
13. Maximum Number of Shares. The maximum number of shares of
Common Stock which may be purchased under the Plan is [500,000], subject,
however, to adjustment as hereinafter set forth. Shares of Common Stock sold
hereunder may be treasury shares, authorized and unissued shares, or a
combination thereof.
14. Adjustment. In the event of any stock split, stock
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a regular cash dividend, the maximum number and class of securities which
may purchased under this Plan, the maximum number and class of securities that
may be purchased by any Eligible Employee during any Purchase Period, and the
purchase price per security shall be appropriately adjusted by the Committee.
The decision of the Committee regarding any such adjustment shall be final,
binding and conclusive. If any such adjustment would result in a fractional
security being available under this Plan, such fractional security shall be
disregarded.
15. Miscellaneous.
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<PAGE> 9
(a) Except as otherwise expressly provided herein, any Authorization,
election, notice or document under the Plan from an Eligible Employee or
Participant shall be delivered to the Company, the Participating Company that is
the employer of such Eligible Employee, or their designated agents and, subject
to any limitations specified in the Plan, shall be effective when so delivered.
(b) The term "business day" shall mean any day other than Saturday,
Sunday or a legal holiday recognized by the Participating Corporation for which
the Participant is employed.
(c) The term "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(d) The term "Parent Corporation" shall mean any corporation which is,
or becomes, after the Effective Date, a parent corporation of the Company
(within the meaning of Section 424(e) of the Code).
(e) The term "Subsidiary Companies" shall mean all corporations which
are, or become, after the Effective Date, subsidiary corporations (within the
meaning of Section 424(f) of the Code) and of which the Company is the common
parent.
(f) The Plan, and the Company's obligation to sell and deliver Common
Stock hereunder, shall be subject to all applicable federal, state and foreign
laws, rules and regulations, and to such approval by any regulatory or
governmental agency as may, in the opinion of counsel for the Company, be
required.
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<PAGE> 10
16. Change in Control.
(a) In order to maintain the Participants' rights in the event of any
Change in Control of the Company, as hereinafter defined, upon such Change in
Control, the then current Purchase Period shall thereupon end, and all
Participants' Purchase Accounts shall be applied to purchase shares of Common
Stock pursuant to Section 6, and the Plan shall immediately thereafter
terminate.
(b) "Change in Control" for the purposes hereof means the occurrence of
any of the following events after the Effective Date:
(i) the acquisition by any individual, entity or group (a
"Person"), including any "person" within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership
within the meaning of Rule 13d-3 promulgated under the Exchange Act, of
35% or more of either (A) the then outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (B) the
combined voting power of the then outstanding securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); excluding, however, the
following: (1) any acquisition directly from the Company (excluding any
acquisition resulting from the exercise of an exercise, conversion or
exchange privilege, unless the security being so exercised, converted
or exchanged was acquired directly from the Company); (2) any
acquisition by the Company; (3) any acquisition by an employee benefit
plan (or related trust) sponsored or maintained by the Company or any
Subsidiary Corporation; or (4) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B) and (C)
of subsection (iii) of this Section 16(b); provided further, that for
purposes of clause (2) above, if any Person (other than the Company or
any employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company) shall become
the beneficial owner of 35% or more of the Outstanding Company Common
Stock or 35% or more of the Outstanding
10
<PAGE> 11
Company Voting Securities by reason of an acquisition by the Company,
and such Person shall, after such acquisition by the Company, become
the beneficial owner of any additional shares of the Outstanding
Company Common Stock or any additional Outstanding Company Voting
Securities and such beneficial ownership is publicly announced, such
additional beneficial ownership shall constitute a Change in Control;
(ii) individuals who, as of the date hereof, constitute the
Board of Directors (the "Incumbent Board") cease for any reason to
constitute at least a majority of such Board; provided that any
individual who becomes a director of the Company subsequent to the date
hereof whose election, or nomination for election by the Company's
stockholders, was approved by the vote of at least a majority of the
directors then comprising the Incumbent Board, shall be deemed a member
of the Incumbent Board; and provided further, that any individual who
was initially elected as a director of the Company as a result of an
actual or threatened election contest, as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act, or any
other actual or threatened solicitation of proxies or consents by or on
behalf of any Person other than the Board, shall not be deemed a member
of the Incumbent Board;
(iii) approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of
all or substantially all of the assets of the Company (a "Corporate
Transaction"); excluding, however, a Corporate Transaction pursuant to
which (A) all or substantially all of the individuals or entities who
are the beneficial owners, respectively, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities immediately
prior to such Corporate Transaction will beneficially own, directly or
indirectly, more than 60% of, respectively, the outstanding shares of
common stock and the combined voting power of the outstanding
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Corporate
Transaction (including, without limitation, a
11
<PAGE> 12
corporation which, as a result of such transaction, owns the Company or
all or substantially all of the Company's assets either directly or
indirectly) in substantially the same proportions relative to each
other as their ownership, immediately prior to such Corporate
Transaction, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities, as the case may be, (B) no
Person (other than the Company, any employee benefit plan (or related
trust) sponsored or maintained by the Company or a Subsidiary
Corporation, the corporation resulting from such Corporate Transaction,
and any Person who beneficially owned, immediately prior to such
Corporate Transaction, directly or indirectly, 35% or more of the
Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) will beneficially own, directly or
indirectly, 35% or more of, respectively, the outstanding shares of
common stock or the combined voting power of the outstanding securities
entitled to vote generally in the election of directors of the
corporation resulting from such Corporate Transaction and (C)
individuals who were members of the Incumbent Board will constitute at
least a majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction; or
(iv) approval by the stockholders of the Company of a plan of
complete liquidation or dissolution of the Company.
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<PAGE> 1
EXHIBIT 10.3
COMMON STOCK PURCHASE AND SALE AGREEMENT
THIS AGREEMENT is entered into as of the 13th day of August, 1999 by
and among Technology Solutions Company, a Delaware corporation ("TSC"), eLoyalty
Corporation, a Delaware corporation ("eLoyalty" and, together with TSC, the
"Sellers"), and those persons listed on the signature page as Purchasers (the
"Purchasers").
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereto agree as follows:
1. Purchase and Sale of the Shares.
1.1 TSC Shares. Concurrently with the execution and delivery of this
Agreement, TSC shall sell to the Purchasers, and Purchasers shall purchase from
TSC, at the Average TSC Share Price, an aggregate of 500,000 shares of the
common stock, par value $.01 per share, of TSC (the "TSC Shares"). The number of
TSC Shares to be purchased by each Purchaser shall be as set forth opposite each
such Purchaser's name on Exhibit A. The "Average TSC Share Price" means $9.0125,
the average of the last reported closing prices per share of the Common Stock of
TSC on the Nasdaq Stock Market ("NASDAQ") for the 10 consecutive trading days
ending on June 25, 1999.
1.2 eLoyalty Shares. Upon the terms and subject to the conditions of
this Agreement (including Section 8.4), on the Funding Date (as defined below),
eLoyalty shall sell to the Purchasers, and the Purchasers shall purchase from
eLoyalty, at a price of $3.50 per share, an aggregate of 2,400,000 shares of the
common stock, par value $.01 per share, of eLoyalty (the "eLoyalty Shares" and,
together with the TSC Shares, the "Shares"). The number of eLoyalty Shares to be
purchased by each Purchaser shall be as set forth opposite each such Purchaser's
name on Exhibit A.
1.3 Acknowledgment; Commercially Reasonable Efforts. (a) Purchasers
acknowledge that, as of the date hereof, eLoyalty has no business or operations.
Prior to the Funding Date, TSC intends to transfer the eLoyalty Business to
eLoyalty. As part of such transfer, TSC intends to transfer to eLoyalty certain
assets and liabilities related to the eLoyalty Business, to enter into certain
agreements with eLoyalty relating to the provision of certain services by either
TSC or eLoyalty to the other party and to the licensing of certain assets by TSC
or eLoyalty to the other, to transfer to eLoyalty certain TSC employees engaged
in the eLoyalty Business, and to establish employee benefits plans and other
compensation arrangements for the eLoyalty employees. Such transfer is referred
to as the "Business Transfer". The "eLoyalty Business" has the meaning specified
in Exhibit B-1.
(b) Following the receipt of the Revenue Ruling (as defined herein),
Sellers agree to use their commercially reasonable efforts to effect the
Business Transfer as expeditiously as is reasonably practicable. For purposes of
the foregoing, "commercially reasonable efforts" shall include expenditures
which are customary and reasonable in transactions of the kind and nature
contemplated by this Agreement.
<PAGE> 2
2. Funding; Deliveries.
2.1 Funding Date. The purchase and sale of the eLoyalty Shares shall be
consummated on a date and at a time agreed upon by the Purchasers and eLoyalty,
but in no event later than the third day after the conditions set forth in
Sections 6.1(b) and 6.2 have been satisfied, at the offices of Sidley & Austin,
Chicago, Illinois, or at such other place as shall be agreed upon by the
Purchasers and eLoyalty. The time and date on which the purchase and sale of the
eLoyalty Shares is actually held is referred to herein as the "Funding Date."
2.2 Deliveries.
(1) Concurrently with the execution and delivery of this Agreement:
(1) TSC shall issue and deliver to the Purchasers certificates for the
number of TSC Shares set forth opposite each Purchaser's name on Exhibit A.
(2) Each Purchaser shall pay TSC an amount equal to the product of (x)
the number of TSC Shares being acquired as set forth opposite each Purchaser's
name on Exhibit A and (y) the Average TSC Share Price, by wire transfer of
immediately available funds to the bank account specified by TSC.
(2) Subject to the terms and conditions of this Agreement (including
Section 8.4), on the Funding Date:
(1) eLoyalty shall issue and deliver to the Purchasers certificates for
the number of eLoyalty Shares set forth opposite each Purchaser's name on
Exhibit A.
(2) Each Purchaser shall pay eLoyalty an amount equal to the product of
(x) the number of eLoyalty Shares being acquired as set forth opposite each
Purchaser's name on Exhibit A and (y) $3.50, by wire transfer of
immediately available funds to the bank account specified by eLoyalty.
3. Representations and Warranties of Sellers. Sellers represent and
warrant to and agree with the Purchasers as set forth in this Section 3.
Sellers' representations and warranties to the Purchasers shall be subject to
the exceptions set forth in the disclosure letter from Sellers to Purchasers
dated as of the date hereof and relating to this Agreement (the "Disclosure
Letter"). Absent fraud, the aggregate liability of Sellers for the breach of any
representation or warranty of Sellers in this Section 3 and any certificate
delivered on behalf of eLoyalty pursuant to this Agreement shall be limited to
the gross sales price of the eLoyalty Shares sold to the Purchasers by eLoyalty.
Notwithstanding anything contained herein to the contrary, on and after the
Funding Date, TSC shall have no liability whatsoever for the breach of any
representation and warranty contained in this Section 3 or in connection with
any other claim arising out of this Section 3 (collectively, "Section 3
Claims"), and, on and after the Funding Date, any rights of Purchasers in
connection with or arising out of a Section 3 Claim shall be brought solely and
exclusively against eLoyalty.
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<PAGE> 3
3.1 Organization and Standing; Certificate and By-Laws. eLoyalty is a
corporation duly organized and validly existing under, and by virtue of, the
laws of the State of Delaware and is in good standing under such laws. eLoyalty
has the requisite corporate power to own and operate and to carry on the
eLoyalty Business as presently conducted. On the Funding Date, eLoyalty will be
qualified, licensed or domesticated as a foreign corporation in all
jurisdictions where the nature of its activities or of its properties owned or
leased makes such qualification, licensing or domestication necessary, other
than those jurisdictions in which the failure to do so would not reasonably be
expected to have a material adverse effect on the eLoyalty Business. eLoyalty
has furnished the Purchasers or their counsel with copies of eLoyalty's
Certificate of Incorporation and By-Laws, including all amendments thereto. Said
copies are true, correct and complete and contain all amendments through the
date of this Agreement.
3.2 Corporate Power. eLoyalty has all requisite corporate power to
enter into this Agreement and to carry out and perform its obligations under the
terms of this Agreement.
3.3 Subsidiaries. eLoyalty does not, and after the Business Transfer
will not, own or control, directly or indirectly, any equity interest in any
other corporation, association or business entity.
3.4 Capitalization. The authorized capital stock of eLoyalty consists
of 100,000,000 shares of Common Stock, $0.01 par value, and 10,000,000 shares of
Preferred Stock, $.01 par value. As of the date hereof, there are issued and
outstanding 100 shares of Common Stock and no shares of Preferred Stock. All
such shares are owned beneficially and of record by TSC and are validly issued,
fully paid and nonassessable. Except as otherwise described in this Agreement
and except for the transactions and issuances described in Section 7.5(e), as of
the date hereof, there are no outstanding rights, plans, options, warrants,
conversion rights, preemptive rights or agreements for the purchase or
acquisition from eLoyalty of any shares of its capital stock or any of its other
securities. The total number of shares of Common Stock of eLoyalty initially
available for all grants of awards over the term of the eLoyalty 1999 Stock
Incentive Plan (the "Plan"), other than Substitute Options (as defined in the
Plan), is 5,340,000, subject to adjustment as provided in the Plan. As of the
date hereof, there are 4,899,000 shares of Common Stock of eLoyalty reserved for
issuance upon the exercise of outstanding options issued pursuant to the Plan.
eLoyalty has delivered to Purchasers a copy of the form of Stock Option
Agreement which awards options under the Plan.
3.5 Authorization.
(1) All corporate action on the part of eLoyalty, its officers,
directors and stockholders necessary for the execution, performance and delivery
by eLoyalty of this Agreement have been taken or will be taken prior to the
Funding Date. This Agreement is a valid and binding obligation of eLoyalty
enforceable against it in accordance with its terms except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and rules or laws concerning equitable remedies.
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<PAGE> 4
(2) The eLoyalty Shares to be sold on the Funding Date will be validly
issued, fully paid and nonassessable and free of any liens, encumbrances and/or
rights of first refusal imposed by or otherwise operating in favor of eLoyalty
or its affiliates; provided, however, that such eLoyalty Shares will be subject
to the restrictions set forth in this Agreement.
3.6 Financial Statements. eLoyalty has delivered to each Purchaser
unaudited consolidated financial statements (balance sheet and statement of
income) of eLoyalty at December 31, 1998 and for the transition period then
ended and its unaudited consolidated statement of income for the three-month
period ended March 31, 1999 (the "Financial Statements"). Except as set forth
therein, the Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated and with each other, except that the Financial
Statements do not contain footnotes. The Financial Statements fairly present in
all material respects the financial condition and operating results of the
eLoyalty Business as of the dates, and for the periods, indicated therein,
subject in the case of the interim Financial Statements to normal year-end audit
adjustments. Except as set forth in the Financial Statements, eLoyalty has no
liabilities, contingent or otherwise, required under generally accepted
accounting principles to be reflected in the Financial Statements, other than
(i) liabilities incurred in the ordinary course of business subsequent to
December 31, 1998 and (ii) liabilities which would not reasonably be expected to
have a material adverse effect on the financial condition or results of
operations of the eLoyalty Business. eLoyalty maintains and will continue to
maintain a standard system of accounting established and administered in
accordance with generally accepted accounting principles.
3.7 Absence of Changes. Since March 31, 1999: (a) except in connection
with the transactions contemplated by the Business Transfer, neither Seller has
entered into any transaction with any third party material to the eLoyalty
Business which was not in the ordinary course of business; (b) there has been no
materially adverse change in the financial condition or results of operations of
the eLoyalty Business; (c) there has been no damage to, destruction of or loss
of physical property of the eLoyalty Business (whether or not covered by
insurance) materially adversely affecting the eLoyalty Business; (d) neither
Seller has received notice that there has been a cancellation of an order for
services provided by the eLoyalty Business or a loss of a customer of the
eLoyalty Business, the cancellation or loss of which would reasonably be
expected to materially adversely affect the financial condition or results of
operations of the eLoyalty Business; (e) there has been no labor dispute
involving the eLoyalty Business or its employees, and none is pending or, to
eLoyalty's knowledge, threatened, in each case which would reasonably be
expected to materially adversely affect the financial condition or results of
operations of the eLoyalty Business; and (f) there have been no loans made or
bonuses awarded by the Sellers to employees, officers or directors engaged in
the eLoyalty Business, other than travel advances and other advances made in the
ordinary course of business and bonuses awarded in the ordinary course of
business.
3.8 Tax Returns. The Sellers have, in respect of the eLoyalty Business,
filed all federal and all material state and other tax returns which are
required to be filed by them and have paid all taxes shown on such returns to be
due and payable. Neither Seller has, in respect of the eLoyalty Business, been
advised that any of its returns, whether federal, state or other, have been or
are being audited as of the date hereof.
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<PAGE> 5
3.9 Title to Properties and Assets; Liens, etc. TSC has, and on the
Funding Date eLoyalty will have, good and marketable title to the properties and
assets reflected in the Financial Statements (except properties and assets
disposed of since the date of the Financial Statements at fair market value in
the ordinary course of business) as being owned by such party and, with respect
to the eLoyalty Business, good title to all its leasehold estates, in each case
subject to no mortgage, pledge, lien, encumbrance or charge, other than or
resulting from taxes which have not yet become delinquent and minor liens and
encumbrances which do not in any case or in the aggregate materially detract
from the value of the property of the eLoyalty Business taken as a whole or
materially impair the operations of the eLoyalty Business and which have not
arisen otherwise than in the ordinary course of business. On the Funding Date,
eLoyalty will have sufficient title and ownership to, or sufficient rights to
use, all of the material assets necessary to conduct the eLoyalty Business
substantially as conducted as of the date hereof.
3.10 Outstanding Indebtedness. Except as disclosed in the Financial
Statements, neither Seller has, in respect of the eLoyalty Business,
indebtedness to any third party for borrowed money which either Seller has
directly or indirectly created, incurred, assumed or guaranteed, or with respect
to which eLoyalty has otherwise become directly or indirectly liable.
3.11 Patents, Trademarks, etc. TSC has, and on the Funding Date
eLoyalty will have, sufficient title and ownership of or valid licenses to all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights and processes necessary for the eLoyalty
Business as now conducted, and neither Seller is aware of any conflict with or
infringement of the rights of others. Neither Seller has received any
communications alleging, and neither Seller is aware, that the eLoyalty Business
has violated or, by conducting the eLoyalty Business as proposed, would violate,
any of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity.
3.12 Compliance with Other Instruments. eLoyalty is not in violation of
any term of its Certificate of Incorporation or By-Laws as heretofore amended.
Neither Seller is, in respect of the eLoyalty Business, in violation in any
material respect of any mortgage, indenture, contract, agreement, instrument,
judgment, decree, order, statute, rule or regulation applicable to it or by
which it is bound or to which its properties are subject (collectively, "Seller
Legal Requirements"), which violation or violations, individually or in the
aggregate, would reasonably be expected to have a material adverse effect on the
financial condition or results of operations of the eLoyalty Business. The
execution, delivery and performance of and compliance with this Agreement and
the transactions contemplated hereby will not result in any violation of, will
not be in conflict with, will not constitute an event that, with the lapse of
time or action by a third party, will result in a default under, any of the
Seller Legal Requirements, and will not result in the creation of any lien or
encumbrance upon any of the properties or assets of the eLoyalty Business,
except in connection with the transactions contemplated by the Business Transfer
and except for such violations, conflicts, events, liens or encumbrances which,
individually or in the aggregate, would not reasonably be expected to have a
material adverse effect on the financial condition or the results of operations
of the eLoyalty Business.
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<PAGE> 6
3.13 Employees. To eLoyalty's knowledge, none of the officers or
employees engaged primarily in the eLoyalty Business is obligated under any
contract or commitment of any nature or subject to any judgment, decree, order
or claim of any court, administrative agency, person or entity which would
conflict with any obligation of any such officer or employee to use his or her
best efforts to promote the interests of the eLoyalty Business. To eLoyalty's
knowledge, conducting the eLoyalty business as currently contemplated will not
conflict with or result in a breach of the terms, conditions or provisions of or
constitute a default under any material contract, covenant or instrument under
which any of such officers or employees is now obligated or any legal obligation
applicable to them.
3.14 Litigation, etc.. There are no actions, proceedings or
investigations pending or, to eLoyalty's knowledge, threatened against the
Sellers in respect of the eLoyalty Business which, either in any case or in the
aggregate, would reasonably be expected to result in any material adverse change
in the financial condition or results of operations of the eLoyalty Business or
in any material impairment of the right or ability of the Sellers to carry on
the eLoyalty Business as now conducted or as proposed to be conducted, and none
which questions the validity of this Agreement or any action taken or to be
taken in connection herewith. Neither Seller, in respect of the eLoyalty
Business, is a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality.
3.15 Material Contracts and Commitments. The Disclosure Letter sets
forth as of the date hereof a true and complete list, in respect of the eLoyalty
Business, of all (i) written or oral contracts to which either Seller is a party
or otherwise bound requiring future annual expenditures by either Seller to
vendors of more than Two Hundred Fifty Thousand Dollars ($250,000), (ii)
employment, consulting or agency contracts not terminable without penalty upon
notice of ninety (90) days or less and (iii) bonus, deferred compensation,
profit sharing, pension, retirement, stock option, stock purchase or other
similar plans or arrangements (the "Material Contracts"). eLoyalty has delivered
to counsel for the Purchasers true and complete copies of all of the written
Material Contracts set forth in the Disclosure Letter requested in writing by
counsel for the Purchasers. All of the Material Contracts are valid, binding and
in full force and effect in all material respects. Neither Seller is in material
default under any of such Material Contracts. To eLoyalty's knowledge, no other
party to any of the Material Contracts is in material default thereunder.
3.16 Governmental Consent, etc. No consent, approval or authorization
of, or designation, declaration or filing with, any governmental authority on
the part of the Sellers is required in connection with the valid execution and
delivery of this Agreement or the performance of the Sellers' obligations
hereunder.
3.17 Insurance. In the reasonable judgment of eLoyalty, TSC maintains,
and on the Funding Date eLoyalty will maintain, (a) insurance on all assets and
activities of the eLoyalty Business covering property damage and loss of income
by fire or other casualty that is adequate in light of the business and risks of
the eLoyalty Business, (b) insurance protection against all other claims and
risks that is reasonable in light of the business and risks of the eLoyalty
Business and (c) directors' and officers' insurance that is reasonable in light
of the business and risks of the eLoyalty Business.
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<PAGE> 7
3.18 Certain Transactions. Neither Seller, in respect of the eLoyalty
Business, is indebted, either directly or indirectly, to any of its officers,
directors or stockholders or to their respective spouses or children
(collectively "Affiliated Parties"), in any amount in excess of $100,000 other
than for payment of salary for services rendered and reasonable expenses; and
none of such Affiliated Parties are indebted to either Seller in an amount in
excess of $100,000. No Affiliated Party has any direct or indirect ownership
interest in any firm or corporation with which either Seller has a business
relationship which is material to the eLoyalty Business or, to the knowledge of
eLoyalty, any firm or corporation which competes with the eLoyalty Business. To
eLoyalty's knowledge, no Affiliated Party is, directly or indirectly, interested
in any third-party contract with either Seller which is material to the eLoyalty
Business.
3.19 Offering. Subject in part to the truth and accuracy of each
Purchaser's representations set forth in Section 5 of this Agreement, the offer,
sale and issuance of the eLoyalty Shares as contemplated by this Agreement are
exempt from the registration requirements of any applicable state and federal
securities laws, and neither eLoyalty nor any authorized agent acting on its
behalf will take any action hereafter that would cause the loss of such
exemption.
3.20 Information. Sellers have provided each Purchaser with all the
information that such Purchaser has requested in writing for deciding whether to
purchase the eLoyalty Shares.
3.21 Registration Rights. eLoyalty has not granted or agreed to grant
any registration rights, including piggyback rights, to any person or entity.
3.22 Minute Books. The minute books of eLoyalty contain a complete
summary of all meetings of directors and stockholders since the time of
incorporation and reflect all transactions referred to in such minutes
accurately in all material respects. eLoyalty has delivered a true and complete
copy of the minute books to counsel for the Purchasers to the extent requested
in writing.
3.23 Labor Agreements and Actions. Neither Seller in respect of the
eLoyalty Business is bound by or subject to (and none of its assets or
properties is bound by or subject to) any written or oral, express or implied,
contract, commitment or arrangement with any labor union, and no labor union has
requested or, to Sellers' knowledge, has sought to represent any of the
employees, representatives or agents of Sellers engaged primarily in the
eLoyalty Business. There is no strike or other labor dispute involving the
eLoyalty Business pending, or to Sellers' knowledge, threatened that would
reasonably be expected to have a material adverse effect on the financial
condition or results of operations of the eLoyalty Business, nor is either
Seller aware of any labor organization activity involving its employees engaged
primarily in the eLoyalty Business.
3.24 Proprietary Information Agreements. To Sellers' knowledge, each
employee at TSC's facility in Austin, Texas has executed a Proprietary
Information Agreement, substantially in the form previously delivered to
Purchasers.
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<PAGE> 8
3.25 Disclosure. As of the date hereof, no representation or warranty
by eLoyalty in this Agreement, after giving effect to the disclosures set forth
in the Disclosure Letter, contains any untrue statement of a material fact or
omits to state a material fact required to be stated herein or therein or
necessary to make such representation or warranty not materially misleading.
3.26 Employee Relations. As of the date hereof, none of the individuals
set forth in the Disclosure Letter shall have resigned.
3.27 Employee Benefit Plans. As of the date hereof, eLoyalty does not
have any "Employee Benefit Plan," as defined in the Employee Retirement Income
Security Act of 1974, as amended, to which employees engaged primarily in the
eLoyalty Business are entitled to receive benefits.
4. Representations and Warranties of TSC. TSC represents and warrants to
and agrees with the Purchasers as set forth in this Section 4. The
representations and warranties of TSC shall be subject to the Disclosure Letter.
The aggregate liability of TSC for the breach of any representation or warranty
of TSC in this Section 4 shall be limited to the gross sales price of the TSC
Shares sold to the Purchasers by TSC.
4.1 Authority.
(1) TSC has all requisite corporate power to enter into this Agreement
and the TSC Registration Rights Agreement and to carry out and perform its
obligations under the terms of this Agreement and the TSC Registration Rights
Agreement.
(2) Each of this Agreement and the TSC Registration Rights Agreement
has been duly and validly authorized by TSC and duly executed and delivered by
TSC and constitutes a valid and binding obligation of TSC enforceable in
accordance with its terms, except in each case as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and rules
or laws concerning equitable remedies and except, in the case of the TSC
Registration Rights Agreement, as limited by principles of public policy.
(3) The TSC Shares to be sold on the date hereof will be validly
issued, fully paid and nonassessable and free of any liens, encumbrances and/or
rights of first refusal imposed by or otherwise operating in favor of TSC or its
affiliates; provided, however, that such TSC Shares will be subject to the
restrictions set forth in this Agreement.
4.2 Conflicts. TSC's compliance with its obligations hereunder and
under the TSC Registration Rights Agreement will not violate, conflict with or
constitute a breach of any agreement, arrangement, commitment or understanding
to which it is a party or by which it is bound.
4.3 Consents. No consent, approval or authorization of, or designation,
declaration or filing with, any governmental authority or agency is required on
the part of TSC in connection with the valid execution and delivery of this
Agreement or the TSC Registration Rights
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<PAGE> 9
Agreement or the offer and sale of the TSC Shares by it, except such consents,
approvals or authorizations as have already been obtained or made.
4.4 SEC Documents and Other Reports. TSC has filed all required
documents with the Securities and Exchange Commission (the "SEC") since January
1, 1998 (the "SEC Documents"). As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Securities Act of
1933, as amended (the "Securities Act"), or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as the case may be, and, at the respective
times they were filed, none of the SEC Documents contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements (including, in each case, any notes thereto) of TSC
included in the SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, were prepared in accordance with generally
accepted accounting principles (except, in the case of the unaudited statements,
as permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated therein or in the notes thereto)
and fairly presented in all material respects the consolidated financial
position of TSC and its consolidated subsidiaries as at the respective dates
thereof and the consolidated results of their operations and their consolidated
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments and to any other adjustments
described therein).
4.5 Absence of Certain Changes or Events. Except as disclosed in SEC
Documents filed with the SEC prior to the date of this Agreement, since December
31, 1998, (A) TSC and its subsidiaries have not incurred any liability or
obligation (indirect, direct or contingent) that would reasonably be expected to
result in a material adverse effect on the financial condition or results of
operations of TSC and its subsidiaries taken as a whole, (B) TSC and its
subsidiaries have not sustained any loss or interference with their business or
properties from fire, flood, windstorm, accident or other calamity (whether or
not covered by insurance) that has had a material adverse effect on the
financial condition or results of operations of TSC and its subsidiaries taken
as a whole and (C) there has been no material adverse change with respect to the
financial condition or results of operations of TSC and its subsidiaries taken
as a whole.
4.6 Litigation. There are no actions, proceedings or investigations
pending or, to TSC's knowledge, threatened against TSC which, either in any case
or in the aggregate, would reasonably be expected to result in any material
adverse change in the financial condition or results of operations of TSC and
its subsidiaries taken as a whole.
4.7 Disclosure. As of the date hereof, no representation or warranty by
TSC in this Agreement, after giving effect to the disclosures set forth in the
Disclosure Letter and the SEC Documents, contains any untrue statement of a
material fact or omits to state a material fact required to be stated herein or
therein or necessary to make such representation or warranty not materially
misleading.
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4.8 Options. As of the distribution to stockholders of TSC of the
Common Stock of eLoyalty held by TSC (the "Spin-Off"), the number of shares of
TSC Common Stock subject to options which will be converted into options to
purchase shares of eLoyalty Common Stock will not exceed 8,400,145, subject to
adjustment for any stock split, stock dividend, recapitalization,
reorganization, merger, consolidation, combination, exchange of shares,
liquidation, spin-off or other similar change in capitalization or event
involving TSC Common Stock, or any distribution to holders of TSC Common Stock
other than a regular cash dividend.
5. Representations and Warranties of the Purchasers and Restrictions on
Transfer Imposed by the Securities Act of 1933.
5.1 Representations and Warranties by Each Purchaser. Each Purchaser
understands that the Shares have not been and, except pursuant to the TSC
Registration Rights Agreement (as defined below), will not be registered under
the Securities Act, or the securities laws of any state, and that they are being
sold to the Purchasers pursuant to an exemption from registration or
qualification, as applicable, contained in the Securities Act or said state
securities laws, based in part upon the representations of the Purchasers
contained herein. Each Purchaser hereby severally represents and warrants to and
agrees with the Sellers as follows:
(1) Such Purchaser has received a copy of the Financial Statements and
the SEC Documents and has carefully reviewed the Financial Statements, the SEC
Documents and this Agreement. All matters relating to the Financial Statements,
the SEC Documents and this Agreement have been discussed with such Purchaser and
explained to such Purchaser's satisfaction by the Sellers, the management of the
Sellers or persons acting on their behalf. Such Purchaser understands that this
investment involves substantial risks and has independently examined and
investigated the Sellers in making its decision to acquire the Shares. Such
Purchaser or its representative has made inquiry deemed by it to be satisfactory
concerning each Seller, its business and services, its officers and its
personnel. The officers, directors, stockholders, employees and agents of each
Seller have made available to such Purchaser or its representative any and all
requested written information.
(2) Such Purchaser is able to bear the economic risk of the investment
contemplated by this Agreement. Such Purchaser understands that the Purchaser
must bear the economic risk of this investment indefinitely unless the Shares
are registered pursuant to the Securities Act, or an exemption from such
registration is available. Such Purchaser is acquiring the Shares for such
Purchaser's own account for investment and not with a view toward the
distribution thereof.
(3) Such Purchaser is duly organized, validly existing and in good
standing, if applicable, under the laws of the jurisdiction of its formation.
Such Purchaser has all requisite power to execute and deliver this Agreement and
to perform its obligations under this Agreement. This Agreement has been duly
and validly authorized by such Purchaser, duly executed and delivered by the
Purchaser or an authorized representative of such Purchaser and constitutes a
valid, legal and binding obligation of such Purchaser, enforceable in accordance
with its terms, except as such enforceability is limited by applicable
insolvency and other laws affecting creditors' rights generally, and by the
availability of equitable remedies. The execution and delivery of this Agreement
by such
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Purchaser, the performance by such Purchaser of its obligations under this
Agreement and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms or provisions of the charter
or bylaws, as amended, of the Purchaser or other documents, as amended, pursuant
to which it was formed, as the case may be, or any statute, rule, regulation or
order of any court or governmental agency or body having jurisdiction over such
Purchaser or any of its property, or in any material respect, any mortgage,
indenture, contract, agreement or instrument to which such Purchaser is a party
or to which the Purchaser is otherwise subject.
(4) Such Purchaser is an "accredited investor" as such term is defined
in Rule 501(a) of Regulation D promulgated under the Securities Act and/or is a
partnership composed solely of partners of such Purchaser, each of whom: (i) is
an accredited investor and/or (ii) has responsibility for evaluating the
investment in the Shares by such Purchaser, with an adequate net worth and means
of providing for his current needs and possible personal contingencies to
sustain a complete loss of the partnership's investment in the Shares.
(5) Such Purchaser was not organized for the specific purpose of
acquiring the TSC Shares or the eLoyalty Shares.
(f) In the case of each Purchaser (other than Sutter Hill Ventures),
such Purchaser's sole general partner is Technology Crossover Management III,
L.L.C.
5.2 Legends. (a) Each certificate representing the Shares may be
endorsed with legends in substantially the following forms:
(1) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND ARE
"RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT.
THE SECURITIES MAY NOT BE DISPOSED OF, WHETHER BY SALE, ASSIGNMENT,
TRANSFER, MORTGAGE, PLEDGE, ENCUMBRANCE OR OTHERWISE, UNLESS SUCH
DISPOSITION IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SHARES UNDER THE ACT OR ANY APPLICABLE STATE "BLUE SKY" OR SECURITIES LAWS,
OR PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO
COUNSEL FOR THE CORPORATION THAT SUCH DISPOSITION DOES NOT REQUIRE
REGISTRATION UNDER THE ACT OR APPLICABLE BLUE SKY OR SECURITIES LAWS OR
UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
(2) Any other legends required by applicable state securities laws.
(b) Neither Seller need register a transfer of any Shares, and may also
instruct its transfer agent not to register the transfer of the Shares, unless
the applicable conditions for transfer are satisfied.
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<PAGE> 12
5.3 Removal of Legend and Transfer Restrictions. Any legend endorsed on
a certificate pursuant to Section 5.2(a)(i) and the stop transfer instructions
with respect to such Shares shall be removed, and the applicable Seller shall
issue a certificate without such legend to the holder thereof, if such Shares
are registered under the Securities Act and a prospectus meeting the
requirements of Section 10 of the Securities Act is available, or if such legend
may be properly removed under the terms of Rule 144 promulgated under the
Securities Act, or if such holder provides the applicable Seller with an opinion
of counsel for such holder reasonably satisfactory to legal counsel for the
applicable Seller, to the effect that such Shares may be sold, transferred or
assigned without registration.
6. Conditions.
6.1 Conditions to the Obligations of the Purchasers. (a) Each
Purchaser's obligation to purchase TSC Shares is subject to the fulfillment on
or prior to the date hereof of the conditions set forth in this Section 6.1(a).
(1) The representations and warranties made by TSC in Section 4, when
read together with the Disclosure Letter, shall be true and correct in all
material respects when made.
(2) The TSC Shares shall have been approved for listing on NASDAQ.
(3) TSC shall have entered into a Registration Rights Agreement,
substantially in the form of Exhibit C (the "TSC Registration Rights
Agreement").
(4) Purchasers shall have received an opinion of Sidley & Austin
substantially in the form attached to Exhibit D-1.
(v) Purchasers shall have received a copy of TSC's Restated Certificate
of Incorporation certified as of a recent date by the Secretary of State of
the State of Delaware.
(vi) Purchasers shall have received a certificate of good standing
issued as of a recent date by the Secretary of State of the State of
Delaware and the Secretary of State of the State of Illinois.
(vii) Purchasers shall have received a certificate of the secretary of
TSC, dated as of a recent date, as to (i) no amendments to the Restated
Certificate of Incorporation of TSC since a specified date, (ii) the By-laws
of TSC, (iii) the resolutions adopted by the Board of Directors of TSC
authorizing the execution and performance of this Agreement and the
transactions contemplated hereby and (iv) incumbency and signatures of the
officers of TSC executing this Agreement and any ancillary agreement.
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Notwithstanding the failure of any one or more of the
foregoing conditions, each Purchaser may proceed with the purchase of the TSC
Shares without satisfaction, in whole or in part, of any one or more of such
conditions and without written waiver. To the extent that on or prior to the
execution of this Agreement TSC delivers to Purchasers a written notice
specifying in reasonable detail the failure of any of such conditions or the
breach by TSC of any of the representations or warranties of TSC herein, and
nevertheless such Purchaser proceeds with the purchase of the TSC Shares, such
Purchaser shall be deemed to have waived for all purposes any rights or remedies
it may have against the Sellers by reason of the failure of any such conditions
or the breach of any such representations or warranties to the extent described
in such notice.
(b) Each Purchaser's obligation to purchase eLoyalty Shares is
subject to the fulfillment on or prior to the Funding Date of the conditions set
forth in this Section 6.1(b), any of which may be waived by such Purchaser.
(i) Each of the representations and warranties of the Sellers
contained in Section 3 that is qualified by materiality, when read
together with the Disclosure Letter as of the date hereof, shall be
true and correct on and as of the Funding Date as if made on and as of
such date (other than representations and warranties which address
matters only as of a certain date which shall be true and correct as of
such certain date), and each of the representations and warranties that
is not so qualified, when read together with the Disclosure Letter as
of the date hereof, shall be true and correct in all material respects
on and as of the Funding Date as if made on and as of such date (other
than representations and warranties which address matters only as of a
certain date which shall be true and correct in all material respects
as of such certain date), in each case except as contemplated or
permitted by this Agreement.
(ii) eLoyalty shall have performed in all material respects
all obligations and conditions herein required to be performed or
observed by it on or prior to the Funding Date.
(iii) TSC shall have received a ruling (the "Revenue Ruling")
from the Internal Revenue Service that the Spin-Off qualifies as a
tax-free distribution under Section 355 of the Internal Revenue Code of
1986, as amended.
(iv) eLoyalty shall have sufficient title and ownership to, or
sufficient rights to use, all of the material assets necessary to
conduct the eLoyalty Business substantially as conducted as of the date
hereof and as of the Funding Date.
(v) TSC shall have completed the Business Transfer, including,
without limitation, the transfer to eLoyalty of the assets described in
Exhibit B-2.
(vi) eLoyalty shall have obtained any and all consents
(including all governmental or regulatory consents, approvals or
authorizations required in connection with the valid execution and
delivery of this Agreement), permits and waivers necessary for
consummation of the transactions contemplated by this
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Agreement, except for such consents, permits and waivers which the
failure to obtain would not reasonably be expected to have a material
adverse effect on the financial condition or results of operation of the
eLoyalty Business.
(vii) No injunction or restraining order shall have been issued by any
court of competent jurisdiction and be in effect which restrains or
prohibits any material transaction contemplated hereby.
(viii) eLoyalty shall have delivered to the Purchasers a certificate,
executed by the President or any Vice President of eLoyalty, dated the
Funding Date, certifying to the fulfillment by eLoyalty of the conditions
specified in subsections (i), (ii) and (iv) of this Section 6.1(b).
(ix) Notwithstanding any other provision of this Agreement, including,
without limitation, Exhibit B-2, between the date hereof and the Funding
Date, there shall not have been any material adverse change (including,
without limitation, taking into account the terms of the Business Transfer)
in the financial condition, results of operations or prospects of the
eLoyalty Business.
(x) Purchasers shall have received opinions of Sidley & Austin and
counsel to TSC in substantially the forms attached as Exhibit D-2.
(xi) Purchasers shall have received a copy of the audited consolidated
financial statements of eLoyalty as of December 31, 1998 and for the period
then ended, and there shall not have been any material adverse change from
the Financial Statements delivered by eLoyalty pursuant to Section 3.6.
(xii) Purchasers shall have received a copy of eLoyalty's Certificate
of Incorporation, as amended, certified as of a recent date by the
Secretary of State of the State of Delaware.
(xiii) Purchasers shall have received a certificate of good standing
issued as of a recent date by the Secretary of State of the State of
Delaware.
(xiv) Purchasers shall have received a certificate of the secretary of
eLoyalty, dated as of a recent date, as to (i) no amendments to the
Certificate of Incorporation of eLoyalty since a specified date, (ii) the
By-laws of eLoyalty, (iii) the resolutions adopted by the Board of
Directors of eLoyalty authorizing the execution and performance of this
Agreement and the transactions contemplated hereby and (iv) incumbency and
signatures of the officers of eLoyalty executing this Agreement and any
ancillary agreement.
(xv) Purchasers shall have received a schedule of assets owned by or to
be contributed to eLoyalty in substantially final form at least 2 business
days prior to the Funding Date.
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<PAGE> 15
(xvi) Kelly D. Conway shall not have resigned from eLoyalty.
Notwithstanding the failure of any one or more of the foregoing
conditions, each Purchaser may proceed with the purchase of the eLoyalty Shares
without satisfaction, in whole or in part, of any one or more of such conditions
and without written waiver. To the extent that on or prior to the Funding Date
eLoyalty delivers to Purchasers a written notice specifying in reasonable detail
the failure of any of such conditions or the breach by eLoyalty of any of the
representations or warranties of eLoyalty herein, and nevertheless such
Purchaser proceeds with the purchase of the eLoyalty Shares, such Purchaser
shall be deemed to have waived for all purposes any rights or remedies it may
have against the Sellers by reason of the failure of any such conditions or the
breach of any such representations or warranties to the extent described in such
notice.
6.2 Conditions to the Obligations of eLoyalty. The obligation of
eLoyalty to sell the eLoyalty Shares and the obligations of eLoyalty to comply
with the other covenants and agreements set forth herein are subject to the
fulfillment on or prior to the Funding Date of the following conditions, any of
which may be waived by eLoyalty.
(1) The representations and warranties made by each Purchaser shall be
true and correct in all material respects on the Funding Date with the same
force and effect as if they had been made on and as of said date; and each such
Purchaser shall have performed or observed in all material respects all
obligations and conditions herein required to be performed or observed by it on
or prior to the Funding Date.
(b) TSC shall have received the Revenue Ruling.
(c) The conditions set forth in subsections (vi) and (vii) of Section
6.1(b) shall have been fulfilled.
Notwithstanding the failure of any one or more of the foregoing
conditions, eLoyalty may proceed with the sale of the eLoyalty Shares without
satisfaction, in whole or in part, of any one or more of such conditions and
without written waiver. To the extent that on or prior to the Funding Date a
Purchaser delivers to eLoyalty a written notice specifying in reasonable detail
the failure of any of such conditions or the breach by such Purchaser of any of
the representations or warranties of such Purchaser herein, and nevertheless
eLoyalty proceeds with the sale of the eLoyalty Shares, eLoyalty shall be deemed
to have waived for all purposes any rights or remedies it may have against such
Purchaser by reason of the failure of any such conditions or the breach of any
such representations or warranties to the extent described in such notice.
7. Affirmative Covenants of eLoyalty. eLoyalty hereby covenants and
agrees as follows:
7.1 Basic Financial Information. From and after the Funding Date,
eLoyalty will furnish to each Purchaser, as soon as practicable after the end of
each fiscal year, and in any event within ninety (90) days thereafter,
consolidated balance sheets of eLoyalty and its subsidiaries, if any, as at the
end of such fiscal year and consolidated statements of income and surplus and
consolidated statements of cash flows of eLoyalty and its subsidiaries, if any,
for such year, prepared in accordance
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with generally accepted accounting principles and setting forth in each case in
comparative form the figures for the previous fiscal year, all in reasonable
detail, and certified by independent public accountants of recognized national
standing selected by eLoyalty.
7.2 Additional Financial and Other Information. From and after the
Funding Date, eLoyalty will deliver the financial and other information
hereafter described in this Section 7.2 to each Purchaser.
(1) As soon as available and in any event within forty-five (45) days
after the close of each fiscal quarter (other than at the end of a fiscal year),
quarterly unaudited financial statements of eLoyalty, including a balance sheet,
profit and loss statement, cash flow analysis, and comparison to year earlier
results and to projected results.
(2) As soon as practicable after the adoption or approval by eLoyalty's
Board of Directors, an annual plan for each fiscal year which shall include
monthly capital and operating expense budgets, cash flow statements, projected
balance sheets and profit and loss projections for each such month and for the
end of the year, itemized in such detail as the Board of Directors may
reasonably determine.
7.3 Board of Directors. From and after the Funding Date (and, in any
event, prior to the earlier to occur of eLoyalty's sale of Common Stock pursuant
to a firm commitment underwritten offering upon an effective registration
statement under the Securities Act (an "IPO") or the Spin-Off), eLoyalty shall
exert its best efforts to cause a nominee of each of Technology Crossover
Ventures and Sutter Hill Ventures to be nominated, elected and maintained as a
member of eLoyalty's Board of Directors. TSC agrees to vote its shares of Common
Stock of eLoyalty in favor of such nominees.
7.4 Employee Stock Issuances. eLoyalty shall issue shares of its
capital stock or grant options to purchase shares of its capital stock pursuant
to the Plan providing for the issuance of stock in the manner and subject to the
terms and conditions outlined in Exhibit E or upon issuance of options which are
substituted for options to purchase shares of TSC Common Stock. eLoyalty agrees
not to amend Sections 1.5 or 2.4 of the Plan to increase the number of shares of
Common Stock of eLoyalty available for issuance under the Plan.
7.5 Preemptive Rights.
(1) If, at any time after the Funding Date and prior to the termination
of these preemptive rights pursuant to Section 7.9, eLoyalty should enter into
an agreement to issue, in a transaction not registered under the Securities Act
in reliance upon a claimed exemption thereunder, any Equity Securities (as
hereinafter defined), it shall give each Purchaser the right to purchase a pro
rata portion of such privately offered Equity Securities on the same terms as
eLoyalty is willing to sell such Equity Securities to any other person. A
Purchaser's pro rata share, for purposes of this Section 7.5, is the number of
whole shares obtained by multiplying the proposed number of new Equity
Securities by a fraction, the numerator of which is the number of shares of
Common Stock of eLoyalty held by such Purchaser, and the denominator of which is
the total number of issued and
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outstanding shares of Common Stock of eLoyalty as of the date of the written
notice pursuant to subsection (b) below (assuming full exercise of all
outstanding options and conversion of all outstanding Preferred Stock). The
intention of this Section 7.5 is to provide Purchasers with an opportunity to
purchase their pro rata share of any proposed issuance of Equity Securities so
as to avoid dilution and maintain each Purchaser's respective percentage
ownership interest in eLoyalty.
(2) Prior to any sale or issuance by eLoyalty of any Equity Securities
subject to preemptive rights as described in this Section 7.5, eLoyalty shall
notify the Purchasers in writing of its intention to sell and issue such
securities, setting forth the terms under which it proposes to make such sale.
Within twenty (20) business days after receipt of such notice, each Purchaser
shall notify eLoyalty whether the Purchaser desires to exercise the option to
purchase all or any part of such Purchaser's pro rata share of the Equity
Securities so offered. If a Purchaser elects not to purchase its pro rata share,
such amount may be purchased by those Purchasers electing to purchase their pro
rata share of the Equity Securities.
(3) After termination of the twenty (20) day period specified in
subsection (b) above, eLoyalty may, during a period of ninety (90) days
following the end of such twenty (20) day period, sell and issue (or enter into
an agreement to sell and issue) such Equity Securities as to which the
Purchasers do not exercise their option to purchase, to another person upon the
same terms and conditions as those set forth in the notice to the Purchasers. In
the event eLoyalty has not sold the Equity Securities within said ninety (90)
day period, eLoyalty shall not thereafter issue or sell any Equity Securities
without again offering such securities to the Purchasers in the manner provided
above.
(4) If any Purchaser exercises its option to purchase any of the Equity
Securities offered by eLoyalty, payment for the Equity Securities shall be by
wire transfer, against delivery of the Equity Securities at the executive
offices of eLoyalty at the closing of such transaction. eLoyalty and such
Purchasers shall take all such reasonable actions as may be required by any
regulatory authority in connection with the exercise by the Purchasers of the
right to purchase Equity Securities as set forth in this Section 7.5.
