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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 000-27975
eLOYALTY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 36-4304577
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
150 FIELD DRIVE
SUITE 250
LAKE FOREST, ILLINOIS 60045
(847) 582-7000
(Address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
205 NORTH MICHIGAN AVENUE
SUITE 1500
CHICAGO, ILLINOIS 60601
(312) 228-4500
(Former address if changed since last report)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT(1) HAS
FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR
SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),
AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES_X NO _
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, $.01 PAR
VALUE PER SHARE AS OF MAY 10, 2000 WAS 47,148,847.
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TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Financial Statements...................................... 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 6
Item 3. Quantitative and Qualitative Disclosure About Market
Risk.................................................... 10
PART II.
Item 1. Legal Proceedings......................................... 11
Item 2. Changes in Securities and Use of Proceeds................. 11
Item 3. Defaults Upon Senior Securities........................... 11
Item 4. Submission of Matters to a Vote of Security Holders....... 11
Item 5. Other Information......................................... 11
Item 6. Exhibits and Reports on Form 8-K.......................... 11
Signatures.......................................................... 12
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eLOYALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
2000 1999
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(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 45,243 $ 13,462
Marketable securities ........................................................ 9,380 7,175
Receivables (less allowances of $2,646 and $2,084, respectively) ............. 48,635 44,056
Deferred income taxes ........................................................ 11,392 9,057
Prepaid expenses ............................................................. 3,740 3,093
Other current assets ......................................................... 1,425 1,072
--------- ---------
Total current assets ............................................... 119,815 77,915
COMPUTERS, FURNITURE AND EQUIPMENT, NET ...................................... 4,446 2,284
GOODWILL, NET ................................................................ 10,865 12,129
DEFERRED INCOME TAXES ........................................................ 2,534 2,387
LONG-TERM RECEIVABLES AND OTHER .............................................. 1,704 1,888
--------- ---------
Total assets ....................................................... $ 139,364 $ 96,603
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................. $ 3,621 $ 640
Accrued compensation and related costs ....................................... 12,626 11,687
Deferred compensation ........................................................ 9,380 7,175
Other current liabilities .................................................... 4,811 3,486
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Total current liabilities .......................................... 30,438 22,988
--------- ---------
COMMITMENTS AND CONTINGENCIES ................................................ -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued and outstanding .................................... -- --
Common stock, $.01 par value; 100,000,000 shares authorized;
Issued and outstanding 47,127,031 shares and 41,400,000 shares,
respectively ............................................................... 471 414
Additional paid-in capital ................................................... 109,367 963
Net advances from Technology Solutions Company ............................... -- 74,048
Retained earnings ............................................................ 2,751 --
Other ........................................................................ (3,663) (1,810)
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Total stockholders' equity ......................................... 108,926 73,615
--------- ---------
Total liabilities and stockholders' equity ......................... $ 139,364 $ 96,603
========= =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of this financial information.
1
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eLOYALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
--------- --------
(UNAUDITED)
REVENUES ............................................ $ 46,179 $ 31,491
Project personnel ................................. (21,181) (14,061)
-------- --------
GROSS PROFIT ........................................ 24,998 17,430
-------- --------
OTHER COSTS AND EXPENSES:
Selling, general and administrative ............... 19,647 10,240
Research and development .......................... 2,028 1,176
Technology Solutions Company corporate services
expense ......................................... 2,210 3,151
Goodwill amortization ............................. 1,246 1,252
-------- --------
25,131 15,819
-------- --------
OPERATING INCOME (LOSS) ............................. (133) 1,611
OTHER INCOME (EXPENSE) .............................. 446 (142)
-------- --------
INCOME BEFORE INCOME TAXES .......................... 313 1,469
INCOME TAX PROVISION ................................ 157 742
-------- --------
NET INCOME .......................................... $ 156 $ 727
======== ========
Basic net income per common share ................... $ 0.00 $ 0.02
======== ========
Diluted net income per common share ................. $ 0.00 $ 0.02
======== ========
Shares used to calculate basic net income per share 44,295 41,400
======== ========
Shares used to calculate diluted net income per share 49,909 42,415
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of this financial information.
2
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eLOYALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE THREE MONTH PERIOD ENDED
MARCH 31,
--------------------------------
2000 1999
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(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ..................................... $ 156 $ 727
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization ................ 1,869 1,946
Provisions for doubtful receivables .......... 552 33
Equity losses of unconsolidated investee ..... -- 141
Deferred income taxes ........................ (2,565) (2,192)
Changes in assets and liabilities:
Receivables ................................ (5,416) (9,059)
Purchases of trading securities related to
deferred compensation program ........... (2,205) (1,539)
Other current assets ....................... (1,032) (771)
Accounts payable ........................... 2,990 (370)
Accrued compensation and related costs ..... 1,027 (464)
Deferred compensation funds from
employees ............................... 2,205 1,539
Other current liabilities .................. 1,436 849
Other assets ............................... 155 (496)
-------- --------
Net cash used in operating
activities ............................ (828) (9,656)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................... (2,754) (1,887)
-------- --------
Net cash used in investing activities ... (2,754) (1,887)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash contribution from Technology Solutions
Company ...................................... 20,000 --
Transfers from Technology Solutions Company .... 3,081 12,681
Proceeds from issuance of common stock ......... 8,407 --
Proceeds from stock compensation plans ......... 4,787 --
-------- --------
Net cash provided by financing activities 36,275 12,681
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EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS .................................... (912) 677
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS ............ 31,781 1,815
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ... 13,462 4,411
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......... $ 45,243 $ 6,226
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of this financial information.