(5) For purposes of this Agreement, the term "Equity Securities" shall
mean (i) Common Stock, rights, options or warrants to purchase Common Stock,
(ii) any security other than Common Stock having voting rights in the election
of the Board of Directors, not contingent upon a failure to pay dividends, (iii)
any security convertible into or exchangeable for any of the foregoing, or (iv)
any agreement or commitment to issue any of the foregoing, other than (1) the
issuance of shares of Common Stock in an IPO, (2) options to purchase shares of
Common Stock granted pursuant to the Plan and any issuance of shares of Common
Stock pursuant to such options, (3) options to purchase shares of Common Stock
which are substituted for options to purchase shares of TSC Common Stock and any
issuances of Common Stock pursuant to such options and (4) preferred stock
purchase rights in connection with a stockholders rights plan.
7.6 Confidentiality of Information. Each Purchaser agrees that all
information obtained by such Purchaser pursuant to Sections 7.1 and 7.2 shall be
deemed proprietary and confidential to eLoyalty and will not be disclosed to any
person or entity, or used other than in
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connection with the evaluation of its investment in eLoyalty, without the prior
written consent of eLoyalty; provided, however, that notwithstanding the
foregoing, each Purchaser may disclose such information without the prior
written consent of eLoyalty to its partners, associates or employees to the
extent required in order to evaluate this investment and as may be necessary to
continue to evaluate eLoyalty, it being understood that each Purchaser shall be
responsible for any breach of this Section 7.6 by its partners, associates and
employees. Each Purchaser further agrees that it will require any transferee of
its eLoyalty Shares to agree to become subject to the confidentiality
obligations of the transferring Purchaser hereunder. At the request of eLoyalty,
any Purchaser or any transferee of a Purchaser who receives information with
respect to the terms and conditions of any proposed offering pursuant to Section
7.5 or Section 7.8 or in any negotiations with eLoyalty of any private placement
shall maintain the confidentiality of such information and shall not disclose
such information to any party with whom eLoyalty is negotiating the proposed
offering or any other offering of its securities or with whom eLoyalty may
negotiate any other offering of its securities.
7.7 Management Rights Agreement. eLoyalty shall execute a management
rights letter with TCV III (Q), L.P. ("TCV"), the form of which is attached
hereto as Exhibit F, pursuant to which a TCV representative shall have the right
to attend all meetings of the eLoyalty Board of Directors in a non-voting
advisory capacity, shall be entitled to consult with and advise management of
eLoyalty on significant business issues and shall have the right to examine
eLoyalty company records.
7.8 Issuance of Equity Securities. eLoyalty covenants that, from and
after the date hereof (except as otherwise provided herein or unless Purchasers
have given their prior written consent, which consent shall not be unreasonably
withheld and which consent shall be deemed granted if Purchasers have not
delivered a written notice of objection to eLoyalty within ten (10) business
days of Purchasers' receipt of written notice of a proposed issuance of Equity
Securities), it shall not issue Equity Securities to any person, other than the
issuance of shares of eLoyalty Common Stock to TSC on or prior to the Funding
Date.
7.9 Termination of Covenants. Notwithstanding anything contained herein
to the contrary, the covenants set forth in Sections 7.1, 7.2, 7.3, 7.4, 7.5,
7.7 and 7.8 shall terminate and be of no further force and effect upon the
earlier to occur of (i) the closing of the IPO and (ii) the closing of the
Spin-Off.
8. Additional Agreements.
8.1 Indemnification; Reimbursement. Prior to the Funding Date, eLoyalty
will enter into indemnification agreements in customary form with its directors
and will amend its Certificate of Incorporation to provide for indemnification
of directors to the maximum extent permitted by law. eLoyalty will reimburse all
non-employee directors for their reasonable expenses to attend Board meetings.
8.2 IPO Lockup; Cooperation. In connection with the IPO, the Purchasers
agree to enter into a lockup agreement with the underwriters containing
customary terms and conditions and restricting sales of Common Stock of eLoyalty
for a period of up to 180 days following the IPO
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(provided (i) directors and officers of eLoyalty agree to the same lockup and
(ii) such agreement shall provide that any discretionary waiver or termination
of the restrictions of such agreements by eLoyalty or representatives of the
underwriters shall apply to all persons subject to such agreements pro rata
based on the number of shares subject to such agreements). Notwithstanding the
foregoing, shares of Common Stock of eLoyalty purchased by a Purchaser in or
following the IPO are specifically excluded from the lockup restrictions
contained in this Section 8.2. In addition, the Purchasers agree to cooperate
with the Sellers and to take such actions as may be reasonably requested by the
Sellers (including furnishing any necessary information) in order to facilitate
the IPO and the Spin-Off. eLoyalty agrees to provide Purchasers with five days
advance written notice prior to its initial filing of a Registration Statement
on Form S-1 with respect to an IPO.
8.3 Put Right. (a) If, prior to the first anniversary of the date of
this Agreement, eLoyalty has not closed an IPO or the Spin-Off, each Purchaser
may, by written notice to eLoyalty (the "Put Notice"), elect to sell all of its
eLoyalty Shares to eLoyalty at a date specified in the Put Notice, which date
shall be not less than 30 nor more than 60 days after the date the Put Notice is
delivered to eLoyalty. Upon delivery of the Put Notice, eLoyalty shall be
obligated to purchase from such Purchaser, and such Purchaser shall be obligated
to sell to eLoyalty, such eLoyalty Shares on such date at a purchase price of $4
per eLoyalty Share as adjusted pursuant to Section 8.4(b) below (the "Put
Price"). Following the closing of the purchase of such Purchaser's eLoyalty
Shares, the Sellers shall have no further liability or obligation whatsoever to
such Purchaser under this Agreement or in connection with the sale of Shares or
otherwise.
(b) If at any time after the Funding Date and prior to the earlier to
occur of the closing of the IPO or the Spin-Off, TSC ceases to own a majority of
the outstanding eLoyalty shares on a fully diluted basis or eLoyalty enters into
an agreement to sell all or substantially all of its assets, each Purchaser may
deliver a Put Notice to eLoyalty. Upon delivery of the Put Notice, eLoyalty
shall be obligated to purchase from such Purchaser, and such Purchaser shall be
obligated to sell to eLoyalty, all of its eLoyalty Shares on the date specified
in the Put Notice at the Put Price (which shall in no event be earlier than the
closing of the proposed transaction). Following the closing of the purchase of
such Purchaser's eLoyalty Shares, the Sellers shall have no further liability or
obligation whatsoever to such Purchaser under this Agreement or in connection
with the sale of Shares or otherwise.
8.4 Adjustment of Number of eLoyalty Shares and Put Right. (a) The
Purchasers acknowledge that the number of eLoyalty Shares being sold pursuant to
this Agreement was calculated based upon the assumption that the aggregate
number of shares of Common Stock of eLoyalty to be owned by TSC on the Funding
Date will be 41,400,000. The number of eLoyalty Shares being sold pursuant to
this Agreement (i.e., initially 2,400,000) and the per share purchase price
(i.e., initially $3.50) shall be adjusted on the Funding Date as follows. The
number of eLoyalty Shares being sold pursuant to this Agreement shall be
adjusted to equal the number of eLoyalty Shares subject to this Agreement
immediately prior to the Funding Date multiplied by the Adjustment Ratio (as
hereinafter defined). The per share purchase price applicable hereto shall be
adjusted to equal the per share price applicable hereto immediately prior to the
Funding Date divided by the Adjustment Ratio and then rounded up to the nearest
cent. Any adjustment that would otherwise result in the purchase of a fraction
of an eLoyalty Share shall be rounded to the nearest whole
-19-
<PAGE> 20
number. As used herein, the term "Adjustment Ratio" shall mean that number,
equal to a fraction, rounded down to the nearest one-millionth, the numerator of
which shall be equal to the number of shares of Common Stock of eLoyalty owned
by TSC on the Funding Date and the denominator of which is 41,400,000.
Notwithstanding the foregoing adjustment to the number of eLoyalty Shares being
sold pursuant to this Agreement, in no event shall the aggregate number of
eLoyalty Shares available for purchase by the Purchasers on the Funding Date
equal less than 4.171% of the Fully Diluted Capitalization of eLoyalty. For
purposes of this Section 8.4, "Fully Diluted Capitalization" means the number of
shares of eLoyalty Common Stock equal to the sum of the following: (i) the
number of shares of eLoyalty Common Stock held by TSC (i.e., assumed to be
41,400,000 shares as of the date hereof); (ii) the number of shares of eLoyalty
Common Stock subject to options that are contemplated to be granted in
connection with the Spin-Off in substitution for options to acquire shares of
TSC Common Stock (i.e., assumed to be 8,400,145 shares as of the date hereof);
(iii) the number of shares of eLoyalty Common Stock (other than those described
in clause (ii)) that are reserved for issuance pursuant to the Plan as of the
date hereof (i.e., assumed to be 5,340,000 shares); and (iv) the number of
shares of eLoyalty Common Stock acquired by the Purchasers pursuant to this
Agreement. For purposes of determining the calculation in clause (ii) above, it
is agreed that the number of shares of TSC Common Stock subject to options which
may be converted into eLoyalty options shall be multiplied by the Adjustment
Ratio in order to obtain the relevant number of shares of eLoyalty Common Stock
subject to options. No adjustment shall be made after the Funding Date if the
actual number of eLoyalty shares under clause (ii) as of the Spin-Off varies
from the assumed number for purposes of this calculation.
(b) In the event of any adjustment pursuant to Section 8.4(a), the
parties agree that the Put Price shall be adjusted to equal $4 divided by the
Adjustment Ratio and then rounded up to the nearest cent.
8.5 Termination. (a) Anything contained in this Agreement to the
contrary notwithstanding, the purchase and sale of the eLoyalty Shares may be
terminated at any time prior to the Funding Date:
(1) by the mutual written consent of the Purchasers and eLoyalty;
(2) by the Purchasers or eLoyalty if TSC shall not have received the
Revenue Ruling on or before December 31, 1999;
(3) by Purchasers or eLoyalty if the Funding Date shall not have
occurred on or before the first anniversary of the date of this Agreement (or
such later date as may be agreed to in writing by Purchasers and eLoyalty); or
(4) by Purchasers in the event of any material breach of Section 1.3(b)
by Sellers and the failure of Sellers to cure such breach within 30 days after
receipt of written notice from Purchasers that such breach be cured.
-20-
<PAGE> 21
(b) Any party desiring to terminate the purchase and sale of
the eLoyalty Shares pursuant to Sections 8.5(a)(ii), 8.5(a)(iii) or 8.5(a)(iv)
shall give written notice of such termination of the other parties to this
Agreement.
(c) In the event that the purchase and sale of the eLoyalty
Shares shall be terminated pursuant to Section 8.5(a), all further obligations
of the parties under this Agreement (other than Section 9.9) shall be terminated
without further liability of any party to the others; provided, however, that if
the purchase and sale of the eLoyalty Shares is terminated pursuant to Section
8.5(a)(iv), TSC shall pay each Purchaser an amount equal to the product of (x)
the number of eLoyalty Shares set forth opposite each Purchaser's name on
Exhibit A and (y) $.50, as liquidated damages (such payment being referred to
herein as the "Termination Fee"). Except for the Termination Fee, Purchasers
will have no other remedy, whether at law or in equity, for any breach by
Sellers of Section 1.3(b). THE PARTIES EXPRESSLY AGREE AND ACKNOWLEDGE THAT
DETERMINING ACTUAL DAMAGES IN THE EVENT OF A BREACH BY SELLERS OF SECTION 1.3(b)
WOULD BE EXTREMELY DIFFICULT OR IMPRACTICABLE TO ASCERTAIN AND THAT THE AMOUNT
SET FORTH ABOVE REPRESENTS THE PARTIES' REASONABLE ESTIMATE OF SUCH DAMAGES. THE
PAYMENT OF THE AMOUNT SET FORTH ABOVE IS NOT INTENDED AS A FORFEITURE OR PENALTY
BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO PURCHASERS.
9. Miscellaneous.
9.1 Waivers and Amendments. With the written consent of the party or
parties entitled to the benefit thereof, any obligation under this Agreement may
be waived (either generally or in a particular instance, either retroactively or
prospectively and either for a specified period of time or indefinitely). In
addition, the Purchasers and eLoyalty may enter into a supplementary agreement
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Agreement relating solely to eLoyalty.
Except as otherwise provided herein, neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but only by a
statement in writing signed by the party against whom enforcement of the change,
waiver, discharge or termination is sought, except to the extent provided in
this Section 9.1.
9.2 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Illinois as such laws are applied to agreements between
Illinois residents entered into and to be performed entirely within Illinois.
9.3 Survival. The representations, warranties, covenants and agreements
made herein shall survive the execution of this Agreement and the closing of the
transactions contemplated hereby. Any liability arising out of (i) the
representations and warranties of eLoyalty, TSC and the Purchasers made in
Sections 3, 4 and 5 hereof, respectively, or (ii) any certificate delivered on
behalf of eLoyalty, TSC or the Purchasers pursuant to this Agreement shall
terminate and be extinguished upon the completion of the audits of TSC and
eLoyalty for the period ending December 31, 2001. No party shall have any
liability for any inaccuracy in or breach of any representation or warranty by
such party or for any certificate delivered on behalf of such party pursuant to
this Agreement if such party can demonstrate that the other party or any of its
officers, employees, counsel or other
-21-
<PAGE> 22
representatives had actual knowledge in writing (including without limitation,
by means of electronic transmission) on or before the Funding Date of the facts
as a result of which such representation or warranty was inaccurate or breached.
9.4 Successors and Assigns. The rights and obligations of the parties
hereto may not be assigned or transferred, other than by operation of law,
without the express written consent of eLoyalty, TSC and the Purchasers. Subject
to the foregoing, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors and permitted assigns of the parties hereto.
9.5 Entire Agreement. This Agreement, the exhibits to this Agreement,
the Disclosure Letter and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof.
9.6 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be sent by overnight courier
or mailed by certified or registered mail, postage prepaid, return receipt
requested, addressed (a) if to TSC, at 205 North Michigan Avenue, 15th Floor,
Chicago, Illinois 60601, or at such other address as TSC shall have furnished to
the other parties hereto in writing, (b) if to eLoyalty, at 205 North Michigan
Avenue, 15th Floor, Chicago, Illinois 60601, or at such other address as
eLoyalty shall have furnished to the other parties hereto in writing, and (c) if
to a Purchaser, at the address of the Purchaser as set forth in the signature
pages hereto, or at such other address as such Purchaser shall have furnished to
the other parties hereto in writing. Notice shall be effective as of the time
received by the addressee.
9.7 Separability. In case any provision of this Agreement shall be
declared invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
9.8 Finder's Fees.
(1) Each of the Sellers (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement and (ii) hereby agrees to indemnify and to hold the Purchasers
harmless of and from any liability for any commission or compensation in the
nature of a finder's fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which it, or any of its employees or representatives, are responsible.
(2) Each Purchaser (i) represents and warrants that it has retained no
finder or broker in connection with the transactions contemplated by this
Agreement and (ii) hereby agrees to indemnify and to hold the Sellers harmless
of and from any liability for any commission or compensation in the nature of a
finder's fee to any broker or other person or firm (and the costs and expenses
of defending against such liability or asserted liability) for which it, or any
of its employees or representatives, are responsible.
-22-
<PAGE> 23
9.9 Expenses. TSC, eLoyalty and the Purchasers shall bear their
respective expenses and legal fees incurred with respect to this Agreement and
the transactions contemplated hereby.
9.10 Interpretation. Articles, titles and headings to sections herein
are inserted for convenience of reference only and are not intended to be a part
of or to affect the meaning or interpretation of this Agreement. The Exhibits
and the Disclosure Letter referred to herein shall be construed with and as an
integral part of this Agreement to the same extent as if they were set forth
verbatim herein. Disclosure of any fact or item in the Disclosure Letter
referenced by a particular section in this Agreement shall be deemed to have
been disclosed with respect to every other section in this Agreement. Neither
the specification of any dollar amount in any representation or warranty
contained in this Agreement nor the inclusion of any specific item in the
Disclosure Letter is intended to imply that such amount, or higher or lower
amounts, or the item so included or other items, are or are not material, and no
party shall use the fact of the setting forth of any such amount or the
inclusion of any such item in any dispute or controversy between the parties as
to whether any obligation, item or matter not described herein or included in
the Disclosure Letter is or is not material for purposes of this Agreement.
Unless this Agreement specifically provides otherwise, neither the specification
of any item or matter in any representation or warranty contained in this
Agreement nor the inclusion of any specific item in the Disclosure Letter is
intended to imply that such item or matter, or other items or matters, are or
are not in the ordinary course of business, and no party shall use the fact of
the setting forth or the inclusion of any such item or matter in any dispute or
controversy between the parties as to whether any obligation, item or matter not
described herein or included in the Disclosure Letter is or is not in the
ordinary course of business for purposes of this Agreement. eLoyalty may, from
time to time prior to or on the Funding Date, by notice in accordance with the
terms of this Agreement, supplement or amend the Disclosure Letter, in order to
add information or correct previously supplied information. No such amendment
shall be evidence, in and of itself, that the representations and warranties in
the corresponding section are no longer true and correct in all material
respects. It is specifically agreed that the Disclosure Letter may be amended to
add immaterial, as well as material, items thereto. No such supplement or
amendment shall be deemed to cure any breach for purposes of Section 6.1(b). If,
however, the purchase and sale of the eLoyalty Shares occurs, any such
supplement, amendment or addition will be effective to cure and correct for all
other purposes any breach of any representation, warranty or covenant which
would have existed if eLoyalty had not made such supplement, amendment or
addition, and all references to the Disclosure Letter which is supplemented or
amended as provided in this Section 9.10 shall for all purposes after the
purchase and sale of the eLoyalty Shares be deemed to be a reference to such
Disclosure Letter as so supplemented or amended.
9.11 No Public Announcement. Neither Purchasers, as a party on the one
hand, nor the Sellers, as a party on the other hand, shall, without the approval
of the other, make any press release or other public announcement concerning the
transactions contemplated by this Agreement, except as and to the extent that
any such party shall be so obligated by law, in which case the other party shall
be advised and the parties shall use their reasonable efforts to cause a
mutually agreeable release or announcement to be issued; provided, however, that
the foregoing shall not preclude communications or disclosures necessary to
implement the provisions of this Agreement or to comply with the accounting and
SEC disclosure obligations or the rules of any stock exchange.
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<PAGE> 24
9.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
9.13 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to the Purchasers, upon any breach
or default of the Sellers under this Agreement, shall impair any such right,
power or remedy, nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. It is further agreed that any waiver, permit, consent or approval of
any kind or character on the Purchasers' part of any breach or default under
this Agreement, or any waiver on the Purchasers' part of any provisions or
conditions of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in such writing and that all remedies, either
under this Agreement or by law or otherwise afforded to the Purchasers, shall be
cumulative and not alternative.
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<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
TECHNOLOGY SOLUTIONS COMPANY
a Delaware corporation
By: /s/ William H. Waltrip
---------------------------------
Name: William H. Waltrip
Title: Chairman of the Board
eLOYALTY CORPORATION
a Delaware corporation
By: /s/ Kelly D. Conway
---------------------------------
Name: Kelly D. Conway
Title: President and Chief
Executive Officer
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
INVESTORS:
TCV III (GP)
a Delaware General Partnership
By: Technology Crossover
Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III, L.P.
a Delaware Limited Partnership
By: Technology Crossover
Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III (Q), L.P.
a Delaware Limited Partnership
By: Technology Crossover
Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
<PAGE> 27
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
INVESTORS:
TCV III STRATEGIC PARTNERS, L.P.
a Delaware Limited Partnership
By: Technology Crossover
Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
Mailing Address:
Technology Crossover Ventures
56 Main Street, Suite 210
Millburn, NJ 07041
Attention: Robert C Bensky
Phone: (973) 467-5320
Fax: (973) 467-5323
with a copy to:
Technology Crossover Ventures
575 High Street, Suite 400
Palo Alto, CA 94301
Attention: Jay C. Hoag
Phone: (650) 614-8210
Fax: (650) 614-8222
<PAGE> 28
IN WITNESS WHEREOF, the Issuer and the Investors have caused this
Agreement to be duly executed as of the day and year first above written.
INVESTORS:
SUTTER HILL VENTURES
a California Limited Partnership
By:
Its:
By: /s/ Tench Coxe
------------------------------
Name: Tench Coxe
Title: Managing Director
Mailing Address:
Sutter Hill Ventures
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Attention:
Phone: (650) 493-5600
Fax: (650) 858-1854
<PAGE> 29
EXHIBIT A
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NUMBER OF TSC SHARES NUMBER OF ELOYALTY
NAME OF PURCHASER BEING PURCHASED SHARES BEING PURCHASED*
----------------- --------------- -----------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TCV III Strategic Partners, L.P. 10,379 49,817
- --------------------------------------------------------------------------------------------------------------
TCV III (GP) 1,815 8,714
- --------------------------------------------------------------------------------------------------------------
TCV III, L.P. 8,623 41,389
- --------------------------------------------------------------------------------------------------------------
TCV III (Q), L.P. 229,183 1,100,080
- --------------------------------------------------------------------------------------------------------------
Sutter Hill Ventures 250,000 1,200,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Subject to Section 8.4
<PAGE> 1
EXHIBIT 10.4
REGISTRATION RIGHTS AGREEMENT
dated as of August 13, 1999
among
TECHNOLOGY SOLUTIONS COMPANY
and
THE HOLDERS OF REGISTRABLE SECURITIES REFERRED TO HEREIN
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of August 13, 1999 among
Technology Solutions Company, a Delaware corporation (the "Issuer"), and the
Investors (as defined herein).
WHEREAS, pursuant to that certain Common Stock Purchase and Sale
Agreement dated August 13, 1999 by and among the Issuer and the Investors (the
"Stock Purchase Agreement"), the Investors purchased shares of Common Stock (as
defined herein) from the Issuer and the Issuer agreed to provide certain rights
to the Holders (as defined herein) to cause the shares so purchased to be
registered pursuant to the Securities Act (as defined herein); and
WHEREAS, the parties hereto desire to set forth the Holders' rights
and the Issuer's obligations to cause the registration of the Registrable
Securities (as defined herein) pursuant to the Securities Act;
NOW, THEREFORE, in consideration of the purchase by the Investors of
the shares of Common Stock pursuant to the Stock Purchase Agreement and the
mutual promises, representations, warranties, covenants and agreements contained
herein, the parties hereto, intending to be legally bound hereby, agree as
follows:
ARTICLE 1
DEFINITIONS
Section 1.1. Definitions. Terms used herein and not defined shall have
the meaning given to such terms in the Stock Purchase Agreement. In addition,
the following terms, as used herein, shall have the following respective
meanings:
"Commission" means the Securities and Exchange Commission or any
successor governmental body or agency.
"Common Stock" means (i) the common stock, par value $.01 per share,
of the Issuer and (ii) shares of capital stock of the Issuer issued by the
Issuer in respect of or in exchange for shares of such common stock in
connection with any stock dividend or distribution, stock split-up,
recapitalization, recombination or exchange by the Issuer generally of shares of
such common stock.
"Demand Registration" has the meaning ascribed thereto in Section
2.1(a).
"Demand Request" has the meaning ascribed thereto in Section 2.1(a).
"Disadvantageous Condition" has the meaning ascribed thereto in
Section 2.3.
<PAGE> 3
"Holder" means a person who owns Registrable Securities and is an
Investor.
"Investors" means the parties listed as "Investors" on the signature
pages hereto.
"Majority Selling Holders" means those Selling Holders whose
Registrable Securities included in such registration represent a majority of the
Registrable Securities of all Selling Holders included therein.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization or government or other agency or political
subdivision thereof.
"Registrable Securities" means Common Stock acquired by the Holders
pursuant to the Stock Purchase Agreement and any shares of stock or other
securities into which or for which such Common Stock may hereafter be changed,
converted or exchanged upon any reclassification, share combination, share
subdivision, share dividend or similar transaction or event. As to any
particular Registrable Securities, such Registrable Securities shall cease to be
Registrable Securities as soon as (i) such Registrable Securities have been sold
or otherwise disposed of pursuant to a registration statement that was filed
with the Commission in accordance with this Agreement and declared effective
under the Securities Act, (ii) they shall have been otherwise sold, transferred
or disposed of by a Holder to any Person that is not a Holder, or (iii) they
shall have ceased to be outstanding.
"Registration Expenses" means any and all expenses incident to
performance of or compliance with any registration of securities pursuant to
Article 2, including (i) the fees, disbursements and expenses of the Issuer's
counsel and accountants (including in connection with the delivery of opinions
and/or comfort letters) in connection with this Agreement and the performance of
the Issuer's obligations hereunder; (ii) all expenses, including filing fees, in
connection with the preparation, printing and filing of one or more registration
statements hereunder; (iii) the cost of printing or producing any agreements
among underwriters, underwriting agreements, and blue sky or legal investment
memoranda; (iv) the filing fees incident to securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
securities to be disposed of; (v) transfer agents' and registrars' fees and
expenses in connection with such offering; (vi) all security engraving and
security printing expenses; (vii) all fees and expenses payable in connection
with the listing of the Registrable Securities on any securities exchange or
automated interdealer quotation system on which the Common Stock is then listed;
and (viii) all reasonable fees and expenses of one legal counsel for the Holders
in connection with the Demand Registration, which legal counsel shall be
selected by the Majority Selling Holders; provided, that Registration Expenses
shall exclude (x) all underwriting discounts and commissions, selling or
placement agent or broker fees and commissions, and transfer taxes, if any, in
connection with the sale of any securities, and (y) the fees and expenses of
counsel for any Holder (other than pursuant to clause (viii)); provided,
however, that the Issuer shall not be required to pay for any expenses of any
registration
-2-
<PAGE> 4
proceeding begun pursuant to Section 2.1 if the registration is subsequently
withdrawn at the request of the Majority Selling Holders (in which case all
Selling Holders shall bear such expense); provided, however, that if at the time
of such withdrawal, the Majority Selling Holders have learned of a material
adverse change in the condition, business or prospects of the Issuer at the time
of their request and have withdrawn the request with reasonable promptness
following disclosure by the Issuer of such material adverse change, then the
Majority Selling Holders shall not be required to pay any of such expenses and
shall retain their rights pursuant to Section 2.1.
"Rule 144" means Rule 144 (or any successor rule to similar effect)
promulgated under the Securities Act.
"Rule 145" means Rule 145 (or any successor rule to similar effect)
promulgated under the Securities Act.
"Rule 415 Offering" means an offering on a delayed or continuous basis
pursuant to Rule 415 (or any successor rule to similar effect) promulgated under
the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Holder" means any Holder who sells Registrable Securities
pursuant to a public offering registered hereunder.
Section 1.2. Usage.
(i) References to a Person are also references to its assigns
and successors in interest (by means of merger, consolidation or sale
of all or substantially all the assets of such Person or otherwise, as
the case may be).
(ii) References to Registrable Securities "owned" by a Holder
shall include Registrable Securities beneficially owned by such Person
but which are held of record in the name of a nominee, trustee,
custodian, or other agent, but shall exclude shares of Common Stock
held by a Holder in a fiduciary capacity for customers of such Person.
(iii) References to a document are to it as amended, waived
and otherwise modified from time to time and references to a statute or
other governmental rule are to it as amended and otherwise modified
from time to time (and references to any provision thereof shall
include references to any successor provision).
(iv) References to Sections or to Schedules or Exhibits are to
sections hereof or schedules or exhibits hereto, unless the context
otherwise requires.
(v) The definitions set forth herein are equally applicable
both to the
-3-
<PAGE> 5
singular and plural forms and the feminine, masculine and neuter forms
of the terms defined.
(vi) The term "including" and correlative terms shall be
deemed to be followed by "without limitation" whether or not followed
by such words or words of like import.
(vii) The term "hereof" and similar terms refer to this
Agreement as a whole.
(viii) The "date of" any notice or request given pursuant to
this Agreement shall be determined in accordance with Section 3.4.
ARTICLE 2
REGISTRATION RIGHTS
Section 2.1. Demand Registration. (a) At any time on or after the date
ninety (90) days from the date of the Stock Purchase Agreement, upon written
notice to the Issuer from a Holder or Holders holding a majority in interest of
the Registrable Securities (the "Demand Request"), which notice requests,
pursuant to this Section 2.1, that the Issuer effect the registration under the
Securities Act of all of the Registrable Securities held by such requesting
Holders, which notice shall specify the intended method or methods of
disposition of such Registrable Securities, the Issuer shall prepare as soon as
practicable and, within 20 days after such request, file with the Commission a
registration statement with respect to such Registrable Securities and
thereafter use all reasonable efforts to cause such registration statement to be
declared effective under the Securities Act for purposes of dispositions in
accordance with the intended method or methods of disposition stated in such
request. Notwithstanding any other provision of this Agreement to the contrary:
(i) the Holders may collectively exercise their rights to
request registration under this Section 2.1(a) on not more than one
occasion (such registration being referred to herein as the "Demand
Registration");
(ii) the method of disposition requested by Holders in
connection with any Demand Registrations may not, without the Issuer's
written consent, be a Rule 415 Offering;
(iii) the Issuer shall not be required to effect a Demand
Registration hereunder if all securities that were Registrable
Securities on the date hereof have ceased to be Registrable Securities;
and
-4-
<PAGE> 6
(iv) the Issuer shall not be required to effect a Demand
Registration hereunder, or to maintain any registration statement filed
pursuant hereto effective after the date on which the Holders have met
the holding period requirements pursuant to Rule 144.
(b) Notwithstanding any other provision of this Agreement to
the contrary, a Demand Registration requested by Holders pursuant to this
Section 2.1 shall not be deemed to have been effected and, therefore, not
requested and the rights of each Holder shall be deemed not to have been
exercised for purposes of paragraph (a) above, (i) if such Demand Registration
has not become effective under the Securities Act or (ii) if such Demand
Registration, after it became effective under the Securities Act, was not
maintained effective under the Securities Act (other than as a result of any
stop order, injunction or other order or requirement of the Commission or other
government agency or court solely on the account of a material misrepresentation
or omission of a Holder) for at least 30 days (or such shorter period ending
when all the Registrable Securities covered thereby have been disposed of
pursuant thereto) (provided that such 30-day period shall be extended for such
number of days that equals the number of days elapsing from (A) the date the
written notice contemplated by Section 2.5(e) is given by the Issuer to (B) the
date on which the Issuer delivers to the Holders of Registrable Securities the
amendment contemplated by Section 2.5(e)), as a result thereof, the Registrable
Securities requested to be registered cannot be distributed in accordance with
the plan of distribution set forth in the related registration statement. The
Holders shall not lose their right to a Demand Registration under Section 2.1 if
the Demand Registration related to such Demand Request is delayed or not
effected in the circumstances set forth in this Section 2.1(b).
(c) The Issuer shall have the right to cause the registration
of additional equity securities for sale for the account of the Issuer in the
registration of Registrable Securities requested by the Holders pursuant to
Section 2.1(a), provided that if such Holders are advised in writing (with a
copy to the Issuer) by the lead or managing underwriter referred to in Section
2.2 that, in such underwriter's good faith view, all or a part of such
Registrable Securities and additional equity securities cannot be sold and the
inclusion of such Registrable Securities and additional equity securities in
such registration would be likely to have an adverse effect on the price, timing
or distribution of the offering and sale of the Registrable Securities and
additional equity securities then contemplated, then the number of securities
that can, in the good faith view of such underwriter, be sold in such offering
without so adversely affecting such offering shall be allocated first, to the
Registrable Securities proposed to be included in the Demand Registration by the
Holders and second, to the securities of the Issuer proposed to be included in
such registration by the Issuer for sale for its own account. The Holders of the
Registrable Securities to be offered pursuant to paragraph (a) above may require
that any such additional equity securities be included by the Issuer in the
offering proposed by such Holders on the same conditions as the Registrable
Securities that are included therein.
(d) Within seven days after delivery of a Demand Request by a
Holder, the Issuer shall provide a written notice to each Holder, advising such
Holder of its right to include all of the Registrable Securities held by such
Holder for sale pursuant to the Demand Registration
-5-
<PAGE> 7
and advising such Holder of procedures to enable such Holder to elect to so
include Registrable Securities for sale in such Demand Registration. Any Holder
may, within twenty days of delivery to such Holder of a notice pursuant to this
Section 2.2(d), elect to so include Registrable Securities in such Demand
Registration by written notice to such effect to the Issuer specifying the
number of Registrable Securities desired to be so included by such Holder.
Section 2.2. Other Matters In Connection With Registrations. In the
event that any public offering pursuant to Section 2.1 shall involve, in whole
or in part, an underwritten offering, the Issuer shall have the right to
designate an underwriter or underwriters as the lead or managing underwriters of
such underwritten offering; provided, however, that each Person so selected
shall be reasonably acceptable the Holders owning a majority of the Registrable
Securities proposed to be sold therein.
Section 2.3. Certain Delay Rights. Notwithstanding anything else
contained in this Agreement, with respect to any registration statement filed,
or to be filed, pursuant to Section 2.1, if the Issuer provides written notice
to each Holder that in the Issuer's good faith and reasonable judgment it would
be materially disadvantageous to the Issuer (because the sale of Registrable
Securities covered by such registration statement or the disclosure of
information therein or in any related prospectus or prospectus supplement would
materially interfere with any acquisition, financing or other material event or
transaction in connection with which a distribution of securities for the
account of the Issuer or eLoyalty is then intended or the public disclosure of
which at the time would be materially prejudicial to the Issuer (a
"Disadvantageous Condition")) for such a registration statement to be maintained
effective, or to be filed and become effective, and setting forth the general
reasons for such judgment, the Issuer shall be entitled to cause such
registration statement to be withdrawn or the effectiveness of such registration
statement terminated, or, in the event no registration statement has yet been
filed, shall be entitled not to file any such registration statement, until such
Disadvantageous Condition no longer exists (notice of which the Issuer shall
promptly deliver to each Holder); provided, however, that in no event shall such
registration pursuant to Section 2.1 be delayed in excess of 90 days, and such
right to delay may be exercised by the Issuer only once in any twelve month
period. With respect to each Holder, upon the receipt by such Holder of any such
notice of a Disadvantageous Condition, if so directed by the Issuer by notice as
aforesaid, such Holder will deliver to the Issuer all copies, other than
permanent filed copies then in such Holder's possession, of the prospectus and
prospectus supplements then covering such Registrable Securities at the time of
receipt of such notice as aforesaid.
Section 2.4. Expenses. Except as provided herein, the Issuer shall pay
all Registration Expenses with respect to each registration hereunder.
Notwithstanding the foregoing, (i) each Holder and the Issuer shall be
responsible for its own internal administrative and similar costs, which shall
not constitute Registration Expenses, (ii) each Holder shall be responsible for
the legal fees and expenses of its own counsel (except as provided in clause
(viii) of the definition of Registration Expenses), and (iii) each Holder shall
be responsible for all
-6-
<PAGE> 8
underwriting discounts and commissions, selling or placement agent or broker
fees and commissions, and transfer taxes, if any, in connection with the sale of
securities by such Holder.
Section 2.5. Registration and Qualification. If and whenever the
Issuer is required to effect the registration of any Registrable Securities
under the Securities Act as provided in Section 2.1, the Issuer shall use its
reasonable efforts to:
(a) prepare, file and cause to become effective a registration
statement and such amendments and supplements thereto under the Securities Act
relating to the Registrable Securities to be offered in accordance with the
Holders' intended methods of disposition thereof;
(b) prepare and file with the Commission such amendments to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective and to comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities until the earlier of (i) such time as all Registrable
Securities proposed to be sold therein have been disposed of in accordance with
the intended methods of disposition set forth in such registration statement;
(ii) the expiration of 30 days after such registration statement becomes
effective, provided, that such 30-day period shall be extended for such number
of days that equals the number of days elapsing from (A) the date the written
notice contemplated by paragraph (e) below is given by the Issuer to (B) the
date on which the Issuer delivers to the Holders of Registrable Securities the
amendment contemplated by paragraph (e) below and (iii) the date on which the
Issuer is no longer required to effect a Demand Registration pursuant to Section
2.1(a)(iv);
(c) furnish to the Holders of Registrable Securities and to any
underwriter of such Registrable Securities such number of conformed copies of
such registration statement and of each such amendment and supplement thereto
(in each case including all exhibits), such number of copies of the prospectus
included in such registration statement (including each preliminary prospectus),
in conformity with the requirements of the Securities Act, and such documents
incorporated by reference in such registration statement or prospectus, as the
Holders of Registrable Securities or such underwriter may reasonably request;
(d) use its reasonable efforts to furnish to any underwriter of such
Registrable Securities an opinion of counsel for the Issuer and a "cold comfort"
letter signed by the independent public accountants who have audited the
financial statements of the Issuer included in the applicable registration
statement, in each such case covering substantially such matters with respect to
such registration statement (and the prospectus included therein) and the
related offering as are customarily covered in opinions of issuer's counsel with
respect thereto and in accountants' letters delivered to underwriters in
underwritten public offerings of securities and such other matters as such
underwriters may reasonably request; provided, however, that delivery of any
such opinion or comfort letter shall be subject to the recipient furnishing such
written representations or acknowledgments as are customarily provided by
selling stockholders who receive such comfort letters or opinions;
-7-
<PAGE> 9
(e) promptly notify the Selling Holders in writing (i) at any time
when a prospectus relating to a registration pursuant to Section 2.1 is required
to be delivered under the Securities Act of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and (ii) of any request by the Commission or any other regulatory
body or other body having jurisdiction for any amendment to any registration
statement or other document relating to such offering, and in either such case,
at the request of the Selling Holders prepare and furnish to the Selling Holders
a reasonable number of copies of an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
are made, not misleading;
(f) use its reasonable efforts to list all such Registrable Securities
covered by such registration on each securities exchange and automated
interdealer quotation system on which the Common Stock is then listed;
(g) furnish for delivery in connection with the closing of any
offering of Registrable Securities pursuant to a registration effected pursuant
to Section 2.1 unlegended certificates representing ownership of the Registrable
Securities being sold in such denominations as shall be requested by the Selling
Holders or the underwriters; and
(h) register and qualify the securities covered by such registration
statement under such other securities or Blue Sky laws of such jurisdictions as
shall be reasonably requested by the Selling Holders; provided that the Issuer
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions.
Section 2.6. Underwriting; Due Diligence. (a) If requested by the
underwriters for any underwritten offering of Registrable Securities pursuant to
a registration requested under this Article 2, the Issuer shall enter into an
underwriting agreement with such underwriters for such offering, which agreement
will contain such representations and warranties by the Issuer and such other
terms and provisions as are customarily contained in underwriting agreements
with respect to secondary distributions, including, without limitation,
indemnification and contribution provisions substantially to the effect and to
the extent provided in Section 2.7, and agreements as to the provision of
opinions of counsel and accountants' letters to the effect and to the extent
provided in Section 2.5(d). Such underwriting agreement shall also contain such
representations and warranties by such Selling Holders and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including, without limitation, indemnification and
contribution provisions substantially to the effect and to the extent provided
in Section 2.7.
-8-
<PAGE> 10
(b) In connection with the preparation and filing of each registration
statement registering Registrable Securities under the Securities Act pursuant
to this Article 2, the Issuer shall give the Holders of such Registrable
Securities and the underwriters, if any, and their respective counsel and
accountants (the identity and number of whom shall be reasonably acceptable to
the Issuer), such reasonable and customary access to its books, records and
properties and such opportunities to discuss the business and affairs of the
Issuer with its officers and the independent public accounts who have certified
the financial statements of the Issuer as shall be necessary, in the opinion of
such Holders and such underwriters or their respective counsel, to conduct a
reasonable investigation within the meaning of the Securities Act.
Section 2.7. Indemnification and Contribution. (a) To the extent
permitted by applicable law, the Issuer agrees to indemnify and hold harmless
each Selling Holder and each person, if any, who controls each Selling Holder
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act from and against any and all losses, claims, damages and
liabilities as incurred (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or any amendment thereof, any
preliminary prospectus or prospectus (as amended if the Issuer shall have
furnished any amendments thereto) relating to the Registrable Securities, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any such untrue statement or omission or alleged untrue statement or
omission based upon information furnished to the Issuer in writing by a Selling
Holder expressly for use therein. The Issuer also agrees to indemnify any
underwriter of the Registrable Securities so offered and each person, if any,
who controls such underwriter on substantially the same basis as that of the
indemnification by the Issuer of the Selling Holder provided in this Section
2.7(a).
(b) To the extent permitted by applicable law each Selling Holder
agrees to indemnify and hold harmless the Issuer, its directors, the officers
who sign the registration statement and each person, if any, who controls the
Issuer within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act, from and against any and all loses, claims, damages,
liabilities as incurred (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or any amendment thereof, any
preliminary prospectus or prospectus (as amended if the Issuer shall have
furnished any amendments thereto) relating to the Registrable Securities, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but only with reference to information furnished in writing by such
Selling Holder (or any representative thereof) expressly for use in a
registration statement, any preliminary prospectus, prospectus or any amendments
thereto. Each Selling Holder also agrees to indemnify any underwriter of the
Registrable Securities so offered and each
-9-
<PAGE> 11
person, if any, who controls such underwriter on substantially the same basis as
that of the indemnification by such Selling Holder of the Issuer provided in
this Section 2.7(b); provided, however, that the indemnity agreement contained
in this Section 2.7(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder (which consent shall not be unreasonably withheld);
and provided, further, that in no event shall any indemnity under this Section
2.7(b) exceed the gross proceeds from the offering received by such Holder.
(c) Each party indemnified under paragraph (a) or (b) above shall,
promptly after receipt of notice of a claim or action against such indemnified
party in respect of which indemnity may be sought hereunder, notify the
indemnifying party in writing of the claim or action; provided that the failure
to notify the indemnifying party shall not relieve it from any liability that it
may have to an indemnified party on account of the indemnity agreement contained
in paragraph (a) or (b) above except to the extent that the indemnifying party
was actually prejudiced by such failure, and in no event shall such failure
relieve the indemnifying party from any other liability that it may have to such
indemnified party. If any such claim or action shall be brought against an
indemnified party, and it shall have notified the indemnifying party thereof,
unless based on the written advice of counsel to such indemnified party a
conflict of interest between such indemnified party and indemnifying parties may
exist in respect of such claim, the indemnifying party shall be entitled to
participate therein, and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof. After
notice from the indemnifying party to the indemnified party of its election to
assume the defense of such claim or action, the indemnifying party shall not be
liable to the indemnified party under this Section 2.7 for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof. Any indemnifying party against whom indemnity may be sought
under this Section 2.7 shall not be liable to indemnify an indemnified party if
such indemnified party settles such claim or action without the consent of the
indemnifying party. The indemnifying party may not agree to any settlement of
any such claim or action, other than solely for monetary damages for which the
indemnifying party shall be responsible hereunder, the result of which any
remedy or relief shall be applied to or against the indemnified party, without
the prior written consent of the indemnified party, which consent shall not be
unreasonably withheld. In any action hereunder as to which the indemnifying
party has assumed the defense thereof, the indemnified party shall continue to
be entitled to participate in the defense thereof, with counsel of its own
choice, but the indemnifying party shall not be obligated hereunder to reimburse
the indemnified party for the costs thereof.
(d) If the indemnification provided for in this Section 2.7 shall for
any reason be unavailable (other than in accordance with its terms) to an
indemnified party in respect of any loss, liability, cost, claim or damage
referred to therein, then each indemnifying party shall, in lieu of indemnifying
such indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, cost, claim or damage in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party or parties on the one hand and of the indemnified party or
parties on the other hand in connection with the statements or omissions
-10-
<PAGE> 12
that resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative fault of the Issuer on the
one hand and the Selling Holders on the other hand shall be determined by
reference to, among other things, the parties' relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by an indemnified party as a result of the loss,
cost, claim, damage or liability, or action in respect thereof, referred to
above in this Section 2.7(d) shall be deemed to include, for purposes of this
Section 2.7(d), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. The Issuer and the Selling Holders agree that it would not be just and
equitable if contribution pursuant to this Section 2.7 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in this paragraph. Notwithstanding
any other provision of this Section 2.7, no Selling Holder shall be required to
contribute any amount in excess of the gross proceeds from the offering received
by such Selling Holder.
(e) The obligations of the parties under this Section 2.7 shall be in
addition to any liability which any party may otherwise have to any other party.
ARTICLE 3
MISCELLANEOUS
Section 3.1. Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof.
Section 3.2. Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their successors and assigns.
Section 3.3. Amendments, Waivers, Etc. This Agreement may not be
amended, changed, supplemented, waived or otherwise modified or terminated,
except upon the execution and delivery of a written agreement executed by the
Issuer and Holders representing a majority of the Registrable Securities then
held by all Holders.
Section 3.4. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if given) by hand delivery or telecopy, or by
any courier service, such as Federal Express, providing proof of delivery. All
communications hereunder shall be delivered to the respective parties at the
address or telecopy number set forth on the signature pages hereto or such other
address as any party shall give the other parties hereto notice of in writing.
-11-
<PAGE> 13
Section 3.5. Severability. Whenever possible, each provision or
portion of any provision of this Agreement will be interpreted in such manner as
to be effective and valid under applicable law but if any provision or portion
of any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or portion of any provision in such jurisdiction, and this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision or portion of any provision had
never been contained herein.
Section 3.6. No Waiver. The failure of any party hereto to exercise
any right, power or remedy provided under this Agreement or otherwise available
in respect hereof at law or in equity, or to insist upon compliance by any other
party hereto with its obligations hereunder, and any custom or practice of the
parties at variance with the terms hereof, shall not constitute a waiver by such
party of its right to exercise any such or other right, power or remedy or to
demand such compliance.
Section 3.7. No Third Party Beneficiaries. This Agreement is not
intended to be for the benefit of, and shall not be enforceable by, any Person
who or which is not a party hereto.
Section 3.8. Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Illinois, without giving
effect to the principles of conflicts of law thereof.
Section 3.9. Descriptive Headings. The descriptive headings used
herein are inserted for convenience of reference only and are not intended to be
part of or to affect the meaning or interpretation of this Agreement.
Section 3.10. Counterparts. This Agreement may be executed in
counterpart, each of which shall be deemed to be an original, but all of which,
taken together, shall constitute one and the same Agreement.
-12-
<PAGE> 14
IN WITNESS WHEREOF, the Issuer and the Investors have caused this
Agreement to be duly executed as of the day and year first above written.
TECHNOLOGY SOLUTIONS COMPANY
a Delaware corporation
By: /s/ William H. Waltrip
-----------------------------
Name: William H. Waltrip
Title: Chairman of the Board
<PAGE> 15
IN WITNESS WHEREOF, the Issuer and the Investors have caused this
Agreement to be duly executed as of the day and year first above written.
INVESTORS:
TCV III STRATEGIC PARTNERS, L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
---------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
Mailing Address:
Technology Crossover Ventures
56 Main Street, Suite 210
Millburn, NJ 07041
Attention: Robert C. Bensky
Phone: (973) 467-5320
Fax: (973) 467-5323
with a copy to:
Technology Crossover Ventures
575 High Street, Suite 400
Palo Alto, CA 94301
Attention: Jay C. Hoag
Phone: (650) 614-8210
Fax: (650) 614-8222
<PAGE> 16
IN WITNESS WHEREOF, the Issuer and the Investors have caused this
Agreement to be duly executed as of the day and year first above written.
INVESTORS:
TCV III (GP)
a Delaware General Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
-------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III, L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
----------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III (Q), L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
----------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
<PAGE> 17
IN WITNESS WHEREOF, the Issuer and the Investors have caused this
Agreement to be duly executed as of the day and year first above written.
INVESTORS:
SUTTER HILL VENTURES
a California Limited Partnership
By: /s/ Tench Coxe
------------------------------------
Name: Tench Coxe
Title: Managing Director of the General Partner
Mailing Address:
Sutter Hill Ventures
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304-1005
Attention: Tench Coxe
Phone: (650) 493-5600
Fax: (650) 858-1854
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,411
<SECURITIES> 4,486
<RECEIVABLES> 28,081
<ALLOWANCES> 2,638
<INVENTORY> 0
<CURRENT-ASSETS> 42,247
<PP&E> 3,242
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0
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<TOTAL-LIABILITY-AND-EQUITY> 63,904
<SALES> 0
<TOTAL-REVENUES> 64,415
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<OTHER-EXPENSES> (116)
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<PAGE> 1
EXHIBIT 99.1
<PAGE> 2
[TSC LETTERHEAD]
January , 2000
Dear Stockholders:
The Board of Directors of Technology Solutions Company (TSC) has decided to
separate the two divisions of TSC through a spin-off of the eLoyalty division.
TSC will accomplish this spin-off by transferring the eLoyalty business to a
newly created company called eLoyalty Corporation and then distributing the
common stock of eLoyalty owned by TSC to TSC stockholders. Following the
spin-off, eLoyalty will be a new, independent public company that is expected to
be traded on The Nasdaq Stock Market under the symbol "ELOY." We expect the
spin-off to occur on or about January , 2000.
TSC will continue to be a public company and TSC common stock will continue
to trade on The Nasdaq Stock Market under the symbol "TSCC." TSC will focus on
its remaining business, the E-Solutions division, which has specialized
experience in helping organizations assess the ability of their current systems
to meet the changing and often increasing demands of business, particularly in
the areas of packaged software implementation and integration, supply chain
management, eBusiness solutions and knowledge management.
If you own TSC common stock as of the close of business on January ,
2000, you will receive one share of eLoyalty for every one share of TSC common
stock you own at that time. You should receive your eLoyalty shares shortly
after January , 2000.
You do not need to take any action for the spin-off to occur. You do not
have to pay for the shares of eLoyalty common stock that you will receive in the
spin-off, nor do you have to surrender or exchange shares of TSC common stock in
order to receive your shares of eLoyalty common stock. The number of shares of
TSC common stock that you own will not change as a result of the spin-off. TSC
has requested a ruling from the IRS that the spin-off will be tax-free to TSC
and its stockholders.
This information statement gives you information about TSC, eLoyalty and
the spin-off. We are enthusiastic about the spin-off and the opportunities that
await these two separate companies. We encourage you to read this document
carefully to learn more about the two companies and this spin-off.
Sincerely,
William H. Waltrip
Chairman of the Board
[TSC LETTERHEAD]
<PAGE> 3
[ELOYALTY LETTERHEAD]
January , 2000
Dear Future Stockholders,
Welcome to eLoyalty.
It is with great pleasure that we are sharing with you the exciting news
about eLoyalty. In March of 1999, the TSC Board of Directors announced its
decision to spin-off eLoyalty into a separate, publicly traded company. If you
own TSC common stock on the record date of January , 2000 you will become a
stockholder in eLoyalty as well as retain your ownership of TSC.
We believe that the spin-off will have significant impact on advances in
the arena of customer loyalty. Consider the following:
- After the spin-off, we will be the largest pure-play customer
relationship solutions provider in the industry;
- We have a unique approach to building loyalty across multiple customer
access channels;
- We offer a broad knowledge of eCRM technologies to deploy loyalty
solutions across the Internet, e-mail, web-chat, telephone and fax;
- We have highly experienced professionals specializing in customer
loyalty; and
- Our investment in research and development differentiates our solutions
and will enable us to remain a driving force in the evolution of customer
loyalty.
We encourage you to read this information statement to learn more about
eLoyalty. We look forward to the focus and expansion that will be possible for
eLoyalty as a stand-alone public company. We believe that eLoyalty, as an
independent company, will be better able to provide complete solutions for our
clients and to adapt to rapid technological change. We are committed to building
an exciting and rewarding company that is worthy of your investment.
Sincerely,
Kelly D. Conway
President and
Chief Executive Officer
[ELOYALTY LETTERHEAD]
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT
PRELIMINARY COPY DATED NOVEMBER 5, 1999
INFORMATION STATEMENT
[ELOYALTY LOGO]
eLOYALTY CORPORATION
COMMON STOCK
We are furnishing you with this information statement in connection with
the spin-off by Technology Solutions Company ("TSC") of all of the outstanding
shares of common stock of eLoyalty Corporation ("eLoyalty") owned by TSC to
stockholders of TSC.
TSC will accomplish the spin-off by distributing all issued and outstanding
shares of our common stock owned by TSC to holders of record of TSC common
stock. TSC expects that the distribution of eLoyalty common stock will be made
on or about January , 2000 to holders of record of TSC common stock at the
close of business on January , 2000, on the basis of one share of common stock
of eLoyalty for every one share of TSC common stock held. NO CONSIDERATION WILL
BE PAYABLE BY TSC STOCKHOLDERS FOR THE ELOYALTY SHARES, NOR WILL THEY BE
REQUIRED TO SURRENDER OR EXCHANGE SHARES OF TSC COMMON STOCK OR TAKE ANY OTHER
ACTION IN ORDER TO RECEIVE THE ELOYALTY SHARES.
There is currently no public market for the common stock of eLoyalty,
although it is expected that a "when-issued" trading market may develop prior to
the time of the spin-off. We will apply to have our common stock listed on The
Nasdaq Stock Market under the symbol "ELOY."
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" COMMENCING ON PAGE 6.
---------------------
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
The material in this information statement may be revised or completed. We
have filed a registration statement relating to the common stock of eLoyalty
with the Securities and Exchange Commission. We will not issue these securities
before the registration statement becomes effective.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
information statement is truthful or accurate. Any representation to the
contrary is a criminal offense.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
---------------------
THE DATE OF THIS INFORMATION STATEMENT IS JANUARY , 2000
<PAGE> 5
[PHOTO- TWO WOMEN TALKING]
WHY?
Increasing competitiveness in
today's global economy is forcing
companies to become more focused
on their current customers and
to seek to create and enhance
customer loyalty. Greater loyalty
is expected to increase revenue
and profitability per customer.
WHO?
Over 600 employees including strategic business
consultants and technology architects with an
average of 20 years industry experience for
Vice Presidents and 12 years for other
professionals. Many of our professionals have
held senior management positions including
Chief Executive Officer, Chief Financial Officer
and Chief Information Officer.
[PHOTO- WOMEN TALKING ON CELLULAR TELEPHONE]
WHAT?
The largest, pure-play customer
relationship solution provider
in the industry.* We deliver
comprehensive loyalty solutions
combining a business understanding
of customer relationships and the
technology framework needed
to implement and support an
integrated system.
[PHOTO- WOMEN TALKING ON CELLULAR TELEPHONE]
[eLOYALTY LOGO]
[PHOTO- MAN SITTING AT LAPTOP COMPUTER]
WHERE?
eLoyalty's global operations are
supported by offices in North
America, Europe and Australia.
For the six months ended
June 30, 1999, our international
operations generated nearly 25
percent of eLoyalty's business.
HOW?
eLoyalty's core competencies, experience,
thought leadership, integrated architecture
and proprietary software deliver our
unique approach that helps companies
define, recognize, execute and measure
the effectiveness of each customer
interaction. These interactions occur
across all customer access channels-
Internet, e-mail, web-chat, telephone and
fax as well as throughout the enterprise-
sales, marketing, customer service, or field
service & logistics.
[PHOTO- MAN SITTING AT LAPTOP COMPUTER]
WHEN?
Operating as a business unit of Technology
Solutions Company (TSC)
since 1994, eLoyalty began operating
as a separate business unit in 1999
to focus on the objective of
delivering loyalty solutions.
*According to a July 1999 Announcement Profile by the Aberdeen Group.
<PAGE> 6
OUR ACTION-ORIENTED APPROACH
eLoyalty helps clients identify customer loyalty goals, improve customer
retention, increase up-selling and cross-selling opportunities, lower
customer acquisition and sales costs, increase customer referrals and
capitalize on pricing sensitivity. These goals are identified by analyzing
and segmenting a client's customer base using key indicators including value,
preference and potential sales opportunities.
When companies develop loyal relationships with their customers, these are the
types of results they are looking for:
[PHOTO- WOMAN TALKING [PHOTO- TWO WOMEN [PHOTO- MAN HOLDING
ON CELLULAR TELEPHONE] TALKING] FLOWERS]
Your email targeting was She sent four of her He pays a pure premium
so accurate, she placed an friends to you by because your service
order before opening bragging about your technicians are more
the rest of her mail. customer service. knowledgeable than your
competitor's.
[PHOTO- WOMAN LOOKING [PHOTO- MAN TALKING ON [PHOTO- MAN WITH BOY
STRAIGHT AHEAD] CELLULAR TELEPHONE] ON HIS SHOULDERS]
She made an instant He turned down your Exceed his expectations
"buy" decision because competitor's lower and he'll buy for an
your web site was price offer because entire lifetime.
customized to her unique your relationship means
needs and performance. that much.
[PHOTO- MAN TALKING ON [PHOTO- MAN SITTING [PHOTO- WOMAN TALKING
CELLULAR TELEPHONE] AT LAPTOP COMPUTER] ON CELLULAR TELEPHONE]
He called you first He moved over from a She now buys from three
because you always seem competitor because he separate product lines
to know what's best can access all of his because you can
for him. accounts online. cross sell.
<PAGE> 7
LOYAL CUSTOMERS ARE MADE, NOT BORN
END-TO-END LOYALTY SOLUTIONS
Successful loyalty solutions require a combined knowledge of business strategy
and technology application. To provide our clients with an end-to-end
solution, we have developed expertise in many key business consulting
disciplines, technology integrations and systems architecture. From our
Loyalty Strategy to our Loyalty Architecture to our Loyalty Support, we work
with our clients to establish loyalty goals, implement the technology solutions
to meet these goals and support these solutions.
We use our unique four-step methodology to translate high-level strategy into an
implementation design.
1. DEFINE. Identify the unique situation of a customer at any point in time.
2. RECOGNIZE. Create rules that prescribe the actions to be taken by the
client when these unique circumstances have been identified.
3. EXECUTE. Enable the client to execute these actions across any customer
access channel each time a customer contact occurs.
4. MEASURE. Report and diagnose the effectiveness of these actions on customer
loyalty.
eCRM - THE NEXT WAVE OF BUSINESS INTEGRATION
Companies today require many components to be integrated into an enterprise-wide
solution that incorporates all customer access channels including the Internet,
e-mail, web-chat, telephone and fax and also provides a seamless integration of
all of these channels to support core business operations.
These solutions result from the integration of many different point
applications that provide key functionality in the following areas:
- - Channel Management
- - eCommerce Segmentation
- - CRM Applications
- - Call Center Technology
- - Back Office Applications
Increasingly, companies are looking for outside providers to implement these
technologies directed at improving customer loyalty. eLoyalty believes we are
differentiated because we have an enterprise-wide focus, we can integrate
multiple customer access channels and we have the ability to create business
rules that result in customer loyalty and increased profitability.
<PAGE> 8
THE LOYALTY EFFECT: TOP-AND BOTTOM-LINE BENEFITS
"As the customer's relationship with a company lengthens, profits rise. And
not just a little. Companies can boost profits by almost 100% by retaining
just 5% more of their customers."
- Frederick R. Reichheld and W. Earl Sasser, Jr., Harvard Business Review
THE BUSINESS WORLD HAS NOTICED
"eLOYALTY HAS GREAT CUSTOMER REFERENCES, PROVEN PROFITABILITY, AND CUSTOMER
RELATIONSHIP MANAGEMENT EXPERTISE...eLOYALTY IS POSITIONING ITSELF IN THE FAST-
GROWTH LAND OF E-BUSINESS."
- John F. Russell, VP/Editor in Chief, Solutions Integrator, August 1999
"IN SHORT, THE COMPANY'S SIZE, BREADTH OF SERVICE OFFERINGS, AND REVENUES MAKE
eLOYALTY THE LARGEST PURE-PLAY CUSTOMER RELATIONSHIP SOLUTIONS SERVICE SUPPLIER
IN THE INDUSTRY."
- Aberdeen Group, July 2, 1999
"WE SAVE THE REAL DIFFICULT PROBLEMS FOR TECHNOLOGY SOLUTIONS (eLOYALTY).
THERE'S A LOT OF COMPLEXITY, AND IT'S GOOD TO HAVE A PARTNER TO WORK THROUGH THE
PROBLEMS WITH."
- Chris Suggs, IT Manager, Hewlett-Packard Company, product-support
division for the Americas (eLoyalty Client), quoted in Information Week,
November 16, 1998
"LEADERSHIP IN THE CUSTOMER MANAGEMENT SOLUTIONS SPACE REQUIRES A LEVEL OF
COMMITMENT BY SYSTEMS INTEGRATORS TO COMPANIES BEYOND THE INITIAL DESIGN AND
IMPLEMENTATION OF CALL CENTER AND CUSTOMER SERVICES PROJECTS. TSC'S (eLOYALTY'S)
SUITE OF SERVICES FOR SUPPORT AND PERFORMANCE MEASUREMENT IS A BIG STEP FOR
NEXT GENERATION CUSTOMER CARE."
- Robert Mirani, Senior Analyst, the Yankee Group, September 2, 1999
"OTHER INTEGRATORS, INCLUDING THE BIG FIVE CONSULTING FIRMS, HAVE LEAPT ONTO THE
CRM BANDWAGON, OF COURSE, BUT NOT EVERYBODY HAS THE LASER FOCUS THAT TSC
(eLOYALTY) TOUTS."
- Ken Yamada, Senior Editor, Solutions Integrator, June 1999
"DYNAMIC TRADE WILL PUSH THE TRADITIONAL MODEL OF CUSTOMER RELATIONSHIP
MANAGEMENT (CRM) BEYOND ITS LIMITS. COMPANIES NEED A NEW APPROACH -
eRELATIONSHIP MANAGEMENT (eRM) - TO LEVERAGE THE WEB'S UNIQUE STRENGTHS FOR
CAPTURING AND PUBLISHING A SINGLE VIEW OF CUSTOMERS. RESULTING SHIFTS IN THE
VENDOR LANDSCAPE WILL FORCE COMPANIES TO RE-ASSESS VENDOR STRATEGIES FOR FRONT
OFFICE APPS."
- The Forrester Report, June 1999
eLoyalty, Solutions for Unbreakable Lifetime Relationships, GetLoyal.com,
Guaranteed Business Benefits, Loyalty Architecture, Loyalty Cockpit, Loyalty
Decision Engine, Loyalty Hosting, Loyalty Lab, Loyalty Observer, Loyalty Process
Design, Loyalty Repository, Loyalty Rules Configurator, Loyalty Strategy,
Loyalty Support, Loyalty Warehouse, Loyalty Channel, Business Case, Channel
Hosting and Loyalty Channel Influencer are all trademarks or the subject of
trademark applications of eLoyalty Corporation. All other brand names or
trademarks appearing in this information statement are the property of their
respective holders.
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 6
The Spin-Off................................................ 18
eLoyalty's Business......................................... 24
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 40
eLoyalty Capitalization..................................... 55
eLoyalty Financing.......................................... 56
eLoyalty Selected Financial Data............................ 57
eLoyalty's Relationship with Technology Solutions Company
After the Spin-Off........................................ 59
eLoyalty's Management....................................... 64
Ownership of eLoyalty Common Stock by Certain Beneficial
Owners.................................................... 74
Description of eLoyalty Capital Stock....................... 75
Certain Transactions........................................ 84
eLoyalty's 2001 Annual Meeting of Stockholders.............. 85
Additional Information...................................... 86
Index to Financial Statements and Schedule.................. F-1
Schedule II -- Valuation and Qualifying Accounts............ S-1
</TABLE>
i
<PAGE> 10
SUMMARY
This summary highlights selected information from this information
statement, but does not contain all details concerning the spin-off and
eLoyalty, including information that may be important to you. To better
understand the spin-off and the business and financial position of eLoyalty you
should carefully review this entire document.
In this information statement, "eLoyalty," "the company," "we," "our" and
"us" each refers to eLoyalty Corporation and the business we conducted as a
division of Technology Solutions Company and "TSC" refers to Technology
Solutions Company.
QUESTIONS AND ANSWERS ABOUT ELOYALTY AND THE SPIN-OFF
What is the spin-off?........ The spin-off is designed to separate TSC's
E-Solutions and eLoyalty businesses into separate
publicly traded companies. TSC will accomplish
the spin-off by distributing to TSC stockholders
as a dividend all of the outstanding common stock
of eLoyalty owned by TSC. For every share of TSC
common stock that you own of record on January
, 2000 you will receive one share of eLoyalty
common stock. For example, if you own 200 shares
of TSC common stock on the record date, you will
receive 200 shares of eLoyalty common stock in
the spin-off.
Why is TSC effecting the
spin-off?.................... TSC's board of directors and management believe
that separating eLoyalty from the rest of TSC's
business will allow both TSC and eLoyalty to
focus their attention and financial resources on
their respective businesses and provide them with
the flexibility to pursue different strategies
and react quickly to changing market
environments. TSC's board of directors and
management believe that the spin-off will achieve
important benefits for TSC and eLoyalty,
including enhanced business focus on each
company's own strategic plan, the development of
incentive programs tailored to their own
business, greater capital planning flexibility
and simplified organizational and internal
reporting structures.
What is eLoyalty?............ eLoyalty is a leading global information
technology services company focused on providing
enterprise-wide solutions across all customer
access channels, including the Internet, that are
designed to result in lasting and profitable
customer relationships for our clients. We define
this new category of solutions as loyalty
solutions. eLoyalty is currently a subsidiary of
TSC and will become an independent, publicly
traded company upon completion of the spin-off.
What are loyalty
solutions?................... eLoyalty believes that loyalty solutions are the
next step in the customer relationship management
(CRM) market. CRM refers to services and software
that focus on the sales, marketing and customer
service functions of an organization. With
advances in the Internet and information
technology, a new market has evolved that we
define as eCRM. eCRM is an expansion of CRM
throughout the enterprise that encompasses all
customer access channels including the Internet,
e-mail and web-chat as well as telephone and fax.
A complete loyalty solution is a combination of
business rules, methodology and eCRM technology
that enables companies
1
<PAGE> 11
to build lasting relationships with their
customers, maximize the efficiency of customer
interactions across multiple channels and
capitalize on up-sell and cross-sell
opportunities based on customer information
gathered during these interactions.
What are eLoyalty's key
objectives?.................. eLoyalty's objective is to maintain our position
as the leading global provider of loyalty
solutions. We intend to substantially increase
our revenues and profitability and to create a
global brand name. Our strategy to attain these
goals is to focus on providing business benefits
to our clients, to enhance our loyalty solutions
to include hosting capabilities, to build
strategic vendor relationships, to invest in
brand equity, to invest in operational and
management systems and processes and to expand
our global presence.
What will be the relationship
between eLoyalty and TSC
after the spin-off?........ After the spin-off, TSC will not own any of our
common stock. TSC and eLoyalty will enter into
certain agreements in connection with the
spin-off to allocate responsibility for
obligations arising prior to the spin-off and for
certain obligations that might arise in the
future. TSC will retain responsibility for
liabilities and obligations relating to its
business and we will assume responsibility for
liabilities and obligations relating to our
business. See "eLoyalty's Relationship with
Technology Solutions Company After the Spin-Off."
What do I have to do to
participate in the
spin-off?.................. Nothing. You are not required to take any action
to receive eLoyalty common stock in the spin-off.
No proxy or vote is necessary for the spin-off.
You should not mail in TSC stock certificates to
receive eLoyalty shares. Our transfer agent will
send to you your eLoyalty share certificates
shortly after January , 2000. The number of
shares of TSC common stock you own will not
change as a result of the spin-off.
When will I receive my
eLoyalty shares?............. If you hold your TSC shares in your own name,
your share certificates will be mailed to you on
or about January , 2000. You should allow
several days for the mail to reach you. If you
hold your TSC shares through your stockbroker,
bank or other nominee, you are probably not a
stockholder of record and your receipt of
eLoyalty shares depends on your arrangements with
the nominee that holds your TSC shares for you.
See "The Spin-Off -- Manner of Effecting the
Spin-Off."
Is the spin-off taxable for
United States federal income
tax purposes?.............. The spin-off is conditioned on, among other
things, TSC receiving a ruling from the United
States Internal Revenue Service that the spin-
off will be tax-free to TSC and its United States
stockholders. See "The Spin-Off -- Material
Federal Tax Consequences," for a more complete
discussion of the United States federal income
tax consequences of the spin-off to holders of
TSC common stock.
2
<PAGE> 12
Where will my shares of our
common stock trade?........ Currently, there is no public market for eLoyalty
common stock. We will apply to have eLoyalty
common stock listed on The Nasdaq Stock Market's
National Market under the symbol "ELOY." If the
shares are accepted for listing, we expect that a
"when-issued" trading market for eLoyalty common
stock will develop prior to January , 2000, and
that "regular-way" trading will begin on that
date. See "The Spin-Off -- Market for eLoyalty
Common Stock."
What will happen to the
listing of TSC's shares on
The Nasdaq Stock Market?... TSC common stock will continue to be listed on
The Nasdaq Stock Market under the symbol "TSCC."
TSC expects that its common stock will continue
to trade on a regular basis through and after the
spin-off date.
Who do I contact for
information regarding the
spin-off, TSC and
eLoyalty?.................. Before the spin-off, you should direct inquiries
relating to the spin-off to:
ChaseMellon Shareholder Services, L.L.C.
111 Founders Plaza, 11th Floor
East Hartford, Connecticut 06108
(860) 282-3512
Technology Solutions Company
205 North Michigan Avenue
Chicago, Illinois 60601
Attention: TSC Investor Relations
(312) 228-4500
After the spin-off, you should direct inquiries
relating to your investment in eLoyalty common
stock to:
eLoyalty
205 North Michigan Avenue
Chicago, Illinois 60601
Attention: Julie Fitzpatrick
(312) 228-4500
Voice Mailbox 2569
[email protected]
After the spin-off, the transfer agent and
registrar for the eLoyalty common stock will be
ChaseMellon Shareholder Services, L.L.C.
3
<PAGE> 13
SUMMARY FINANCIAL DATA
The following tables present summary selected historical financial data of
eLoyalty. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes thereto included
in this information statement. The statement of operations data for the seven
month period ended December 31, 1998 and for each of the three years ended May
31, 1998, 1997 and 1996 and the balance sheet data as of December 31, 1998 set
forth below are derived from the audited combined financial statements included
in this information statement. They should be read in conjunction with those
financial statements and the notes. The statement of operations data for the six
month periods ended June 30, 1999 and 1998 and for the seven month period ended
December 31, 1997 and for years ended May 31, 1995 and 1994, December 31, 1997
and for the balance sheet data as of June 30, 1999 are derived from unaudited
combined financial statements.
The historical financial information may not be indicative of our future
performance and does not necessarily reflect what our financial position and
results of operations would have been had we operated as a separate, stand-alone
entity during the periods covered.
ELOYALTY
STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX FOR THE SEVEN
MONTH MONTH PERIODS
PERIODS ENDED ENDED
JUNE 30, DECEMBER 31, FOR THE YEARS ENDED MAY 31,
----------------- --------------------- ---------------------------------------------
1999 1998 1998 1997 1998 1997 1996 1995 1994
------- ------- ------- ----------- ------- ------- ------- ------ ------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues(1)........................... $67,636 $49,641 $64,415 $43,668 $84,488 $43,181 $26,516 $6,132 $1,333
Revenues less project personnel(1).... $34,511 $25,788 $33,113 $21,339 $43,159 $25,103 $14,842 $2,995 $ 618
Operating income (loss)(1, 2)......... $ 4,290 $ 3,195 $ (230) $ 911 $ 4,259 $ 4,808 $ 4,907 $ (179) $ (101)
Net income (loss)(1, 2)............... $ 2,207 $ 1,722 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050 $ (128) $ 2
Net income (loss) per common share....
Shares used to calculate net income
(loss) per share....................
</TABLE>
ELOYALTY
BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 7,117 $ 4,411
Working capital............................................. $45,371 $26,231
Total assets................................................ $85,973 $63,904
Stockholders' Equity........................................ $64,750 $47,888
</TABLE>
- ---------------
(1)Includes the results of acquired businesses since their acquisition dates.
See Note 3 to the Notes to Combined Financial Statements.
(2)Includes goodwill amortization of $2,501, $1,654, $2,450, $1,856, $3,201 and
$376 for the six month periods ended June 30, 1999 and 1998, the seven month
periods ended December 31, 1998 and 1997, and the years ended May 31, 1998
and 1997, respectively, and amortization of capitalized software to be sold
of $177, $447, $206, $354 and $110 for the six months ended June 30, 1998,
the seven month periods ended December 31, 1998 and 1997, and the fiscal
years ended May 31, 1998 and 1997, respectively. There was no goodwill
amortization for the years ended May 31, 1996, 1995 and 1994. There was no
amortization of capitalized software to be sold during the six month period
ended June 30, 1999 and the years ended May 31, 1996, 1995 and 1994.
4
<PAGE> 14
Unless we specifically state otherwise, all share numbers in this
information statement assume that we have issued:
- 41.4 million shares of our common stock to TSC; and
- 2.4 million shares of our common stock to Sutter Hill Ventures and four
entities controlled by Technology Crossover Management III, L.L.C.
("Technology Crossover Ventures") under an agreement that we have with
them. See "Certain Transactions."
The number of shares issued to Sutter Hill Ventures and Technology
Crossover Ventures, and the purchase price per share, will be adjusted
proportionately to the extent that the number of our shares owned by TSC when we
issue shares to these investors does not equal 41.4 million shares. The number
of shares reserved for issuance under our 1999 Stock Incentive Plan, as well as
the number of shares and the exercise price for options we have already granted
under that plan, may also need to be adjusted proportionately if TSC distributes
in the spin-off a different number of our shares than the 41.4 million shares we
assumed at the time we adopted the 1999 Stock Incentive Plan and issued options
under that plan.
5
<PAGE> 15
RISK FACTORS
You should carefully consider each of the following risks and all of the
other information in this information statement. Some of the following risks
relate principally to the spin-off while other risks relate principally to our
business in general and the industry in which we operate. Finally, other risks
relate principally to the securities markets and ownership of our stock. The
risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into actual events,
our business, financial condition or results of operations could be materially
adversely affected. If that happens, the trading price of our common stock could
decline.
This information statement contains forward-looking statements that involve
risks and uncertainties. You should not rely on these forward-looking
statements. We use words such as "anticipate," "believe," "plan," "expect,"
"future," "intend" and similar expressions to identify such forward-looking
statements. This information statement also contains forward-looking statements
attributed to certain third parties relating to their estimates regarding, among
other things, the growth of the CRM industry and the number of Internet users.
You should not place undue reliance on those forward-looking statements. Our
actual results could differ materially from those anticipated in the
forward-looking statements for many reasons, including the risks faced by us
described below and elsewhere in this information statement.
RISKS RELATING TO THE SPIN-OFF
We are subject to the following risks relating to the spin-off.
SIGNIFICANT TAX LIABILITY COULD BE INCURRED BY TSC AND THE TSC STOCKHOLDERS IF
THE CONTRIBUTION OF THE ELOYALTY BUSINESS OR THE SPIN-OFF DOES NOT QUALIFY FOR
TAX-FREE TREATMENT AND WE COULD BE JOINTLY AND SEVERALLY LIABLE FOR, AND COULD
BE REQUIRED TO INDEMNIFY AND PAY TSC FOR, TAXES AND RESULTING LIABILITIES
IMPOSED UPON TSC WITH RESPECT TO THE CONTRIBUTION OR THE SPIN-OFF
TSC has requested a private letter ruling from the IRS to the effect that,
among other things, the contribution of the eLoyalty business assets by TSC to
eLoyalty will be tax-free to TSC and the spin-off by TSC of all of the shares of
eLoyalty common stock owned by TSC to the stockholders of TSC will not be
taxable to TSC or its stockholders. See "The Spin-Off -- Material Federal Tax
Consequences." The ruling, assuming it is received, will be based upon various
factual representations and assumptions, as well as upon certain undertakings.
We are not aware of any facts or circumstances that would cause the
representations and assumptions to be untrue or incomplete in any material
respect. If, however, any of those factual representations or assumptions were
untrue or incomplete in a material respect, any undertaking was not complied
with, or the facts upon which that ruling is based were materially different
from the facts at the time of the spin-off, the ruling received from the IRS
might be invalid. Certain acquisitions of the stock of either eLoyalty or TSC
prior to, or following, the spin-off might cause the spin-off to be taxable to
TSC if, for either eLoyalty or TSC, the acquisitions involve, in the aggregate,
50% or more (by vote or value) of its stock and are found to be part of a plan
(or series of related transactions) of which the spin-off is a part.
If the contribution or the spin-off were not to qualify for tax-free
treatment for United States federal income tax purposes then, in general, a very
substantial tax would be payable by TSC (in the case of the contribution or the
spin-off) and TSC stockholders (in the case of the spin-off only). In general,
TSC would be subject to tax as if it had sold the eLoyalty business in a taxable
sale and the TSC shareholders would be subject to tax as if they had received a
taxable distribution equal to the fair market value of the eLoyalty stock
distributed to them. See "The Spin-Off -- Material Federal Tax Consequences."
Although the taxes described above generally would be imposed on TSC and
its stockholders, we would in certain circumstances be liable for all or a
portion of such taxes. As part of the spin-off, TSC and we will enter into a Tax
Sharing and Disaffiliation Agreement which agreement will, in general, provide
that if, as a result of any action (or failure to take any reasonably available
action) by us, or as a result of any
6
<PAGE> 16
acquisition or other transaction involving the capital stock of eLoyalty (other
than pursuant to the spin-off), the contribution or the spin-off fails to
qualify for tax-free treatment or TSC otherwise recognizes gain on the
distribution to its stockholders of eLoyalty stock, eLoyalty will indemnify and
pay TSC for all taxes and other liabilities imposed. The Tax Sharing and
Disaffiliation Agreement will also contain representations by us relating to the
truthfulness of the facts and representations set out in the IRS ruling and the
materials submitted to the IRS in connection with the ruling, in each case, to
the extent descriptive of us or our business (including our plans, proposals,
intentions and policies). We will be liable for taxes and liabilities imposed as
a result of any breach by us of those representations. The Tax Sharing and
Disaffiliation Agreement also contains provisions where we and TSC share taxes
and other liabilities resulting from the failure of the contribution or
distribution to be tax free where neither we nor TSC otherwise has liability
under the Agreement or where both otherwise have liability under the Agreement.
See "eLoyalty's Relationship with Technology Solutions Company After the
Spin-Off -- Tax Sharing and Disaffiliation Agreement."
Aside from the Tax Sharing and Disaffiliation Agreement, under United
States federal income tax laws, TSC and we would be jointly and severally liable
for TSC's federal income taxes resulting from the spin-off being taxable. This
means that even if we do not have to indemnify TSC for any liabilities and
expenses if the contribution or the spin-off fails to be tax-free, we may still
be liable for any part of, including the whole amount of, these liabilities and
expenses. In certain circumstances, however, TSC may be required to indemnify us
for such liabilities and expenses. See "eLoyalty's Relationship with Technology
Solutions Company After the Spin-Off -- Tax Sharing and Disaffiliation
Agreement."
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY
The historical financial information we have included in this information
statement may not reflect what our results of operations, financial position and
cash flows would have been had we been a separate, stand-alone entity during the
periods presented or what our results of operations, financial position and cash
flows will be in the future. This is because:
- we have made adjustments and allocations, primarily with respect to
corporate-level adjustments and administrative functions, because TSC did
not account for us as, and we were not operated as, a single stand-alone
business for all periods presented; and
- the information does not reflect changes that we expect to occur in the
future as a result of our separation from TSC, including tax, employee,
transitional service matters and establishing new offices.
For additional information, see "eLoyalty Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
THE TRANSITIONAL SERVICES PROVIDED TO US BY TECHNOLOGY SOLUTIONS COMPANY MAY NOT
BE SUFFICIENT TO MEET OUR NEEDS
We have never operated as a stand-alone company. While TSC is contractually
obligated to provide us with transitional services including, among others,
accounting, tax, benefits, human resources and information systems, we cannot
assure you that these services will be sustained at the same level as when we
were part of TSC or that we will obtain the same benefits. We will also lease
and sub-lease certain office facilities from TSC. We cannot assure you that,
after the expiration of these various arrangements, we will be able to replace
the transitional services or enter into appropriate leases in a timely manner or
on terms and conditions, including cost, as favorable as those we will receive
from TSC. In addition, as we build our own infrastructure during the term of
those agreements, we will incur additional costs for duplicated administrative
services.
These agreements were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of our separation from
TSC. For more information about these arrangements, see "eLoyalty's Relationship
with Technology Solutions Company After the Spin-Off."
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WE WILL NOT BE ABLE TO RELY ON TSC TO FUND FUTURE CAPITAL REQUIREMENTS
In the past, our capital needs have been satisfied by TSC. However,
following the spin-off, TSC will no longer provide funds to finance our working
capital or other cash requirements. We cannot guarantee that financing, if
needed, will be available on favorable terms.
We believe that our capital requirements will vary greatly from quarter to
quarter, depending on, among other things, capital expenditures, fluctuations in
our operating results and financing activities. We believe that the net proceeds
from the investment by the venture capital investors described under "Certain
Transactions," current cash and cash equivalents and additional cash to be
contributed by TSC to eLoyalty prior to the spin-off, the revolving credit
facility described under "eLoyalty Financing," and cash flow from operations
after the spin-off, will be sufficient to satisfy our cash requirements for the
foreseeable future. However, to increase our financial resources, we intend to
obtain additional equity financing in the next twelve months through a public
offering. In addition, we may obtain additional capital through a private
placement of equity with strategic or other investors or through additional debt
financing in the future. Future equity financings would dilute the relative
percentage ownership of the then existing holders of our common stock. Future
debt financings could involve restrictive covenants that limit our ability to
take certain actions. We may not be able to obtain financing with interest rates
as favorable as those historically enjoyed by TSC. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
IF WE ARE UNABLE TO OBTAIN CERTAIN THIRD-PARTY CONSENTS TO THE SPIN-OFF, OUR
ABILITY TO CONDUCT OUR BUSINESS AS CURRENTLY CONDUCTED COULD BE MATERIALLY
ADVERSELY AFFECTED
The spin-off and related transactions could result in a violation of
certain of TSC's existing contractual arrangements or require the consent of a
third party to transfer these arrangements to us. In a substantial number of
situations, an amendment, consent or waiver from third parties (such as from
clients or suppliers) will be required. Although we believe that no single
agreement for which an amendment, consent or waiver is being sought is material,
the failure to receive a significant number of such amendments, waivers or
consents with respect to contractual arrangements could have a material adverse
effect on our ability to continue to conduct our business.
CREDITORS OF TSC AT THE TIME OF THE SPIN-OFF MAY ATTEMPT TO CHALLENGE THE
SPIN-OFF AS A FRAUDULENT CONVEYANCE
If a court in a lawsuit by an unpaid creditor or representative of
creditors of TSC, such as a trustee in bankruptcy, were to find that, among
other reasons, at the time of the spin-off, TSC or eLoyalty,
- was insolvent,
- was rendered insolvent by reason of the spin-off,
- was engaged in a business or transaction for which TSC's or eLoyalty's
remaining assets constituted unreasonably small capital or
- intended to incur, or believed it would incur, debts beyond its ability
to pay such debts as they matured,
the court may be asked to void the spin-off (in whole or in part) as a
fraudulent conveyance. The court could then require that the stockholders return
some or all of the shares of eLoyalty common stock, or require TSC or eLoyalty,
as the case may be, to fund certain liabilities of the other company for the
benefit of creditors. The measure of insolvency for purposes of the foregoing
will vary depending upon the jurisdiction whose law is being applied. Generally,
however, each of TSC and eLoyalty, as the case may be, would be considered
insolvent if the fair value of its assets were less than the amount of its
liabilities or if it incurred debt beyond its ability to repay such debt as it
matures. TSC and eLoyalty believe that each company will be solvent after the
spin-off.
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IF THE SPIN-OFF IS NOT A LEGAL DIVIDEND, IT COULD BE HELD INVALID BY A COURT
The dividend which effects the spin-off is subject to the Delaware
corporate law. We cannot assure you that a court will not later determine that
the spin-off was invalid under Delaware law and reverse the spin-off. The
resulting complications and cost could have a material adverse effect on our
financial condition and results of operations.
THE COMBINED POST-SPIN-OFF VALUE OF TSC AND ELOYALTY SHARES MAY NOT EQUAL OR
EXCEED THE PRE-SPIN-OFF VALUE OF TSC SHARES
After the spin-off, TSC common stock will continue to be listed and traded
on The Nasdaq Stock Market and we expect that eLoyalty common stock will be
listed and traded on The Nasdaq Stock Market. We cannot assure you that the
combined trading prices of TSC common stock and eLoyalty common stock after the
spin-off will be equal to or greater than the trading price of TSC common stock
prior to the spin-off. Until the market has fully evaluated the business of TSC
without the business of eLoyalty, the price at which TSC common stock trades may
fluctuate significantly. Similarly, until the market has fully evaluated the
eLoyalty business, the price at which our common stock trades may fluctuate
significantly.
RISK FACTORS RELATING TO OUR BUSINESS
Our business is subject to the following risks, which include risks
relating to the industry in which we operate.
WE HAVE A LIMITED OPERATING HISTORY AND CONSEQUENTLY FACE SIGNIFICANT RISKS AND
UNCERTAINTIES
We commenced our business as a separate business unit within TSC in 1994
and therefore have a limited operating history. An owner of our common stock
must consider the risks and difficulties frequently encountered by early stage
companies. We have a limited history of addressing material risks in our
business. These risks include our potential inability to:
- attract, retain and motivate qualified personnel;
- increase the scale of our operations;
- maintain sufficiently high employee utilization;
- respond effectively to competitive pressures;
- continue to develop and upgrade our solutions;
- replace the transitional services necessary for the conduct of our
business that TSC has agreed to provide to us for a limited period after
the completion of the spin-off; and
- satisfy legal and regulatory requirements.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND, IF
WE ARE UNABLE TO MANAGE THIS GROWTH, OUR BUSINESS WILL BE ADVERSELY AFFECTED
Our ability to successfully implement our business plan in a rapidly
evolving market requires an effective planning and management process. Our
growth has placed significant demands on our management and other resources and
will continue to do so in the future. Our revenues increased approximately 36.3%
for the six month period ended June 30, 1999 compared to the first six months of
1998. Our employees increased from 518 full-time employees at December 31, 1998
to 618 at June 30, 1999. Our future success will depend on our ability to manage
our growth effectively, including:
- continuing to retain and motivate our existing employees and attract and
integrate new employees;
- improving our business development capabilities;
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- maintaining project quality;
- maintaining high rates of employee utilization;
- accurately estimating time and resources for engagements; and
- developing and improving our operational, financial, accounting and other
internal systems and controls.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS BECAUSE
OF MANY FACTORS, ANY OF WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE
Our quarterly financial results will vary from quarter to quarter. It is
possible that in some future periods our operating results may be below the
expectations of public market analysts and investors. In this event, the price
of our common stock may fall. Our revenues and operating results may vary
significantly from quarter to quarter due to a number of factors, many of which
are not in our control. These factors include:
- unanticipated cancellations or reductions in the scope of major projects;
- variability in market demand for the solutions we provide;
- our ability to upgrade and develop our systems and infrastructure and
attract new personnel in a timely and effective manner;
- our ability to deliver complex projects and the number, size and scope of
our projects;
- our client retention and acquisition rate and the length of the sales
cycle associated with our solutions;
- the introduction of new services and solutions;
- the efficiency with which we utilize our employees, plan and manage our
existing and new projects and manage future growth;
- our ability to anticipate accurately our revenues and operating expenses;
- changes in pricing policies by us or our competitors;
- number of billing days;
- general economic conditions; and
- seasonal availability of employees.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for detailed information on our quarterly operating
results.
OUR INDUSTRY IS VERY COMPETITIVE AND, IF WE FAIL TO SUCCESSFULLY COMPETE, OUR
MARKET SHARE AND BUSINESS WILL BE ADVERSELY AFFECTED
Although the CRM market has been in existence for some time, the eCRM
market in which we compete is relatively new and very competitive. We expect
competition to intensify even further as this market evolves. Many of our
competitors have longer operating histories, more clients, longer relationships
with their clients, greater brand or name recognition and significantly greater
financial, technical, marketing and public relations resources than we do. As a
result, our competitors may be in a stronger position to respond quickly to new
or emerging technologies and changes in client requirements. They may also
develop and promote their products and services more effectively than we do.
These risks are especially pronounced in our industry where we will face major
challenges from other companies including:
- systems integrators such as Andersen Consulting, Deloitte & Touche LLP,
Ernst & Young LLP, KPMG LLP, PricewaterhouseCoopers LLP, Arthur Andersen
LLP, IBM Global Services,
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Cambridge Technology Partners, Sapient Corporation, Diamond Technology Partners
and Whittman-Hart, Inc.;
- Internet and e-commerce services companies such as Scient Corporation,
Viant Corporation, Proxicom, Inc., AppNet Inc., Tanning Technology
Corporation and Razorfish, Inc.;
- large information technology service companies such as Computer Sciences
Corporation (CSC) and Perot Systems Corporation;
- management consulting firms such as Bain & Company, Booz, Allen &
Hamilton, Boston Consulting Group, Inc. and McKinsey & Company; and
- internal information technology departments of current and potential
clients.
New market entrants pose a threat to our business. We do not own any
patented technology that precludes or inhibits competitors from entering this
market or from providing solutions similar to ours. Existing or future
competitors may develop or offer solutions that are comparable or superior to
ours at a lower price.
To compete successfully, we must respond promptly and effectively to the
challenges of technological change, evolving standards and our competitors'
innovations by continuing to enhance and expand our solutions, as well as our
sales and marketing channels. Increased competition could result in price
reductions, reduced margins or loss of market share.
THE LOSS OF OUR PROFESSIONALS, OR THE INABILITY TO RECRUIT ADDITIONAL
PROFESSIONALS, WOULD MAKE IT DIFFICULT TO COMPLETE EXISTING PROJECTS AND BID FOR
NEW PROJECTS
The people-intensive information technology professional services industry
currently faces a shortage of qualified personnel, which is expected to
continue. We compete intensely with other companies to recruit and hire from
this limited pool. In addition, our industry suffers from a high rate of
employee turnover. If we cannot hire and retain qualified personnel, or if a
significant number of our current employees leave, we may be unable to complete
or retain existing projects or bid for new projects of similar scope and
revenue.
WE DEPEND ON OUR KEY PERSONNEL AND THE LOSS OF ANY KEY PERSONNEL MAY HARM OUR
ABILITY TO OBTAIN AND RETAIN CLIENT ENGAGEMENTS AND COMPETE EFFECTIVELY
We believe that our success will depend on the continued employment of our
key personnel. This dependence is particularly important to our business because
personal relationships are critical to obtaining and maintaining client
engagements. If one or more of our key personnel were unable or unwilling to
continue in their present positions, they would be very difficult to replace and
our business could be seriously harmed. In addition, if any of these key
employees joins a competitor or forms a competing company, some of our clients
might choose to use the services of that competitor or new company instead of
our own. Furthermore, clients or other companies seeking to develop in-house
information technology services capabilities may hire away some of our key
employees. This would not only result in the loss of key employees but could
also result in the loss of a client relationship or a new business opportunity.
WE MAY INCUR SIGNIFICANT UNANTICIPATED COSTS ASSOCIATED WITH OUR NEW BUSINESS
OFFERINGS
We are currently exploring several new solution offerings that represent
fundamentally different business models from our core business. One such model
is our Architecture Hosting solution. Using the Architecture Hosting solution,
we plan to provide our clients with dial-up access to an integrated collection
of third-party and proprietary software applications to support their customer
interactions across multiple channels including the Internet, e-mail, web-chat,
telephone and fax. With this solution, we expect that our clients will reduce
their risk, time and investment in supporting loyalty-building interactions with
their customers. To provide this service, we need to form alliances and to
invest in infrastructure including, computers, software and application
integration in amounts that may exceed our current expectations. We
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have no prior experience delivering such a comprehensive operational system from
a remote site, and our failure to successfully deliver this and other new
business offerings could cause us to lose business opportunities with both
existing and potential clients. In addition, we may fail to accurately price new
business offerings, which could reduce the profitability of, or result in a loss
on, projects involving these new offerings.
WE MUST MAINTAIN OUR REPUTATION AND EXPAND OUR NAME RECOGNITION TO REMAIN
COMPETITIVE
We believe that establishing and maintaining a good reputation and name
recognition is critical for attracting and expanding our targeted client base.
If our reputation is damaged or if potential clients do not know what solutions
we provide, we may become less competitive or lose our market share. Promotion
and enhancement of our name will depend largely on our success in providing high
quality services and solutions, which cannot be assured. If clients do not
perceive our solutions to be effective or of high quality, our brand name and
reputation could be materially and adversely affected.
Our clients use our solutions for critical applications. Any errors,
defects or other performance problems, including those in our proprietary
software or products supplied by third-party vendors, could result in financial
or other damages. In addition to any liability we might have, performance
problems could also adversely affect our brand name and reputation.
WE MAY FAIL TO ACCURATELY ESTIMATE THE TIME AND RESOURCES NECESSARY FOR THE
PERFORMANCE OF OUR SERVICES, OR THE BUSINESS BENEFITS TO BE REALIZED BY OUR
CLIENTS DUE TO OUR SOLUTIONS, WHICH COULD REDUCE THE PROFITABILITY OF, OR RESULT
IN A LOSS ON, OUR PROJECTS AND DAMAGE OUR CLIENT RELATIONSHIPS
To date, we have generally provided solutions to our clients on a time and
materials basis, although we sometimes work on a fixed-fee or capped-fee basis.
In the future, it is possible that an increasing percentage of our client
engagements will be subject to fixed-fee or other arrangements that are not
solely based on time and materials. For example, we may price certain
engagements on a value-based model under which we may reduce our billing rates
or limit our fees in exchange for a share of the expected economic benefits to
our clients from implementing our solutions. Because we have limited experience
in pricing engagements on these terms, it can be difficult to judge the time and
resources necessary to complete a project or to gauge any business benefits that
our clients may realize from our solutions. Our failure to accurately estimate
these variables could reduce the profitability of, or result in a loss on, our
projects and could damage our client relationships and our reputation.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO ADAPT TO RAPID TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS
Our industry is characterized by rapidly changing technologies, the
introduction of many new products and services and evolving industry standards.
The recent growth of the eCRM market and the intense competition in our industry
magnify these characteristics. In addition, enhancements of our solutions must
meet the requirements of our current and prospective clients and must achieve
significant acceptance. Our future success will depend on our ability to:
- adapt to rapidly changing technologies by continually improving our
solutions;
- continue to develop our strategic business consulting and technical
expertise;
- enhance our current solutions;
- remain knowledgeable on emerging eCRM technology including the Internet,
telephony and software applications;
- remain knowledgeable with respect to leading-edge research on customer
behavior and actions required to increase customer loyalty;
- develop new solutions that meet changing client needs;
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- advertise and market our solutions; and
- influence and respond to emerging industry standards and other
technological changes.
We cannot give any assurance that we will be successful in addressing these
developments and challenges on a timely basis or at all.
WE DEPEND ON OUR ABILITY TO RAPIDLY LEARN, USE AND INTEGRATE SOFTWARE PACKAGES
DEVELOPED BY THIRD PARTIES TO SUCCESSFULLY COMPETE IN THE ECRM MARKET
To conduct our business we use software packages from a variety of
third-party vendors. In particular, we rely on third-party software products and
services. If we are unable to integrate this software in a fully functional
manner, we may experience difficulties that could delay or prevent the
successful development, introduction or marketing of new solutions. We could
also incur substantial costs if we need to modify our services or infrastructure
to adapt to these changes. These modifications and complex solutions that
include software often contain errors or defects, particularly when first
introduced or when new versions or enhancements are released. Despite internal
testing and testing by current and potential clients, our current and future
solutions may contain serious defects due to our software or that of third-party
vendors. Serious defects or errors could result in liability for damages, lost
revenues or a delay in market acceptance.
We rely on relationships with the executive level management of third-party
vendors of technology that we integrate or incorporate into our solutions. These
relationships are necessary to allow us to rapidly learn about their software
packages, to develop appropriate methods to integrate their software into our
solutions and to gain executive level sponsorship of the integration process. If
we are unable to initiate and maintain such relationships, we may significantly
reduce our ability to successfully integrate third-party technology in our
solutions.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES
Proprietary rights are important to our success and our competitive
position. Although we seek to protect our proprietary rights through a variety
of means, we cannot assure you that the actions we have taken are adequate to
protect these rights.
We typically enter into confidentiality or license agreements with our
clients, employees, professionals and corporate partners and generally control
access to and distribution of our technologies, documentation and other
proprietary information. Despite our efforts to protect our proprietary rights
from unauthorized use or disclosure, parties may attempt to disclose, obtain or
use our rights. The steps we have taken may not prevent misappropriation of our
proprietary rights, particularly in foreign countries where laws or law
enforcement practices may not protect our proprietary rights as fully as in the
United States.
We may be required to obtain licenses from others to refine, develop,
market and deliver current and new services and solutions. There can be no
assurance that we will be able to obtain any of these licenses on commercially
reasonable terms or at all, or that rights granted by these licenses will be
valid and enforceable.
OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS WHICH
MAY RESULT IN SUBSTANTIAL COSTS, DIVERSION OF RESOURCES AND MANAGEMENT
ATTENTION, AND HARM TO OUR REPUTATION
Although we believe that our solutions do not infringe on the intellectual
property rights of others, we cannot give any assurances that an infringement
claim will be successfully defended. We may also license content from third
parties in the future and it is possible that we could become subject to
infringement actions based upon the content licensed from these third parties.
In addition, a portion of our business involves the development of software
applications for specific client engagements. Ownership of client-specific
software is generally retained by the client, although we retain rights to some
of the applications, processes and other intellectual property developed in
connection with client engagements. We may have
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disputes with our clients related to our development of software for specific
client engagements and our ability to resell or reuse that software. A
successful infringement claim against us could materially and adversely affect
us in the following ways:
- we may experience a diversion of our financial resources and the
attention of technical and management personnel;
- we may be liable for damages and litigation costs, including attorneys'
fees;
- we may be enjoined from further use of the intellectual property;
- we may have to obtain a license to use the intellectual property,
incurring licensing fees;
- we may have to develop a non-infringing alternative, which could be
costly and delay projects; and
- we may have to indemnify clients with respect to losses incurred as a
result of our infringement of the intellectual property.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS
For the six month period ended June 30, 1999, 23.8% of our revenues were
derived from our international operations. We expect international revenue to
account for a growing percentage of total revenue in the future and we believe
that we will need to continue to expand our international operations in order to
be successful. Our international sales growth will be limited if we are unable
to establish additional foreign operations, expand international sales
management and support organizations, hire additional personnel, customize our
solutions for use in local markets, develop relationships with international
service providers and establish relationships with additional distributors and
third-party vendors. Even if we are able to successfully expand international
operations, we cannot be certain that international market demand for our
solutions will increase. International operations are generally subject to a
number of risks, including:
- difficulties in staffing and managing international operations, including
the logistics of transferring information and training employees;
- expenses associated with customizing our solutions for use in foreign
countries;
- protectionist laws and business practices that favor local competition;
- dependence on local vendors;
- multiple, conflicting and changing governmental laws and regulations and
difficulties in enforcing contractual obligations related to intellectual
property in foreign countries;
- potentially adverse tax consequences;
- international currency issues, including foreign currency exchange rate
fluctuations;
- longer sales cycles;
- seasonal reductions in business activity; and
- political and economic instability.
To date, a majority of our international revenue and costs have been
denominated in foreign currencies. We believe that an increasing portion of our
international revenue and costs will be denominated in foreign currencies in the
future. To date, we have not engaged in any foreign exchange hedging
transactions and we are therefore subject to foreign currency risk.
INCREASING GOVERNMENT REGULATION COULD AFFECT OUR BUSINESS
We are subject not only to regulations applicable to businesses generally,
but also to laws and regulations directly applicable to electronic commerce.
Although there are currently few such laws and
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regulations, state, federal and foreign governments may adopt laws and
regulations applicable to our business. Any such legislation or regulation could
dampen the growth of the Internet and decrease its acceptance. If such a decline
occurs, companies may decide in the future not to use our solutions. Any new
laws and regulations in the following areas could affect our business:
- user privacy;
- the pricing and taxation of goods and services offered over the Internet;
- the content of websites;
- copyrights;
- consumer protection;
- the online distribution of specific material or content over the
Internet; and
- the characteristics and quality of products and services offered over the
Internet.
THE YEAR 2000 ISSUE MAY ADVERSELY AFFECT OUR BUSINESS
The Year 2000 issue is a general term used to address a class of problems
caused by the inability of computer programs to recognize various date values
around January 1, 2000. This class of problems could result in a system failure
or miscalculations causing disruptions of operations such as, among others, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
Pursuant to a Shared Services Agreement with TSC, we will be relying on TSC
to provide a number of transitional services to us, including among others
accounting, tax, benefits administration, human resources and information
systems. As a result, Year 2000 problems experienced by TSC could have a
material adverse effect on our business, financial condition or results of
operations. TSC has advised us that, based on presently available information,
it believes that any necessary compliance efforts concerning its internal
systems will not have a material adverse effect on its business, operating
results and financial condition. However, if compliance efforts of which TSC is
not currently aware are required and are not completed on time, or if the cost
of any required updating, modification or replacement of TSC's information
systems exceeds its estimates, the Year 2000 issue could have a material adverse
impact on TSC's business, operating results and financial condition, which in
turn could have a material adverse impact on our business, operating results and
financial condition.
In addition, Year 2000 problems of our clients could affect our systems or
operations. Widespread Year 2000 difficulties could also decrease demand for our
services as companies expend resources upgrading their computer systems. As part
of our analysis of the Year 2000 problem, we have analyzed the impact of the
"worst case scenario" on our business. The "worst case scenario" would occur if
the statements and warranties of vendors concerning their Year 2000 compliance
and upgrade programs were entirely false, its current upgrades were unsuccessful
and our contingency plan failed, resulting in a critical systems failure.
Although, as a general matter, we do not specifically warrant to clients
that our work will be Year 2000 compliant, certain clients have requested and
received such warranties. In such cases, we do not warrant the compliance of
third-party software; rather, we warrant only that software created by us will
be Year 2000 compliant. However, even absent a specific Year 2000 warranty,
there is a risk that clients for whom we have created or implemented software
will attempt to hold us liable for any damages that result in connection with
Year 2000 problems.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000" for a more complete description of the Year
2000 risks that we face and the steps we have taken to reduce those risks.
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OUR BUSINESS MAY SUFFER IF GROWTH IN THE USE OF THE INTERNET AND ECRM
TECHNOLOGIES DECLINES
Internet and eCRM technologies are central to many of our solutions. Our
business depends upon continued growth in the use of the Internet and eCRM
technologies by our clients, prospective clients and their customers and
suppliers. If the number of users of this technology does not increase and
commerce using this technology does not become more accepted and widespread,
demand for our services may decrease. Factors that may affect the usage of this
technology include:
- actual or perceived lack of security of information;
- lack of access and ease of use;
- congestion of Internet traffic or other usage delays;
- inconsistent quality of service;
- increases in costs of using the Internet and eCRM technology;
- increased government regulation;
- uncertainty regarding intellectual property ownership;
- reluctance to adopt new business methods; and
- costs associated with the obsolescence of existing infrastructure.
POTENTIAL FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS AND DILUTE STOCKHOLDER VALUE
Although we currently have no specific plans to do so, we may acquire other
businesses in the future that may complicate our management tasks. We may need
to integrate widely dispersed operations with distinct corporate cultures. Such
integration efforts may not succeed or may distract our management from
servicing existing clients. Our failure to manage future acquisitions
successfully could seriously harm our operating results. Also, acquisition costs
could cause our quarterly operating results to vary significantly. Furthermore,
our stockholders would be diluted if we finance the acquisitions by issuing
equity or equity-linked securities.
RISK FACTORS RELATING TO SECURITIES MARKETS
There are risks relating to securities markets that you should consider in
connection with your ownership of our stock.
THE MARKET PRICE FOR OUR COMMON STOCK COULD BE ADVERSELY AFFECTED BY SALES OF
COMMON STOCK IN THE PUBLIC MARKET
Sales of substantial amounts of our common stock in the public market or
the perception that such sales might occur could have a material adverse effect
on the price of our common stock. The shares of our common stock distributed in
the spin-off will be freely tradable except for shares received by persons who
may be deemed to be our "affiliates." An aggregate of 5,340,000 shares of our
common stock are reserved initially for issuance under the our stock incentive
plan, plus, as of the first day of each fiscal year, an additional number of
shares equal to 5% of the number of shares of our common stock then outstanding.
As of September 30, 1999 we have issued options to purchase an aggregate of
5,046,000 shares of our common stock, and will issue additional options as of
the date of the spin-off in substitution of all of the TSC options then held by
our employees and directors and some of the TSC options then held by TSC
employees and directors. See "eLoyalty Relationship with Technology Solutions
Company After the Spin-Off -- Stock Options" and Note 8 of the Notes to
Consolidated Financial Statements. These substitute options are not subject to
the limit on the shares reserved for issuance set forth above. An additional
1,687,500 shares are reserved for issuance under the our employee stock purchase
plan. We intend to file registration statements on Form S-8 covering the
issuance of shares of our
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common stock pursuant to those plans. Accordingly, the shares issued pursuant to
either of those plans will be freely tradable, subject to the restrictions on
resale by persons who may be deemed to be our affiliates.
PROVISIONS IN OUR CORPORATE DOCUMENTS, AND CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS, COULD DELAY OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY, WHICH
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK
The existence of some provisions in our corporate documents and Delaware
law could delay or prevent a change in control of our company, which could
adversely affect the price of our common stock. Our certificate of incorporation
and bylaws contain some provisions that may make the acquisition of control of
our company more difficult, including provisions relating to the nomination,
election and removal of directors and limitations on actions by our
stockholders. For example, our certificate of incorporation provides that the
board of directors will be divided into three classes as nearly equal in size as
possible with staggered three-year terms. This classification of the board of
directors has the effect of making it more difficult for stockholders to change
the composition of the board of directors. In addition, our preferred share
purchase rights would cause substantial dilution to any person or group who
attempts to acquire a significant interest in our company without advance
approval from our board of directors. For a more complete description of our
capital stock, our certificate of incorporation, bylaws, our preferred share
purchase rights and the effects of Delaware law that could hinder a third
party's attempt to acquire control over us, see "Description of eLoyalty Capital
Stock."
Certain acquisitions of the stock of eLoyalty prior to, or following, the
spin-off might cause the spin-off to be taxable, for federal income tax
purposes, to TSC if the acquisitions involve, in the aggregate, 50% or more (by
vote or value) of eLoyalty's stock and are found to be part of a plan (or series
of related transactions) of which the spin-off is a part. Acquisitions of
eLoyalty stock occurring during the four-year period beginning two years before,
and ending two years after, the spin-off are presumed to be part of a plan (or
series of related transactions) of which the spin-off is a part. Under the Tax
Sharing and Disaffiliation Agreement, eLoyalty has agreed to indemnify TSC if
the spin-off is taxable as a result of any acquisition or other transaction
involving the capital stock of eLoyalty. Such liability, if it were to arise,
would be significant. As a consequence of the foregoing, persons otherwise
interested in acquiring eLoyalty stock might postpone or cancel any acquisitions
out of concern that their acquisitions would cause the spin-off to be taxable,
with the resulting tax liability effectively borne by eLoyalty under the terms
of the Tax Sharing and Disaffiliation Agreement. See "The Spin-Off -- Material
Federal Tax Consequences" and "eLoyalty's Relationship with Technology Solutions
Company After the Spin-Off -- Tax Sharing and Disaffiliation Agreement."
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY FOLLOWING THE SPIN-OFF
The market price of our common stock could be subject to significant
fluctuations in response to our operating results, changes in earnings estimated
by securities analysts or our ability to meet those estimates, publicity
regarding the CRM industry in general or any of our significant clients and
other factors. Some or all of these factors may be beyond our control. In
particular, the realization of any of the risks described in these "Risk
Factors," including the possibility of substantial sales of our common stock and
the timing, structure and terms of the spin-off, could have a significant and
adverse impact on the market price of our common stock. In addition, the stock
market in general has experienced extreme volatility that has often been
seemingly unrelated to the operating performance of particular companies,
particularly those that are technology related. These broad market fluctuations
may adversely affect the trading price of our common stock. In the past,
securities class action litigation has often been instituted against companies
following periods of volatility in the market price of their securities. Such
litigation could result in substantial costs and a diversion of management's
attention and resources. There is currently no public market for our common
stock and we cannot assure you that an active trading market will develop or be
sustained after the spin-off.
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THE SPIN-OFF
BACKGROUND AND PURPOSES OF THE SPIN-OFF
TSC was organized in 1988 and became a public company in 1991. TSC's
businesses originally consisted of the design, development and implementation of
custom client/server computer systems for large corporate clients. TSC's first
engagements in the CRM area consisted of custom call center projects at two
Fortune 500 companies, the first of which began in 1991.
Over time, the business conducted by TSC has evolved in related but
distinct directions, which led to the establishment of two divisions within TSC:
- the eLoyalty division, which represents the business formerly conducted
as the Enterprise Customer Management business unit within TSC; and
- the E-Solutions division, which comprises the remaining business
currently conducted by TSC.
TSC's E-Solutions division is a full service solutions provider that offers
a unique blend of technology, operations and business expertise, helping global
organizations realize the full benefits of information technology throughout the
enterprise. Its services span the entire life cycle -- from strategy definition
and planning through implementation and extended support. The E-Solutions
division has specialized experience in helping organizations assess the ability
of their current systems to meet the changing and often increasing demands of
business, particularly in the areas of packaged software implementation and
integration, supply chain management, eBusiness solutions and knowledge
management. The principal market in which the E-Solutions division operates is
the more established information technology services market, which is distinct
from the eCRM market targeted by eLoyalty. As a result, eLoyalty and E-Solutions
have developed different fundamentals, growth characteristics and strategic
priorities as both divisions have tailored their approaches to reflect the
requirements of their respective markets.
Over the past year, TSC's board of directors has considered alternatives to
separate the businesses of the eLoyalty division from the E-Solutions division,
including by way of a spin-off or a spin-off preceded by an initial public
offering of eLoyalty common stock. On September 23, 1999, TSC announced its
intention to spin-off eLoyalty through the tax-free distribution of eLoyalty
shares to TSC stockholders.
The spin-off is designed to separate the E-Solutions and eLoyalty
businesses and thereby achieve important benefits for TSC and eLoyalty,
including the following:
- Capital Financing Flexibility. After the spin-off, each company should
have greater capital planning flexibility. For example, each company
would be able to use its own stock to pursue acquisitions if and when it
chooses to do so, subject to certain federal income tax considerations.
See "-- Material Federal Tax Consequences." The eLoyalty business will no
longer have to compete with other business units in TSC to secure funding
for the investments it believes are appropriate to effect its growth
plan.
- Business Focus. As a result of the spin-off, each of TSC and eLoyalty
will be better able to focus its attention and financial resources on its
own business and on exploring and implementing the most appropriate
growth opportunities and executing its own strategic plans.
- Employee Incentives. The spin-off will allow each company to develop
incentive programs for management and other professionals that are
tailored to their own business and are tied to the market performance of
their own common stock. These programs will more directly reward
employees based on each company's individual success.
- Simplified Internal Structures. Management of each company should be able
to implement simplified organizational and internal reporting structures.
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MANNER OF EFFECTING THE SPIN-OFF
TSC will accomplish the spin-off by distributing all of the outstanding
common stock of eLoyalty owned by TSC to TSC stockholders as a dividend. TSC
expects that its board of directors will declare the dividend necessary to
effect the spin-off. Each TSC stockholder of record as of the close of business
on January , 2000, which is the "record date" for the spin-off, will be
entitled to participate in the spin-off. On the spin-off date, those same TSC
stockholders will each receive one share of our common stock for every one share
of TSC common stock that they hold as of the record date. Although the spin-off
will not occur unless certain conditions are satisfied, we expect that the
spin-off will take place on or about January , 2000. See "-- Conditions to the
Spin-Off."
As soon as possible on or after the spin-off date, TSC will deliver to the
spin-off agent, as agent for TSC stockholders as of the close of business on the
record date for the spin-off, certificates representing shares of eLoyalty
common stock. The spin-off agent will then mail, on or about the spin-off date,
certificates representing shares of our common stock to those stockholders.
No TSC stockholder will be required to pay cash or other consideration for
the shares of eLoyalty common stock to be received in the spin-off or to
surrender or exchange shares of TSC common stock in order to receive eLoyalty
common stock.
RESULTS OF THE SPIN-OFF
After the spin-off, TSC and eLoyalty will be separate, independent public
companies. Our management, fundamentals, growth characteristics and strategic
priorities will be different from those of TSC.
The number and identity of our stockholders immediately after the spin-off
will be the number and identity of TSC's stockholders at the close of business
on the record date for the spin-off together with the venture capital investors
described under "Certain Transactions." Immediately after the spin-off we expect
to have approximately holders of record of our common stock and
approximately shares of our common stock issued and outstanding, based on
the number of holders of record and issued and outstanding shares of TSC common
stock on December 31, 1999 for the spin-off and the holders of eLoyalty common
stock prior to the spin-off.
Our board of directors expects to consider adopting a rights plan before
the spin-off, which will entitle each eLoyalty stockholder, as of the close of
business on January , 2000, to one preferred share purchase right for every
share of eLoyalty common stock he or she receives in the spin-off. Shares of
eLoyalty common stock also will represent the same number of rights issued under
the rights plan. See "Description of eLoyalty Capital Stock -- Rights Plan."
Unless the context otherwise requires, references in this information statement
to our common stock include the related rights issued under our rights plan.
The spin-off will not affect the rights of the holders of outstanding
shares of TSC or the rights associated with those shares.
The shares of our common stock will be fully paid and nonassessable and
holders of those shares will not be entitled to preemptive rights.
MATERIAL FEDERAL TAX CONSEQUENCES
The following summarizes the material United States federal income tax
consequences of the spin-off. The discussion that follows is based on and
subject to the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations under the Code, existing administrative interpretations and court
decisions as of the date of this information statement, all of which are subject
to change (possibly with retroactive effect) and all of which are subject to
differing interpretation. The following discussion does not address the effects
of the spin-off under any state, local or foreign tax laws.
The tax treatment of a TSC stockholder may vary depending upon the
stockholder's particular situation, and certain TSC stockholders (including
insurance companies, tax-exempt organizations,
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financial institutions, broker-dealers, persons who do not hold TSC stock as
capital assets, employees of TSC, and individuals who hold TSC stock as part of
a straddle or conversion transaction) may be subject to special rules not
discussed below. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE
SPECIFIC TAX CONSEQUENCES OF THE SPIN-OFF INCLUDING THE EFFECTS OF UNITED STATES
FEDERAL, STATE AND LOCAL, AND FOREIGN AND OTHER TAX RULES, AND THE EFFECT OF
POSSIBLE CHANGES IN TAX LAWS.
TSC has requested a private letter ruling from the IRS regarding the United
States federal income tax consequences of the spin-off, substantially to the
effect that, among other things:
- No gain or loss will be recognized by TSC or eLoyalty upon the transfer
of the eLoyalty business assets by TSC to eLoyalty (and the assumption by
eLoyalty of certain liabilities);
- The spin-off will qualify as a tax-free spin-off under Section 355 of the
Code;
- No gain or loss will be recognized by TSC upon the distribution of all of
its shares of eLoyalty common stock to the stockholders of TSC;
- No gain or loss will be recognized by (and no amount will be included in
the income of) the TSC stockholders as a result of their receipt of
eLoyalty common stock in the spin-off;
- In connection with the spin-off, a stockholder's basis in TSC stock will
be apportioned between the TSC stock and the eLoyalty common stock
received in the spin-off in accordance with their relative fair market
values on the date of the spin-off; and
- The holding period of the eLoyalty common stock received in the spin-off
will include the holding period of the TSC stock with respect to which
the eLoyalty common stock will be distributed, provided the TSC stock is
held as a capital asset on the date of the spin-off.
The private letter ruling, if received, will generally be binding on the
IRS. However, the ruling, assuming it is received, will be based upon various
factual representations on assumptions, as well as upon certain undertakings. We
are not aware of any facts or circumstances that would cause the representations
on assumptions to be untrue or incomplete in a material respect. If, however,
any of those factual representations or assumptions were untrue or incomplete in
a material respect, any undertaking were not complied with, or the facts upon
which the ruling is based were materially different from the facts at the time
of the spin-off, the ruling received from the IRS might be invalid.
Certain acquisitions of the stock of eLoyalty or TSC prior to, or
following, the spin-off might cause the spin-off to be taxable, for federal
income tax purposes, to TSC (but not its stockholders) if the acquisitions
involve, in the aggregate, 50% or more (by vote or value) of the stock of
eLoyalty or TSC, respectively, and are found to be part of a plan (or series of
related transactions) of which the spin-off is a part. Acquisitions of eLoyalty
or TSC stock occurring during the four-year period beginning two years before,
and ending two years after, the spin-off are presumed to be part of a plan (or
series of related transactions) of which the spin-off is a part.
If the contribution or the spin-off were not to qualify for tax-free
treatment for United States federal income tax purposes then, in general, a very
substantial tax would be payable by TSC. Such a tax would generally be based on
the excess of the fair market value of the eLoyalty assets over the tax basis of
such assets. If the spin-off were not to qualify for tax-free treatment for
United Stated federal income tax purposes (other than by reason of acquisitions
described in the preceding paragraph) then, in general, a very substantial tax
would also be payable by the TSC stockholders. Such a tax would generally be
based on the fair market value of the eLoyalty stock distributed by TSC in the
spin-off taxed at ordinary income rates.
Under United States federal income tax laws, TSC and eLoyalty would be
jointly and severally liable for TSC's federal income taxes resulting from the
contribution or spin-off being taxable. As summarized below under "eLoyalty's
Relationship with Technology Solutions Company After the Spin-Off -- Tax Sharing
and Disaffiliation Agreement," arrangements will exist between TSC and eLoyalty
relating to tax
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sharing and other tax matters, including indemnification by TSC and eLoyalty to
each other with respect to the failure of the contribution of the eLoyalty
business or the spin-off to be tax free.
United States Treasury Regulations require each TSC stockholder to attach
to its United States federal income tax return for the year of the spin-off a
detailed statement setting forth such data as may be appropriate in order to
show the applicability of Section 355 of the Code to the spin-off. Within a
reasonable time after the spin-off, TSC will provide TSC stockholders with the
information necessary to comply with such requirements, and will provide
information regarding the allocation of the tax basis as described in the fifth
bullet point above in this section. The private letter ruling, if received by
TSC, will not specifically address the tax basis allocation rules applicable to
TSC stockholders who hold blocks of TSC stock with different per share tax bases
and such stockholders must consult their own tax advisors in that regard. ALL
TSC STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR
TAX CONSEQUENCES OF THE SPIN-OFF TO THEM, INCLUDING THE APPLICATION OF STATE,
LOCAL AND FOREIGN TAX LAWS AND ANY CHANGES IN UNITED STATES FEDERAL INCOME TAX
LAW THAT MAY OCCUR AFTER THE DATE OF THIS INFORMATION STATEMENT.
MARKET FOR ELOYALTY COMMON STOCK
See "Risk Factors" for a discussion of certain considerations relating to
the market for and trading prices of our common stock following the spin-off.
Currently there is no regular public market for our common stock. We will
apply to have our common stock listed on The Nasdaq Stock Market's National
Market under the symbol "ELOY," and "regular-way" trading of our common stock is
expected to begin on the first business day after the spin-off date. In
addition, we expect that "when-issued" trading for our common stock will develop
prior to the spin-off date. "When-issued" trading refers to that period when
shares are traded prior to the time shares are actually available or issued.
None of these trades, however, will settle until after the spin-off date, when
regular trading in our common stock has begun. If the spin-off does not occur,
all when-issued trading will be null and void. TSC expects that its common stock
will continue to trade on a regular basis through and after the spin-off date.
Shares of our common stock distributed in the spin-off will be freely
transferable, except for shares received by persons who may be deemed to be our
"affiliates" under the Securities Act of 1933, as amended (the "Securities
Act"). Persons who may be deemed to be our affiliates after the spin-off
generally include individuals or entities that control, are controlled by, or
are under common control with, us and may include certain of our officers,
directors or principal stockholders. Persons or entities who or which are our
affiliates will be permitted to sell shares of our common stock only pursuant to
an effective registration statement under the Securities Act or any exemption
from the registration requirements of the Securities Act that may be available.
CONDITIONS TO THE SPIN-OFF
The spin-off is conditioned on, among other things, declaration of the
spin-off by the TSC board of directors. Other conditions to the spin-off
include:
- TSC's receipt of the private letter ruling from the IRS as described
under "-- Material Federal Tax Consequences;"
- the receipt by TSC's board of directors of opinions of TSC's financial
advisor regarding the fairness to stockholders of TSC of the spin-off and
the viability of TSC and eLoyalty after the spin-off;
- receipt of all material approvals and consents necessary to consummate
the spin-off;
- the absence of any prohibition of the spin-off by any law or governmental
authority;
- registration of our common stock under the Securities Exchange Act of
1934 (the "Exchange Act"); and
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- approval for listing on The Nasdaq Stock Market's National Market of our
common stock.
Even if all the conditions to the spin-off are satisfied, TSC has reserved
the right to amend or terminate the reorganization agreement providing for the
spin-off and the related transactions. The TSC board of directors has not
attempted to identify or establish objective criteria for evaluating the
particular types of events or conditions that would cause the TSC board of
directors to consider amending or terminating the spin-off. Although the
conditions described above may be waived by TSC to the extent permitted by law,
the TSC board of directors presently has no intention to proceed with the
spin-off unless each of these conditions is satisfied.
OPINIONS OF FINANCIAL ADVISOR
TSC has engaged Credit Suisse First Boston Corporation as a financial
advisor in connection with the spin-off. We expect that the TSC board of
directors will rely, in part, upon the receipt of the opinions described below
in deciding to declare the dividend necessary to effect the spin-off.
Credit Suisse First Boston expects to deliver to the TSC board of directors
its written opinions, dated January , 2000 to the effect that: (1) the
spin-off will not have a material adverse effect on the financial viability of
TSC (as it is constituted immediately following the spin-off) or eLoyalty during
the period immediately following the spin-off through the end of
(the period for which Credit Suisse First Boston was
provided forecasts) and (2) the spin-off is fair to the stockholders of TSC from
a financial point of view.
For the purposes of these opinions, "financial viability" means and refers
exclusively to the ability of TSC or eLoyalty, as the case may be, to finance
its currently anticipated operating and capital requirements as separate,
stand-alone entities (as projected in the financial forecasts provided to Credit
Suisse First Boston by TSC and eLoyalty) following the spin-off.
Credit Suisse First Boston's opinions are expected to be based upon, among
other things, Credit Suisse First Boston's review of:
- certain publicly available business and financial information relating to
TSC and eLoyalty and financial information contained in the information
statement in the form provided to it which it deemed relevant to its
review;
- financial forecasts provided to Credit Suisse First Boston, and other
information provided by TSC and eLoyalty prior to the date of the
opinions;
- discussions with TSC and eLoyalty management regarding their respective
businesses and prospects;
- comparisons of financial and stock market data of TSC and eLoyalty with
similar data for other publicly-held companies in similar businesses;
- the financial terms of other transactions similar to the spin-off that
have recently been effected;
- prevailing market conditions; and
- other information, financial studies, analyses and investigations and
financial, economic and market criteria that Credit Suisse First Boston
deems relevant.
In each opinion, Credit Suisse First Boston is expected to state that it
has not assumed any responsibility for independent verification of any of the
foregoing information (including the information contained in the information
statement in the form provided to it) and has relied on its being complete and
accurate in all material respects. Each opinion is further expected to state
that, with respect to the financial forecasts reviewed by Credit Suisse First
Boston, Credit Suisse First Boston assumed that such financial forecasts have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of management of TSC and eLoyalty as to the future
financial performance of TSC and
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eLoyalty. Credit Suisse First Boston has assumed no responsibility for, and has
expressed no view as to, such financial forecasts or the assumptions on which
they were based.
Each of Credit Suisse First Boston's opinions is expected to state that
Credit Suisse First Boston has assumed that no income, gain or loss will be
recognized to TSC or eLoyalty for United States federal or state income tax
purposes as a result of the spin-off and that the receipt of eLoyalty stock in
the spin-off will be tax-free for United States federal and state income tax
purposes to the TSC stockholders.
In arriving at its financial opinions, Credit Suisse First Boston will not
attribute any particular weight to any analysis or factor considered in reaching
its conclusions, but rather will make qualitative judgments as to the
significance and relevance of each analysis and factor.
Each Credit Suisse First Boston opinion is expected to be subject to the
limitations that Credit Suisse First Boston neither made any independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of TSC or eLoyalty nor has Credit Suisse First Boston been furnished with any
such appraisal and that each such opinion is based on financial, economic,
monetary and market conditions as they exist and can be evaluated on the date of
such opinion. Credit Suisse First Boston's opinions will not represent an
opinion as to what the market value of the securities of TSC or eLoyalty
actually will be following the consummation of the spin-off.
The full text of each of Credit Suisse First Boston's opinions, each of
which sets forth the assumptions made, matters considered and limits on the
review undertaken, will be filed as an exhibit to the registration statement of
which this information statement is a part. The summary of the opinions of
Credit Suisse First Boston set forth in this information statement is qualified
in its entirety by reference to the full text of such opinions.
Credit Suisse First Boston will receive customary fees, contingent upon the
consummation of the spin-off, and will be reimbursed for certain out-of-pocket
expenses for its services as financial advisor in connection with the spin-off.
TSC has agreed to indemnify Credit Suisse First Boston against certain
liabilities and expenses in connection with its services as financial advisor.
Credit Suisse First Boston and its affiliates may in the future act as
underwriter for, and may in the future participate as members of underwriting
syndicates with respect to, offerings of TSC and eLoyalty securities, and Credit
Suisse First Boston may in the future act as a financial advisor to TSC and
eLoyalty.
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eLOYALTY'S BUSINESS
OUR HISTORY
eLoyalty was founded in 1994 as a business unit within TSC and was
incorporated in Delaware in May 1999.
TSC's core business originally consisted of the design, development and
implementation of custom client/server computer systems for large corporate
clients. TSC's first engagements in the CRM area consisted of custom call center
projects at two Fortune 500 companies, the first of which began in 1991. Kelly
Conway, eLoyalty's President and Chief Executive Officer, was hired by TSC in
November 1993. Drawing upon TSC's experience and his own background and
knowledge, Mr. Conway led the development of TSC's expertise in call center and
other CRM technologies.
Mr. Conway established the call center business unit within TSC in May
1994. To reflect the broader scope and strategic, enterprise-wide focus of the
solutions developed and offered by the group headed by Mr. Conway, it was
renamed the Enterprise Customer Management (ECM) business unit in 1997. In June
1999, the ECM business unit was launched as the eLoyalty division of TSC. Since
1994, this group within TSC has consistently dedicated time and resources to
developing eLoyalty's strategic consulting and technology capabilities in an
effort to lead the development of, and stay at the forefront of, the eCRM
market.
OVERVIEW
We are a leading global information technology services company focused on
providing enterprise-wide solutions across all customer access channels,
including the Internet, that are designed to result in lasting and profitable
customer relationships for our clients. We define this new category of solutions
as loyalty solutions. We believe that loyalty solutions are the next step in the
customer relationship management (CRM) market. CRM refers to services and
software that focus on the sales, marketing and customer service functions of an
organization. With advances in the Internet and information technology, a new
market has evolved that we define as eCRM. eCRM is an expansion of CRM
throughout the enterprise that includes all customer access channels including
the Internet, e-mail and web-chat as well as telephone and fax. A loyalty
solution is a combination of business rules, methodology and eCRM technology
that enables companies to build lasting relationships with their customers,
maximize the efficiency of customer interactions across multiple channels and
capitalize on up-sell and cross-sell opportunities based on customer information
gathered during these interactions.
Our key capabilities include:
- strategic and business consulting;
- eCRM technology architecture, integration and implementation expertise;
- proprietary software and methodology; and
- ongoing support for our solutions.
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The following scenarios illustrate how loyalty solutions can increase
profitability and build loyalty:
CUSTOMER SCENARIO #1: BANKING
A highly valued customer is late making his credit card payment. He has
exceeded his credit limit and is about to have his credit line suspended.
The bank's standard policy on late payments is to charge a $20 delinquency
fee and to apply a high interest charge to the outstanding balance.
A customer information database identifies the situation and notes that
although he is a low value customer to the credit card division, he is of
high overall value to the bank because he maintains several profitable
accounts. In recognition of his value, the business rules put into place
by executive management and embedded in the loyalty solution direct the
customer service representative to initiate a call to the customer and
notify him that he has been granted a two-week payment extension and that
no fees or interest will be charged to his account. To increase the
profitability of this relationship, the loyalty solution also prompts the
customer service representative to up-sell the customer a new platinum
credit card. The customer accepts the offer because his credit limit will
be increased. The bank expects to generate higher annual fees from this
upgrade as well as greater transaction revenue from the customer's
increased spending.
CUSTOMER SCENARIO #2: TECHNOLOGY
A highly valued customer has purchased many top-of-the-line computers from
the direct sales division over the past two years. The customer has
recently experienced a problem with a new printer only four months after
buying it. Unfortunately, the customer did not purchase an extended
warranty. The company's standard policy is to charge a fee to repair the
machine after the standard, ninety-day coverage expires.
The customer goes on-line, but cannot find the solution to the printer's
problem using the self-service problem resolution application on the
company's web site. The loyalty solution recognizes the customer's value
and automatically presents the customer with a "call me" option. Within
minutes, the customer receives a call at home from a technical engineer.
The engineer quickly determines that the printer does not have sufficient
memory to meet the customer's needs. Information pulled from the customer
database by the loyalty solution also notifies the engineer that during
the customer's previous on-line activity he has been browsing the scanner
section of the company's web site. The engineer then informs the customer
that he will not be charged for the service request and successfully sells
the customer an upgrade package for the printer along with a new order for
a scanner at a special discounted rate.
CUSTOMER SCENARIO #3: TRAVEL
A top-tier business traveler is making an on-line reservation to fly with
her husband and daughter on vacation. The executive travels over 100,000
miles a year with the airline, putting her in the top group of frequent
fliers. She has collected sufficient points to upgrade her family on this
trip, however, the airline's standard travel policy allows only one
additional upgrade per reservation. This would mean that one of the three
passengers has to travel alone in coach class seating. This same
businesswoman is also the decision maker for her company's travel policy.
The Internet ticketing system automatically searches the customer
information database and determines that the customer is in the airline's
highest value segment. Based on business rules put into place by executive
management, the Internet ticketing system allows the high-value customer
to upgrade up to three additional reservations. These rules, embedded in
the loyalty solution, direct the system to offer the businesswoman a
"companion travels free" coupon as an incentive for her to use the airline
for subsequent personal travel.
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INDUSTRY BACKGROUND
Increasing competitiveness is forcing companies to become more focused on
their current customers. The importance of customer relationships is a familiar
business concept and new technologies are enabling companies to attract and
maximize the value of their existing customers more effectively. In addition,
the rapid growth of the Internet is fundamentally changing the way businesses
interact with their customers. Customers can use the Internet to more quickly
evaluate products and prices from a wide range of companies without regard to
geographical constraints. Consumers are increasingly using the Internet, e-mail
and web-chat as preferred methods of communication. International Data
Corporation (IDC) expects the number of worldwide Internet users to grow from
142 million in 1998 to 502 million in 2003. In addition, IDC expects consumer
e-mail users in the United States to grow from 48 million in 1998 to 112 million
in 2005.
To remain competitive in this dynamic business environment, more companies
are seeking to create and enhance customer loyalty by making interactions with
customers more personal and relevant. Greater loyalty is expected to increase
revenue and profitability per customer. By knowing their customers better,
companies can market complementary products, known as "cross-selling," or market
higher-end products, known as "up-selling," during regular customer
interactions.
Furthermore, companies today are increasingly aware of the significant
financial impact associated with losing high-value customers, particularly in
the early stages of the relationship. In most industries, initial customer
acquisition costs far exceed a typical customer's spending in the first year.
According to research presented by Frederick R. Reichheld and W. Earl Sasser,
Jr. in a Harvard Business Review article, "companies can boost their profits by
almost 100% by retaining just 5% more of their customers."
The early stage of CRM was focused on the call center, where customer
interaction took place through telemarketing, telesales and follow-up customer
service. Although call centers were a first step in the CRM initiative, they
were limited to only one customer access channel -- the telephone. In addition,
call centers were often not integrated with back office transaction processing
systems. As a result, this created significant amounts of manual processing to
fulfill a customer's request.
With advances in the Internet and information technology, CRM has become
more sophisticated and complex. As a result of the Internet, barriers to market
entry are significantly reduced and competitors are now only a click away. The
Internet also enables companies to obtain real-time customer information and
feedback at considerably reduced costs. The eCRM market is an expansion of CRM
throughout the enterprise and it includes all customer access channels including
the Internet, e-mail and web-chat as well as telephone and fax.
Currently, no single application provided by software vendors is capable of
addressing multiple channels, has an enterprise-wide focus and has the
functionality required to identify the actions needed to increase customer
loyalty. The eCRM market can be separated into six significant components:
Channel Management, eCommerce, Customer Segmentation, CRM Applications, Back
Office and Call Center Technology. The following diagram illustrates those six
components grouped by their functionality, as well as examples of third party
vendors who provide services in each category.
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As illustrated by the following diagram, eCRM solutions are complex and
require many different systems or applications to work together. No vendor has
been able to develop a single product that is able to integrate all of the
components of the eCRM solution to allow those components to work together. We
believe that we can fill this critical void by tying together the other eCRM
components into an integrated architecture and apply the necessary business
rules to allow our clients to realize the full value of our loyalty solution.
Significant Components of the eCRM Market
eLOYALTY
Companies today require these components to be integrated into an
enterprise-wide solution that incorporates all customer access channels
including Internet, e-mail, web-chat, telephone and fax, and provides a seamless
integration of these channels to support core business operations. Increasingly,
companies are looking for outside providers to implement these initiatives
directed at improving customer loyalty. The Yankee Group, an information
technology research firm, predicts that the market for CRM services will grow
from $12.8 billion in 1999 to $23 billion in 2003.
A well-defined system architecture is needed to successfully integrate
business processes and customer access channels; however, the value of an eCRM
solution is derived from combining this architecture with an effective business
methodology. This methodology involves grouping customers into value segments
and analyzing potential customer interactions across each access channel.
Business rules need to be created to define the specific actions that should be
taken each time an interaction occurs. The results of these actions then need to
be analyzed to ensure that the customers' loyalty has increased.
eLoyalty believes we are differentiated because we have an enterprise-wide
focus, we can integrate multiple customer access channels and we have the
ability to create business rules that result in customer loyalty and increased
profitability. We also design the technology architecture and integrate various
software packages, point applications and legacy systems.
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THE ELOYALTY DIFFERENCE
eLoyalty is "the largest pure-play customer relationship solutions service
supplier in the industry," according to a July 2, 1999 report by the Aberdeen
Group. A complete loyalty solution is an eCRM business and technology solution
that is designed to enable companies to build lasting relationships with their
customers, maximize the efficiency of customer interactions across multiple
channels and capitalize on up-sell and cross-sell opportunities based on
customer information gathered during these interactions. We believe we are the
leading provider of loyalty solutions for the following reasons:
- ACTION-ORIENTED APPROACH TO CREATING LOYALTY
We help our clients identify appropriate customer loyalty goals, improve
customer retention, increase up-selling and cross-selling opportunities,
reduce sales costs and increase customer referrals. We identify these
goals by analyzing and segmenting a client's customer base using key
indicators including value, preference and potential sales opportunities.
We work with the senior executives of our clients to align the company's
approach to its customers based on the results of the segmentation
analysis. Our approach is designed to ensure that the customer loyalty
goals of our clients translate directly into operational business rules.
The business rules prescribe a set of specific actions to be used by the
client to increase customer loyalty. In essence, we create practical steps
to optimize everyday customer interactions to accomplish our clients'
loyalty goals.
- ABILITY TO ARCHITECT AND INTEGRATE MULTI-CHANNEL ENTERPRISE-WIDE
SOLUTIONS
We have the necessary expertise to develop enterprise-wide loyalty
solutions. We understand the technology, software applications and
components across each customer access channel, including the Internet,
e-mail, web-chat, telephone and fax. We are able to architect solutions
that integrate various point applications, our proprietary software and
the back office transaction processing systems of our clients.
Our familiarity with emerging technology and software applications used in
the eCRM market coupled with our understanding of key business processes
allow us to implement successful loyalty solutions.
- PROPRIETARY TECHNOLOGY THAT ENHANCES OUR SOLUTIONS
We have developed software that is designed to complement existing
technology and point applications. The availability of this software
reduces the time needed to deploy our solutions. In addition, our software
increases the functionality of third-party applications that are used in
our solutions. Our proprietary software, the Loyalty Suite, enables us to
architect a comprehensive enterprise-wide solution that takes advantage of
emerging technology.
We develop software in our Loyalty Lab, which is a showcase for our
business and technology capabilities. The Loyalty Lab is also used as a
demonstration center for current and prospective clients and as a training
center for employees. In addition, we use the Loyalty Lab to create
prototypes and test solutions before they are implemented at a client's
site.
- ONGOING SUPPORT FOR OUR SOLUTIONS
Loyalty solutions are complex multi-channel implementations that include
many different software applications in an integrated architecture. To
maintain optimal operating performance, a wide breadth of knowledge and
expertise is required to understand each individual component and also how
the pieces of the solution fit together. Each time one of these
application vendors releases a new version of their software, our clients
need to understand and verify the compatibility with the other components
of their solution. These upgrades normally take place at least twice a
year for each application and our clients are often unable to attract or
retain resources with the broad range of skills in each of the existing
and emerging technologies. Our Loyalty Support group provides
around-the-clock support of the entire loyalty solution to ensure that all
of our clients' customer-facing systems are operational. We also offer a
broad range of maintenance, upgrade and
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performance monitoring services to establish a benchmark for our client's
operations and to identify opportunities for continual improvement. In
1999, we received the Solution Integrator of the Year Award for New
Business.
- EXPERIENCED PROJECT TEAMS
Our differentiated delivery model uses a team of between ten and fifteen
principals and senior consultants, providing a solid core of experience
and subject-matter expertise. This group is led by two to three Vice
Presidents and complemented by a similar number of junior consultants. We
believe this model provides us with an advantage over some of our
competitors, who prefer a pyramid model of pairing one partner with many
less experienced professionals.
Many of our consultants have held senior management positions including
Chief Executive Officer, Chief Financial Officer and Chief Information
Officer. Our 90 Vice Presidents average 20 years of relevant industry
experience and are distinguished in their ability to manage and deploy
complex and multi-channel solutions. The average years of experience for
our other professionals is 12 years.
- ABILITY TO SERVE CLIENTS ON A GLOBAL BASIS
We are a global firm with a large domestic presence and international
offices in London, Cologne, Paris, Sydney and Toronto. We have an
established presence in Europe and are now expanding in Asia Pacific. For
the six month period ended June 30, 1999, 23.8% of our revenues were
derived from our international operations.
Through our Loyalty Lab and knowledge base of shared projects,
methodologies and best practices, we have demonstrated to our
multi-national clients our ability to provide loyalty solutions tailored
to their local needs and requirements.
STRATEGY
Our objective is to maintain our position as the leading global provider of
loyalty solutions. We intend to substantially increase our revenues and
profitability and to create a global brand name. Our strategy to achieve these
goals includes the following:
- FOCUS ON THE BUSINESS BENEFITS WE DELIVER TO OUR CLIENTS
We focus on highly strategic projects that have enterprise-wide benefits
and are designed to improve the profitability of our clients. We identify
customer loyalty goals and design business rules that prescribe a specific
set of actions used by the client to increase customer loyalty. We perform
detailed financial analysis to calculate the expected return on investment
from implementing our loyalty solutions. Based upon our experience to
date, we believe that the expected business benefits derived from using
our loyalty solutions will measurably improve our clients' profitability.
We may from time to time offer certain clients a value-based pricing model
for our solutions based upon these expected business benefits. We believe
that this pricing model (which we call Guaranteed Business Benefits) will
be of significant interest to our clients and differentiate us from our
competitors.
Under this model, we may reduce our billing rates or limit our fees in
exchange for a share of the expected economic benefits to our clients from
implementing our solutions. By sharing in the cost savings, profitability
and increased revenues that result from our solutions, we anticipate that
we will experience greater client satisfaction, higher revenues and
increased profitability.
- EXTEND OUR TECHNOLOGY INNOVATION AND THOUGHT LEADERSHIP
We will continue to invest the necessary resources to develop leading-edge
loyalty solutions. The investment is directed in two main areas: emerging
eCRM technology and business thought leadership that we define as
leading-edge research on customer behavior.
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To be at the forefront of emerging technology, specifically the Internet,
we will continue to maintain and develop relationships with leading
software vendors. We have strategically invested in a talented group of
technology experts that focus exclusively on creating innovative loyalty
solutions. Our Loyalty Lab is the focal point for these activities in
addition to providing a demonstration center for our competencies.
We plan to advance our business thought leadership and education on the
concepts of customer loyalty. We intend to explore areas including brand
impact, customer perception and satisfaction, the interdependency of
multiple interactions and enterprise business rule management to ensure
that our loyalty solutions reflect and extend the most forward-thinking
business ideas. We believe that our technology and business capabilities
will significantly enhance our competitive position by enabling us to
deliver more complete solutions.
- CONTINUE TO ENHANCE OUR LOYALTY SOLUTIONS
We currently have two separate initiatives to enhance our loyalty
solutions: extend our current Loyalty Support services and introduce our
Loyalty Hosting offering. We have been providing our clients with our
Loyalty Support service to ensure that our implementations result in
continued business value to our clients. We provide around-the-clock
maintenance, support and upgrade services. We intend to additionally
provide business performance monitoring to identify opportunities for
continual improvement of their loyalty solutions.
We intend to offer additional flexibility to our clients with our Loyalty
Hosting offering. This offering will provide remote subscription to our
loyalty solutions for those clients who desire to reduce risk, time and
initial investment in their effort to use a sophisticated architecture to
realize the on-going value of our loyalty solutions.
- BUILD STRATEGIC VENDOR RELATIONSHIPS
We will continue our investment in two kinds of strategic vendor
relationships. First, we plan to continue to partner with the leading-edge
technology and application vendors to gain access to new products at an
early stage of release. This early access allows us to rapidly develop the
necessary implementation and integration skills required in our loyalty
solutions. Second, we intend to establish vendor relationships as part of
our overall sales efforts including joint lead development and sales
calls. The purpose of these relationships is to give us alternate channels
for developing new business. We have been collaborating with Lucent
Technologies and DST Systems and are in the process of establishing formal
agreements with them.
- CONTINUE TO BUILD BRAND EQUITY
A successful brand results in a greater ability to attract new clients and
employees as well as to improve competitive positioning. We will continue
to invest in marketing programs to build brand awareness through regular
publications, award sponsorship, communications with analysts, trade
shows, industry events and marketing material. In 1999, eLoyalty received
Solutions Integrator magazine's SI Impact Award for Solution Integrator of
the Year. In addition, our Loyalty Support services received the SI Impact
Award for New Business. We are the founder and a sponsor of the
prestigious Computerworld Smithsonian 21st Century Pioneer Awards Program
and the sponsor of Britain's Most Admired Company award.
- CONTINUE TO INVEST IN INFRASTRUCTURE
We plan to continue our strategic investments in operational and
management information systems. We have developed a sophisticated
web-based management information system, GetLoyal.com, that provides us
with a real-time global view of our staffing, pipeline, scheduling,
forecasting, accounting and client information. We will continue to refine
and upgrade our management systems so that we can optimize our resource
allocation and achieve our target operational measures.
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- CONTINUE TO ATTRACT AND RETAIN EMPLOYEES
Our key assets are our employees. We will continue to invest in the
necessary resources to attract and retain highly qualified and motivated
personnel. We have concentrated on fostering an energetic working
environment that facilitates and rewards initiative and achievement. In
keeping with this goal, we are developing our Employee Loyalty program, an
enterprise-wide human resources management program. The Employee Loyalty
program is designed to create a culture that engenders communication,
recognize significant employee achievements and provide training on new
technology. In addition, we intend to make available to all of our
employees stock options and other performance-based incentives.
In our five years of operation, the success of our human resources
management is reflected in the fact that the average tenure of our senior
management is 52 months, Vice Presidents 42 months and other professionals
26 months.
- EXPAND OUR GLOBAL PRESENCE
We expect our plans for global expansion will allow us to capitalize on
high-growth geographic regions and further diversify our revenue base. We
also believe this will enable us to develop closer relationships with our
multi-national clients who are increasingly seeking service providers with
experience in addressing their needs and requirements on a global basis.
We are committed to ensuring the consistency and quality of our loyalty
solutions worldwide through our Loyalty Lab and knowledge base of shared
projects, methodologies and best practices.
THE ELOYALTY SOLUTION
We believe our unique ability to deliver successful loyalty solutions to
our clients results from our approach, our competencies and the software that we
develop in-house. Our approach is a methodology that we adopt to define,
identify and articulate the various elements that create a successful loyalty
solution. Our competencies allow us to address the business needs of our client.
These competencies include strategic consulting skills, business value analysis,
business process redesign, architecture and integration of various technologies
and software applications and post-implementation support. Our software enables
us to complement the functional gaps of existing technology and eCRM
applications and helps reduce time to implementation, reduce deployment risks
and increase the functionality of our loyalty solutions.
Approach
eLoyalty has developed a unique four-step methodology to translate
high-level strategy into an implementation design:
- DEFINE: Identify the unique situation of a customer at any point in time;
- RECOGNIZE: Create rules that prescribe the actions to be taken by the
client when these unique circumstances have been identified;
- EXECUTE: Enable the client to execute these actions across any customer
access channel each time a contact with the customer occurs; and
- MEASURE: Report and diagnose the effectiveness of these actions on
customer loyalty.
By executing this approach across multiple access channels, organizations can
influence behavior resulting in customer loyalty.
Competencies
Successful loyalty solutions generally require a combined knowledge of
business strategy and technology application. To provide our clients with an
end-to-end solution, we have developed expertise in
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many key business consulting disciplines, technology integration and system
architecture. These competencies include repeatable methodologies and
proprietary tools that should increase the success and effectiveness of our
projects. The following list highlights our core competencies:
- ASSESSMENT -- Working with our clients, we evaluate their efficiency and
effectiveness in handling customer interactions. We use our Loyalty
Observer, a proprietary software tool, to help with this process. The
Loyalty Observer enables our professionals to capture and analyze the
metrics of each customer interaction, including the number of legacy
systems used to handle the situation, interaction time, reason for
interaction and actions taken to resolve any customer issues. We use
these results to influence the Business Process Design.
- STRATEGIC CONSULTING -- Through our strategic consulting competency,
which we call our Loyalty Strategy, we assist our clients in identifying
their most valuable customers through detailed segmentation of their
customer base. We use this segmentation to target high-value customers to
receive special offers or service levels designed to increase their
loyalty to the client. Enhanced loyalty results in increased purchases,
reduced cost of sales and additional customer referrals.
- BUSINESS CASE -- Based on the results of our strategic consulting and
operational assessment, we perform a detailed financial analysis to
calculate the expected return on investment for the implementation of our
loyalty solutions. Our Business Case also establishes goals, alternatives
and priorities and assigns client accountability throughout resulting
projects.
- BUSINESS PROCESS DESIGN -- Following our Business Case analysis, we
select the appropriate loyalty solution for our client. The
implementation of our loyalty solutions can lead to significant
organizational, structural, operational and staffing changes. Our Loyalty
Process Design is the method we employ to determine the changes in
business processes and organizational structure required to implement our
loyalty solutions. Our clients implement these changes because of the
tangible business benefits identified by our Business Case analysis.
- ARCHITECTURE AND SYSTEMS INTEGRATION -- This competency allows us to
implement the technical aspects of our loyalty solutions. We design the
Loyalty Architecture which allows us to integrate a variety of software
applications from third-party vendors and our own Loyalty Suite. The
applications we integrate include channel management, customer
segmentation, CRM applications, eCommerce, back office and call center
technology.
- SUPPORT AND HOSTING -- Through our Loyalty Support capabilities, we
provide ongoing maintenance, technical upgrades, benchmarking and we
monitor our solutions to ensure high quality service and efficiency. We
intend to offer hosting services of our loyalty solutions on behalf of
our clients. Loyalty Hosting will provide our clients with remote access
to our loyalty solutions. By using this solution, our clients will
experience less risk, time and initial investment in their effort to
enhance customer loyalty.
Software
The Loyalty Suite is a set of software applications that we license to our
clients. Our software ties together the critical components of the Loyalty
Architecture to complete the solution. The Loyalty Suite provides sophisticated
real-time information, allowing the client to handle each customer interaction
in a consistent manner throughout the enterprise. As of June 30, 1999, we had
licensed components of our Loyalty Suite to over 30 clients as part of our
solution. The Loyalty Suite currently consists of the following:
- LOYALTY COCKPIT -- The Loyalty Cockpit is a desktop portal providing
real-time customer information collected throughout the enterprise. The
application is designed for employees that interact with customers. The
user benefits from an enterprise view of the customer. A sophisticated
scripting feature assists the user to navigate quickly to the multiple
point solutions required to effectively manage the interaction. This is
accomplished by automating the sequence and the access to various CRM
applications and back office systems.
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- LOYALTY REPOSITORY -- The customer information contained in the Loyalty
Repository enhances and extends existing data stored in CRM applications,
legacy systems and marketing databases. The information is used to
determine customer loyalty indicators such as customer value, preference
and potential sales opportunities. Unlike traditional application
databases, the Loyalty Repository is specifically designed for optimum
use in real-time for quickly accessing multiple pieces of customer
information. The data model is highly flexible allowing companies to
define specific parameters for their loyalty indicators in real-time. For
example, the levels at which customer value is segmented are assigned
using the Loyalty Rules Configurator, and can be changed dynamically to
reflect a company's loyalty goals.
- LOYALTY RULES CONFIGURATOR -- The Loyalty Rules Configurator is the user
interface for the Loyalty Decision Engine. It is designed for the
business user, allowing non-technical managers to define key
characteristics of their customers, employees, events and actions.
Business managers can then decide which resources and actions to select
for unique customer profiles and in specific situations. These decisions
are stored as "rules" by the application and reflect the
multi-dimensional aspects of the customer relationship strategy.
- LOYALTY DECISION ENGINE -- The Loyalty Decision Engine is the brain of
the Loyalty Suite. It is a powerful, efficient, server-based application
that applies loyalty business rules across multiple channels and
enterprise applications.
- LOYALTY OUTCOME MANAGER -- The Loyalty Outcome Manager is a web-based
application that enables companies to streamline their data collection
and measurement processes. It enables companies to test and report on
their performance through measurement and analysis of key customer, event
and resource information that is collected over time. The Loyalty Outcome
Manager reduces the time and cost to provide companies with a customer
loyalty scorecard.
- LOYALTY CHANNEL INFLUENCER -- The Loyalty Channel Influencer pulls
information from customer interactions across all customer access
channels, including the Internet, e-mail, web-chat, fax and interactive
voice response systems. This information is then stored in the Loyalty
Repository for use with future customer interactions.
- LOYALTY WAREHOUSE -- The Loyalty Warehouse is a database that stores
information about customers, human resources, events, actions and
customer interactions. It is a chronological history of information that
reflects patterns and trends of customer loyalty data over time. The
Loyalty Warehouse is a flexible model that is able to continually respond
to the dynamic nature of a company's customer relationship and loyalty
information. This data model is specifically designed for optimum
processing of large data requests such as batch reporting.
CLIENTS
For the six months ended June 30, 1999 and for the twelve months ended June
30, 1999, eLoyalty's five largest clients accounted for 24.2% and 23.6%,
respectively, of our revenue during those periods. No single client accounted
for more than 10% of our total revenue in any quarter during that period.
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The following is a representative list of companies for which we have
provided solutions within the last twelve months:
- ADAC Laboratories, Inc.
- A&E Signature Services, a Division of Montgomery Wards
- Agilent Technologies, Inc.
- Allina Health System
- Allstate Insurance Company
- Atmos Energy Corporation
- Axel Springer Verlag AG
- Bank of America Corporation
- Bausch & Lomb, Inc.
- British Broadcasting Corporation (BBC)
- Club Mediterranee (Club Med)
- Conectiv Resource Partners, Inc.
- Deutsche Telekom AG
- Federal Kemper Life Assurance Company
- General Motors Corporation
- GlaxoWellcome, Inc.
- Hewlett-Packard Company
- Intuit Inc.
- Lucent Technologies, Inc.
- News Limited
- Penn Treaty American
Corporation
- PNC Bank Corporation
- Premera
- Provident Financial Group, Inc.
- Royal Bank of Canada
- South Carolina Electric & Gas
Company
- Sprint Communications Company, L.P.
- Union Bank of California, N.A.
- USA Group, Inc.
- U S WEST Communications, Inc.
- Virgin Atlantic Airways Limited
- Vision Service Plan, Inc. (VSP)
- Xerox Canada Ltd.
CASE STUDIES
The following examples illustrate some of the solutions that we have
created for our clients.
A LARGE INTERNATIONAL TECHNOLOGY COMPANY
CHALLENGE
To help our client build loyal relationships with its customers across
multiple channels by improving their ability to implement new products, reducing
their dependency on legacy systems, encouraging shared accountability of
customers across the enterprise and providing on-going support for their
proposed solution.
SOLUTION
- Worked with multiple divisions, across many product lines and in several
countries, to implement our loyalty solutions.
- Defined a customer interaction strategy for our client which specified
their customers' desired experiences in transactions across our client's
multiple geographies, divisions and product lines.
- Reduced the complexity and improved the efficiency of their customer
interactions by re-designing the way in which they handled customer
transactions on a global basis and throughout their multiple product
divisions.
- Selected and implemented the appropriate CRM software applications and
channel management technologies to allow our client to communicate
effectively with their customers through the Internet, via e-mail, in the
field and by telephone.
- Designed and implemented an architecture that enabled global access to
our client's customer information and upgraded core business systems to
enable fast configuration and roll-out of new products in a highly
targeted and focused manner.
- Implemented components from our Loyalty Suite to connect our client's CRM
applications and back office systems with their channel management,
customer segmentation and traditional call center applications.
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- Reduced repetitive and manual tasks and focused the sales and customer
service divisions on relationship building strategies.
- Provided support services that enabled our client to effectively manage
and maintain the applications integrated in our loyalty solution in a
time and cost-effective manner.
- As a result of these efforts, our client has an increased focus on
customer loyalty and has achieved multi-million dollar benefits at
significantly reduced cost of sales and service.
A LARGE LONG TERM CARE INSURANCE PROVIDER
CHALLENGE
To help our client improve its competitive position and to make their sales
agents more effective in building long-term relationships with their customers
by providing alternative channels to improve the sales and accuracy of
processing sales orders and increase their on-line marketing capabilities.
SOLUTION
- Developed an on-line system for our client's national independent agency
network for access to real-time information on insurance quotes and
status of pending customer policies and applications.
- Created a solution that simplified and streamline the sales process. This
new solution enabled agents to complete their customer policy
applications in real-time, thereby creating a competitive advantage.
- Defined and implemented an overall architecture to support these new
systems and their customer relationship strategy.
- Currently creating individual web sites for all the agents that will
allow them to have a direct relationship with their customers and engage
in e-commerce. We intend to link these web sites to the on-line system,
enabling agents to obtain real-time insurance quotes and status on
pending customer policies and applications directly from their individual
web sites. This will significantly improve the marketing capability of
these agents.
AN INTERNATIONAL FINANCIAL SERVICES COMPANY
CHALLENGE
Help our client achieve the following objectives: (1) streamline the
management of their customer interactions; (2) develop a consistent mechanism
for handling their customers; and (3) support the roll-out of new channels for
their customer interactions.
SOLUTION
- Developed a methodology and set of business rules that supported target
marketing and proactive selling to their customers based upon the
knowledge of each customer and distribution channel. A pilot campaign
increased outbound sales call productivity between 30% and 50%.
- Deployed the overall solution including software developed in our Loyalty
Lab that enabled a multi-channel management of customer interactions.
- Automated numerous manual functions and integrated the solution with back
office processing systems resulting in a more efficient sales and
fulfillment process.
- Provided support services to maintain and support the customized
technology environment.
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- By implementing a consistent architecture throughout our client's
enterprise, we were able to help our client share valuable information
about their customers across multiple divisions. This improved our
client's ability to up-sell and cross-sell their products and services to
their customers.
- Our solution resulted in multi-million dollar cost savings and increased
sales for our client as well as causing a significant reduction in
employee attrition due in large part to the introduction of easy-to-use
customer service desktops powered by the Loyalty Cockpit.
A LARGE EUROPEAN PUBLISHING COMPANY
CHALLENGE
Help our client achieve the following objectives: (1) reduce operational
costs; (2) increase sales; and (3) strengthen their competitive position.
SOLUTION
- Developed an effective strategy to facilitate and improve our client's
customer relationships by deploying multimedia customer interaction
centers that handled e-mail, fax, telephone calls and written
correspondence. By defining the overall strategy and architecture that
integrated a number of customer contact channels, our client could more
cost-effectively influence their customer's experience and focus on
additional selling opportunities.
- Created a set of best practices for each customer access channel to
ensure high quality service and consistent management of their customers.
- Integrated the solution with the SAP enterprise backbone and legacy
systems resulting in a seamless and consistent architecture throughout
our client's company. This provided the ability for our client to handle
multiple customer requests across different divisions.
- Developed a web-based transaction processing application that captured
real-time information about customer inquiries. Our client used this
information to increase up-selling and cross-selling opportunities for
its products across all customer channels.
- Implemented our software to allow our client to collect detailed
information about their customer's needs and preferences. This
information was used to tailor their products and services to increase
sales and to increase up-selling and cross-selling opportunities.
- Centralized customer contacts relating to more than 20 different product
lines into two multimedia centers offering around-the-clock access for
their customers.
SALES AND MARKETING
Our sales and marketing efforts are performed by our senior level
professionals, the majority of whom are also responsible for managing the
implementation of our solutions. We have recently created two new sales and
marketing groups, the business development team and the solutions marketing
group. Our business development team consists of experienced industry
professionals who focus on new client opportunities. Our solutions marketing
group establishes relationships with select vendors and leverages their
distribution networks to accelerate the acquisition of new clients.
Our strategy is to maintain long-term relationships with our clients in
order to generate recurring revenues. A significant portion of our revenue comes
from additional work from clients with whom we worked in the past.
BUSINESS DEVELOPMENT TEAM -- Our business development team targets Global
2000 companies. This team is a set of senior professionals with an average
industry experience of 12 years. These professionals develop executive level
relationships with our clients which allow us to obtain business with an
enterprise-wide impact. As of June 30, 1999, eLoyalty had 12 North American
business developers, each dedicated to a specific region.
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SOLUTIONS MARKETING -- We have established collaborative relationships
through our solutions marketing group and are in the process of establishing
formal agreements with companies such as Lucent Technologies and DST Systems.
These relationships provide us alternative channels for identifying prospective
clients. We intend to develop more of these relationships to increase our market
share.
In addition, our solutions marketing group seeks to communicate a
consistent message to our professionals on the availability, use, pricing and
integration of our solutions and leverage the benefits of our Loyalty Lab. This
communication results in the reduction of technical risk, time and cost
associated with the delivery of our solutions.
AGGRESSIVE BRAND DEVELOPMENT -- Following the launch of the eLoyalty brand,
we continue to expand our strategic initiatives to create greater awareness of
our solutions. We have conducted aggressive marketing and branding programs that
include the development and launch of our new web site, frequent press releases
and new marketing material. Our Journal of Customer Loyalty, a quarterly
publication featuring articles by industry professionals, has a distribution
list of over 19,000 and is supplemented by a monthly e-mail campaign entitled
"All Roads Lead to Loyalty." We also have direct mail campaigns, joint
marketing, industry and investment analyst relations and trade show
participation and sponsorship.
We are also a sponsor of two awards that recognize individuals and
companies on their quality of operations. We established the Computerworld
Smithsonian 21st Century Pioneer Awards Program to honor prestigious companies
and individuals that leverage technology to benefit society. Management Today's
"Britain's Most Admired Companies" researches companies from several sectors to
find the one that has the best reputation among its competitors based on
categories such as quality of marketing, use of corporate assets, quality of
products/services and many others. These award programs give eLoyalty the
opportunity to promote its name recognition globally and continue its
positioning as an industry thought leader.
RESEARCH AND DEVELOPMENT
We are in a market that is constantly evolving and we believe that it is
necessary to invest in research and development to remain competitive. In 1998,
we formally established our Loyalty Lab as a center for our research and
development group. The lab is an important part of our strategy and
differentiates us from other companies in our industry. We have made significant
investments to build our research and development over the last four years and
plan to continue these investments. As of June 30, 1999, 34 employees were
working in our Loyalty Lab. The objectives of our Loyalty Lab are as follows:
- to enhance the Loyalty Architecture through research and evaluation of
emerging technologies;
- to work closely with technology partners to decrease the time and
difficulty of integration;
- to develop and enhance the Loyalty Suite;
- to be a center for demonstrating loyalty solutions to our current and
prospective clients; and
- to train our employees on our solutions.
eLoyalty's research and development expenditures for fiscal 1997 and 1998
were approximately $1.7 million and $2.4 million, respectively. We spent $2.9
million on research and development for the seven month period ended December
31, 1998, and $2.3 million for the six months ended June 30, 1999.
STRATEGIC TECHNOLOGY RELATIONSHIPS -- We have collaborated with vendors to
allow us to more effectively integrate their software into our solutions. These
relationships enhance our ability to provide a more complete solution. The
following list is an example of some of these vendors:
- BroadVision, Inc.
- Cisco Systems, Inc.
- Clarify, Inc.
- DST Systems, Inc.
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<PAGE> 47
- eFusion, Inc.
- E.piphany Incorporated
- Genesys Corporation
- Kana Communications, Inc.
- Lucent Technologies, Inc.
- Nuance Communications, Inc.
- Oracle Corporation
- RightPoint Software, Inc.
- SAP AG
- Servicesoft Technologies, Inc.
- Silknet Corporation
- Speechworks International, Inc.
- Siebel Systems, Inc.
- TriVida Corporation
- Vantive Corporation
- Vignette Corporation
- Webline Communications Corporation
COMPETITION
Although the CRM market has been in existence for some time, the eCRM
market in which we compete is relatively new and very competitive. We expect
competition to intensify even further as this market evolves. Many of our
competitors have longer operating histories, more clients, longer relationships
with their clients, greater brand or name recognition and significantly greater
financial, technical, marketing and public relations resources than we do. As a
result, our competitors may be in a better position to respond quickly to new or
emerging technologies and changes in client requirements. They may also develop
and promote their products and services more effectively than we do. These risks
are especially pronounced in our industry where we will face major challenges
from other companies including:
- systems integrators such as Andersen Consulting, Deloitte & Touche LLP,
Ernst & Young LLP, KPMG LLP, PricewaterhouseCoopers LLP, Arthur Andersen
LLP, IBM Global Services, Cambridge Technology Partners, Sapient
Corporation, Diamond Technology Partners and Whittman-Hart Inc.;
- Internet and e-commerce services companies such as Scient Corporation,
Viant Corporation, Proxicom, Inc., AppNet Inc., Tanning Technology
Corporation and Razorfish, Inc.;
- large information technology services companies such as Computer Sciences
Corporation (CSC) and Perot Systems Corporation;
- management consulting firms such as Bain & Company, Booz, Allen &
Hamilton, Boston Consulting Group, Inc. and McKinsey & Company; and
- internal information technology departments of current and potential
clients.
New market entrants pose a threat to our business. We do not own any
patented technology that precludes or inhibits competitors from entering this
market or from providing solutions similar to ours. Existing or future
competitors may develop or offer solutions that are comparable or superior to
ours at a lower price. In addition, several competitors have announced their
intention to offer a broader range of services than they currently provide. Many
of our competitors focus on the implementation of CRM applications.
We believe that we are differentiated from our competition by our ability
to provide a complete loyalty solution. This involves designing and implementing
the business rules that result in customer loyalty and increased profitability,
as well as the technology architecture and integration across the various
software packages, point applications and legacy systems.
INTELLECTUAL PROPERTY RIGHTS
A majority of our clients has required that we grant to them all
proprietary and intellectual property rights with respect to the work product
resulting from our performance of solutions, including the intellectual property
rights to any custom software developed by us for them. Each grant of
proprietary and intellectual property rights limits our ability to reuse work
product components and work product solutions with other clients. In a limited
number of such situations, we have obtained, and in the future may attempt to
obtain, an ownership interest or a license from our clients to permit us to
market custom
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software to other clients. These arrangements may be nonexclusive or exclusive,
and licensors to us may retain the right to sell products and services that
compete with those of eLoyalty.
We also develop core software and methodologies, such as the Loyalty Suite,
that are owned by us and licensed to our clients. We regard these software and
methodologies as proprietary and intend to protect our rights, where
appropriate, with registered copyrights, patents, registered trademarks, trade
secret laws and contractual restrictions on disclosure and transferring title.
In addition, to protect our proprietary information, we rely upon a
combination of trade secret and common law, employee nondisclosure policies and
third-party confidentiality agreements.
EMPLOYEES
As of June 30, 1999, eLoyalty had 618 employees of which 524 were billable
employees. Of the 618 employees, 494 were located in North America, 108 in
Europe and 16 in Australia. Our business is mainly of professional services and
is inherently people intensive. We believe we have a satisfactory relationship
with our employees. None of our employees is represented by a union. Most of our
European employees have employment agreements generally requiring three months'
notice of termination by us. In addition, the laws and regulations of the
foreign countries in which we operate may increase the cost of terminating
employees in those countries. We maintain various programs and strategies to
retain and recruit employees.
FACILITIES
eLoyalty's principal executive office is located at 205 North Michigan
Avenue, Suite 1500, Chicago, Illinois. It consists of approximately 15,000
square feet of leased office space. We also lease office space throughout the
United States and abroad, in some cases pursuant to subleases with TSC. Our
domestic offices are located in Austin, Texas, San Francisco, California and
Waltham, Massachusetts. Our international offices are located in London,
Cologne, Paris, Sydney and Toronto. Pursuant to the reorganization agreement
between us and TSC, we will also have the ability to use, subject to certain
restrictions, TSC offices in Atlanta, Georgia, Dallas, Texas, Los Angeles,
California, Minneapolis, Minnesota and New York City through June 30, 2000 for
no charge. TSC also has comparable rights to use our domestic branch offices for
the same period and subject to the same terms, conditions and restrictions.
LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with eLoyalty's
Financial Statements and Notes and the other financial information appearing in
this information statement. In addition to historical information, the following
discussion and other parts of this information statement contain forward-looking
information that involves risks and uncertainties. eLoyalty's actual results
could differ materially from those anticipated by such forward-looking
information for many reasons, including competitive factors, risks associated
with eLoyalty's expansion plans, transitional service agreements with TSC and
other factors discussed under "Risk Factors" and elsewhere in this information
statement. Effective beginning December 31, 1998, we changed our fiscal year end
from May 31 to December 31. The seven month transition period of June 1, 1998
through December 31, 1998 precedes the start of the new fiscal year. References
in this section to a fiscal year mean the fiscal year ended May 31.
OVERVIEW
Our revenue consists of fees generated for professional services and
support services, as well as license revenue generated from sales of in-house
developed software, all of which we collectively sell as solutions to our
customers. To date, revenues from software have not exceeded 3% of our total
revenues in any quarter and were 1.7% and 1.5% of our total revenues for the
first six months of 1999 and the twelve months ended December 31, 1998,
respectively. We expect this split of revenues between professional services and
software to remain relatively constant in the foreseeable future.
Revenues from our support services were less than 1% of our total revenues
for the first six months of 1999 and the twelve months ended December 31, 1998.
Our revenues from support services may increase in the future. These services
are charged on a time and materials basis. In addition, we intend to offer
hosting services for our loyalty solutions, which would generate a recurring
revenue stream. For selected clients, and after the completion of a detailed
financial analysis, we may from time to time price engagements on a value-based
model under which we reduce our billing rates or limit our fees in exchange for
a share of the expected economic benefit to our clients of implementing our
solutions. Our failure to accurately estimate variables in pricing engagements
on these terms could reduce the profitability of, or result in a loss on, those
projects and could damage our client relationships and our reputation.
To date, we have provided professional services to our clients principally
on a time and materials basis. We have, on limited occasions, contracted certain
phases of our projects on a fixed fee basis. We expect that we will continue to
provide most of our professional services on a time and materials basis. Under
time and materials contracts, we recognize revenue as services are provided. We
are generally reimbursed for reasonable expenses under our contracts.
Our revenue from international operations represents revenue from
engagements with our clients outside of the United States. Currently, we have
international operations in Europe and Australia. We intend to expand our
Australian operations and establish a presence in Asia. Revenue from
international operations has made an increasing contribution to our total
revenues and we anticipate that in the future our revenues from international
operations will account for a greater percentage of our total revenues.
International operations are subject to a number of unique risks and our
international sales growth will be limited if we are unable to manage those
risks. International operations represented 23.8% and 21.9% of total revenues in
the first six months of 1999 and in the twelve months ended December 31, 1998,
respectively. International operations represented 14.1% and 12.5% of income
before income taxes in the first six months of 1999 and in the twelve months
ended December 31, 1998, respectively.
We typically experience seasonal fluctuations in our revenues and earnings
on a global basis in the fourth quarter because of the reduced number of billing
days due to holidays. In addition, we have experienced a slight decrease in
revenues from our European operations in the third quarter because of extended
vacation periods. Although those decreases in revenue have not been significant
in the past, they may increase as we expand internationally.
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Revenues from our operations in the United Kingdom, Germany, Switzerland,
France, Australia and Canada are currently denominated in U.S. dollars and
various other local currencies such as Pound Sterling, Deutsche Marks, French
Francs, Swiss Francs, Euros, Australian dollars and Canadian dollars. We believe
that an increasing portion of our international revenue and costs will be
denominated in foreign currencies in the future. Non-U.S. currency denominated
revenue represented 15.4% and 17.5% of revenues for the first six months of 1999
and the twelve months ended December 31, 1998, respectively. Historically, we
have not experienced material fluctuations in our results of operations due to
foreign currency exchange rate changes.
We have a diversified client base and revenues from our top five and top 20
clients represented 24.2% and 59.8%, respectively, of revenues in the first six
months of 1999 and 23.6% and 54.5%, respectively, of revenues in the twelve
months ended June 30, 1999. No single client accounted for more than 10% of our
total revenue in any quarter during those periods. We do not expect that our
revenues from our top clients as a percentage of our total revenues will
increase.
Project personnel costs represent our most significant expense. These costs
consist primarily of salaries, incentive compensation and employee benefits for
company personnel available for client assignments as well as fees paid to
subcontractors for work performed on our projects. Our revenues from using
subcontractors were 4.0% of total revenues in the first six months of 1999 and
2.7% of total revenues in the twelve months ended December 31, 1998. We
anticipate that we will continue to use subcontractors from time to time,
although we expect that the extent to which we use subcontractors will remain
constant or decrease as a percentage of revenues.
Gross profits represent our revenues less project personnel costs ("Gross
Profit"). We anticipate that to the extent we have additional software and
hosting services revenues, the margin on our Gross Profits will increase. Gross
Profit margins are negatively impacted by several factors, including the use of
subcontractors and non-billable time incurred by project personnel. To the
extent we experience those factors, any Gross Profit margin improvements may be
offset by additional expenses.
Sales and marketing expenses consist primarily of salaries, incentive
compensation and employee benefits for dedicated sales and marketing personnel
in our marketing, business development and solutions marketing groups (prior to
May 1999 this also included an allocation from TSC for their corporate sales and
marketing). Sales and marketing expenses do not include sales and marketing
expenses associated with other employees who are not part of the sales and
marketing group. In addition, sales and marketing expenses include promotional
and brand development costs, business development staff recruiting costs, travel
expenses and depreciation expenses. We expect that our sales and marketing
expenses will increase as a percentage of revenues in the future as we invest in
brand development.
Research and development expenses consist primarily of salaries, incentive
compensation and employee benefits for dedicated personnel, staff recruiting
costs, administrative costs, travel expenses and depreciation expenses. Expenses
of establishing our Loyalty Lab in fiscal year 1998 are included in research and
development expenses beginning in the second quarter of 1998. Our Loyalty Lab is
the center for our research and development activities. It is an important part
of our strategy which we believe differentiates us from other companies in our
industry. The objectives of our Loyalty Lab are to enhance our loyalty
solutions, to allow us to work closely with emerging technology and to be a
demonstration center for our clients' senior executives. Our research and
development expenses as a percentage of revenues have decreased to 3.4% for the
first six months of 1999 from 3.5% for the twelve months ended December 31,
1998. We anticipate that research and development expenses will continue at
approximately the same percentage of revenues for the foreseeable future.
General and administrative support expenses consist of salaries, incentive
compensation and benefits for our managerial and administrative staff (including
senior and regional management) as well as provisions for doubtful receivables.
The provisions for doubtful receivables have historically been approximately 1%
of total revenues with the exception of the 1998 transition period. Because we
established a provision for doubtful receivables related to revenues generated
during the 1998 transition period (largely from clients of The Bentley Group),
the total provisions for doubtful receivables rose to
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approximately 4.1% of total revenues. Other overhead expenses consist of
employee costs for training, certain travel expenses, laptop computer leases and
other non-billable expenses not directly related to projects, sales or research
and development.
TSC corporate services allocation expenses relate to all shared services
provided to us by TSC, including legal, information systems, finance and
accounting, insurance, human resources, benefits administration, stockholder
services and corporate managerial services. TSC corporate services allocation
expenses also include the Chicago headquarters for all periods and all other
directly allocated offices prior to April 30, 1999. In addition, labor costs
associated with recruiting were also included in this expense item prior to
April 30, 1999. From January 1 through June 30, 2000, these services will be
allocated as part of the Shared Services Agreement described under "eLoyalty's
Relationship with Technology Solutions Company After the Spin-Off -- Shared
Services Agreement." Although we have never operated as a stand-alone company
and have limited historical basis for our cost estimates, we anticipate our
combined general and administrative and corporate services allocation expenses
will decrease as a percentage of total revenues; however, we expect short term
increases as we build our infrastructure to manage these functions as a separate
company. We expect that by the third quarter of 2000 we will be able to provide
for ourselves the services currently provided by TSC. After that time we expect
that the costs for these services will be reflected in general and
administrative expenses.
Since May 1, 1999, our recruiting and certain office expenses have been
transferred from TSC corporate services allocation expenses to general and
administrative expenses as the management of those functions was transferred to
us from TSC. The expenses for facilities are attributable to facilities
specifically allocated to us.
Goodwill amortization expenses relate to our acquisitions of The Bentley
Group in June 1997, Geising International in February 1997 and Aspen Consultancy
Ltd. in May 1996. The goodwill amortization for The Bentley Group acquisition is
approximately $1.0 million per quarter and is being amortized over a five year
period (1997 to 2002). The goodwill amortization associated with The Bentley
Group acquisition currently represents approximately 80% of our total goodwill
amortization costs.
Historically, our effective tax rate has fluctuated significantly and for
certain periods our effective tax rate was unusually high. The high effective
tax rates were due primarily to pre-tax losses being generated in low tax-rate
jurisdictions and pre-tax earnings being generated in high tax-rate
jurisdictions. Our effective tax rate of 48.7% and 61.0% for the six months
ended June 30, 1999 and the twelve months ended December 31, 1998, respectively,
was adversely impacted by nondeductible goodwill and expenses as well as foreign
tax rate differences. As we implement tax planning strategies for our business
as a stand-alone entity, we expect our effective tax rates to be less than these
historical levels.
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The following tables present the relative composition of revenue and
expenses.
eLOYALTY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SEVEN MONTH
FOR THE SIX MONTH FOR THE PERIODS FROM JUNE 1 TO
PERIODS ENDED JUNE 30, YEAR ENDED DECEMBER 31, FOR THE YEARS ENDED MAY 31,
----------------------- DECEMBER 31, ---------------------- ------------------------------
1999 1998 1998 1998 1997 1998 1997 1996
---------- ---------- ------------ -------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................... $ 67,636 $ 49,641 $105,235 $ 64,415 $ 43,668 $ 84,488 $ 43,181 $ 26,516
Project personnel.......... (33,125) (23,853) (50,687) (31,302) (22,329) (41,329) (18,078) (11,674)
-------- -------- -------- -------- -------- -------- -------- --------
REVENUES LESS PROJECT
PERSONNEL................ 34,511 25,788 54,548 33,113 21,339 43,159 25,103 14,842
-------- -------- -------- -------- -------- -------- -------- --------
OTHER COSTS AND EXPENSES
Sales and marketing........ 3,773 1,952 4,894 3,456 994 2,429 1,663 1,032
Research and development... 2,307 1,115 3,635 2,889 1,393 2,383 1,689 46
General and administrative
support.................. 13,700 11,689 26,738 16,850 10,641 20,216 11,539 5,559
TSC corporate services
allocation............... 7,940 6,183 12,769 7,698 5,544 10,671 5,028 3,298
Goodwill amortization...... 2,501 1,654 3,794 2,450 1,856 3,201 376 --
-------- -------- -------- -------- -------- -------- -------- --------
30,221 22,593 51,830 33,343 20,428 38,900 20,295 9,935
-------- -------- -------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS).... 4,290 3,195 2,718 (230) 911 4,259 4,808 4,907
-------- -------- -------- -------- -------- -------- -------- --------
OTHER INCOME (EXPENSE)
Net investment income...... 54 37 95 116 39 68 15 --
Interest expense........... (39) (39) (74) (31) (53) (92) -- --
-------- -------- -------- -------- -------- -------- -------- --------
15 (2) 21 85 (14) (24) 15 --
-------- -------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.................... 4,305 3,193 2,739 (145) 897 4,235 4,823 4,907
INCOME TAX PROVISION....... 2,098 1,471 1,672 398 562 2,022 1,897 1,857
-------- -------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS).......... $ 2,207 $ 1,722 $ 1,067 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
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eLOYALTY
STATEMENTS OF OPERATIONS
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
FOR THE FOR THE
SIX MONTH FOR THE SEVEN MONTH PERIOD
PERIODS ENDED YEAR ENDED FROM JUNE 1 TO FOR THE YEARS ENDED
JUNE 30, DECEMBER 31, DECEMBER 31, MAY 31,
---------------- ------------ ------------------- -----------------------
1999 1998 1998 1998 1997 1998 1997 1996
----- ----- ------------ ----- ----------- ----- ----- -----
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Project personnel.................... (49.0)% (48.1)% (48.2)% (48.6)% (51.1)% (48.9)% (41.9)% (44.0)%
----- ----- ----- ----- ----- ----- ----- -----
REVENUES LESS PROJECT PERSONNEL...... 51.0% 51.9% 51.8% 51.4% 48.9% 51.1% 58.1% 56.0%
----- ----- ----- ----- ----- ----- ----- -----
OTHER COSTS AND EXPENSES
Sales and marketing.................. 5.6% 3.9% 4.6% 5.4% 2.3% 2.9% 3.9% 3.9%
Research and development............. 3.4% 2.2% 3.5% 4.5% 3.2% 2.8% 3.9% 0.2%
General and administrative support... 20.2% 23.5% 25.4% 26.0% 24.3% 24.0% 26.6% 21.0%
TSC corporate services allocation.... 11.7% 12.5% 12.1% 12.0% 12.7% 12.6% 11.6% 12.4%
Goodwill amortization................ 3.7% 3.3% 3.6% 3.8% 4.3% 3.8% 0.9% 0.0%
----- ----- ----- ----- ----- ----- ----- -----
44.6% 45.4% 49.2% 51.7% 46.8% 46.1% 46.9% 37.5%
----- ----- ----- ----- ----- ----- ----- -----
OPERATING INCOME (LOSS).............. 6.4% 6.5% 2.6% (0.3)% 2.1% 5.0% 11.2% 18.5%
----- ----- ----- ----- ----- ----- ----- -----
OTHER INCOME (EXPENSE)
Net investment income................ 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0%
Interest expense..................... (0.1)% (0.1)% (0.1)% 0.0% (0.1)% (0.1)% 0.0% 0.0%
----- ----- ----- ----- ----- ----- ----- -----
0.0% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0%
----- ----- ----- ----- ----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES.... 6.4% 6.5% 2.6% (0.2)% 2.1% 5.0% 11.2% 18.5%
INCOME TAX PROVISION................. 3.1% 3.0% 1.6% 0.6% 1.3% 2.4% 4.4% 7.0%
----- ----- ----- ----- ----- ----- ----- -----
NET INCOME (LOSS).................... 3.3% 3.5% 1.0% (0.8)% 0.8% 2.6% 6.8% 11.5%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
The first half of 1999 was significant because of the launch of the
eLoyalty brand and our continued focus on improving our operational management
systems.
REVENUES
Our revenues increased $18.0 million, or 36.3%, to $67.6 million in the
first six months of 1999 from $49.6 million in the first six months of 1998.
Revenues from professional services increased $16.9 million, or 34.1%, to $66.5
million in the first six months of 1999 from $49.6 million in the first six
months of 1998. Revenues generated from using subcontractors was 4.0% of
revenues in the first six months of 1999 compared to 2.4% in the first six
months of 1998. Revenues from sales of software were $1.2 million in the first
six months of 1999, representing 1.7% of revenues in that period. We had
revenues of $0.1 million from sales of software in the first six months of 1998.
The increase in our revenues of $18.0 million reflected increases in both
the size and number of client projects as well as higher average billing rates.
During the first six months of 1999 our average billable employees increased to
524, or 27.1%, from 424 for the first six months of 1998. Our average billing
rate for the first six months of 1999 increased by 7.5% from the first six
months of 1998. Revenues from Europe and Australia increased to approximately
18.1% of our total revenues in the first six months of 1999, compared to 13.4%
of total revenues in the first six months of 1998.
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PROJECT PERSONNEL COSTS
Our project personnel costs increased $9.2 million, or 38.5%, to $33.1
million in the first six months of 1999 from $23.9 million in the first six
months of 1998. The increase in project personnel costs in the first six months
of 1999 was primarily due to the increase in average billable employees to 524
at June 30, 1999 from 424 at June 30, 1998, as well as higher salaries. Our
Gross Profit margin decreased to 51.0% in the first six months of 1999 from
51.9% in the comparable period in 1998, principally as a result of marginally
lower utilization rates and higher salaries.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased $1.8 million, or 90.0%, to $3.8
million in the first six months of 1999 from $2.0 million in the first six
months of 1998. The increase in sales and marketing expenses was primarily the
result of our decision to invest in brand building with respect to the launch of
our new identity as eLoyalty and to formalize our business development group. We
increased our sales and marketing staff with the launch of our solutions
marketing group at the beginning of calendar year 1999. As a result of the
foregoing, sales and marketing expenses increased as a percentage of total
revenues to 5.6% in the first six months of 1999 from 3.9% in the comparable
period in 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses increased $1.2 million, or 109.1%, to
$2.3 million in the first six months of 1999 from $1.1 million in the first six
months of 1998. Research and development expenses increased as a percentage of
total revenues to 3.4% in the first six months of 1999 from 2.2% for the
comparable period in 1998. In the first six months of 1999, we substantially
increased our investment in our Loyalty Lab by hiring additional developers and
purchasing additional software and hardware.
GENERAL AND ADMINISTRATIVE SUPPORT EXPENSES
Our general and administrative support expenses increased $2.0 million, or
17.1%, to $13.7 million in the first six months of 1999 from $11.7 million in
the first six months of 1998. General and administrative expenses decreased as a
percentage of total revenues to 20.2% in the first six months of 1999 from 23.5%
for the comparable period in 1998. This decrease resulted from greater leverage
of our regional management, particularly in Europe, who are responsible for
general and administrative functions. This more than offset an increase in
general and administrative support expenses resulting from the reallocation of
recruiting and certain office expenses from TSC corporate services allocation
expenses as the management of those functions was transferred to us from TSC. In
addition, we were able to eliminate the duplication of expenses associated with
The Bentley Group.
TSC CORPORATE SERVICES ALLOCATION EXPENSES
TSC corporate services allocation expenses increased $1.7 million, or
27.4%, to $7.9 million in the first six months of 1999 from $6.2 million in the
first six months of 1998. TSC corporate services allocation expenses decreased
as a percentage of total revenues to 11.7% in the first six months of 1999 from
12.5% for the comparable period in 1998. This decrease was a result of the
reallocation of recruiting and certain office expenses into general and
administrative support expenses as described above.
GOODWILL AMORTIZATION
Our goodwill amortization expenses increased $0.8 million or 47.1%, to $2.5
million in the first six months of 1999 from $1.7 million in the first six
months of 1998. This increase was due to the contingent purchase price payments
related to the acquisition of The Bentley Group and Aspen Consultancy Ltd.
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PROVISION FOR INCOME TAXES
Income tax expense represents combined federal, state and foreign taxes.
Our income tax provision increased to $2.1 million on pre-tax profits of $4.3
million at the end of the first six months of 1999 compared to $1.5 million on
pre-tax profits of $3.2 million at the end of the comparable period in 1998. Our
effective tax rate was 48.7% in the first six months of 1999 and 46.1% in the
comparable period in 1998. The increased effective tax rate was primarily the
result of a larger proportion of pre-tax earnings being generated in foreign,
high tax-rate jurisdictions.
SEVEN MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1998 COMPARED WITH THE SEVEN
MONTH PERIOD ENDED DECEMBER 31, 1997
This section discusses the seven-month transition period ended December 31,
1998, resulting from our change from a May 31 fiscal year end to a December 31
fiscal year end beginning December 31, 1998. The 1998 transition period was
significant for the company due to a number of events including the integration
of the Bentley Group, which was previously acquired by TSC, the integration of
the telecom business unit of TSC and investments in Europe and Australia. During
this period we established a direct sales force and began a dedicated sales
effort in Europe and Australia. We also undertook a significant restructuring to
support our focus on large multi-channel engagements.
REVENUES
Our revenues increased $20.7 million, or 47.4%, to $64.4 million in the
transition period ended December 31, 1998, from $43.7 million in the seven month
period ended December 31, 1997. Revenues generated from using subcontractors was
2.2% of revenues in the transition period ended December 31, 1998 compared with
1.7% of revenues in the comparable period in the prior year. Revenues from sales
of software were $1.0 million in the transition period ended December 31, 1998
representing 1.6% of revenues in that period. We had revenues of $0.2 million
from sales of software in the transition period ended December 31, 1997.
The increase in our revenues of $20.7 million reflected increases in both
the size and number of client projects as well as higher average billing rates.
The increase in revenues from our international operations also significantly
contributed to this increase in revenue. In addition, The Bentley Group
acquisition contributed approximately $7.8 million of revenues in the transition
period ended December 31, 1997.
PROJECT PERSONNEL COSTS
Our project personnel costs increased $9.0 million, or 40.4%, to $31.3
million in the transition period ended December 31, 1998 from $22.3 million in
the prior year period. The increase in project personnel costs was primarily due
to an increase in average billable employees, as well as higher salaries. Our
Gross Profit margin increased to 51.4% for the transition period ended December
31, 1998 from 48.9% for the comparable period in 1997, principally due to higher
utilization of project personnel.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased $2.5 million, or 250.0%, to $3.5
million in the transition period ended December 31, 1998 from $1.0 million in
the comparable period in the prior year. The increase in sales and marketing
expenses was primarily the result of establishing our business development group
in North America and beginning our sales activities in Europe and Australia. By
the end of 1998 we had hired more than 10 people as dedicated business
developers in North America. Sales and marketing expenses increased as a
percentage of total revenues to 5.4% in the transition period ended December 31,
1998 from 2.3% in the comparable period in the prior year because of the
significant growth in our new business regions.
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<PAGE> 56
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses increased $1.5 million, or 107.1%, to
$2.9 million in the transition period ended December 31, 1998 from $1.4 million
in the comparable period in the prior year. Research and development expenses
increased as a percentage of total revenues to 4.5% in the transition period
ended December 31, 1998 from 3.2% in the comparable period in the prior year.
This increase resulted from the significant expansion of the scope and
operations of our Loyalty Lab. We increased our development staff from nine
employees to 28 employees and established quality assurance, documentation and
full time research and demonstration groups to broaden our capabilities and
leverage this investment throughout our business. In addition, the increase
includes increased capitalized software costs that resulted in increased
amortization expense in this period.
GENERAL AND ADMINISTRATIVE SUPPORT EXPENSES
Our general and administrative support expenses increased $6.3 million, or
59.4%, to $16.9 million in the transition period ended December 31, 1998 from
$10.6 million for the comparable period in the prior year. General and
administrative expenses increased as a percentage of total revenues to 26.0% in
the transition period ended December 31, 1998 from 24.3% in the comparable
period in the prior year. We launched our operations group to manage
utilization, hourly billing rate, revenue per billable employee, employee
turnover and day-to-day project pipeline development. During this period, we
also increased the support level for our operations in Europe and Australia.
Prior to the end of 1998, The Bentley Group included their own operational and
management infrastructure that duplicated our capabilities. By the end of the
1998 transition period we significantly eliminated the duplication and related
expenses. In addition, we established a $2.7 million provision for uncollectible
accounts receivable related to revenues generated during the transition period,
largely from clients of The Bentley Group.
TSC CORPORATE SERVICES ALLOCATION EXPENSES
TSC corporate services allocation expenses increased $2.2 million, or 40.0%
to $7.7 million in the transition period ended December 31, 1998 from $5.5
million in the comparable period in the prior year. TSC corporate services
allocation expenses decreased as a percentage of total revenue to 12.0% in the
transition period ended December 31, 1998 from 12.7% in the comparable period in
the prior year. This decrease was due to the transition of certain management
expenses related to The Bentley Group to general and administrative expenses.
GOODWILL AMORTIZATION
Our goodwill amortization expenses increased $0.6 million or 31.6%, to $2.5
million in the transition period ended December 31, 1998 from $1.9 million in
the comparable period in the prior year. This increase was because of the
contingent purchase price payments related to the acquisitions of The Bentley
Group and Aspen Consultancy Ltd.
PROVISION FOR INCOME TAXES
Our income tax provision decreased to $0.4 million on a pre-tax loss of
$0.1 million at the end of the transition period ended December 31, 1998
compared to $0.6 million on pre-tax profits of $0.9 million at the end of the
comparable period in the prior year. This unusual income tax provision for the
transition period ended December 31, 1998 resulted from the impact of
nondeductible goodwill and expenses as well as foreign tax rate differences.
FISCAL 1998 COMPARED WITH FISCAL 1997
REVENUES
Our revenues increased $41.3 million, or 95.6%, to $84.5 million in the
fiscal year ended May 31, 1998 from $43.2 million in the fiscal year ended May
31, 1997. The increase in our revenues reflected
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<PAGE> 57
increases in both the size and number of client projects. The Bentley Group
acquisition contributed $16.4 million of revenues in fiscal year 1998. Our
internal compound annual growth rate less the revenue associated with The
Bentley Group acquisition was 57.6% for fiscal year 1998 compared with 62.8%
compound annual growth rate for the previous year.
PROJECT PERSONNEL COSTS
Our project personnel costs increased $23.2 million, or 128.2%, to $41.3
million in fiscal 1998 from $18.1 million in fiscal 1997. The increase in
project personnel costs in fiscal 1998 was primarily due to an increase in
average billable employees, as well as higher salaries. Our Gross Profit margin
decreased to 51.1% in fiscal 1998 from 58.1% in fiscal 1997. This decrease in
Gross Profit margin resulted from a substantial increase in our available
billable employees who we were not able to immediately deploy. The increase in
available billable resources was necessary to respond to the growing demand in
our North American business.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased $0.7 million, or 41.2%, to
approximately $2.4 million in fiscal 1998 from $1.7 million in fiscal 1997. The
increase in sales and marketing expenses was primarily the result of our
decision to expand our sales and marketing effort in North America. Sales and
marketing expenses decreased as a percentage of total revenues to 2.9% in fiscal
1998 from 3.9% in fiscal 1997. This decrease reflected the maturity of our North
American business and our ability to leverage our existing sales and marketing
functions in fiscal 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses increased $0.7 million, or 41.2%, to
approximately $2.4 million in fiscal 1998 from $1.7 million in fiscal 1997.
Research and development expenses decreased as a percentage of total revenues to
2.8% in fiscal 1998 from 3.9% in fiscal 1997. This decrease resulted from our
significant revenue growth in fiscal 1998 and the redeployment of our
development staff as billable employees to meet the demands of our expanding
North American business.
GENERAL AND ADMINISTRATIVE SUPPORT EXPENSES
Our general and administrative support expenses increased $8.7 million, or
75.7%, to $20.2 million in fiscal 1998 from $11.5 million in fiscal 1997.
General and administrative support expenses decreased as a percentage of total
revenues to 24.0% in fiscal 1998 from 26.6% in fiscal 1997. This decrease also
reflects the generation of additional revenue in North America without a
proportional increase in general and administrative support expenses.
TSC CORPORATE SERVICES ALLOCATION EXPENSES
TSC corporate services allocation expenses increased $5.7 million, or
114.0%, to $10.7 million in fiscal 1998 from $5.0 million in fiscal 1997. TSC
corporate services allocation expenses increased slightly as a percentage of
total revenues at 12.6% in fiscal 1998 and 11.6% in fiscal 1997. This increase
was as a result of TSC's international expansion.
GOODWILL AMORTIZATION
Our goodwill amortization expenses increased $2.8 million to $3.2 million
in fiscal 1998 from $0.4 million in fiscal 1997. The increase in goodwill
amortization as a percentage of revenues to 3.8% in fiscal 1998 from 0.9% in
fiscal 1997 was primarily a result of The Bentley Group acquisition in June
1997.
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<PAGE> 58
PROVISION FOR INCOME TAXES
Our income tax provision increased to $2.0 million on pre-tax profits of
$4.2 million at the end of fiscal 1998 compared to $1.9 million on pre-tax
profits of $4.8 million at the end of fiscal 1997. Our effective tax rate was
47.7% in fiscal 1998 and 39.3% in fiscal 1997. The increased effective tax rate
was primarily the result of earning income in jurisdictions with relatively
higher tax rates as we expanded our international operations.
FISCAL 1997 COMPARED WITH FISCAL 1996
REVENUES
Our revenues increased $16.7 million, or 63.0%, to $43.2 million in the
fiscal year ended May 31, 1997 from $26.5 million in the fiscal year ended May
31, 1996.
The increase in our revenues of $16.7 million reflected a significant
increase in domestic billable hours and our expansion into international
operations. During fiscal 1997 we began our operations in Europe and Canada and
in May 1996 made an acquisition of Aspen Consultancy Ltd. in the United Kingdom.
PROJECT PERSONNEL COSTS
Our project personnel costs increased $6.4 million, or 54.7%, to $18.1
million in fiscal 1997 from $11.7 million in fiscal 1996. The increase in
project personnel costs in fiscal 1997 was primarily due to an increase in
average billable employees and higher salaries. Our Gross Profit margin
increased to 58.1% in fiscal 1997 from 56.0% in fiscal 1996, primarily as a
result of better utilization.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased $0.7 million, or 70.0%, to $1.7
million in fiscal 1997 from $1.0 million in fiscal 1996. The increase in sales
and marketing expenses resulted from expansion of our international sales effort
to generate revenue growth. Overall sales and marketing expenses remained
constant as a percentage of revenues at 3.9% for both fiscal 1997 and fiscal
1996.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses increased $1.6 million to $1.7
million in fiscal 1997 from $0.1 million in fiscal 1996. Research and
development expenses increased as a percentage of total revenues to 3.9% in
fiscal 1997 from 0.2% in fiscal 1996. During fiscal 1997 we invested in research
and development to differentiate our solutions by increasing the size of our
development group from one employee in fiscal 1996 to eight employees in fiscal
1997.
GENERAL AND ADMINISTRATIVE SUPPORT EXPENSES
Our general and administrative support expenses increased $5.9 million, or
105.4%, to $11.5 million in fiscal 1997 from $5.6 million in fiscal 1996.
General and administrative support expenses increased as a percentage of total
revenues to 26.6% in fiscal 1997 from 21.0% in fiscal 1996. This increase was
largely due to launching our business in Europe and decentralizing our
management functions in our North American region into four regions.
TSC CORPORATE SERVICES ALLOCATION EXPENSES
Our corporate services allocation expenses increased $1.7 million, or
51.5%, to $5.0 million in fiscal 1997 from $3.3 million in fiscal 1996.
Corporate services allocation expenses decreased as a percentage of total
revenues to 11.6% in fiscal 1997 from 12.4% in fiscal 1996. This decrease was a
result of increased leverage of management and operational expenses and
effective cost management by TSC.
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<PAGE> 59
GOODWILL AMORTIZATION
Our goodwill amortization expenses were $0.4 million in fiscal 1997. We had
no goodwill amortization expenses in fiscal 1996. This goodwill is related to
the acquisition of Aspen Consulting.
PROVISION FOR INCOME TAXES
Our income tax provision was $1.9 million on pre-tax profits of $4.8
million for fiscal 1997 compared to $1.9 million on pre-tax profits of $4.9
million for fiscal 1996. Our effective tax rate was 39.3% in fiscal 1997 and
37.8% in fiscal 1996.
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<PAGE> 60
QUARTERLY PERIODS
The following table presents our quarterly results of operations for
calendar year 1998 and the first and second quarters of calendar year 1999. We
derived these data from unaudited financial statements and, in the opinion of
management, they include all adjustments, consisting of only normal recurring
adjustments, considered necessary for a fair presentation of such information.
The operating results for the quarterly periods are not necessarily indicative
of the results that may be expected for the entire year.
eLOYALTY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED (UNAUDITED)
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUES.................. $ 23,643 $ 25,998 $ 28,044 $ 27,550 $ 31,491 $ 36,145
Project personnel......... (11,710) (12,143) (13,611) (13,223) (15,276) (17,849)
-------- -------- -------- -------- -------- --------
REVENUES LESS PROJECT
PERSONNEL............... 11,933 13,855 14,433 14,327 16,215 18,296
-------- -------- -------- -------- -------- --------
OTHER COSTS AND EXPENSES
Sales and marketing....... 758 1,194 1,245 1,697 1,801 1,972
Research and
development............. 466 649 1,116 1,404 1,086 1,221
General and administrative
support................. 5,645 6,044 7,223 7,826 6,221 7,479
TSC corporate services
allocation.............. 2,806 3,377 3,042 3,544 4,385 3,555
Goodwill amortization..... 794 860 1,050 1,090 1,252 1,249
-------- -------- -------- -------- -------- --------
10,469 12,124 13,676 15,561 14,745 15,476
-------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS)... 1,464 1,731 757 (1,234) 1,470 2,820
OTHER (EXPENSE) INCOME.... (7) 5 (7) 30 (1) 16
-------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES............ 1,457 1,736 750 (1,204) 1,469 2,836
INCOME TAX PROVISION
(BENEFIT)............... 629 842 458 (257) 742 1,356
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS)......... $ 828 $ 894 $ 292 $ (947) $ 727 $ 1,480
======== ======== ======== ======== ======== ========
</TABLE>
STOCK-BASED COMPENSATION
We have elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for our employee stock options. Under Accounting Principles Board
Opinion No. 25, because the exercise prices of our employee stock options equal
the fair market value of the underlying stock on the date of grant, no
compensation expense is recorded. We have adopted the disclosure-only provisions
of the Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 123.
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<PAGE> 61
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund working capital needs and
capital expenditures in order to support revenue growth. Historically, these
capital requirements have been satisfied by funds provided by TSC. TSC has
performed cash management services for us, whereby our cash flow was directed to
TSC and TSC provided cash to us to fund our operating expenses and capital
expenditures. Following the spin-off, we will no longer participate in TSC's
cash management system and TSC will no longer be obligated, and does not intend,
to provide additional funds to us to finance our operations.
In the first six months of 1999, net cash used in operating activities
totaled $11.3 million. Cash was provided by $2.2 million of net income, $3.0
million from depreciation and amortization and $3.8 million related to an
increase in accrued compensation. This was offset by an $18.7 million increase
in receivables. The increase in receivables was mainly due to growth in
revenues. In the first six months of 1998, net cash used in operating activities
was $2.4 million, driven by $1.7 million of income and $2.4 million of
depreciation and amortization and offset by a $5.5 million increase in
receivables.
Capital expenditures for the first six months of 1999 were $0.7 million for
computer, furniture, equipment and leasehold improvements. Capital expenditures
may continue at the current rate throughout calendar year 1999. We currently
have no material commitments for capital expenditures.
In connection with the spin-off, we intend to enter into a revolving credit
facility with Bank of America which would be sufficient to provide the cash
needed for short term operating obligations. See "eLoyalty Financing" for a
description of the expected terms of that facility. We believe that the net
proceeds of the investment by the venture capital investors described under
"Certain Transactions," current cash and cash equivalents and additional cash to
be contributed by TSC to eLoyalty prior to the spin-off, the revolving credit
facility and cash flow from operations should be sufficient to satisfy our cash
requirements for the foreseeable future. We intend to obtain additional equity
financing in the next twelve months through a public offering. In addition, we
may obtain additional capital through a private placement of equity with
strategic or other investors or through additional debt financing. We believe
that in the future we will be able to access the capital markets on terms and in
amounts that will be satisfactory to us, although there can be no assurance in
that regard.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We provide our solutions to clients in a number of countries including the
United States, Canada, United Kingdom, Germany, France, Switzerland and
Australia. For the first six months of 1999 and the twelve months ended December
31, 1998, 15.4% and 17.5%, respectively, of our revenue was denominated in
foreign currencies such as Pound Sterling, Deutsche Marks, French Francs, Swiss
Francs, Euros, Australian dollars and Canadian dollars. We believe that an
increasing portion of our international revenue and costs will be denominated in
foreign currencies in the future. As a result of our exposure to foreign
currencies, our financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in those foreign
markets. Revenues of our foreign subsidiaries are currently realized or received
in U.S. dollars or in various foreign currencies. To the extent that we bill
clients in a currency other than their local currency, exchange rate
fluctuations that strengthen the currency in which we bill relative to their
local currency could make our services less competitive to those clients.
Historically, we have not experienced material fluctuations in our results of
operations due to foreign currency exchange rate changes.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133," is effective for fiscal years beginning after June 15, 2000 (January 1,
2001 for eLoyalty). SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or
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<PAGE> 62
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. We
anticipate that the adoption of SFAS No. 133 will not have a significant effect
on our results of operations or financial position.
YEAR 2000
The Year 2000 issue is a general term used to address a class of problems
caused by the inability of computer programs to recognize various date values
around January 1, 2000. This class of problems could result in a system failure
or miscalculations causing disruptions of operations such as, among others, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
Pursuant to a Shared Services Agreement with TSC, we will be relying on TSC
to provide a number of transitional services to us, including among others
accounting, tax, benefits administration, human resources and information
systems. TSC will charge us for these services by allocating the portion of its
total costs for these functions that represents the proportion of our revenues
or employees, depending on the particular service, to those of TSC. For a more
detailed discussion of the terms governing these interim services, see
"eLoyalty's Relationship with Technology Solutions Company After the Spin-Off --
Shared Services Agreement." As a result, Year 2000 problems experienced by TSC
could have a material adverse effect on our business, financial condition or
results of operations. The discussion of the state of TSC's Year 2000 compliance
efforts set forth below is based on information furnished to us by TSC.
TSC has advised us that it has conducted an assessment of its computer
information systems and has determined the nature and extent of the work
required to ensure that its internal systems are Year 2000 compliant. The
majority of the software used by TSC has been purchased as packaged software.
TSC's internal systems can be grouped into three principal categories: its
accounting and human resources software, its legacy systems that perform a
variety of processes and its office automation software products. With respect
to the suite of software products licensed by TSC and relied upon in the
administration of accounting and human resources functions, the licensor has
indicated to TSC that the version presently employed by TSC is not currently
Year 2000 compliant and, therefore, TSC has advised us that it has replaced the
production and development versions with newer ones that are Year 2000
compliant. TSC has also advised us that it plans to apply future patches to
address the Year 2000 issue as they are made available. Based on currently
available information, TSC believes the expense associated with these efforts
will not be material. TSC expects that additional issues concerning Year 2000
compliance will be reported by the licensor to TSC and updates will be provided
by the licensor. TSC has received the most recent updates and enhancements
pursuant to a software support service agreement presently in place with the
licensor. Provided that the licensor gives such assurances concerning the
updates and enhancements to its software product suite, TSC does not expect that
it will incur additional expense aside from the cost of the software support
service agreement in order to bring its accounting and human resources software
package into Year 2000 compliance.
Other important internal business processes of TSC that we will rely upon
in whole or in part during the term of the Shared Services Agreement between us
and TSC, such as time and expense reporting and labor distribution (and their
associated back office functions), are performed by legacy systems that TSC has
re-written to be Year 2000 compliant. TSC's remaining office automation products
have been inventoried and each vendor has been contacted by TSC for the
product's Year 2000 status. All identified products have either been upgraded,
entirely replaced, determined to be Year 2000 compliant, or shown to possess no
date-associated functions within the product. TSC estimates that it is nearly
completed with the compliance project effort and expects that the identified
systems will be compliant as of December 30, 1999. TSC estimates that the cost
associated with replacing or upgrading these systems, excluding labor costs,
will be less than $0.3 million, and has provided for the replacement of these
systems in its operating and capital budgets for calendar year 1999.
TSC has contacted vendors of the standard software packages and secured
patches and/or newer versions of the applications. Distribution of the patches
and newer versions of the software occurred in the third quarter and will occur
in the fourth quarter of calendar year 1999.
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<PAGE> 63
TSC has advised us that, based on presently available information, it
believes that any necessary compliance efforts concerning its internal systems
will not have a material adverse effect on its business, operating results and
financial condition. However, if compliance efforts of which TSC is not
currently aware are required and are not completed on time, or if the cost of
any required updating, modification or replacement of TSC's information systems
exceeds its estimates, the Year 2000 issue could have a material adverse impact
on TSC's business, operating results and financial condition, which in turn
could have a material adverse impact on our business, operating results and
financial condition.
In addition to TSC's internal systems, TSC relies on third-party vendors in
the conduct of its business. For example, third-party vendors handle the payroll
function for TSC and TSC also relies on the services of telecommunication
companies, banks, utilities and commercial airlines, among others. We also will
rely on third-party vendors for comparable services in the conduct of our
business. TSC has sought assurances from its material vendors and suppliers that
there will be no interruption of service as a result of the Year 2000 issue and,
to the extent such assurances have not been given, TSC is finalizing contingency
plans to mitigate the effects on the conduct of TSC's business in the event the
Year 2000 issue results in the unavailability of services. We intend to do the
same. There can be no assurance that any contingency plans will prevent any such
service interruption on the part of one or more of our respective third-party
suppliers from having a material adverse effect on our business, operating
results and financial condition.
In addition, the failure on the part of the accounting systems of our
clients due to the Year 2000 issue could result in a delay in the payment of our
invoices for services and expenses. A failure of the accounting systems of a
significant number of our clients would have a material adverse effect on our
business, operating results and financial condition.
We have generally refrained from performing Year 2000 remediation services
for our clients. It is possible, however, that former, present and future
clients could assert that certain services performed by us from time to time
involve, or are related to, the Year 2000 issue. We have recommended,
implemented and customized various third-party software packages for our clients
and, to the extent that such software programs may not be Year 2000 compliant,
we could be subjected to claims as a result. Since our inception as a business
unit within TSC, we have also designed and developed software and systems for
our clients, and licensed our proprietary software. Due to the large number of
engagements we have undertaken over the years, there can be no assurance than
all such software programs and systems will be Year 2000 compliant, which could
also result in the assertion of claims against eLoyalty.
Our policy has been to endeavor to secure provisions in our client
contracts that, among other things, disclaim implied warranties, limit the
duration of our express warranties, relate our liability to the amount of fees
paid to us by the client in connection with the project and disclaim any
liability arising from third-party software that we implemented, customized or
installed. There can be no assurance that we will be able to secure contractual
protections in agreements concerning future projects, or that any contractual
protections we have secured in agreements governing pending and completed
projects will dissuade the other party from asserting claims against us with
respect to the Year 2000 issue.
Due to the complexity of the Year 2000 issue, upon any failure of critical
client systems or processes that may be directly or indirectly connected or
related to systems or software designed, developed, licensed, customized or
implemented as described above, we may be subjected to claims regardless of
whether the failure is related to the services we provided or our proprietary
software. There can be no assurance that we would be able to establish that we
did not cause or contribute to the failure of a critical client system or
process. There also can be no assurance that the contractual protections, if
any, we secure in connection with any past, present or future clients will
operate to insulate us from, or limit the amount of, any liability arising from
claims asserted against eLoyalty. If asserted, the resolution of such claims
(and the associated defense costs) could have a material adverse effect on our
business, operating results and financial condition.
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eLOYALTY CAPITALIZATION
The following table sets forth, as of June 30, 1999, (1) the historical
capitalization of eLoyalty; (2) the pro forma capitalization to give effect to
the issuance of 41.4 million shares of eLoyalty to TSC and the sale of 2.4
million shares to venture capital investors as described in "Certain
Transactions" and (3) the pro forma as adjusted capitalization giving effect to
the spin-off, the sale of the shares to the venture capital investors and the
expiration of eLoyalty's obligation to repurchase such shares described in note
(1) below and under "Certain Transactions." In addition, prior to the spin-off
TSC will contribute to eLoyalty an additional amount of cash to be determined
prior to the spin-off. You should read the information set forth below in
conjunction with "eLoyalty Selected Financial Data," our historical financial
statements and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ELOYALTY
CAPITALIZATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999 (UNAUDITED)
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
Cash........................................................ $ 7,117 $15,931 $15,931
------- ------- -------
Redeemable Common Stock, $.01 par value: 2,400,000 shares
authorized; no shares issued and outstanding on an actual
basis; 2,400,000 shares issued and outstanding on a pro
forma basis; no shares issued and outstanding on a pro
forma as adjusted basis(1)................................ $ -- $ 8,400 $ --
Stockholders' Equity:
Common Stock, $.01 par value: 100,000,000 shares authorized;
100 shares issued and outstanding on an actual basis;
41,400,000 issued and outstanding on a pro forma basis;
43,800,000 shares issued and outstanding on a pro forma as
adjusted basis(2)......................................... -- 414 438
Additional paid-in capital.................................. -- 65,329 73,705
Net advances from TSC....................................... 65,329 -- --
Accumulated comprehensive loss.............................. (579) (579) (579)
------- ------- -------
Total stockholders' equity.................................. 64,750 65,164 73,564
------- ------- -------
Total capitalization.............................. $64,750 $73,564 $73,564
======= ======= =======
</TABLE>
- ---------------
(1) As described under "Certain Transactions," certain venture capital investors
agreed on June 22, 1999 to purchase an aggregate of 2.4 million shares of
our common stock at $3.50 per share. Such purchase is subject to the receipt
of a private letter ruling from the IRS to the effect that the spin-off will
be tax-free to TSC and its stockholders for United States Federal income tax
purposes and certain other customary conditions. If those investors purchase
our shares of common stock and the spin-off does not occur by August 13,
2000, we could become obligated to repurchase such shares at a premium
totalling $1.2 million over the price paid by the investors for such shares.
Because those shares may be repurchased prior to the spin-off, we have
classified those shares as redeemable common stock until the spin-off
occurs.
(2) Excludes 5,046,000 shares of Common Stock issuable upon exercise of options
outstanding as of September 30, 1999 and shares issuable upon exercise of
options to be issued in substitution of existing TSC options as of the date
of the spin-off, the number of which will not be ascertainable until the
spin-off. See "eLoyalty's Management -- Incentive Plans," "eLoyalty's
Relationship with Technology Solutions Company After the Spin-Off -- TSC
Stock Options" and Note 8 of the Notes to Consolidated Financial Statements.
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<PAGE> 65
eLOYALTY FINANCING
In connection with the spin-off, we intend to enter into a revolving credit
facility which would allow us to borrow up to $ from time to time. We expect
that Bank of America will commit to provide the financing for the revolving
credit facility on an unsecured basis. We expect that the credit facility will
automatically renew on an annual basis. Although, at the date of this
information statement, we do not anticipate borrowing under the facility, after
the spin-off borrowings may be made under the facility for general corporate
purposes.
We expect that borrowings under the revolving credit facility will bear
interest at the then current market rates. We expect the credit facility to
contain customary representations, warranties, covenants and default provisions,
including working capital commitments and debt to equity ratios.
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<PAGE> 66
ELOYALTY SELECTED FINANCIAL DATA
The following tables summarize certain selected financial data of eLoyalty.
This information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the historical
financial statements and notes thereto included elsewhere in this information
statement. The statement of operations data for the seven month period ended
December 31, 1998 and for each of the three years ended May 31, 1998, 1997 and
1996 and the balance sheet data as of December 31, 1998 and May 31, 1998 and
1997 below are derived from the audited combined financial statements included
in this information statement. They should be read in conjunction with those
financial statements and the notes. The statement of operations data for the six
month periods ended June 30, 1999 and 1998, for the seven month period ended
December 31, 1997, for the year ended December 31, 1998, and for the years ended
May 31, 1995 and 1994 and the balance sheet data as of June 30, 1999 and May 31,
1996, 1995 and 1994 are derived from unaudited combined financial statements.
The historical financial information may not be indicative of eLoyalty
future performance and does not necessarily reflect what the financial position
and results of operations of eLoyalty would have been had eLoyalty operated as a
separate, stand-alone entity during the period covered.
eLOYALTY
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX FOR THE
MONTH PERIODS FOR THE YEAR SEVEN MONTH PERIODS
ENDED ENDED FROM JUNE 1 TO
JUNE 30, DECEMBER 31, DECEMBER 31,
------------------- ------------ ----------------------
1999 1998 1998 1998 1997
-------- -------- ------------ -------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................ $ 67,636 $ 49,641 $105,235 $ 64,415 $ 43,668
Project personnel.............. (33,125) (23,853) (50,687) (31,302) (22,329)
-------- -------- -------- -------- --------
REVENUES LESS PROJECT
PERSONNEL...................... 34,511 25,788 54,548 33,113 21,339
-------- -------- -------- -------- --------
OTHER COSTS AND EXPENSES:
Sales and marketing............ 3,773 1,952 4,894 3,456 994
Research and development....... 2,307 1,115 3,635 2,889 1,393
General and administrative..... 13,700 11,689 26,738 16,850 10,641
TSC corporate services
allocation................... 7,940 6,183 12,769 7,698 5,544
Goodwill amortization.......... 2,501 1,654 3,794 2,450 1,856
-------- -------- -------- -------- --------
30,221 22,593 51,830 33,343 20,428
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS)......... 4,290 3,195 2,718 (230) 911
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE).......... 15 (2) 21 85 (14)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 4,305 3,193 2,739 (145) 897
INCOME TAX PROVISION
(BENEFIT)...................... 2,098 1,471 1,672 398 562
-------- -------- -------- -------- --------
NET INCOME (LOSS)............... $ 2,207 $ 1,722 $ 1,067 $ (543) $ 335
======== ======== ======== ======== ========
Net income (loss) per common
share..........................
Shares used to calculate net
income (loss) per share........
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................ $ 84,488 $ 43,181 $ 26,516 $ 6,132 $1,333
Project personnel.............. (41,329) (18,078) (11,674) (3,137) (715)
-------- -------- -------- ------- ------
REVENUES LESS PROJECT
PERSONNEL...................... 43,159 25,103 14,842 2,995 618
-------- -------- -------- ------- ------
OTHER COSTS AND EXPENSES:
Sales and marketing............ 2,429 1,663 1,032 312 40
Research and development....... 2,383 1,689 46 -- --
General and administrative..... 20,216 11,539 5,559 1,335 482
TSC corporate services
allocation................... 10,671 5,028 3,298 1,527 197
Goodwill amortization.......... 3,201 376 -- -- --
-------- -------- -------- ------- ------
38,900 20,295 9,935 3,174 719
-------- -------- -------- ------- ------
OPERATING INCOME (LOSS)......... 4,259 4,808 4,907 (179) (101)
-------- -------- -------- ------- ------
OTHER INCOME (EXPENSE).......... (24) 15 -- -- --
-------- -------- -------- ------- ------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 4,235 4,823 4,907 (179) (101)
INCOME TAX PROVISION
(BENEFIT)...................... 2,022 1,897 1,857 (51) (103)
-------- -------- -------- ------- ------
NET INCOME (LOSS)............... $ 2,213 $ 2,926 $ 3,050 $ (128) $ 2
======== ======== ======== ======= ======
Net income (loss) per common
share..........................
Shares used to calculate net
income (loss) per share........
</TABLE>
57
<PAGE> 67
eLOYALTY
BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF MAY 31,
JUNE 30, DECEMBER 31, -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
----------- ------------ ------- ------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash................. $ 7,117 $ 4,411 $ 4,726 $ 4,130 $ 321 $ -- $ --
Working capital...... $45,371 $26,231 $23,840 $13,506 $ 6,249 $3,130 $1,316
Total assets......... $85,973 $63,904 $54,118 $24,188 $14,008 $4,351 $2,119
Stockholder's
equity............. $64,750 $47,888 $40,893 $17,147 $ 9,312 $3,169 $1,346
</TABLE>
58
<PAGE> 68
eLOYALTY'S RELATIONSHIP WITH TECHNOLOGY SOLUTIONS COMPANY
AFTER THE SPIN-OFF
The spin-off, and the transactions being undertaken in connection with the
spin-off, are being effected according to a Reorganization Agreement between
eLoyalty and TSC. In addition, we have entered into or will enter into certain
ancillary agreements contemplated by the Reorganization Agreement and certain
other agreements that will govern various ongoing relationships between us and
TSC.
Below is a summary description of the Reorganization Agreement and certain
of the ancillary agreements. This description, which summarizes the material
terms of those agreements, does not purport to be complete and is qualified in
its entirety by reference to the full text of the agreements. Certain of these
agreements, including the Reorganization Agreement and the forms of Shared
Services Agreement and Tax Sharing and Disaffiliation Agreement, have been filed
with the Securities and Exchange Commission as exhibits to the registration
statement of which this information statement is a part.
REORGANIZATION AGREEMENT
The Reorganization Agreement will provide for, among other things, the
principal corporate transactions required to effect the separation of eLoyalty's
business from the remaining TSC business, the spin-off and certain other
agreements governing the relationship between eLoyalty and TSC after the
spin-off.
Pursuant to the Reorganization Agreement, TSC will transfer to eLoyalty
substantially all of the assets, and eLoyalty will assume substantially all of
the corresponding liabilities, of eLoyalty's business. The assets of eLoyalty's
business will be transferred to eLoyalty on an "as is, where is" basis and no
representations or warranties will be made by TSC regarding those assets.
Certain international, intellectual property, real property and other assets
relating primarily to the business of eLoyalty may still be held by TSC or its
affiliates at the time of the distribution of the eLoyalty common stock pending
receipt of consents or approvals or satisfaction of other applicable
requirements necessary for the transfer of such assets to eLoyalty. These assets
and operations are not, individually or in the aggregate, material to eLoyalty.
However, the information included in this information statement, including our
financial statements, assumes the completion of all such transactions.
The TSC board will have the sole discretion to determine the date of the
spin-off. The spin-off is conditioned on, among other things, declaration of the
spin-off by the TSC board of directors. Other conditions to the spin-off
include:
- TSC's receipt of the private letter ruling from the IRS described under
"The Spin-Off -- Material Federal Tax Consequences;"
- receipt by TSC's board of directors of opinions of TSC's financial
advisor regarding the fairness to stockholders of TSC of the spin-off and
the viability of TSC and eLoyalty after the spin-off;
- receipt of all material approvals and consents necessary to consummate
the spin-off;
- the absence of any prohibition of the spin-off by any law or governmental
authority;
- registration of our common stock under the Exchange Act;
- approval for listing on The Nasdaq Stock Market's National Market of our
common stock;
- no other events or developments shall have occurred that, in the judgment
of the TSC board, would result in the spin-off having a material adverse
effect on TSC or on the stockholders of TSC; and
- final approval by TSC's board of directors of the spin-off.
Even if all of the conditions to the spin-off are satisfied, TSC has
reserved the right to amend or terminate the Reorganization Agreement and the
related transactions. The TSC board of directors has not attempted to identify
or establish objective criteria for evaluating the particular events or
conditions that
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<PAGE> 69
would cause the TSC board of directors to consider amending or terminating the
spin-off. Although the conditions described above may be waived by TSC to the
extent permitted by law, the TSC board of directors presently has no intention
to proceed with the spin-off unless each of these conditions is satisfied.
Subject to certain exceptions, the Reorganization Agreement will provide
for certain cross-indemnities principally designed to place financial
responsibility for the liabilities of eLoyalty's business with eLoyalty and
financial responsibility for the obligations and liabilities of TSC's retained
business with TSC. Specifically, eLoyalty has agreed to assume liability for,
and to indemnify TSC against, any and all liabilities associated with eLoyalty's
business. These liabilities include any litigation, proceedings or claims
relating to the products, services and operations thereof whether or not the
underlying basis for such litigation, proceeding or claim arose prior to or
after the date of the transfer of the eLoyalty business by TSC to eLoyalty. TSC
has agreed to indemnify eLoyalty against any and all liabilities associated with
TSC's retained business.
The Reorganization Agreement will provide for the allocation of benefits
between TSC and eLoyalty under existing insurance policies after the date of the
spin-off for claims made or occurrences prior to the date of the spin-off and
sets forth procedures for the administration of insured claims. In addition, the
Reorganization Agreement provides that TSC will use its reasonable efforts to
maintain directors' and officers' insurance at substantially the level of TSC's
current directors' and officers' insurance policy for a period of three years
with respect to the directors and officers of TSC who will become directors and
officers of eLoyalty as of the date of the spin-off for acts relating to periods
prior to the date of the spin-off.
The Reorganization Agreement will also provide that each of TSC and
eLoyalty will be granted access to certain records and information in the
possession of the other. This requires the retention by TSC and eLoyalty, for a
period of seven years following the spin-off, of the information in its
possession relating to the other. Further, the party in possession of the
information must use commercially reasonable efforts to notify the other party
of its intention to dispose of such information and, with respect to tax
information, the period shall be extended to the expiration of the applicable
statute of limitations.
The Reorganization Agreement will also provide that for one year following
the spin-off neither TSC nor eLoyalty can solicit or recruit any of the
employees of the other. Further, the Reorganization Agreement will address the
treatment of employee benefit matters and other compensation arrangements for
certain former and current eLoyalty employees and their beneficiaries and
dependents. These provisions of the Reorganization Agreement contemplate that
eLoyalty will establish certain retirement savings and welfare plans. The
Reorganization Agreement will provide that the account balances (including
outstanding loans) of all eLoyalty employees participating in TSC's deferred
compensation and 401(k) plans will be transferred to eLoyalty's new deferred
compensation and 401(k) plans and assets held in trust related to such account
balances will be transferred to new trusts established by eLoyalty. The
Reorganization Agreement will also generally provide that, after the spin-off,
eLoyalty will assume all liabilities for benefits under any welfare plans
related to eLoyalty employees, other than certain claims incurred on or before
the spin-off. Moreover, the Reorganization Agreement will provide that,
effective as of the spin-off, eLoyalty will become responsible for all other
liabilities to eLoyalty employees. The Reorganization Agreement will also
provide that eLoyalty will issue stock options in substitution of outstanding
options to purchase TSC common stock and will maintain an employee stock
purchase plan substantially similar to TSC's 1995 employee stock purchase plan.
The Reorganization Agreement contains provisions that govern the resolution
of disputes, controversies or claims that may arise between or among the
parties. These provisions contemplate that efforts will be made to resolve
disputes, controversies and claims by escalation of the matter to senior
management (or other mutually agreed) representatives of the parties. Disputes
remaining unresolved are then to be submitted to mandatory mediation. If such
efforts are not successful, any party may submit the dispute, controversy or
claim to mandatory, binding arbitration, subject to the provisions of the
Reorganization Agreement. The Reorganization Agreement contains procedures for
the selection of a sole arbitrator of the dispute, controversy or claim and for
the conduct of the arbitration hearing, including
60
<PAGE> 70
certain limitations on discovery rights of the parties. These procedures are
intended to produce an expeditious resolution of any such dispute, controversy
or claim.
TSC STOCK OPTIONS
eLoyalty Employees and Directors. TSC and eLoyalty have agreed that as of
the spin-off, each outstanding option to purchase TSC common stock held by a
person who will be an employee or director of eLoyalty immediately after the
spin-off (and who will not also be a director of TSC) will be converted into a
substitute option to purchase eLoyalty common stock. The substitute option will
preserve the intrinsic value of the option and the ratio of the exercise price
to the fair market value of the stock by adjusting the number of shares
purchasable and the exercise price, based on a comparison of the trading price
of TSC common stock, including the value of eLoyalty common stock, and the
trading price of eLoyalty common stock on a "when-issued" basis. The substitute
option will take into account all employment with both TSC and eLoyalty for
purposes of determining when the option becomes exercisable and when it
terminates. All other terms of the substitute option will be the same as the
current TSC option.
TSC Employees and Directors, and Former Employees and Directors. Each
outstanding nonqualified TSC option granted before June 22, 1999 to a person who
will continue as an employee or director of TSC after the spin-off, or who will
not be an employee or director of either TSC or eLoyalty after the spin-off,
will be converted into both an adjusted TSC option and a substitute eLoyalty
option. These TSC options will be converted in a manner that preserves the
aggregate exercise price of each option, which will be allocated between the
adjusted TSC option and the substitute eLoyalty option based on a comparison of
the trading price of TSC common stock, excluding the value of eLoyalty common
stock and the trading price of eLoyalty common stock on a "when-issued" basis.
Both options, when combined, will preserve the intrinsic value of the existing
option, and each will preserve the ratio of the exercise price to the fair
market value of the stock subject to the option.
Specifically, the number of shares of TSC common stock subject to an
adjusted TSC option will be the same as the number of shares subject to the
existing TSC option, and the current exercise price will be multiplied by the
following fraction:
TSC Stock Price (excluding the value of eLoyalty stock)
- --------------------------------------------------------------------------------
TSC Stock Price (including the value of eLoyalty stock)
The number of shares subject to a substitute eLoyalty option will equal the
number of shares of eLoyalty common stock that would have been received in the
spin-off with respect to the shares of TSC common stock subject to the existing
TSC option. The exercise price of the substitute eLoyalty option will equal the
exercise price of the existing TSC option multiplied by the following ratio:
eLoyalty Stock Price (on a "when-issued" basis)
- --------------------------------------------------------------------------------
TSC Stock Price (including the value of eLoyalty stock)
Employment with TSC will be taken into account in determining when each
substitute eLoyalty option becomes exercisable and when it terminates, and in
all other respects the terms of the substitute option will be substantially the
same as the existing TSC option.
Options Granted After June 21, 1999. Each outstanding nonqualified TSC
option granted after June 21, 1999 to a person who will continue as an employee
or director of TSC after the spin-off, or who will not be an employee or
director of either TSC of eLoyalty after the spin-off will not be adjusted as
described above, but instead will continue solely as an option to purchase
shares of TSC common stock. Each of these options will be adjusted to reflect
the spin-off, based on a comparison of the trading price of TSC common stock,
including the value of eLoyalty common stock, and the trading price of TSC
common stock, excluding the value of eLoyalty common stock and will preserve the
intrinsic value of the option and the ratio of the exercise price to the fair
market value of the stock.
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<PAGE> 71
Incentive Stock Options. Each TSC option that is an incentive stock option,
within the meaning of Section 422 of the Code, will be converted into an
incentive stock option to purchase the stock of the corporation with which the
optionee is employed immediately after the spin-off. These options will be
converted based on a comparison of the trading price of the stock purchasable
under the option, reflecting the spin-off, and the trading price of TSC common
stock, including the value of eLoyalty common stock and will preserve both the
intrinsic value of the option and the ratio of the exercise price to the fair
market value of the stock.
TAX SHARING AND DISAFFILIATION AGREEMENT
The Tax Sharing and Disaffiliation Agreement will set forth the rights and
obligations of TSC and eLoyalty with respect to taxes imposed on their
respective businesses both before and after the spin-off and with respect to
"Restructuring Taxes." For purposes of the Tax Sharing and Disaffiliation
Agreement, "Restructuring Taxes" are taxes and other liabilities imposed as a
result of a determination that (1) the contribution of the eLoyalty assets to
eLoyalty failed to qualify for tax-free treatment, (2) the spin-off failed to
qualify as a tax-free spin-off under Section 355 of the Code, or (3) TSC, under
certain special rules, was subject to tax as a result of the spin-off even
though the spin-off generally qualified for tax-free treatment under Section 355
of the Code.
General Taxes. Under the Tax Sharing and Disaffiliation Agreement, eLoyalty
will be liable for and indemnify TSC against any taxes (other than Restructuring
Taxes) that are attributable to the business carried on by eLoyalty. eLoyalty
will indemnify TSC against these taxes even though they may have been incurred
prior to the formation of eLoyalty. TSC will indemnify eLoyalty against any
taxes (other than Restructuring Taxes) that are attributable to the business
retained by TSC. The Tax Sharing and Disaffiliation Agreement sets forth rules
for determining taxes attributable to the eLoyalty business and taxes
attributable to the business retained by TSC.
Restructuring Taxes. Under the Tax Sharing and Disaffiliation Agreement, we
will, in general, be liable for any Restructuring Taxes imposed by reason of any
"eLoyalty Tainting Act," which means (1) any breach by eLoyalty, any eLoyalty
subsidiary or any eLoyalty affiliate of any written representation or covenant
with respect to the contribution of the eLoyalty assets or the spin-off that is
made by eLoyalty in that agreement (which, in general, includes representations
by eLoyalty relating to the truthfulness of the facts and representations set
out in the IRS ruling and the materials submitted to the IRS in connection with
that ruling, in each case to the extent descriptive of eLoyalty and the eLoyalty
business (including eLoyalty's plans, proposals, intentions and policies)), (2)
any action (or failure to take any reasonably available action) by eLoyalty, any
eLoyalty subsidiary, any eLoyalty affiliate, or the eLoyalty business or any
employee thereof, or (3) any acquisition or other transaction involving the
capital stock of eLoyalty (other than pursuant to the spin-off).
Under that agreement, TSC will, in general, be liable for any Restructuring
Taxes imposed by reason of any "TSC Tainting Act", which means (1) any breach by
TSC, any TSC subsidiary or any TSC affiliate of any written representation or
covenant with respect to the contribution of the eLoyalty assets or the spin-off
that is made by TSC in that agreement (which, in general, includes
representations by TSC relating to the truthfulness of the facts and
representations set out in the IRS ruling and the materials submitted to the IRS
in connection with that ruling, in each case to the extent descriptive of TSC
and the TSC business (including TSC's plans, proposals, intentions and
policies)), (2) any action (or failure to take any reasonably available action)
by TSC, any TSC subsidiary or any TSC affiliate, or the TSC business or any
employee thereof (excluding, in all cases, any action or failure by eLoyalty,
the eLoyalty business or any employee thereof), or (3) any acquisition or other
transaction involving the capital stock of TSC.
Under that agreement, eLoyalty and TSC are each liable for 50% of
Restructuring Taxes that are not imposed as a result of either an eLoyalty
Tainting Act or a TSC Tainting Act. If a Restructuring Tax is imposed where
there is both an eLoyalty Tainting Act and a TSC Tainting Act, and each of the
eLoyalty Tainting Act and the TSC Tainting Act would alone be sufficient to
result in the imposition of such
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<PAGE> 72
Restructuring Tax, eLoyalty and TSC are each liable for 50% of such
Restructuring Tax. Finally, in the case of a Restructuring Tax that would not
have been imposed but for the existence of both an eLoyalty Tainting Act and a
TSC Tainting Act, eLoyalty and TSC are each liable for such Restructuring Tax to
the extent the eLoyalty Tainting Act and the TSC Tainting Act, respectively,
contributed to the imposition of such Restructuring Tax.
Administrative matters. The Tax Sharing and Disaffiliation Agreement will
also set forth the obligations of eLoyalty and TSC with respect to the filing of
tax returns, the administration of tax contests and other matters.
SHARED SERVICES AGREEMENT
TSC and eLoyalty will enter into a Shared Services Agreement, pursuant to
which TSC will provide to eLoyalty certain administrative services that may be
necessary for the conduct of eLoyalty's business. Services to be provided to
eLoyalty by TSC include accounting, tax, benefits administration, human
resources, information systems and certain corporate overhead services. This
agreement will expire on June 30, 2000 unless the parties mutually agree upon a
renewal. For benefits administration, human resources and information systems we
will be charged by TSC based on our percentage of the total number of TSC and
eLoyalty employees. For accounting, tax and other corporate overhead services we
will be charged by TSC based on our percentage of the total revenues of TSC and
eLoyalty.
TSC INTELLECTUAL PROPERTY LICENSE AGREEMENT
TSC and eLoyalty will enter into a TSC Intellectual Property Agreement,
pursuant to which TSC will grant to eLoyalty a nonexclusive, royalty-free,
worldwide, perpetual license in and to certain intellectual properties,
processes, know-how and technical information of TSC which are not used
exclusively or primarily in connection with eLoyalty's business but which are
used in connection with eLoyalty's business as of the date of the spin-off.
ELOYALTY INTELLECTUAL PROPERTY LICENSE AGREEMENT
eLoyalty and TSC will enter into an eLoyalty Intellectual Property
Agreement, pursuant to which eLoyalty will grant to TSC a nonexclusive,
royalty-free, worldwide, perpetual license in and to certain intellectual
properties, processes, know-how and technical information which were assigned to
eLoyalty, which are used primarily in connection with eLoyalty's business, and
which were also used in connection with TSC's businesses other than eLoyalty's
business as of the date of the spin-off.
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<PAGE> 73
ELOYALTY'S MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below is certain information concerning the executive officers,
other key employees and members of our board of directors upon completion of the
spin-off.
The ages listed below are as of September 1, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Kelly D. Conway....................... 43 Director, President and Chief Executive Officer
Tench Coxe............................ 41 Director and Chairman of the Board of Directors
Jay C. Hoag........................... 41 Director
John T. Kohler........................ 52 Director
Michael J. Murray..................... 55 Director
John R. Purcell....................... 67 Director
Michael R. Zucchini................... 53 Director
Timothy J. Cunningham................. 46 Senior Vice President and Chief Financial Officer
Craig B. Lashmet...................... 39 Senior Vice President -- North American
Operations
Arthur J. Bird........................ 46 Senior Vice President -- European Operations
Chris J. Danson....................... 32 Senior Vice President -- Development and Support
Julie M. Fitzpatrick.................. 32 Senior Vice President -- Marketing
Jackie L. Hilt........................ 42 Senior Vice President -- Employee Loyalty
Kevin J. Kraft........................ 34 Senior Vice President -- Solutions Marketing
Stephen D. Mayers..................... 42 Senior Vice President -- Australian Operations
Michael Weintraub..................... 40 Senior Vice President -- Operations
</TABLE>
KELLY D. CONWAY has been our President and Chief Executive Officer and a
Director of eLoyalty since our incorporation in May 1999. Mr. Conway joined TSC
in November 1993 as Senior Vice President, assumed the position of Executive
Vice President in July 1995 and became Group President of TSC in October 1998.
Prior to joining TSC, he was a partner in the management consulting firm of
Spencer, Shenk and Capers from 1991 to 1993. From 1989 to 1991, he was President
and Chief Executive Officer of Telcom Technologies, a leading manufacturer of
automatic call distribution equipment. From 1984 to 1989, he held the positions
of Vice President of Finance and Vice President of Marketing for Telcom
Technologies. From 1980 to 1984, he was a consultant with Deloitte, Haskins and
Sells. In 1998, he became a board member of Edify Corporation.
TENCH COXE is our Chairman of the board of directors. Mr. Coxe has served
as a managing director of the general partner of Sutter Hill Ventures, a venture
capital company located in Palo Alto, California, since 1989. From 1984 to 1987,
Mr. Coxe served as Director of Marketing and in other management positions with
Digital Communications Associates. Mr. Coxe is currently on the Board of
Directors of Clarus Corporation, Copper Mountain Networks, Inc., Edify
Corporation, NVidia Corporation, Alteon WebSystems, Inc. and various private
companies.
JAY C. HOAG has been, since June 1995, a general partner of Technology
Crossover Ventures, a venture capital group located in Palo Alto, California.
From 1985 to 1994, he was a managing director with Chancellor Capital
Management, Inc. Mr. Hoag serves on the board of directors of Onyx Software
Corporation, Autoweb.com, Inc., iVillage, Inc. and several privately held
companies.
JOHN T. KOHLER has been a Director of eLoyalty since May 1999. Mr. Kohler
is currently TSC's President and Chief Executive Officer and has been a Director
of TSC since June 1994. He joined TSC as Senior Vice President in June 1992, was
promoted to Executive Vice President and named to the Office of the Chairman in
September 1993, became President and Chief Operating Officer in January 1994 and
became Chief Executive Officer in June 1995. From 1986 to 1992, he was Senior
Vice President and Chief Information Officer of Kimberly-Clark Corporation. From
1983 to 1986, he was a partner and
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<PAGE> 74
regional practice director for the Midwest Region consulting practice of Arthur
Young. He is also currently serving as a Director of Follett Corporation and
Infosis Corp.
MICHAEL J. MURRAY has been a Director of eLoyalty since June 1999 and a
Director of TSC since July 1988. Mr. Murray is President of Global Corporate and
Investment Banking at Bank of America Corporation and a member of their Policy
Committee. Reporting to Mr. Murray are the Global Capital Raising and Global
Markets, International Corporate Banking Group, United States & Canada Group and
Principal Investing. From March 1997 until the BankAmerica-NationsBank merger in
1998, Mr. Murray headed BankAmerica Corporation's Global Wholesale Bank and was
responsible for its business with large corporate, international and government
clients around the world. Mr. Murray was named a BankAmerica vice chairman and
head of the United States and International Groups in September 1995. He had
been responsible for BankAmerica's United States Corporate Group since
BankAmerica's merger with Continental Bank Corporation in September 1994. Prior
to the BankAmerica-Continental Bank merger, he was vice chairman and head of
Corporate Banking for Continental Bank, which he joined in 1969. He is also
currently serving as a Director of CNF Transportation Inc., a transportation
company located in Palo Alto, California.
JOHN R. PURCELL has been a Director of eLoyalty since June 1999 and a
Director of TSC since July 1988. He has served as Chairman and Chief Executive
Officer of Grenadier Associates, Ltd., a venture banking, merger and acquisition
consulting firm, since 1989. From February 1991 until 1997, he served as
Chairman of Donnelley Marketing, Inc., a direct marketing company. From 1987
until 1990, he served as Chairman of Mindscape, Inc., an educational
entertainment computer software company. From 1982 until 1986, he served as
Chairman and President of SFN Companies, Inc., a communications company. He
previously served as Executive Vice President of CBS, Inc. and Senior Vice
President, Finance of Gannett Co., Inc. He is also currently serving as a
Director of Bausch & Lomb, Inc., Omnicom Group Inc. and Journal Register
Company.
MICHAEL R. ZUCCHINI has been a Director of eLoyalty since June 1999 and a
Director of TSC since October 1997. He has served as Chief Technology Officer of
Fleet Financial Group, a financial services company, since April 1997 and as
Vice Chairman since 1993. Since January 1997, he has served as Chairman of the
Bankers Roundtable Subcommittee on Legislation and Regulation charged with
interacting with Congress on issues related to technology. He is also currently
serving as a Director of Visa U.S.A., Inc., a credit card company.
TIMOTHY J. CUNNINGHAM will be eLoyalty's Senior Vice President and Chief
Financial Officer effective November , 1999. From October 1998 until November
1999 he held the position of Vice President -- Finance and Chief Financial
Officer of CTS Corporation, a publicly traded electronics and communications
company. Prior to joining CTS, Mr. Cunningham served as Vice
President -- Finance of the Moore Document Solutions division of Moore
Corporation from July 1996 to September 1998, and from 1995 to 1996, he was the
Group Controller for the ConAgra Refrigerated Foods group of ConAgra, Inc. Prior
to that, Mr. Cunningham served as Chief Financial Officer -- North America for
British Steel Inc., a U.S. based subsidiary of a large European industrial
products company, where he was employed from 1989 to 1994.
CRAIG B. LASHMET is the Senior Vice President of eLoyalty with overall
responsibility for Sales and Delivery in North America, which represents our
largest revenue base. Mr. Lashmet first joined TSC in October 1995 as Senior
Vice President. Prior to joining TSC he was a partner with Grant Thornton LLP,
an international accounting and consulting firm, where he managed the advanced
technology consulting practice for nine years.
ARTHUR J. BIRD is eLoyalty's Senior Vice President responsible for Sales
and Delivery in Europe. Mr. Bird joined TSC in October 1997 as a Senior Vice
President initially responsible for Sales and Delivery in the United Kingdom
and, beginning in November 1998, all of Europe. Mr. Bird previously worked for
CSC Computer Sciences, where he was European Director at the JP Morgan Pinnacle
Alliance in London from June 1995 to October 1997. Prior to working for CSC, Mr.
Bird spent two years
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<PAGE> 75
with Energis plc, a wholly-owned subsidiary of The National Group, where he held
positions as Director of Customer Service and Director of Corporate Sales.
CHRIS J. DANSON leads eLoyalty's Development and Support as Senior Vice
President, and his responsibilities include managing the Loyalty Lab in Austin,
Texas and our Loyalty Support offering. Mr. Danson first joined TSC in 1993 as a
senior consultant, and became a Senior Vice President in September, 1998. He
managed several large projects and helped develop our European operations.
JULIE M. FITZPATRICK is Senior Vice President of Marketing for eLoyalty.
Ms. Fitzpatrick joined TSC in 1996 as a principal, after a seven-year career at
IBM Corporation. While at IBM, she held several positions, including account
systems engineer, product marketing manager and product manager for strategic
call center and middleware technologies.
JACKIE L. HILT is our Senior Vice President responsible for Employee
Loyalty, which includes recruiting and human resources functions with a specific
emphasis on employee relationships. Ms. Hilt has been with TSC for ten years,
most recently as the Senior Vice President of TSC's global recruiting
organization, a role she assumed in 1994. Prior to joining TSC, she was part of
Arthur Young's Midwest Consulting Practice.
KEVIN J. KRAFT is a Senior Vice President of eLoyalty responsible for
Solutions Marketing. Mr. Kraft joined TSC in 1995 as a Senior Principal, became
a Vice President in 1996, and assumed the role of Senior Vice President,
Solutions Marketing in December 1997. Prior to joining TSC, Mr. Kraft was a
senior manager in Grant Thornton LLP's advanced technology consulting practice.
STEPHEN D. MAYERS is eLoyalty's Senior Vice President responsible for Sales
and Delivery in Australia. Mr. Mayers joined TSC's ECM division in July 1998.
Previously he worked for two years with the Colonial Limited Group, a large
Australian-based financial services group, as General Manager-Strategic
Development for its retail financial services business through both its
insurance and banking divisions. From 1994 to 1996, Mr. Mayers was Assistant
General Manager for Commonwealth Bank of Australia responsible for marketing and
product development in the retail banking sector.
MICHAEL WEINTRAUB is a Senior Vice President of eLoyalty responsible for
Operations since June 1998. Mr. Weintraub joined TSC in October 1997 as a Vice
President in charge of The Bentley Group acquisition. From September 1993 to
September 1997, Mr. Weintraub was Vice President & General Manager of The
MEDSTAT Group, a health care strategy business offering consulting, applications
technology, and information services.
Messrs Kohler, Murray and Purcell intend to resign from the TSC board of
directors at the time of the spin-off.
BOARD COMPOSITION
Our board is divided into three classes that serve in staggered terms.
Directors in each class will be elected to serve for three-year terms and until
their successors are elected and qualified. Each year, the directors of one
class will stand for election as their terms of office expire. We expect that,
after the spin-off, Messrs. and will be Class I directors,
with their terms of office expiring in 2000; Messrs. and
will be Class II directors, with their terms of office expiring in 2001; and
Messrs. and will be Class III directors, with their terms of
office expiring in 2002.
The authorized number of directors may be changed only by resolution of the
board of directors adopted by a majority of the whole board. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the total number of directors.
BOARD COMMITTEES
Prior to completion of the spin-off, our board intends to create an audit
committee and a compensation committee.
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<PAGE> 76
The audit committee will review the internal accounting procedures of
eLoyalty and consult with and review the services provided by eLoyalty's
independent accountants. Following the completion of the spin-off, the audit
committee is expected to consist of Messrs. Murray and Hoag.
The compensation committee will review and recommend to the board the
compensation and benefits of all executive officers of eLoyalty, administer
eLoyalty's stock-based incentive plans and establish and review general policies
relating to compensation and benefits of employees of eLoyalty. Following the
completion of the spin-off, the compensation committee is expected to consist of
Messrs. Purcell and Coxe.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
None of our officers, directors or director nominees owns any of our common
stock. To the extent they own shares of TSC common stock at the time of the
spin-off, they will participate in the spin-off and receive shares of our common
stock on the same terms as other holders of TSC's common stock.
As described more fully under "Certain Transactions" we have agreed to sell
1,200,000 shares of our common stock to Sutter Hill Ventures and an aggregate of
1,200,000 shares of our common stock to Technology Crossover Ventures. We expect
to issue these shares prior to the spin-off. See "Certain Transactions." Mr.
Coxe is a managing director of the general partner of Sutter Hill Ventures and
as such, may be deemed to beneficially own the shares to be acquired by Sutter
Hill Ventures. Mr. Coxe disclaims beneficial ownership of those shares, except
to the extent of his interest in the partnership. Mr. Hoag is a co-managing
member of Technology Crossover Management III, L.L.C. and as such, may be deemed
to beneficially own the shares to be acquired by the entities controlled by it.
Mr. Hoag disclaims beneficial ownership of those shares, except to the extent
that he has a pecuniary interest in such shares by virtue of his interest in
Technology Crossover Management III, L.L.C.
Certain executives, including the executive officers named in the Summary
Compensation Table in the "-- Executive Compensation" section below, have been
awarded options to purchase shares of eLoyalty common stock. See "-- Outstanding
eLoyalty Stock Options."
In connection with the spin-off, each nonqualified option to purchase TSC
common stock held by an employee or director of eLoyalty (1) who will not also
be a director of TSC, will be converted into a substitute option to purchase
eLoyalty common stock, and (2) who will also be a director of TSC, will be
converted into a substitute option to purchase eLoyalty common stock and an
adjusted TSC option. In addition, each incentive stock option, within the
meaning of section 422 of the Code, held by an employee of eLoyalty will be
converted into an option to purchase eLoyalty common stock. See "eLoyalty's
Relationship with Technology Solutions Company After the Spin-Off -- TSC Stock
Options" for a more complete discussion of the treatment of options to purchase
TSC common stock in connection with the spin-off.
The following table shows the number of shares of our common stock that we
expect will be beneficially owned by each person who will be a director or
executive officer and all persons who will be directors, and executive officers
of eLoyalty after the spin-off, as a group. Except as otherwise noted, the
individual director or executive officer or his family members has or have sole
voting and investment power
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<PAGE> 77
with respect to his or their shares. This information is based on our knowledge
of the number of shares of TSC common stock owned by the persons as of September
30, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME NUMBER OF SHARES OUTSTANDING SHARES
- ---- ---------------- ------------------
<S> <C> <C>
Kelly D. Conway............................................. 493,447(1) 1.0%
Tench Coxe.................................................. 250,000(2) *
Jay C. Hoag................................................. 428,750(3) *
John T. Kohler.............................................. 679,171(4) 1.4%
Michael J. Murray........................................... 350,086(5) *
John R. Purcell............................................. 804,437(6) 1.6%
Michael R. Zucchini......................................... 36,802(7) *
Timothy J. Cunningham....................................... --(8) --
Craig B. Lashmet............................................ 120,300(9) *
All Directors and Executive Officers as a group (9
persons).................................................. 3,162,993(10) 6.4%
</TABLE>
- ---------------
* Less than one percent
(1) Includes 476,292 shares Mr. Conway has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(2) Includes 250,000 shares beneficially owned by Sutter Hill Ventures, a
venture capital company. Mr. Coxe serves as a managing director of the
general partner of Sutter Hill Ventures [and by virtue of such position has
shared voting power with respect to shares owned by Sutter Hill Ventures].
Mr. Coxe disclaims beneficial ownership of the shares held by Sutter Hill
Ventures except to the extent of his interest in the partnership.
(3) Includes shares beneficially owned by the following four entities
controlled by Technology Crossover Management III, L.L.C. ("TCM III"): TCV
III (GP), TCV III, L.P., TCV III (Q), L.P. and TCV III Strategic Partners,
L.P. (the "Funds"). Mr. Hoag serves as a managing member of Technology
Crossover Management III, L.L.C., and by virtue of such position has,
together with one other managing member, sole investment control with
respect to TCM III and, therefore, the Funds. Mr. Hoag disclaims beneficial
ownership of the shares held by TCM III and the Funds except to the extent
that he has pecuniary interest in such shares by virtue of his interest in
TCM III.
(4) Includes 440,116 shares Mr. Kohler has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(5) Includes 92,250 shares Mr. Murray has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(6) Includes 92,250 shares Mr. Purcell has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days. Includes 33,437 shares held by Mr. Purcell's wife and 93,750 shares
held by the Purcell Foundation.
(7) Includes 29,250 shares Mr. Zucchini has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days. Includes 1,687 shares held by Mr. Zucchini's wife.
(8) Mr. Cunningham's employment began November , 1999.
(9) Includes 117,630 shares Mr. Lashmet has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(10) Includes 1,247,788 shares all of the directors, director designees and
executive officers as a group (9 persons) have the right to acquire under
options which are currently exercisable or which will be exercisable within
60 days.
DIRECTOR COMPENSATION
Each of our directors who is not also an employee of eLoyalty or its
subsidiaries will receive $1,000 for each board and committee meeting that he or
she attends. These non-employee directors will also receive options to purchase
shares of our common stock under our 1999 Stock Incentive Plan. For more detail
regarding the options to be granted to non-employee directors, see "-- 1999
Stock Incentive Plan" below. All other directors will receive no additional
compensation for serving as a director. All of our directors will be reimbursed
for out-of-pocket expenses incurred in connection with attending board and
committee meetings.
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<PAGE> 78
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information paid by TSC
for our Chief Executive Officer and the two other executive officers of
eLoyalty. All information set forth in this table reflects compensation earned
by these individuals for services with TSC and its subsidiaries. The people
listed in the table below are sometimes referred to as Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- --------------------------- ------ -------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kelly D. Conway............ 1998(1) $266,667 $120,000 -- 65,000 --
President and Chief 1998(2) 440,000 100,000 -- 135,000 --
Executive Officer
Timothy J. Cunningham(5)... 1998(1) -- -- -- -- --
Senior Vice President and 1998(2) -- -- -- -- --
Chief Financial
Officer
Craig B. Lashmet........... 1998(1) $266,667 $ 90,000 -- 97,750(3) --
Senior Vice President, 1998(2) 340,000 95,000 -- 33,750(4) --
North America
</TABLE>
- ---------------
(1) The compensation figures reported cover the transition period from June 1,
1998 through December 31, 1998.
(2) The compensation figures reported cover the fiscal year ended May 31, 1998.
(3) 47,750 of the 97,750 options reported for the transition period ended
December 31, 1998 were granted pursuant to a stock option repricing program
offered by TSC to all of its employees other than its executive officers.
(4) The 33,750 options reported for the fiscal year ended May 31, 1998 were
surrendered pursuant to the stock option repricing program described in
footnote 3.
(5) Mr. Cunningham's employment began November , 1999. He would have been a
Named Executive Officer but for the fact that he was not serving as an
executive officer at the end of the last completed fiscal year.
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<PAGE> 79
OPTION GRANTS IN LAST FISCAL YEAR
The following tables show all grants of options to acquire shares of TSC
common stock granted to the Named Executive Officers in the seven-month
transition period ended December 31, 1998 and the fiscal year ended May 31,
1998. In connection with the spin-off, each nonqualified option to purchase TSC
common stock held by an employee or director of eLoyalty (1) who will not also
be a director of TSC, will be converted into a substitute option to purchase
eLoyalty common stock, and (2) who will also be a director of TSC, will be
converted into a substitute option to purchase eLoyalty common stock and an
adjusted TSC option. In addition, each incentive stock option, within the
meaning of section 422 of the Code, held by an employee of eLoyalty will be
converted into an option to purchase shares of eLoyalty common stock. See
"eLoyalty's Relationship with Technology Solutions Company After the Spin-Off --
TSC Stock Options" for a more complete discussion of the treatment of options to
purchase TSC common stock in connection with the spin-off.
OPTION GRANTS IN TRANSITION PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(2)
----------------------------------------------------
PERCENT OF
NUMBER TOTAL POTENTIAL REALIZED VALUE
OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM
OPTIONS IN FISCAL BASE PRICE EXPIRATION -----------------------------
NAME GRANTED YEAR (PER SHARE) DATE 5%(1) 10%(1)
- ---- ---------- ---------- ----------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Kelly D. Conway............ 65,000(3) 5% 21.75 06/25/08 $ 889,100 $ 2,253,153
Timothy J. Cunningham(4)... -- -- -- -- -- --
Craig B. Lashmet........... 47,750(5) 4% 10.875 09/04/08 326,573 827,601
50,000(6) 4% 9.00 10/01/08 283,003 717,184
Potential gain by all
common stockholders(7)... $560,365,052 $1,420,075,064
</TABLE>
- ---------------
(1) Amounts reflect assumed rates of appreciation set forth in the SEC's
executive compensation disclosure rules. Actual gains, if any, on stock
option exercises depend on future performance of our common stock and
overall stock market conditions. No assurance can be given that the amounts
reflected in these columns will be achieved.
(2) Upon a sale of substantially all of the business and assets of the company,
the board may accelerate the exercise date of these options.
(3) Subject to option provisions regarding termination of employment, one third
of these options became exercisable on June 25, 1999 and 1/36 of these
options become exercisable on the last day of each calendar month for 24
months thereafter.
(4) Mr. Cunningham's employment began November , 1999. He would have been a
Named Executive Officer but for the fact that he was not serving as an
executive officer at the end of the last completed fiscal year.
(5) These options were granted pursuant to a stock option repricing program
offered by TSC to all of its employees other than its executive officers.
Subject to option provisions regarding termination of employment, one third
of these options became exercisable on September 4, 1999, and 1/36 of these
options become exercisable on the last day of each calendar month for 24
months thereafter.
(6) Subject to option provisions regarding termination of employment, one third
of these options became exercisable on October 1, 1999, and 1/36 of these
options become exercisable on the last day of each calendar month for 24
months thereafter.
(7) The future hypothetical value of one share of common stock based on a fair
market value of $21.75 on June 25, 1998, and assumed rates of appreciation
of five percent and ten percent through June 25, 2008, would be $35.43 and
$56.41, respectively. The potential realizable value for all holders of
common stock is based on 40,966,975 shares of common stock outstanding as of
December 31, 1998.
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<PAGE> 80
OPTION GRANTS IN FISCAL YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(2)
------------------------------------------------------ POTENTIAL REALIZED VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES BASE PRICE EXPIRATION --------------------------------
NAME GRANTED IN FISCAL YEAR (PER SHARE) DATE 5%(1) 10%(1)
- ---- ---------- -------------- ----------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Kelly D. Conway......... 135,000(3) 5% 15.8890 06/23/07 $ 1,348,988 $ 3,418,601
Timothy J.
Cunningham(4)......... -- -- -- -- -- --
Craig B. Lashmet........ 33,750(5) 1% N/A(4) N/A(4) N/A(4) N/A(4)
Potential gain by all
common
stockholders(6)....... -- -- -- -- $505,141,307 $1,280,127,251
</TABLE>
- ---------------
(1) Amounts reflect assumed rates of appreciation set forth in the SEC's
executive compensation disclosure rules. Actual gains, if any, on stock
option exercises depend on future performance of our common stock and
overall stock market conditions. No assurance can be given that the amounts
reflected in these columns will be achieved.
(2) Upon a sale of substantially all of the business and assets of the company,
the board may accelerate the exercise date of these options.
(3) Subject to option provisions regarding termination of employment, one third
of these options became exercisable on June 23, 1998 and 1/36 of these
options become exercisable on the last day of each calendar month for 24
months thereafter.
(4) Mr. Cunningham's employment began November , 1999. He would have been a
Named Executive Officer but for the fact that he was not serving as an
executive officer at the end of the last completed fiscal year.
(5) The 33,750 options reported were surrendered pursuant to a stock option
repricing program offered by TSC to all of its employees other than its
executive officers. The replacement grant is reflected in the table
captioned "Option Grants in Transition Period Ended December 31, 1998."
(6) The future hypothetical value of one share of common stock based on a fair
market value of $20.13 on May 31, 1998 and assumed rates of appreciation of
five percent and ten percent through June 23, 2007, would be $32.79 and
$52.21, respectively. The potential realizable value for all holders of
common stock is based on 39,901,684 shares of common stock outstanding as of
May 31, 1998.
OUTSTANDING ELOYALTY STOCK OPTIONS
On July 1, 1999 options to purchase shares of eLoyalty common stock with an
exercise price of $3.50 per share were awarded to Mr. Conway totaling 625,000
shares and Mr. Lashmet totaling 350,000 shares. On November , 1999 Mr.
Cunningham was granted options to purchase shares of eLoyalty common stock
with an exercise price of $ per share. These options have a ten-year term,
and become exercisable with respect to one-third of the number of shares
initially subject to the option on the second anniversary of the grant date. At
the end of each of the 24 calendar months following the second anniversary of
the grant, the options become exercisable with respect to an additional 1/36 of
the number of shares initially subject to the option.
EXERCISES OF STOCK OPTIONS AND FISCAL YEAR END OPTION VALUES
The following table shows aggregate exercises of options to purchase TSC
common stock in the seven-month transition period ended December 31, 1998 by the
Named Executive Officers and certain other information concerning the options to
purchase TSC common stock held by each of them at the end of such period.
In connection with the spin-off, each nonqualified option to purchase TSC
common stock held by an employee or director of eLoyalty (1) who will not also
be a director of TSC, will be converted into a substitute option to purchase
eLoyalty common stock, and (2) who will also be a director of TSC, will be
converted into a substitute option to purchase eLoyalty common stock and an
adjusted TSC option. In addition, each incentive stock option, within the
meaning of section 422 of the Code, held by an employee of eLoyalty will be
converted into an option to purchase shares of eLoyalty common stock. See
"eLoyalty's Relationship with Technology Solutions Company After the
Spin-Off -- TSC Stock Options" for a more complete discussion of the treatment
of options to purchase TSC common stock in connection with the spin-off.
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<PAGE> 81
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED DECEMBER 31, 1998 AT DECEMBER 31, 1998
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kelly D. Conway............. -- -- 371,142 165,687 $1,642,934 $23,285
Timothy J. Cunningham(1).... -- -- -- -- -- --
Craig B. Lashmet............ -- -- 71,625 107,128 $ 157,494 $67,579
</TABLE>
- ---------------
(1) Mr. Cunningham's employment began November , 1999. He would have been a
Named Executive Officer but for the fact that he was not serving as an
executive officer at the end of the last completed fiscal year.
INCENTIVE PLANS
1999 STOCK INCENTIVE PLAN
Officers, directors, key employees, consultants, independent contractors
and agents of eLoyalty and its subsidiaries are eligible to participate in the
1999 Stock Incentive Plan. The 1999 Stock Incentive Plan provides for the grant
of non-statutory stock option awards, incentive stock option awards, stock
appreciation rights awards, restricted stock awards, bonus stock awards and
performance share awards. An aggregate of 5,340,000 shares of eLoyalty common
stock will be initially reserved for issuance under the 1999 Stock Incentive
Plan for all awards other than any awards issued in connection with the spin-off
in substitution of previously granted options to purchase shares of TSC common
stock. See "eLoyalty's Relationship with Technology Solutions Company After the
Spin-Off -- TSC Stock Options" for a more complete description of the treatment
of options to purchase TSC common stock in connection with the spin-off. The
aggregate number of shares of eLoyalty common stock available for issuance under
the 1999 Stock Incentive Plan will be increased as of the first day of each
fiscal year of eLoyalty beginning on or after January 1, 2000, by an amount
equal to 5% of the total number of shares of eLoyalty common stock then
outstanding. Subject to adjustments set forth in the 1999 Stock Incentive Plan,
the maximum number of shares of eLoyalty common stock that may be granted to any
person during (1) the 1999 fiscal year is 750,000 and (2) any other fiscal year
of eLoyalty is 300,000.
The 1999 Stock Incentive Plan also provides that each non-employee director
will receive an option to purchase 25,000 shares of common stock when he or she
commences service as a director. Each current non-employee director (other than
a non-employee director who received an option grant on July 1, 1999) received
such an option. In addition, on the day following the date of each annual
stockholders' meeting beginning with the stockholders' meeting to be held in
2000, each non-employee director (other than a non-employee director who
receives an initial grant at that meeting) will receive an option to purchase
6,000 shares of eLoyalty common stock. If the non-employee director received an
initial grant since the previous annual meeting, the annual grant will be
reduced proportionately. The stock options granted to non-employee directors
will (1) have an exercise price per share equal to the fair market value of a
share of eLoyalty common stock on the grant date, (2) expire ten years after the
grant date and (3) become exercisable in 48 equal monthly installments,
commencing with the last day of the calendar month following the calendar month
in which the option is granted.
1999 STOCK PURCHASE PLAN
eLoyalty's 1999 Employee Stock Purchase Plan was adopted by our board of
directors in October, 1999. The stock purchase plan will terminate automatically
if our stockholders do not approve the plan within 12 months after its adoption.
The stock purchase plan authorizes the issuance of up to a total of 1,687,500
shares of eLoyalty common stock to participating employees.
All of our employees (including our directors who are employees and all
employees of any participating subsidiaries) who have been continuously employed
for at least three months, and whose customary employment is more than 20 hours
per week and more than five months in any calendar year,
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are eligible to participate in the stock purchase plan. Employees who own 5% or
more of the total combined voting power or value of our stock or any subsidiary
are not eligible to participate.
During each designated payroll deduction period, or purchase period, each
eligible employee may authorize us to deduct between 1% and 15% (in increments
of 1%) of his or her base pay. We will credit these deductions to a non-interest
bearing account for each participating employee. On the last business day of the
purchase period we will use the amount in each participating employee's account
to buy shares of eLoyalty common stock for the employee at a purchase price
equal to 85% of the average of the high and low transaction prices of a share of
eLoyalty common stock, as reported on The Nasdaq Stock Market, on either (1) the
first business day of the purchase period or (2) the last business day of the
purchase period, whichever is lower. No employee is allowed to buy shares of
common stock worth more than $25,000, based on the fair market value of the
common stock on the first day of the applicable purchase period, in any calendar
year under the plan. Also, no employee is allowed to buy more than 2,500 shares
of stock during any purchase period. Each purchase period will last for three
months and will coincide with each calendar quarter. The first purchase period
will begin on the first business day after the record date of the spin-off and
will end on the last business day of the same calendar quarter. A purchase
period will end automatically upon termination of the plan by the board of
directors or upon a change in control of the company.
An employee must be a participant on the last day of a purchase period in
order to purchase stock under the plan. An employee's participation terminates
prior to the last day of a purchase period upon:
- the employee's withdrawal of the balance accumulated in his or her
account;
- termination of employment;
- retirement;
- death;
- transfer to a subsidiary of the company that does not participate in the
plan; or
- the subsidiary for which the employee works no longer being a subsidiary
of the company.
Upon the termination of an employee's participation, the balance in the
employee's account will be refunded to the employee. In the event of the
employee's death, the balance in the employee's account will be refunded to the
employee's beneficiary or the executor or administrator of the employee's
estate.
Because participation in the plan is voluntary, we cannot now determine the
number of shares of our common stock to be purchased by any of our current
executive officers, by all of our current executive officers as a group or by
our non-executive employees as a group.
EMPLOYMENT AGREEMENTS
Messrs. Conway, Cunningham and Lashmet have entered into employment
agreements with TSC. We intend to enter into agreements with those executive
officers in connection the spin-off.
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OWNERSHIP OF eLOYALTY COMMON STOCK BY CERTAIN BENEFICIAL OWNERS
Prior to the sale of common stock to the investors described under "Certain
Transaction," all of the outstanding shares of our common stock will be owned by
TSC. In the spin-off, TSC stockholders will receive one share of eLoyalty common
stock per share of TSC Common Stock. The following table lists information about
people that we expect to hold more than 5% of our common stock upon completion
of the spin-off based on a review of reports filed with the SEC as of September
30, 1999 by holders of more than 5% of TSC's common stock.
<TABLE>
<CAPTION>
SHARES OF COMMON PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER STOCK OWNED(1) OUTSTANDING SHARES(1)
------------------------------------ ---------------- ---------------------
<S> <C> <C>
Massachusetts Financial Services Company.................. 4,806,779 11.2%
500 Boylston Street, Boston, MA 02116(2)
Dresdner Bank AG.......................................... 3,973,450 9.3%
Jurgen-Ponto-Platz 1, 60301 Frankfurt, Germany
Dresdner RCM Global Investors
Dresdner RCM Global Investors LLC
Four Embarcadero Center, San Francisco, California
94111(3)
GeoCapital LLC............................................ 3,172,149 7.4%
767 Fifth Ave-45th Fl, New York, NY 10153-4590(4)
Brookside Capital Partners Fund, L.P. .................... 2,718,800 6.4%
Two Copley Place, Boston, Massachusetts 02116(5)
</TABLE>
- ---------------
(1) Calculated on the basis of the actual number of outstanding shares of TSC
common stock as of September 30, 1999.
(2) Based on the most recent report on Schedule 13G/A filed with the SEC on
February 11, 1999, Massachusetts Financial Services Company is expected to
have sole voting power with respect to 4,675,854 shares of TSC common stock
and sole dispositive power with respect to 4,806,779 shares of TSC common
stock.
(3) Based on the most recent joint report on Schedule 13G, filed with the SEC on
February 16, 1999, Dresdner Bank AG is expected to have sole voting power
with respect to 2,726,000 shares of TSC common stock and dispositive power
with respect to 3,973,450 shares of TSC common stock; each of Dresdner RCM
Global Investors and Dresdner RCM Global Investors LLC is expected to have
sole voting power with respect to 2,611,050 shares of TSC common stock and
dispositive power with respect to 3,858,450 shares of TSC common stock.
(4) Based on the most recent report on Schedule 13G, filed with the SEC on
February 10, 1999, GeoCapital LLC is expected to have sole dispositive power
with respect to 3,172,149 shares of TSC common stock.
(5) Based on the most recent report on Schedule 13G, filed with the SEC on March
29, 1999, Brookside Capital Partners Fund, L.P. is expected to have sole
voting power with respect to 2,718,800 shares of TSC common stock and sole
dispositive power with respect to 2,718,800 shares of TSC common stock.
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DESCRIPTION OF ELOYALTY CAPITAL STOCK
The authorized capital stock of eLoyalty consists of 100,000,000 shares of
common stock, $0.01 par value and 10,000,000 shares of preferred stock, $0.01
par value. Immediately following the spin-off, approximately shares of
common stock will be outstanding.
THE FOLLOWING DESCRIPTIONS ARE SUMMARIES OF THE MATERIAL TERMS OF OUR
CERTIFICATE OF INCORPORATION AND BYLAWS. REFERENCE IS MADE TO THE MORE DETAILED
PROVISIONS OF, AND SUCH DESCRIPTIONS ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO, THE ELOYALTY CERTIFICATE OF INCORPORATION AND BYLAWS, COPIES OF
WHICH ARE FILED WITH THE SEC AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH
THIS INFORMATION STATEMENT IS A PART, AND APPLICABLE LAW.
COMMON STOCK
Holders of our common stock will be entitled to one vote per share with
respect to each matter presented to stockholders for vote. Except as may be
provided in connection with any eLoyalty preferred stock, or as may otherwise be
required by law or the certificate of incorporation, the common stock will be
the only capital stock of eLoyalty entitled to vote in the election of directors
and on all other matters presented to the stockholders of eLoyalty; provided
that holders of common stock, as such, will not be entitled to vote on any
matter that relates solely to the terms of any outstanding series of preferred
stock or the number of shares of such series and does not affect the number of
authorized shares of preferred stock or the powers, privileges and rights
pertaining to the common stock. The common stock will not have cumulative voting
rights, which means that the holders of a majority of the outstanding shares of
common stock can elect all of the directors then standing for election.
Subject to the prior rights of holders of preferred stock, if any, holders
of common stock are entitled to receive such dividends as may be lawfully
declared from time to time by our board of directors. Upon any liquidation,
dissolution or winding up of eLoyalty, whether voluntary or involuntary, holders
of common stock will be entitled to receive the assets that are legally
available for distribution to stockholders after there shall have been paid or
set apart for payment the full amounts necessary to satisfy any preferential or
participating rights to which the holders of each outstanding series of
preferred stock are entitled by the express terms of such series.
The outstanding shares of our common stock are validly issued, fully paid
and nonassessable. The common stock distributed in the spin-off will not have
any preemptive, subscription or conversion rights. Additional shares of
authorized common stock may be issued, as determined by our board from time to
time, without stockholder approval, except as may be required by applicable
Nasdaq requirements.
We will apply to have our common stock listed on The Nasdaq Stock Market's
National Market under the symbol "ELOY."
ChaseMellon Shareholder Services, L.L.C. will serve as the transfer agent
and registrar for our common stock.
PREFERRED STOCK
Subject to Delaware law, our board may, without approval of the
stockholders, cause shares of preferred stock to be issued from time to time in
one or more series. The board will determine the number of shares of each series
as well as the designation, powers, privileges, preferences and rights of the
shares of that series. Among the specific matters that may be determined by the
board are:
- the designation of each series;
- the number of shares of each series;
- the rate of dividends, if any;
- whether dividends, if any, will be cumulative or non-cumulative;
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- the terms of redemption, if any;
- the terms of any sinking fund providing for the purchase or redemption of
shares of each series;
- the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of eLoyalty;
- rights and terms of conversion or exchange, if any;
- restrictions on the issuance of shares of the same series or any other
series, if any; and
- voting rights, if any.
ANTITAKEOVER EFFECTS
Our amended certificate of incorporation and bylaws contain provisions that
could make the acquisition of eLoyalty more difficult by means of a tender
offer, proxy contest or otherwise.
Classified board of directors. Our amended certificate of incorporation
provides that our board of directors will be divided into three classes of
directors, with the classes to be as nearly equal in number as possible, and
with each class serving a staggered three-year term.
The classification of directors has the effect of making it more difficult
for stockholders to change the composition of the board of directors. At least
two annual meetings of stockholders, instead of one, will generally be required
to effect a change in a majority of our board. Such a delay may help ensure that
the directors, if confronted by a stockholder attempting to force a proxy
contest, a tender or exchange offer or an extraordinary corporate transaction,
would have sufficient time to review the proposal as well as any available
alternatives to the proposal and to act in what they believe to be the best
interest of eLoyalty. The classification provisions will apply to every election
of directors, however, regardless of whether a change in the composition of our
board would be beneficial to eLoyalty and our stockholders and whether a
majority of our stockholders believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of eLoyalty, even though such an attempt might be
beneficial to us and our stockholders. Accordingly, the classification of our
board could increase the likelihood that incumbent directors will retain their
position.
Number of directors; removal; filling vacancies. The amended certificate of
incorporation provides that, subject to any rights of holders of eLoyalty
preferred stock to elect additional directors under specific circumstances, the
number of directors will be fixed by resolution of the board of directors
adopted by a majority of the whole board. In addition, the amended certificate
of incorporation and the bylaws provide that, subject to any rights of holders
of preferred stock, and unless the board of directors otherwise determines, any
vacancies, or newly created directorships, will be filled only by the
affirmative vote of a majority of the remaining directors, though it may be less
than a quorum. Accordingly, stockholders will not be able to increase the size
of the board in order to fill the newly created directorships with stockholder
nominees.
Under Delaware law, unless otherwise provided in the certificate of
incorporation, directors serving on a classified board may only be removed by
the stockholders for cause. The amended certificate of incorporation and the
bylaws provide that directors may be removed only for cause and only upon the
affirmative vote of holders of at least 80% of the voting power of the then
outstanding shares of our stock, voting together as a single class.
No stockholder action by written consent; limitations on the calling of
special meetings. The amended certificate of incorporation and the bylaws
provide that, subject to the rights of any holders of preferred stock to elect
additional directors under specific circumstances, effective from and after date
of the spin-off stockholder action can be taken only at an annual or special
meeting of stockholders. This provision prohibits stockholder action by written
consent in lieu of a meeting. The bylaws further provide that, subject to the
rights of holders of any series of preferred stock to elect additional directors
under specific
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circumstances, special meetings of stockholders can be called only by the board
pursuant to a resolution adopted by a majority of the whole board. Stockholders
are not permitted to call a special meeting or to require that the board call a
special meeting of stockholders. Moreover, the business permitted to be
conducted at any special meeting of stockholders is limited to the business
brought before the meeting pursuant to the notice of special meeting given by
eLoyalty.
The provisions of the amended certificate of incorporation and the bylaws
prohibiting stockholder action by written consent may have the effect of
delaying consideration of a stockholder proposal until the next annual meeting
unless a special meeting is called by a majority of the whole board. These
provisions would also prevent the holders of a majority of the voting power of
our stock from unilaterally using the written consent procedure to take
stockholder action. Moreover, a stockholder could not force stockholder
consideration of a proposal over the opposition of the board by calling a
special meeting of stockholders prior to the time a majority of the whole board
believes such consideration to be appropriate.
Advance notice provisions for stockholder nominations and stockholder
proposals. The bylaws establish an advance notice procedure for stockholders to
make nominations of candidates for election as directors, or bring other
business before an annual meeting of our stockholders. Only persons who are
nominated by, or at the direction of, our board, or by a stockholder who has
given timely written notice to our Secretary prior to the meeting at which
directors are to be elected, will be eligible for election as directors of
eLoyalty. The business to be conducted at an annual meeting will be limited to
business brought before the meeting by, or at the direction of, the board or by
a stockholder who has given timely written notice to the Secretary of his or her
intention to bring such business before such meeting.
Notice of a stockholder nomination or other business to be brought before
an annual meeting will be timely only if it is delivered to eLoyalty not earlier
than the close of business on the 100th calendar day nor later than the close of
business on the 75th calendar day prior to the first anniversary of the
preceding year's annual meeting. However, if the date of the annual meeting is
more than 30 calendar days before or more than 75 calendar days after that
anniversary date, notice by the stockholder to be timely must be delivered to
eLoyalty not earlier than the close of business on the 100th calendar day prior
to the annual meeting and not later than the close of business on the later of
(1) the 75th calendar day prior to the annual meeting and (2) the 10th calendar
day after public announcement is first made by eLoyalty of the date of the
annual meeting. Notwithstanding the foregoing, in the event that the number of
directors to be elected to the eLoyalty board is increased and there is no
public announcement by eLoyalty naming all of the nominees for directors or
specifying the size of the increased board made at least 80 calendar days prior
to the first anniversary of the preceding year's annual meeting, a stockholder's
notice will be timely, but only with respect to nominees for any new positions
created by the increase, if it is delivered to eLoyalty not later than the close
of business on the 10th calendar day after the public announcement is first
made. Notice of a stockholder nomination to be made at a special meeting at
which directors are to be elected will be timely only if it is delivered to us
not earlier than the close of business on the 100th calendar day prior to the
special meeting, and not later than the close of business on the later of (1)
the 75th calendar day prior to the special meeting and (2) the 10th calendar day
after public announcement is first made by eLoyalty of the date of the special
meeting and of the nominees proposed by the eLoyalty board to be elected at the
special meeting.
A stockholder's notice proposing to nominate a person for election as a
director must contain certain information including, without limitation, the
identity and address of the nominating stockholder, the class and number of
shares of eLoyalty common stock that are owned by the stockholder and all
information regarding the proposed nominee that would be required to be included
in a proxy statement soliciting proxies for the proposed nominee. A
stockholder's notice relating to the conduct of business other than the
nomination of directors must contain certain information about that business and
about the proposing stockholder, including, without limitation:
- a brief description of the business the stockholder proposes to bring
before the meeting;
- the reasons for conducting the business at the meeting;
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- the name and address of the stockholder;
- the class and number of shares of eLoyalty common stock beneficially
owned by the stockholder; and
- any material interest of the stockholder in the business so proposed.
If the chairman or other officer presiding at a meeting determines that a person
was not nominated or other business was not brought before the meeting in
accordance with the bylaw provisions summarized above, the person will not be
eligible for election as a director or the proposed business will not be
conducted at the meeting, as the case may be.
Although the bylaws do not give our board any power to approve or
disapprove stockholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election of
directors or the consideration of stockholder proposals if the proper procedures
are not followed. Also, they may discourage or deter a third-party from
conducting a solicitation of proxies to elect its own slate of directors or to
approve its own proposal, without regard to whether consideration of such
nominees or proposals might be harmful or beneficial to eLoyalty and our
stockholders.
Preferred stock. The Series A Preferred Stock described under "-- Rights
Plan" below is a series of preferred stock that has been authorized by our board
of directors. Although no shares of preferred stock are currently outstanding
and we have no current plans to issue preferred stock, the issuance of shares of
preferred stock, or the issuance of rights to purchase such shares, could be
used to discourage an unsolicited acquisition proposal. For example, a business
combination could be impeded by the issuance of a series of preferred stock
containing class voting rights that would enable the holder or holders of such
series to block any such transaction. Alternatively, a business combination
could be facilitated by the issuance of a series of preferred stock having
sufficient voting rights to provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
preferred stock could adversely affect the voting power and other rights of the
holders of the common stock. Although our board of directors is required to make
any determination to issue any such stock based on its judgment as to the best
interests of the stockholders of eLoyalty, it could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a majority,
of the stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over prevailing market
prices. Our board of directors does not presently intend to seek stockholder
approval prior to any issuance of currently authorized stock, unless otherwise
required by law or applicable stock exchange requirements.
Rights to purchase securities and other property. The amended certificate
of incorporation authorizes the eLoyalty board to create and issue rights
entitling holders to purchase from us shares of stock or other securities of
eLoyalty or any other corporation. The times at which and terms upon which the
rights are to be issued would be determined by our board and set forth in the
contracts or other instruments that evidence those rights. The authority of the
board with respect to such rights includes, but is not limited to, determination
of:
- the initial purchase price per share or other unit of the stock or other
securities or property to be purchased upon exercise of the rights;
- provisions relating to the times at which and the circumstances under
which the rights may be exercised or sold or otherwise transferred,
either together with or separately from any other stock or other
securities of eLoyalty;
- provisions that adjust the number or exercise price of the rights or
amount or nature of the stock or other securities or property receivable
upon exercise of the rights in the event of a (1) combination, split or
recapitalization of any stock of eLoyalty, (2) a change in ownership of
eLoyalty's stock or other securities or (3) a reorganization, merger,
consolidation, sale of assets or other occurrence relating to eLoyalty or
any stock of eLoyalty, and provisions restricting the ability of eLoyalty
to enter into any such transaction absent an assumption by the other
party or parties thereto of the obligations of eLoyalty under such
rights;
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- provisions that deny the holder of a specified percentage of the
outstanding stock or other securities of eLoyalty the right to exercise
the rights and/or cause the rights held by such holder to become void;
- provisions that permit us to redeem or exchange the rights; and
- the appointment of the rights agent with respect to the rights.
This provision is intended to confirm the authority of the board to issue rights
to purchase shares of stock or other securities of eLoyalty or any other
corporation. See "-- Rights Plan."
Amendment of certain provisions in the certificate of incorporation and
bylaws. Under Delaware law, the stockholders of a corporation have the right to
adopt, amend or repeal the bylaws and, with the approval of the board of
directors, the certificate of incorporation of a corporation. In addition, under
Delaware law if the certificate of incorporation so provides, the bylaws may be
adopted, amended, or repealed by the board of directors. Our amended certificate
of incorporation provides that the affirmative vote of the holders of at least
80% of the voting power of the outstanding shares of our stock, voting together
as a single class, is required to amend provisions of the certificate of
incorporation relating to:
- the prohibition of stockholder action without a meeting;
- the number, election and term of directors;
- the removal of directors;
- the issuance of rights; and
- the adoption, amendment or repeal of the bylaws by the board of directors
or by the affirmative vote of the holders of at least 80% of the voting
power of the outstanding shares of our stock, voting together as a single
class.
The vote of the holders of a majority of the voting power of the outstanding
shares of our stock is required to amend all other provisions of our amended
certificate of incorporation. The amended certificate of incorporation further
provides that the bylaws may be amended by the eLoyalty board by a majority of
the whole board or by the affirmative vote of the holders of at least 80% of the
voting power of the outstanding shares of our stock, voting together as a single
class.
These 80% voting requirements will have the effect of making more difficult
any amendment by stockholders of the bylaws or of any of the provisions of the
certificate of incorporation described above, even if a majority of the
stockholders of eLoyalty believes that the amendment would be in their best
interests.
Other provisions. The amended certificate of incorporation expressly
authorizes the board to take such action as it may determine to be reasonably
necessary or desirable to encourage any person or entity to enter into
negotiations with our board and management respecting any transaction that may
result in a change in control of eLoyalty, and to contest or oppose any such
transaction that the eLoyalty board determines to be unfair, abusive or
otherwise undesirable to us, our businesses or our stockholders. In this
connection, the amended certificate of incorporation specifically permits the
board to adopt plans or to issue securities of eLoyalty (including common stock
or preferred stock, rights or debt securities), which securities may be
exchangeable or convertible into cash or other securities on such terms as the
board determines and may provide for differential and unequal treatment of
different holders or classes of holders. The existence of this authority or the
actions that may be taken by the board may deter potential acquirers from
proposing unsolicited transactions not approved by the board and might enable
the board to hinder or frustrate such a transaction if proposed. These
provisions are included in the amended certificate of incorporation to confirm
and support the authority of the board to take the various actions authorized
thereby. The certificate of incorporation is also designed to enable the board
to utilize such other tactics or mechanisms as are developed in the future to
carry out the general authorization set forth therein.
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RIGHTS PLAN
Our board of directors will consider adopting a Stockholder Rights Plan
(the "Rights Plan") before the spin-off. Pursuant to the Rights Plan, one Right
(a "Right") will be issued and attached to each outstanding share of common
stock. Each Right will entitle its holder, under the circumstances described
below, to purchase from eLoyalty one one-hundredth of a share of its Series A
Junior Participating Preferred Stock, $0.01 par value, (the "Series A Preferred
Stock"), at an exercise price per Right determined by our board of directors (or
a committee of our board of directors) at the time of the spin-off, subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between eLoyalty and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent. The following description of the Rights is a
summary and is qualified in its entirety by reference to the Rights Agreement,
the form of which has been filed with the SEC as an exhibit to the registration
statement of which this information statement is a part.
Initially, the Rights will be associated with the common stock and
evidenced by the common stock certificates, which will contain a notation
incorporating the Rights Agreement by reference. The Rights initially will be
transferred with and only with underlying shares of common stock. The Rights
will become exercisable and separately certificated only upon the "Distribution
Date," which will occur upon the earlier of:
- ten days following a public announcement that a person or group (an
"Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of % or more of the outstanding shares of
common stock then outstanding (the date of the announcement being the
"Stock Acquisition Date"); or
- ten business days (or later if determined by our board of directors prior
to any person becoming an Acquiring Person) following the commencement of
a tender offer or exchange offer that would result in a person or group
becoming an Acquiring Person.
Until the Distribution Date, the surrender for transfer of any shares of
common stock outstanding will also constitute the transfer of the Rights
associated with such shares.
As soon as practicable after the Distribution Date, separate certificates
for the Rights will be mailed to holders of record of common stock as of the
close of business on the Distribution Date. From and after the Distribution
Date, the separate certificates alone will represent the Rights. Except as
otherwise provided in the Rights Agreement, only shares of common stock issued
prior to the Distribution Date will be issued with Rights.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on January , 2010 unless earlier redeemed or
exchanged by eLoyalty as described below.
In the event (a "Flip-In Event") that a person or group becomes an
Acquiring Person, each holder of a Right (other than any Acquiring Person and
certain related parties, whose Rights will automatically become null and void)
will have the right to receive, upon exercise, common stock, or, in certain
circumstances, cash, property or other securities of eLoyalty, with a value
equal to two times the exercise price of the Right. The Rights may not be
exercised following a Flip-In Event while we have the ability to cause the
Rights to be redeemed. Our ability to redeem the Rights is described below.
For example, at an exercise price of $100 per Right, each Right not owned
by an Acquiring Person (or by certain related parties) following a Flip-In Event
would entitle its holder to purchase $200 worth of common stock (or other
consideration, as noted above) for $100. Assuming that the common stock had a
per share value of $50 at that time, the holder of each valid Right would be
entitled to purchase 4 shares of Common Stock for $100.
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In the event (a "Flip-Over Event") that, at any time following the Stock
Acquisition Date:
- we are acquired in a merger or other business combination in which it is
not the surviving entity,
- we are acquired in a merger or other business combination in which it is
the surviving entity and all or part of its common stock is converted
into or exchanged for securities of another entity, cash or other
property, or
- 50% or more of our assets or earning power is sold or transferred,
then each holder of a Right (except Rights which previously have been voided as
set forth above) will have the right to receive, upon exercise, common stock of
the acquiring company having a value equal to two times the exercise price of
the Right. Flip-In Events and Flip-Over Events are collectively referred to as
"Triggering Events."
The exercise price payable, and the number of shares of Series A Preferred
Stock or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution:
- in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock;
- if holders of the Series A Preferred Stock are granted certain rights,
options or warrants to subscribe for Series A Preferred Stock or
convertible securities at less than the current market price of the
Series A Preferred Stock; or
- upon the distribution to holders of the Preferred Stock of evidences of
indebtedness or assets (excluding regular periodic cash dividends) or of
subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the exercise price will be
required until cumulative adjustments amount to at least 1% of the then current
exercise price. No fractional shares of Series A Preferred Stock will be issued
and, in lieu thereof, an adjustment in cash will be made based on the market
price of the Series A Preferred Stock on the last trading day prior to the date
of exercise. We may require prior to the occurrence of a Triggering Event that,
upon any exercise of Rights, a number of Rights be exercised so that only whole
shares of Series A Preferred Stock will be issued.
We may redeem the Rights in whole, but not in part, at a price of $0.01 per
Right (subject to adjustment and payable in cash, common stock or other
consideration deemed appropriate by our board of directors) at any time until
ten days following the Stock Acquisition Date. Immediately upon the action of
our board of directors authorizing any redemption, the Rights will terminate and
the only right of the holders of Rights will be to receive the redemption price.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by that person or group of 50% or more of the outstanding
shares of common stock, eLoyalty may exchange the Rights (other than Rights
owned by that person or group which will have become void), in whole or in part,
at an exchange ratio of one share of common stock, or one one-hundredth of a
share of Series A Preferred Stock (or of a share of a class or series of our
preferred stock having equivalent rights, preferences and privileges), per Right
(subject to adjustment).
Until a Right is exercised, its holder, as such, will have no rights as a
stockholder of eLoyalty, including, without limitation, the right to vote or to
receive dividends. While the distribution of the Rights will not result in the
recognition of taxable income by our stockholders or us, stockholders may,
depending upon the circumstances, recognize taxable income after a Triggering
Event.
The terms of the Rights may be amended by our board of directors without
the consent of the holders of the Rights. The board of directors could, among
other things, lower the thresholds described above to the greater of 10% or
.001% more than the largest percentage of the outstanding shares of common stock
81
<PAGE> 91
then known to us to be beneficially owned by any person or group of affiliated
or associated persons. Once a person or group has become an Acquiring Person no
amendment can adversely affect the interests of the holders of the Rights.
The Rights will have certain antitakeover effects. The rights will cause
substantial dilution to any person or group who attempts to acquire a
significant interest in eLoyalty without advance approval from our board of
directors. As a result, the overall effect of the Rights may be to render more
difficult or discourage any attempt to acquire eLoyalty, even if the acquisition
would be in the interest of our stockholders. Because we can redeem the Rights,
the Rights will not interfere with a merger or other business combination
approved by our board of directors.
Section 203 of the DGCL. We are subject to Section 203 of the Delaware
General Corporation Law, an antitakeover law. In general, Section 203 prohibits
a publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is a person
who is the owner of 15% or more of the outstanding voting stock of the
corporation, or an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of the corporation at any time
within the three-year period immediately prior to the date on which it is sought
to be determined whether such person is an interested stockholder. The existence
of this provision may have an antitakeover effect with respect to transactions
not approved in advance by the board of directors of eLoyalty, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by stockholders.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its stockholders to exempt itself from coverage, provided that such bylaw or
charter amendment shall not become effective until 12 months after the date it
is adopted. Neither the certificate of incorporation nor the bylaws of eLoyalty
contains any such exclusion.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
eLoyalty's certificate of incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for:
- breach of their duty of loyalty to the corporation or its stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of liability does not apply to liabilities arising under the
federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
eLoyalty's bylaws provide that we will indemnify our directors and officers
to the fullest extent permitted by Delaware law, except that no indemnification
will be provided to a director, officer, employee or agent if the
indemnification sought is in connection with a proceeding initiated by such
person without the authorization of our board of directors. Our bylaws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any statute, provision of our certificate of
incorporation, bylaws, agreements, vote of stockholders or disinterested
directors or otherwise. Our bylaws also permit us to secure insurance on
82
<PAGE> 92
behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
bylaws permit such indemnification.
Our agreement with Sutter Hill Ventures and Technology Crossover Ventures,
pursuant to which we have agreed to sell them shares of our common stock, grants
each of Sutter Hill Ventures and Technology Crossover Ventures the right to
designate a nominee to our board of directors. The agreement also provides that
we will enter into indemnification agreements with these designees. We have not
yet entered into these indemnification agreements, but we expect to do so prior
to the spin-off.
83
<PAGE> 93
CERTAIN TRANSACTIONS
We have entered into a common stock purchase and sale agreement with Sutter
Hill Ventures and Technology Crossover Ventures. On June 22, 1999, the investors
agreed to purchase an aggregate of 2,400,000 shares of our common stock at $3.50
per share. The agreement with the investors provides that the proposed purchase
of our common stock is subject to the receipt of a private letter ruling from
the IRS to the effect that the spin-off will be tax-free to TSC and its
stockholders for United States federal income tax purposes and certain other
customary conditions. The purchase and sale of common stock to those investors
was exempt from registration under Section 4(2) of the Securities Act because
the transactions did not involve a public offering. The agreement with the
investors contains the following additional terms.
- If TSC receives a favorable private letter ruling from the IRS regarding
the spin-off and nevertheless fails to use commercially reasonable
efforts to complete the separation of the eLoyalty business operations
from TSC, TSC could become obligated to make a liquidated damages payment
of $1.2 million to the investors.
- If the investors purchase our common stock and the spin-off does not
occur by August 13, 2000, eLoyalty could become obligated to repurchase
such shares then held by the investors at a premium totaling $1.2 million
over the price paid by the investors for such shares.
Following the completion of the sale of our common stock to the investors,
each of Sutter Hill Ventures and Technology Crossover Ventures will have the
right to designate a nominee to our board of directors. We expect Sutter Hill
Ventures to nominate Tench Coxe as its designee on our board and Technology
Crossover Ventures to nominate Jay Hoag as its designee on our board. See
"eLoyalty's Management."
On January 4, 1999, the TSC board extended by one year the payment date for
a loan in the amount of $600,000 made to Mr. Kohler on January 6, 1998. The loan
is payable on demand but no later than January 5, 2000, and bears interest at
the rate of 5.7% per annum. Mr. Kohler's outstanding balance and accrued
interest as of June 30, 1999 was $650,730.
On November 12, 1998, TSC made a loan of $1,200,000 to Mr. Conway with a
five-year term that, to the extent not forgiven in whole or in part as described
below, is payable on demand upon the cessation of Mr. Conway's employment with
TSC or its affiliates. The loan bears interest at the rate of 4.5% per annum,
and so long as Mr. Conway remains employed by us or our affiliates, the
principal amount of the loan (and interest accrued thereon) will be forgiven
over a five-year period, as follows: 25% of the principal amount on November 12,
1999; $25,000 in principal per month for the next twelve months; $20,000 in
principal per month for the next twenty-four months; and $10,000 in principal
per month for the next twelve months. Mr. Conway's outstanding balance and
accrued interest as of June 30, 1999 was $1,234,276. We expect that the note
representing this loan will be assigned to eLoyalty in connection with the
separation of our business operations from TSC.
84
<PAGE> 94
ELOYALTY'S 2001 ANNUAL MEETING OF STOCKHOLDERS
The eLoyalty bylaws provide that an annual meeting of stockholders will be
held each year on a date specified by our board of directors. The first annual
meeting of eLoyalty stockholders after the distribution will be held on such
date as determined by the eLoyalty board of directors, or, if the board does not
set a date, the first Thursday in May, 2001. In order to be considered for
inclusion in eLoyalty's proxy materials for the 2001 annual meeting of
stockholders, any proposals by stockholders must be received at eLoyalty's
principal executive offices at 205 North Michigan Avenue, Suite 1500, Chicago,
Illinois 60601, within a reasonable time before eLoyalty begins to print and
mail its proxy materials for the meeting. eLoyalty anticipates commencing the
mailing of proxies for the 2001 annual meeting of stockholders on or about
, 2001. In addition, stockholders at the eLoyalty 2001 annual meeting
may consider stockholder proposals or nominations brought by a stockholder of
record on the record date for the 2001 annual meeting, who is entitled to vote
at such annual meeting and who has complied with the advance notice procedures
established by the eLoyalty bylaws. A stockholder proposal or nomination
intended to be brought before the eLoyalty 2001 annual meeting must be received
by the Secretary of eLoyalty on or after , and on or prior
to , 2001. See "Description of eLoyalty Capital Stock -- Antitakeover
Effects -- Advance notice provisions for stockholder nominations and stockholder
proposals."
85
<PAGE> 95
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form 10 under the
Exchange Act with respect to the eLoyalty common stock. This information
statement does not contain all of the information set forth in the registration
statement and the exhibits and schedules filed with it. Although we have
provided a summary of the material terms of the contents of certain contracts,
agreements and other documents, the summary does not describe all of the details
of the contracts, agreements and other documents. In each instance where a copy
of the contract, agreement or other document has been filed as an exhibit to the
registration statement, please refer to the registration statement. Each
statement in this information statement regarding a contract, agreement or other
document is qualified in all respects by such exhibit.
You may read and copy all or any portion of the registration statement at
the SEC's public reference room, located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of all or any part of the registration statement may be
obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon the payment of the fees prescribed by the SEC.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room. The SEC maintains an Internet site at http://www.sec.gov, that
contains reports, proxy and information statements and other information
regarding registrants, such as TSC and eLoyalty, that file electronically with
the SEC. Following the spin-off, eLoyalty will be required to comply with the
reporting requirements of the Exchange Act and will file periodic reports, proxy
statements and other information with the SEC. These periodic reports, proxy
statements and other information will be available for inspection and copying at
the SEC's public reference room and the SEC's Internet site.
eLoyalty intends to furnish its stockholders with annual reports containing
consolidated financial statements (beginning with fiscal year 2000) audited by
independent accountants.
You should rely only on the information contained in this information
statement and other documents referred to in this information statement. TSC and
eLoyalty have not authorized anyone to provide you with information that is
different. This information statement is being furnished by TSC solely to
provide information to TSC stockholders who will receive eLoyalty common stock
in the spin-off. It is not, and is not construed as, an inducement or
encouragement to buy or sell any securities of TSC or eLoyalty. TSC and eLoyalty
believe that the information presented herein is accurate as of the date hereof.
Changes will occur after the date hereof, and neither TSC nor eLoyalty will
update the information except to the extent required in the normal course of
their respective public disclosure practices and as required pursuant to the
federal securities laws.
eLoyalty maintains an Internet site at www.eloyaltyco.com. This website and
the information contained therein shall not be deemed to be incorporated into
this information statement.
86
<PAGE> 96
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Combined Balance Sheets as of June 30, 1999 (unaudited),
December 31, 1998, May 31, 1998 and 1997.................. F-3
Combined Statements of Operations for the six month periods
ended June 30, 1999 and 1998 (unaudited), the seven month
period from June 1, 1998 to December 31, 1998, the seven
month period from June 1, 1997 to December 31, 1997
(unaudited), and for each of the three years in the period
ended May 31, 1998........................................ F-4
Combined Statements of Cash Flows for the six month periods
ended June 30, 1999 and 1998 (unaudited), the seven month
period from June 1, 1998 to December 31, 1998, the seven
month period from June 1, 1997 to December 31, 1997
(unaudited) and for each of the three years in the period
ended May 31, 1998........................................ F-5
Combined Statements of Changes in Stockholder's Equity and
Comprehensive Income (Loss) for the six month period ended
June 30, 1999 (unaudited), the seven month period ended
December 31, 1998, and for each of the three years in the
period ended May 31, 1998................................. F-6
Notes to Combined Financial Statements...................... F-7
Schedule II -- Valuation and Qualifying Accounts............ S-1
</TABLE>
F-1
<PAGE> 97
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of eLoyalty Corporation
In our opinion, the combined financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of eLoyalty Corporation (the "Company") at December 31, 1998 and May
31, 1998 and 1997, and the results of their operations and their cash flows for
the seven month period ended December 31, 1998, and for each of the three years
in the period ended May 31, 1998, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related combined financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
September 10, 1999
Chicago, Illinois
F-2
<PAGE> 98
eLOYALTY CORPORATION
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, MAY 31, MAY 31,
1999 1998 1998 1997
----------- ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................... $ 7,117 $ 4,411 $ 4,726 $ 4,130
Marketable securities............................. 6,545 4,486 3,656 1,560
Receivables, net of allowances of $3,134
(unaudited), $2,638, $475 and $198.............. 43,534 25,443 23,898 11,748
Deferred income taxes............................. 5,845 4,711 1,311 513
Prepaid expenses.................................. 2,424 2,175 2,508 1,463
Other current assets.............................. 1,129 1,021 966 835
------- ------- ------- -------
Total current assets.................... 66,594 42,247 37,065 20,249
COMPUTERS, FURNITURE AND EQUIPMENT, NET........... 1,812 1,581 1,432 245
GOODWILL.......................................... 14,631 17,201 12,614 2,194
DEFERRED INCOME TAXES............................. 1,606 1,054 1,022 --
LONG-TERM RECEIVABLES AND OTHER................... 1,330 1,821 1,985 1,500
------- ------- ------- -------
Total assets............................ $85,973 $63,904 $54,118 $24,188
======= ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 509 $ 994 $ 347 $ 768
Accrued compensation and related costs............ 11,189 7,304 6,528 3,054
Deferred compensation............................. 6,545 4,486 3,656 1,560
Other current liabilities......................... 2,980 3,232 2,694 1,361
------- ------- ------- -------
Total current liabilities............... 21,223 16,016 13,225 6,743
------- ------- ------- -------
DEFERRED INCOME TAXES............................. -- -- -- 298
COMMITMENTS AND CONTINGENCIES..................... -- -- -- --
------- ------- ------- -------
STOCKHOLDER'S EQUITY:
Net advances from TSC............................. 65,329 48,475 41,241 17,420
Accumulated other comprehensive loss.............. (579) (587) (348) (273)
------- ------- ------- -------
Total stockholder's equity.............. 64,750 47,888 40,893 17,147
------- ------- ------- -------
Total liabilities and stockholder's
equity................................ $85,973 $63,904 $54,118 $24,188
======= ======= ======= =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
F-3
<PAGE> 99
ELOYALTY CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SEVEN MONTH
FOR THE SIX MONTH PERIODS FROM
PERIODS ENDED JUNE 30, JUNE 1 TO DECEMBER 31, FOR THE YEARS ENDED MAY 31,
----------------------- ----------------------------- ------------------------------
1999 1998 1998 1997 1998 1997 1996
---------- ---------- ------------- ------------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES.......................... $ 67,636 $ 49,641 $ 64,415 $ 43,668 $ 84,488 $ 43,181 $ 26,516
Project personnel............... (33,125) (23,853) (31,302) (22,329) (41,329) (18,078) (11,674)
-------- -------- -------- -------- -------- -------- --------
REVENUES LESS PROJECT PERSONNEL... 34,511 25,788 33,113 21,339 43,159 25,103 14,842
-------- -------- -------- -------- -------- -------- --------
OTHER COSTS AND EXPENSES:
Sales and marketing............. 3,773 1,952 3,456 994 2,429 1,663 1,032
Research and development........ 2,307 1,115 2,889 1,393 2,383 1,689 46
General and administrative...... 13,700 11,689 16,850 10,641 20,216 11,539 5,559
TSC corporate services
allocation.................... 7,940 6,183 7,698 5,544 10,671 5,028 3,298
Goodwill amortization........... 2,501 1,654 2,450 1,856 3,201 376 --
-------- -------- -------- -------- -------- -------- --------
30,221 22,593 33,343 20,428 38,900 20,295 9,935
-------- -------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS)........... 4,290 3,195 (230) 911 4,259 4,808 4,907
-------- -------- -------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Net investment income........... 54 37 116 39 68 15 --
Interest expense................ (39) (39) (31) (53) (92) -- --
-------- -------- -------- -------- -------- -------- --------
15 (2) 85 (14) (24) 15 --
-------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES........................... 4,305 3,193 (145) 897 4,235 4,823 4,907
INCOME TAX PROVISION.............. 2,098 1,471 398 562 2,022 1,897 1,857
-------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS)................. $ 2,207 $ 1,722 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050
======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
F-4
<PAGE> 100
ELOYALTY CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SEVEN MONTH
FOR THE SIX MONTH PERIODS FROM FOR THE YEARS ENDED
PERIODS ENDED JUNE 30, JUNE 1 TO DECEMBER 31, MAY 31,
------------------------- --------------------------- ----------------------------
1999 1998 1998 1997 1998 1997 1996
----------- ----------- ------------ ------------ -------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................. $ 2,207 $ 1,722 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050
Adjustments to reconcile net
income to net cash from
operating activities:
Depreciation and amortization... 3,033 2,383 3,509 2,275 3,874 617 60
Provisions for doubtful
receivables................... 601 116 2,652 577 531 453 272
Equity losses of unconsolidated
investee...................... 252 -- 412 -- -- -- --
Deferred income taxes........... (1,686) (576) (3,432) (1,330) (2,118) (315) (4,306)
Changes in assets and
liabilities:
Receivables................... (18,692) (5,472) (4,197) (3,441) (10,217) (3,453) (136)
Purchases of trading
securities related to
deferred compensation
program..................... (2,059) (943) (830) (1,275) (2,096) (799) (761)
Other current assets.......... (357) (1,632) 278 211 (1,079) (1,177) (531)
Accounts payable.............. (485) (54) 647 (1,076) (1,184) 229 467
Accrued compensation and
related costs............... 3,885 431 776 1,202 2,674 (217) 1,115
Deferred compensation funds
from employees.............. 2,059 943 830 1,275 2,096 799 761
Other current liabilities..... (252) 1,375 538 (2,983) (2,383) 1,335 1
Other assets.................. 240 (686) (11) (309) (815) (339) (1,270)
-------- ------- ------- -------- -------- ------- -------
Net cash (used in) provided
by operating activities... (11,254) (2,393) 629 (4,539) (8,504) 59 (1,278)
-------- ------- ------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures.............. (695) (616) (570) (607) (1,065) (182) (127)
Investment in unconsolidated
investee........................ -- -- (875) -- -- -- --
Acquired businesses............... -- (383) (6,625) (10,360) (10,741) (940) (1,367)
-------- ------- ------- -------- -------- ------- -------
Net cash used in investing
activities................ (695) (999) (8,070) (10,967) (11,806) (1,122) (1,494)
-------- ------- ------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Transfers from TSC................ 14,647 2,585 7,777 17,288 21,608 5,182 3,093
-------- ------- ------- -------- -------- ------- -------
Net cash provided by
financing activities...... 14,647 2,585 7,777 17,288 21,608 5,182 3,093
-------- ------- ------- -------- -------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS......... 8 (70) (651) (782) (702) (310) --
-------- ------- ------- -------- -------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................... 2,706 (877) (315) 1,000 596 3,809 321
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD......................... 4,411 5,130 4,726 4,130 4,130 321 --
-------- ------- ------- -------- -------- ------- -------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................ $ 7,117 $ 4,253 $ 4,411 $ 5,130 $ 4,726 $ 4,130 $ 321
======== ======= ======= ======== ======== ======= =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
F-5
<PAGE> 101
eLOYALTY CORPORATION
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
(LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADVANCES OTHER
(TO) COMPREHENSIVE TOTAL
FROM INCOME STOCKHOLDER'S
TSC (LOSS) EQUITY
-------- ------------- -------------
<S> <C> <C> <C>
Balance, May 31, 1995..................................... $ 3,169 $ -- $ 3,169
------- ----- -------
Net income................................................ 3,050 -- 3,050
-------
Comprehensive income.................................... 3,050
Net transfers from TSC.................................... 3,093 -- 3,093
------- ----- -------
Balance, May 31, 1996..................................... 9,312 -- 9,312
------- ----- -------
Net income................................................ 2,926 -- 2,926
Foreign currency translation.............................. -- (273) (273)
-------
Comprehensive income.................................... 2,653
Net transfers from TSC.................................... 5,182 -- 5,182
------- ----- -------
Balance, May 31, 1997..................................... 17,420 (273) 17,147
------- ----- -------
Net income................................................ 2,213 -- 2,213
Foreign currency translation.............................. -- (75) (75)
-------
Comprehensive income.................................... 2,138
Net transfers from TSC.................................... 21,608 -- 21,608
------- ----- -------
Balance, May 31, 1998..................................... 41,241 (348) 40,893
------- ----- -------
Net loss.................................................. (543) -- (543)
Foreign currency translation.............................. -- (239) (239)
-------
Comprehensive loss...................................... (782)
Net transfers from TSC.................................... 7,777 -- 7,777
------- ----- -------
Balance, December 31, 1998................................ 48,475 (587) 47,888
------- ----- -------
Net income (unaudited).................................... 2,207 -- 2,207
Foreign currency translation (unaudited).................. -- 8 8
-------
Comprehensive income (unaudited)........................ 2,215
Net transfers from TSC (unaudited)........................ 14,647 -- 14,647
------- ----- -------
Balance, June 30, 1999 (unaudited)........................ $65,329 $(579) $64,750
======= ===== =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
F-6
<PAGE> 102
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF JUNE 30, 1999 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED)
NOTE 1 -- THE COMPANY
eLoyalty Corporation ("eLoyalty") is a leading global information
technology services company focused on providing enterprise-wide solutions
across all customer access channels, including the Internet, that are designed
to result in lasting and profitable customer relationships for its clients.
eLoyalty defines this new category of solutions as loyalty solutions. eLoyalty's
clients generally are located throughout the United States and in Europe, Canada
and Australia.
eLoyalty is currently a wholly owned subsidiary of Technology Solutions
Company ("TSC" or the "Parent"). On March 30, 1999, TSC announced its intention
to create a separate company comprised of the TSC business and operations that
now comprise eLoyalty, and the associated assets and liabilities of such
businesses and operations (the "Separation"). TSC also announced that it intends
to distribute to its shareholders, subject to certain conditions and consents,
all of TSC's remaining equity interest in eLoyalty ("Distribution").
eLoyalty and TSC will enter into, on or prior to the Separation, certain
agreements governing various interim and ongoing relationships between eLoyalty
and TSC after the completion of the anticipated Separation and subsequent
Distribution.
The financial information included herein may not necessarily reflect the
combined results of operations, financial position, changes in stockholder's
equity and cash flows of eLoyalty in the future or what they would have been had
it been a separate, stand-alone entity during the periods presented.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The combined financial statements reflect the
results of operations, financial position, changes in stockholder's equity and
cash flows of the businesses that will be transferred to eLoyalty from TSC in
the Separation (the "eLoyalty Businesses") as if eLoyalty were a separate entity
for all periods presented. The combined financial statements have been prepared
using the historical basis in the assets and liabilities and historical results
of operations related to the eLoyalty Businesses. Changes in stockholder's
equity represent the net income of eLoyalty plus net cash transfers to or from
TSC and the effects of foreign currency translation. All significant
intercompany transactions have been eliminated. Acquired businesses are included
in the results of operations since their acquisition dates. Investments in which
eLoyalty has the ability to exercise significant influence, but which it does
not control, are accounted for under the equity method of accounting.
Investments in which eLoyalty does not have the ability to exercise significant
influence are accounted for under the cost method of accounting.
Interim Financial Statements -- The accompanying interim combined balance
sheet as of June 30, 1999 and the combined statements of operations and combined
statements of cash flows for the six months ended June 30, 1999 and 1998 and for
the seven month period from June 1, 1997 to December 31, 1997 and the related
notes have not been audited by independent accountants. However, they have been
prepared in conformity with the accounting principles stated in the audited
financial statements as of December 31, 1998 and include all adjustments, which
were of a normal and recurring nature, which in the opinion of management are
necessary to present fairly the financial position of eLoyalty and results of
operations and cash flows for the periods presented. The operating results for
the interim periods, consisting of the six month periods ended June 30, 1999 and
1998 and the seven month period from June 1, 1997 to December 31, 1997, are not
necessarily indicative of results expected for the full years of which the
aforementioned interim periods are a part.
Fiscal Year Change -- On November 22, 1998, TSC's Board of Directors voted
to change the fiscal year of TSC from a fiscal year ending on May 31 in each
year to a calendar year ending on December 31
F-7
<PAGE> 103
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF JUNE 30, 1999 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED)
in each year. The seven month transition period of June 1, 1998 through December
31, 1998 (transition period) precedes the start of the new fiscal year. The
unaudited financial information for the seven months ended December 31, 1997
(prior period) is presented for comparative purposes and includes any
adjustments (consisting of normal, recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation.
Revenue Recognition -- eLoyalty derives substantially all of its revenues
from professional services. eLoyalty provides professional services, including
support, primarily on a time and materials basis. Although eLoyalty occasionally
performs certain projects on a fixed fee basis, the total portion of combined
net revenues derived from fixed fee engagements is not significant. For time and
materials engagements, eLoyalty recognizes revenue as services are performed,
based on hourly billing rates. For fixed fee engagements, revenue is recognized
under the percentage-of-completion basis of accounting, based on the ratio of
costs incurred to total estimated costs. From time to time, eLoyalty uses
subcontractors to supplement its resources in client engagements. Revenue
generated through subcontractors is recognized based on the terms of the related
project (time and materials or fixed fee), and the related subcontractor costs
are included in project personnel expense as incurred. eLoyalty also derives
revenues from in-house developed software. Depending on the nature of the client
engagement, eLoyalty recognizes these software revenues using contract
accounting or as the product is shipped. To date, software revenues have not
exceeded 3% of total revenues for any period. Out-of-pocket expenses (travel,
lodging, etc.) charged on client engagements are presented net of amounts billed
to clients as general and administrative expense in the accompanying combined
statements of operations. Engagements are performed in phases. Losses on
engagements, if any, are reserved in full when determined.
Project Personnel Costs -- eLoyalty expenses the cost of project personnel
as incurred. Project personnel costs consist primarily of salaries, incentive
compensation and employee benefits for eLoyalty personnel available for client
assignments, and fees paid to subcontractors for work performed on client
projects.
Cash and Cash Equivalents -- eLoyalty considers all highly liquid
investments readily convertible into cash (with original maturities of three
months or less) to be cash equivalents. These short-term investments are carried
at cost plus accrued interest, which approximates market.
Marketable Securities -- eLoyalty's marketable securities consist of
investments related to TSC's executive deferred compensation plan (see Note 4)
and are classified as trading securities, with unrealized gains and losses
included in eLoyalty's combined statements of income. Realized gains or losses
are determined on the specific identification method.
Computers, Furniture and Equipment -- Computers, furniture and equipment
are carried at cost and depreciated on a straight-line basis over their
estimated useful lives. Useful lives generally are five years or less.
Goodwill -- Goodwill is amortized on a straight-line basis, typically over
a five-year period. Accumulated amortization of goodwill as of June 30, 1999,
December 31, 1998, May 31, 1998 and 1997 was $8,543, $6,042, $3,573 and $371,
respectively.
Research and Development Costs -- Research and development costs are
expensed as incurred, except for costs incurred for the development of computer
software that will be sold. Research and development expenses relate primarily
to the dedicated research and development facility maintained by eLoyalty, and
consist primarily of salaries, incentive compensation and employee benefits
costs for dedicated personnel, occupancy costs, staff recruiting costs,
administrative costs, travel expenses and depreciation.
F-8
<PAGE> 104
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF JUNE 30, 1999 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED)
Software Development Costs -- eLoyalty capitalizes software development
costs once technological feasibility is established and prior to general
release. Amortization is computed as the greater of the amount computed using
the (a) ratio of current revenues to the total current and anticipated future
revenues or (b) the straight-line method over the estimated economic life of the
product. Included in long-term receivables and other on eLoyalty's combined
balance sheets as of May 31, 1998 and 1997 are $447 and $801 of net software
development costs. There are no net software development costs included on
eLoyalty's combined balance sheet in any other period presented. Amortization
expense associated with software development costs was $447, $354 and $110 for
the seven month transition period ended December 31, 1998 and the fiscal years
ended May 31, 1998 and 1997, respectively. There was no amortization expense of
software development costs during the fiscal year ended May 31, 1996.
Stockholder's Equity -- Stockholder's equity includes amounts payable to
TSC primarily for operations and working capital requirements, offset by amounts
receivable for cash collected by TSC. The balances are primarily the result of
eLoyalty's participation in TSC's central cash management system, wherein all of
eLoyalty's domestic cash receipts are collected by TSC and all domestic cash
disbursements are funded by TSC. Other transactions include the Company's share
of TSC's combined income tax liability and other administrative expenses
incurred by TSC on behalf of eLoyalty. Such amounts payable do not have specific
repayment terms and do not bear interest.
Earnings (Loss) Per Common Share -- Historical earnings (loss) per share
have not been presented because the eLoyalty Businesses are not a separate legal
entity. Historical earnings (loss) per share will be presented once the eLoyalty
Businesses are transferred to eLoyalty.
Foreign Currency Translation -- All assets and liabilities of foreign
subsidiaries are translated to U.S. dollars at end of period exchange rates. The
resulting translation adjustments are recorded as a component of stockholder's
equity. Income and expense items are translated at average exchange rates
prevailing during the period. Gains and losses from foreign currency
transactions of these subsidiaries are included in the combined statements of
income. The functional currencies for eLoyalty's foreign subsidiaries are their
local currencies.
Fair Value of Financial Instruments -- The carrying values of current
assets and liabilities and long-term receivables approximated their fair values
at June 30, 1999, December 31, 1998, May 31, 1998 and 1997, respectively.
Concentration of Credit Risk -- No client accounted for 10 percent or more
of revenues during the six-month period ended June 30, 1999, the transition
period ended December 31, 1998, fiscal 1998 or fiscal 1997. During fiscal 1996,
one customer accounted for 21 percent of revenues. No client accounted for 10
percent or more of gross accounts receivables as of December 31, 1998, May 31,
1998 or May 31, 1997.
Stock-Based Compensation -- eLoyalty accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations.
Income Taxes -- Historically, eLoyalty's results have been included in
TSC's consolidated federal and state income tax returns. The income tax
provision is calculated and deferred tax assets and liabilities are recorded as
if eLoyalty had operated as an independent entity. eLoyalty uses an asset and
liability approach to financial accounting and reporting for income taxes.
Deferred income taxes are provided when tax laws and financial accounting
standards differ with respect to the amount of income for a year and the
F-9
<PAGE> 105
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF JUNE 30, 1999 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED)
basis of assets and liabilities. eLoyalty does not provide U.S. deferred income
taxes on earnings of foreign subsidiaries which are expected to be indefinitely
reinvested.
New Accounting Standards -- On June 15, 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," is effective for fiscal years
beginning after June 15, 2000 (January 1, 2001 for eLoyalty). SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. eLoyalty anticipates that the adoption of SFAS No. 133
will not have a significant effect on eLoyalty's results of operations or its
financial position.
Estimates and Assumptions -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 3 -- ACQUISITIONS
In June 1997, eLoyalty acquired The Bentley Group, Inc., (Bentley), a
business and operations consulting firm. Total consideration aggregated $17.5
million, including cash of $12.0 million, 44,303 shares of TSC Common Stock and
stock options. Goodwill of approximately $18.1 million resulted from the Bentley
acquisition and is being amortized over five years.
In February 1997, eLoyalty acquired Geising International, a German-based
business consulting firm. Total consideration aggregated $1.4 million, including
cash of $1.0 million and 37,962 shares of TSC's Common Stock. Goodwill of
approximately $1.0 million resulted from the Geising International acquisition
and is being amortized over five years.
In May 1996, eLoyalty acquired Aspen Consultancy Ltd., (Aspen). Aspen is a
United Kingdom-based consulting firm. Total cash consideration aggregated $3.4
million. Goodwill of approximately $3.5 million resulted from the Aspen
acquisition and is being amortized over a five year period.
These acquisitions have been accounted for under the purchase method and
accordingly their results have been included in eLoyalty's results since the
date of acquisition.
NOTE 4 -- RELATED PARTY TRANSACTIONS
Employees of eLoyalty are eligible to participate in the TSC 401(k) Savings
Plan (the "Plan"). The Plan allows employees to contribute up to 15 percent of
their annual compensation, subject to Internal Revenue Service statutory
limitations. Contributions to the Plan are made at the discretion of TSC and the
related expense is allocated to eLoyalty based on the actual employees covered.
Plan expense allocated to eLoyalty by TSC totaled $503 in the six-month period
ended June 30, 1999, $487 in the seven-month period ended December 31, 1998 and
$470 and $336 in the years ended May 31, 1998 and 1997, respectively.
eLoyalty participates in TSC's nonqualified executive deferred compensation
plan. All eLoyalty executives (defined as Vice Presidents and above) are
eligible to participate in this voluntary program
F-10
<PAGE> 106
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF JUNE 30, 1999 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED)
which permits participants to elect to defer receipt of a portion of their
compensation. Deferred contributions and investment earnings are payable to
participants upon various specified events, including retirement, disability or
termination. The accompanying combined balance sheets include the deferred
compensation liability, including investment earnings thereon, owed to
participants. The accompanying combined balance sheets also include eLoyalty's
portion of the investments, classified as trading securities, purchased by TSC
with the deferred funds. These investments remain assets of eLoyalty and are
available to the general creditors of eLoyalty in the event of eLoyalty's
insolvency. eLoyalty intends to implement a similar plan subsequent to the
Distribution.
Project expenses have been recorded on an individual project basis. The
financial statements include expenses which have been allocated to eLoyalty by
TSC on a specific identification basis. Further, eLoyalty shares certain
employees and other resources with TSC. Allocations from TSC for indirect
expenses for such shared resources have been made primarily on a proportional
cost allocation method based on revenues and headcount. Management believes
these allocations are reasonable and that such expenses would not have differed
materially had eLoyalty operated on a stand-alone basis for all periods
presented. Such allocations of general corporate overhead expenses are included
in eLoyalty's combined statement of operations as follows:
<TABLE>
<CAPTION>
FOR THE SIX
MONTH PERIODS FOR THE SEVEN MONTH
ENDED PERIODS FROM JUNE 1
JUNE 30, TO DECEMBER 31, FOR THE YEARS ENDED MAY 31,
--------------- --------------------------- ----------------------------
1999 1998 1998 1997 1998 1997 1996
------ ------ ------------ ------------ -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and marketing................ $ 795 $ 650 $ 731 $ 405 $ 972 $ 586 $ 633
Other corporate services
allocation....................... 7,940 6,183 7,698 5,544 10,671 5,028 3,298
------ ------ ------ ------ ------- ------ ------
Total allocated general
corporate overhead...... $8,735 $6,833 $8,429 $5,949 $11,643 $5,614 $3,931
------ ------ ------ ------ ------- ------ ------
</TABLE>
On November 12, 1998, TSC made a loan of $1,200,000 to Mr. Conway with a
five-year term that, to the extent not forgiven in whole or in part as described
below, is payable on demand upon the cessation of Mr. Conway's employment with
TSC or its affiliates. The loan bears interest at the rate of 4.5% per annum
and, so long as Mr. Conway remains employed by eLoyalty, the principal amount of
the loan (and interest accrued thereon) will be forgiven over a five-year period
as follows: 25% of the principal amount on November 12, 1999; $25,000 in
principal per month for the next twelve months; $20,000 in principal per month
for the next twenty-four months; and $10,000 in principal per month for the next
twelve months. Mr. Conway's outstanding balance and accrued interest as of June
30, 1999 was $1,234,276. It is expected that the note representing this loan
will be assigned to eLoyalty.
F-11
<PAGE> 107
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF JUNE 30, 1999 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED)
NOTE 5 -- RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
AS OF AS OF AS OF MAY 31,
JUNE 30, DECEMBER 31, -----------------
1999 1998 1998 1997
-------- ------------ ------- -------
<S> <C> <C> <C> <C>
Amounts billed to clients........................... $37,211 $23,737 $20,712 $ 7,518
Engagements in process.............................. 9,457 4,344 3,661 4,428
------- ------- ------- -------
46,668 28,081 24,373 11,946
Receivable allowances............................... (3,134) (2,638) (475) (198)
------- ------- ------- -------
$43,534 $25,443 $23,898 $11,748
======= ======= ======= =======
</TABLE>
Amounts billed to clients represent professional fees and reimbursable
project-related expenses. Engagements in process represent unbilled professional
fees and project costs such as out-of-pocket expense, materials and
subcontractor costs. Amounts billed to clients are unsecured and primarily due
within 30 days.
NOTE 6 -- COMPUTERS, FURNITURE AND EQUIPMENT
Computers, furniture and equipment consist of the following:
<TABLE>
<CAPTION>
AS OF AS OF AS OF MAY 31,
JUNE 30, DECEMBER 31, ---------------
1999 1998 1998 1997
-------- ------------ ------- -----
<S> <C> <C> <C> <C>
Computers and software............................... $ 2,241 $ 2,486 $ 1,835 $ 547
Furniture and equipment.............................. 1,201 756 743 27
------- ------- ------- -----
3,442 3,242 2,578 574
Accumulated depreciation............................. (1,630) (1,661) (1,146) (329)
------- ------- ------- -----
$ 1,812 $ 1,581 $ 1,432 $ 245
======= ======= ======= =====
</TABLE>
Depreciation expense was $463, $327, $421, $308, $131 and $60 for the six
month periods ended June 30, 1999 and 1998, the transition period ended December
31, 1998 and for the fiscal years ended May 31, 1998, 1997, and 1996,
respectively.
F-12
<PAGE> 108
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF JUNE 30, 1999 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED)
NOTE 7 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE SEVEN MONTH
PERIOD FROM
JUNE 1 TO FOR THE YEARS ENDED MAY 31,
DECEMBER 31, ---------------------------
1998 1998 1997 1996
------------------- ------- ------- -------
<S> <C> <C> <C> <C>
Current:
Federal................................ $(1,929) $ 115 $1,427 $1,655
State.................................. (275) 16 204 236
Foreign................................ (830) (227) (49) --
------- ------ ------ ------
Total current.................. (3,034) (96) 1,582 1,891
------- ------ ------ ------
Deferred:
Federal................................ 1,941 1,357 256 (30)
State.................................. 277 194 37 (4)
Foreign................................ 1,214 567 22 --
------- ------ ------ ------
Total deferred................. 3,432 2,118 315 (34)
------- ------ ------ ------
Provision for income taxes............... $ 398 $2,022 $1,897 $1,857
======= ====== ====== ======
</TABLE>
Total income tax provision differed from the amount computed by applying
the federal statutory income tax rate to income from continuing operations due
to the following:
<TABLE>
<CAPTION>
FOR THE SEVEN MONTH
PERIOD FROM
JUNE 1 TO FOR THE YEARS ENDED MAY 31,
DECEMBER 31, ---------------------------
1998 1998 1997 1996
------------------- ------- ------- -------
<S> <C> <C> <C> <C>
Federal tax (benefit) provision, at
statutory rate........................... $(50) $1,475 $1,688 $1,718
State tax (benefit) provision, net of
Federal benefit........................ (6) 211 241 245
Effect of foreign tax rate differences... 303 34 (58) --
Nondeductible expenses................... 61 96 48 51
Nondeductible goodwill................... 170 172 150 --
Other.................................... (80) 34 (172) (157)
---- ------ ------ ------
Income tax provision..................... $398 $2,022 $1,897 $1,857
==== ====== ====== ======
</TABLE>
F-13
<PAGE> 109
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF JUNE 30, 1999 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED)
Deferred tax assets and liabilities were comprised of the following:
<TABLE>
<CAPTION>
AS OF AS OF MAY 31,
DECEMBER 31, ------------------
1998 1998 1997
------------ ------- ------
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation and bonuses....................... $1,794 $ 1,462 $ 624
Equity losses of unconsolidated investee................ 215 -- --
Receivable allowances................................... 844 197 187
Other accruals.......................................... 743 464 252
Net operating loss...................................... 1,803 -- --
Depreciation and amortization........................... 1,054 1,277 22
------ ------- ------
Total deferred tax assets....................... 6,453 3,400 1,085
------ ------- ------
Deferred tax liabilities:
Prepaid expenses........................................ (688) (812) (550)
Capitalized software development costs.................. -- (255) (320)
------ ------- ------
Total deferred tax liabilities.................. (688) (1,067) (870)
------ ------- ------
Net deferred tax asset.................................. $5,765 $ 2,333 $ 215
====== ======= ======
</TABLE>
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
FOR THE SEVEN MONTH
PERIOD FROM
JUNE 1 TO FOR THE YEARS ENDED MAY 31,
DECEMBER 31, ----------------------------
1998 1998 1997 1996
------------------- ------ ------ ------
<S> <C> <C> <C> <C>
United States.............................. $(164) $3,781 $4,527 $4,907
Foreign.................................... 19 454 296 --
----- ------ ------ ------
Total............................ $(145) $4,235 $4,823 $4,907
===== ====== ====== ======
</TABLE>
NOTE 8 -- STOCK OPTIONS
As of the Distribution, each outstanding option to purchase TSC common
stock held by a person who will be an employee or director of eLoyalty
immediately after the Distribution (and who will not also be a director of TSC)
will be converted into a substitute option to purchase eLoyalty common stock.
The conversion of the options will be done in such a manner that (1) the
aggregate intrinsic value of the options immediately before and after the
exchange are the same, (2) the ratio of the exercise price per option to the
market value per option is not reduced, and (3) the vesting provisions and
option period of the replacement options are the same as the original vesting
terms and option period. The substitute option will take into account all
employment with both TSC and eLoyalty for purposes of determining when the
option becomes exercisable and when it terminates. All other terms of the
substitute option will be the same as the current TSC option.
Each outstanding nonqualified TSC option granted before June 22, 1999 to a
person who will continue as an employee or director of TSC after the
Distribution, or who will not be an employee or director of either TSC or
eLoyalty after the Distribution, will be converted into both an adjusted TSC
option and a substitute eLoyalty option. The conversion of the options will be
done in such a manner that (1) the aggregate intrinsic value of the options
immediately before and after the exchange are the same,
F-14
<PAGE> 110
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF JUNE 30, 1999 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED)
(2) the ratio of the exercise price per option to the market value per option is
not reduced, and (3) the vesting provisions and option period of the replacement
options are the same as the original vesting terms and option period. Employment
with TSC will be taken into account in determining when each substitute eLoyalty
option becomes exercisable and when it terminates, and in all other respects
will be substantially the same as the existing TSC option.
Each outstanding nonqualified TSC option granted after June 21, 1999 to a
person who will continue as an employee or director of TSC after the
Distribution, or who will not be an employee or director of either TSC or
eLoyalty after the Distribution, will continue solely as an option to purchase
shares of TSC common stock.
Each TSC option that is an incentive stock option, within the meaning of
Section 422 of the Code, will be converted into an incentive stock option to
purchase the stock of the corporation with which the optionee is employed
immediately after the Distribution. These options will be converted based on the
relative trading prices of the stock purchasable under the option over a fixed
period of time before and after the record date of the Distribution, and will
preserve both the intrinsic value of the option and the ratio of the exercise
price to the fair market value of the stock.
In June of 1999, eLoyalty's shareholder approved the 1999 eLoyalty Stock
Incentive Plan (the "Plan") for eLoyalty's directors, officers, employees and
key advisors. The total number of shares of eLoyalty common stock initially
reserved for issuance under the Plan is 5,340,000. Awards granted under the Plan
are at the discretion of the Compensation Committee of eLoyalty's board of
directors (or, prior to the Distribution, the Compensation Committee of the TSC
board of directors) (the "Compensation Committee), and may be in the form of
incentive or nonqualified stock options. These options have a maximum term of 10
years. Upon adoption of the Plan, the Compensation Committee granted options to
purchase 4,824,000 shares of eLoyalty's common stock to eLoyalty employees and
certain employees of TSC who are instrumental to eLoyalty's operations up to and
including the Distribution. These options have a ten-year term and vest ratably
over the next four years. As the $3.50 exercise price of these options is equal
to the then fair market value of the underlying eLoyalty common stock, no
compensation expense was recognized in accordance with APB 25.
Pro forma net earnings and earnings per share information, as required by
SFAS No. 123, "Accounting for Stock-Based Compensation," has been determined as
if TSC had accounted for employee stock options granted to eLoyalty employees
under the fair value method prescribed by SFAS No. 123. The fair value of these
options was estimated at grant date using the Black-Scholes option pricing model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
FOR THE
SEVEN MONTH
PERIOD ENDED FOR THE YEARS ENDED MAY 31,
DECEMBER 31, ---------------------------------------
1998 1998 1997 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Expected volatility........... 43.6%-49.8% 41.9%-44.1% 40.9%-51.4% 50.6%-52.0%
Risk-free interest rates...... 4.1%-5.6% 5.3%-6.5% 5.3%-6.8% 5.3%-6.4%
Expected lives................ 4.5 years 4.5 years 4.5 years 4.5 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of options
is amortized over the four-year average vesting period of the options. The pro
forma effect of recognizing compensation expense in accordance with SFAS No. 123
would have been to reduce eLoyalty's reported net earnings by $2,031
F-15
<PAGE> 111
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF JUNE 30, 1999 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED)
in the seven-month period ended December 31, 1998, and $2,713, $1,275 and $366
in the years ended May 31, 1998, 1997 and 1996, respectively.
NOTE 9 -- SEGMENT INFORMATION
eLoyalty operates as a single reportable segment. The following is revenue
and long-lived asset information by geographic area as of and for the six month
period ended June 30, 1999, the transition period ended December 31, 1998 and
the fiscal years ended May 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
UNITED EUROPE AND COMBINED
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999 STATES CANADA AUSTRALIA TOTAL
- -------------------------------------------- ------- ------ ---------- --------
<S> <C> <C> <C> <C>
Revenues........................................... $51,566 $3,824 $12,246 $67,636
Identifiable Assets................................ $61,627 $3,530 $20,816 $85,973
</TABLE>
<TABLE>
<CAPTION>
UNITED EUROPE AND COMBINED
FOR THE SEVEN MONTH PERIOD FROM JUNE 1 TO DECEMBER 31, 1998 STATES CANADA AUSTRALIA TOTAL
- ----------------------------------------------------------- ------- ------ ---------- --------
<S> <C> <C> <C> <C>
Revenues............................................... $50,139 $3,729 $10,547 $64,415
Identifiable Assets.................................... $42,715 $3,300 $17,889 $63,904
</TABLE>
<TABLE>
<CAPTION>
UNITED COMBINED
FOR THE YEAR ENDED MAY 31, 1998 STATES CANADA EUROPE TOTAL
- ------------------------------- ------- ------ ---------- --------
<S> <C> <C> <C> <C>
Revenues........................................... $61,882 $6,296 $16,310 $84,488
Identifiable Assets................................ $34,711 $3,008 $16,399 $54,118
</TABLE>
<TABLE>
<CAPTION>
UNITED COMBINED
FOR THE YEAR ENDED MAY 31, 1997 STATES CANADA EUROPE TOTAL
- ------------------------------- ------- ------ ---------- --------
<S> <C> <C> <C> <C>
Revenues........................................... $30,346 $1,963 $10,872 $43,181
Identifiable Assets................................ $11,068 $2,598 $10,522 $24,188
</TABLE>
<TABLE>
<CAPTION>
UNITED COMBINED
FOR THE YEAR ENDED MAY 31, 1996 STATES CANADA EUROPE TOTAL
- ------------------------------- ------- ------ ---------- --------
<S> <C> <C> <C> <C>
Revenues........................................... $26,516 $ -- $ -- $26,516
Identifiable Assets................................ $10,381 $ -- $ 3,627 $14,008
</TABLE>
Foreign revenue is based on the country in which eLoyalty's operations are
domiciled.
NOTE 10 -- COMMITMENTS
eLoyalty leases various office facilities under operating leases expiring
at various dates through July 31, 2004. Additionally, eLoyalty leases various
property and office equipment under operating leases expiring at various dates.
Rental expense for all operating leases approximated $469, $367, $469, $738,
$133 and $0 for the six month periods ended June 30, 1999 and 1998, the
transition period ended December 31, 1998 and for the fiscal years ended May 31,
1998, 1997, and 1996, respectively. Future
F-16
<PAGE> 112
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF JUNE 30, 1999 AND FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 1999 AND 1998
AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 IS UNAUDITED)
minimum rental commitments under noncancelable operating leases with terms in
excess of one year are as follows:
<TABLE>
<CAPTION>
CALENDAR YEAR AMOUNT
- ------------- ------
<S> <C>
1999....................................................... $1,047
2000....................................................... 570
2001....................................................... 404
2002....................................................... 221
2003....................................................... 47
------
$2,289
======
</TABLE>
eLoyalty had no capital leases as of December 31, 1998.
NOTE 11 -- LITIGATION
eLoyalty is not a party to any material legal proceedings.
NOTE 12 -- SUBSEQUENT EVENTS
On June 22, 1999, certain venture capital investors agreed to purchase an
aggregate of 2.4 million shares of eLoyalty common stock at $3.50 per share.
Such purchase is subject to the receipt of a private letter ruling from the IRS
to the effect that the spin-off will be tax-free to TSC and its stockholders for
United States Federal income tax purposes and certain other customary
conditions. If those venture capital investors purchase shares of eLoyalty
common stock and the spin-off does not occur by August 13, 2000, eLoyalty could
become obligated to repurchase such shares at a premium totalling $1.2 million
over the price paid by the venture capital investors for such shares. Because
these shares may be repurchased prior to the spin-off, eLoyalty will classify
these shares as redeemable common stock until the spin-off occurs. In addition,
each of the venture capital investors has the right to designate a nominee to
the eLoyalty Board of Directors.
As part of the agreement the venture capital investors purchased 500,000
shares of TSC common stock at $9.013 per share (the average last reported sales
price for the ten days ending June 25, 1999).
F-17
<PAGE> 113
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1998
AND FOR THE YEARS ENDED MAY 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DESCRIPTION OF BEGINNING END OF
ALLOWANCE AND RESERVES OF YEAR ADDITIONS DEDUCTIONS YEAR
---------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
May 31, 1996
Valuation allowances and receivable reserves for
potential losses................................... $ 48 $ 272 $(136) $ 184
May 31, 1997
Valuation allowances and receivable reserves for
potential losses................................... $184 $ 453 $(439) $ 198
May 31, 1998
Valuation allowances and receivable reserves for
potential losses................................... $198 $ 531 $(254) $ 475
December 31, 1998
Valuation allowances and receivable reserves for
potential losses................................... $475 $2,652 $(489) $2,638
</TABLE>
S-1
<PAGE> 114
RECOGNITION RECEIVED AS AN INDUSTRY LEADER:
<TABLE>
<CAPTION>
<S><C>
[SI IMPACT AWARD 1999 LOGO] [SOLUTIONS INTEGRATOR LOGO] [CALL CENTER NEWS SERVICE BEST OF ICCM 1998 LOGO]
eLoyalty won the Solutions Integrator Our Loyalty Support group won the Best-of-show honors went to eLoyalty
of the Year Award, outdistancing many SI Impact Award for New Business at Incoming Call Center Management (ICCM)
other companies for the top honor. for being among the first business for its innovative approach to customer
management consulting and systems loyalty support.
integration organizations to provide
comprehensive support and multivendor
capabilities.
RECOGNITION BESTOWED AS AN INDUSTRY LEADER:
<CAPTION>
<S><C>
[MANAGEMENT TODAY LOGO]
eLoyalty is the founder and a sponsor of the prestigious
Computerworld Smithsonian 21st Century Pioneer Awards
Each year, eLoyalty sponsors Management Today program which recognizes an individual who has leveraged
magazine's "Britain's Most Admired Company" award. technology to build customer relationships. Recent winners
This award recognizes companies admired by their peers have been Scott Eckert of Dell Computer and Jeff Bezos of
and by loyal customers. Last year's winner was Tesco, Amazon.com.
one of the leading supermarket chains in the UK and Europe.
</TABLE>
RECOGNITION FROM CLIENT TRUST:
Some of the most successful companies in the world trust eLoyalty's expertise to
help them manage and grow their most valuable asset - their customers.
<TABLE>
<S><C>
- - ADAC Laboratories, Inc. - Conectiv Resource Partners, Inc. - Premera
- - A&E Signature Services, a Division of - Deutsche Telekom AG - Provident Financial Group, Inc.
Montgomery Wards - Federal Kemper Life Assurance Company - Royal Bank of Canada
- - Agilent Technologies, Inc. - General Motors Corporation - South Carolina Electric & Gas Company
- - Allina Health System - GlaxoWellcome, Inc. - Sprint Communications Company, L.P.
- - Allstate Insurance Company - Hewlett-Packard Company - Union Bank of California, N.A.
- - Atmos Energy Corporation - Intuit Inc. - USA Group, Inc.
- - Axel Springer Verlag AG - Lucent Technologies, Inc. - US WEST Communications, Inc.
- - Bank of America Corporation - News Limited - Virgin Atlantic Airways Limited
- - Bausch & Lomb, Inc. - Penn Treaty American Corporation - Vision Service Plan, Inc. (VSP)
- - British Broadcasting Corporation (BBC) - PNC Bank Corporation - Xerox Canada Ltd.
- - Club Mediterranee (Club Med)
</TABLE>
WWW.ELOYALTYCO.COM (This website and the information contained therein shall not
be deemed to be incorporated into this information statement.)
<PAGE> 115
[ELOYALTY LOGO]