3
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eLOYALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 -- GENERAL
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all normal and recurring adjustments
necessary to present fairly the financial position as of March 31, 2000, the
results of operations for the three months ended March 31, 2000 and 1999 and
cash flows for the three months ended March 31, 2000 and 1999, and are in
conformity with Securities and Exchange Commission Rule 10-01 of Regulation S-X.
The financial statements include the combined results of operations, cash flows
and financial position for the period prior to February 15, 2000, when the
Company operated within Technology Solutions Company and subsequent to February
15, 2000, as it operated as a separate publicly traded company. Certain
reclassifications have been made to the first quarter 1999 Statement of
Operations to conform to the 2000 presentation.
The results of operations for any interim period are not necessarily
indicative of the results for the full year. The financial statements should be
read in conjunction with the audited combined financial statements and the notes
thereto on Form 10-K for the year ended December 1999.
NOTE 2 -- eLOYALTY SPIN-OFF FROM TECHNOLOGY SOLUTIONS COMPANY
On February 15, 2000 Technology Solutions Company (TSC) successfully
completed the spin-off of its eLoyalty division into a separate publicly traded
company. To effectuate the transaction, the Board of Directors of TSC declared a
dividend payable to the holders of record of TSC as of February 9, 2000, based
upon a ratio of one share of the Company's common stock, par value of $0.01 per
share for every one share of TSC common stock owned on the record date.
Effective February 15, 2000 all of the outstanding shares of common stock were
distributed to TSC stockholders. In connection with the spin-off, TSC's net
advances to the Company were recorded as common stock and additional paid-in
capital. The net assets distributed were as follows :
(In 000's) FEBRUARY 15, 2000
-----------------
Cash $ 29,278
Receivables, net 50,056
Other current assets 23,606
Goodwill 11,342
Other long-term assets 7,379
Accounts payable 1,238
Other current liabilities 26,755
Other comprehensive loss (1,516)
In addition, eLoyalty entered into a $10 million revolving line of credit
facility with Bank of America to provide cash for short term operating
obligations. TSC has agreed to guarantee obligations under this facility through
December 31, 2000. The borrowings under this revolving credit facility bear
interest at a rate of LIBOR plus .75%. The credit facility contains customary
representations, warranties, covenants and default provisions, including working
capital commitments and debt to equity ratios.
Pursuant to the Tax Sharing and Disaffiliation Agreement between TSC and
eLoyalty, TSC will generally be liable to eLoyalty for any income tax benefits
realized by TSC related to the exercise of eLoyalty stock options by TSC
employees.
NOTE 3 -- COMPREHENSIVE NET INCOME (LOSS)
Comprehensive net income (loss) is comprised of the following:
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
(In 000's)
2000 1999
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Net Income $ 156 $ 727
Other comprehensive income:
Effect of currency translation (1,399) 344
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Other comprehensive net income (loss) $ (1,243) $ 1,071
========= ========
4
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eLOYALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The accumulated other comprehensive loss, which represents the accumulated
effect of currency translation adjustments, was $2.2 million and $0.8 million at
March 31, 2000 and December 31, 1999, respectively.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
The Company is involved in various pending or threatened claims in the
normal course of business. Management believes that losses, if any, arising from
such claims will not have a material adverse affect on the Company's financial
position, results of operations or cash flows.
NOTE 5 -- EARNINGS PER SHARE
The following table sets forth the computation of the shares used in the
calculation of basic and diluted earnings per share:
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
(In 000's)
2000 1999
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Basic:
Weighted average common shares outstanding 44,295 41,400
Diluted:
Effect of dilutive stock options 5,614 1,015
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Weighted average common and common share equivalents 49,909 42,415
========== ==========
NOTE 6 -- SUBSEQUENT EVENTS
Common stock Agreement to Issue to Technology Crossover Ventures
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On April 18, 2000 the Company signed a letter of intent with Technology
Crossover Ventures (TCV) to issue 2 million shares of common stock at $13.50 per
share, the closing market price on the signing date, for an investment of $27
million in eLoyalty. The issuance of stock is expected to close at the end of
the waiting period for the Hart-Scott-Rodino filing. The Company will use the
funding to continue its market expansion, build out its infrastructure to
support its operations and launch its application service provider model with
its newly announced Loyalty Foundation offering.
The securities to be sold to TCV by the Company will not be registered under
the Securities Act of 1933, as amended, and may not be offered or sold in the
United States absent registration or an exemption from registration
requirements. Pursuant to the letter of intent, the Company will grant to TCV
registration rights customary for this transaction.
TCV is a venture capital firm based in Palo Alto, California. Jay Hoag, a
member of the Board of Directors of eLoyalty, is a general partner of TCV. At
March 31, 2000, TCV owned approximately 1.7 million shares, or 3.6% of shares
issued and outstanding.
Board of Directors approval of eLoyalty 2000 Stock Incentive Plan
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On May 12, 2000, the Board of Directors approved the eLoyalty 2000 Stock
Incentive Plan. The plan is broadly based and is substantially identical to the
1999 Stock Incentive Plan, except that current employees at or above the level
of Senior Vice President and all Directors will be excluded from participation.
Option grants under the plan will generally be made at market prices and have
vesting periods of one to five years. A total of 2,400,000 shares of eLoyalty
common stock will be reserved and held available for issuance under the plan.
The purpose of the plan is to use equity incentives to help attract, retain, and
reward employees in a highly competitive market and eLoyalty believes equity
incentives are an important employee benefit.
5
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MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER 2000 COMPARED WITH FIRST QUARTER 1999
GENERAL
On February 15, 2000, Technology Solutions Company (TSC) successfully
completed the spin-off of its eLoyalty division into a separate publicly traded
company. TSC has contractually agreed to provide certain corporate services to
eLoyalty from the date of the spin-off through June 30, 2000. The financial
statements include the combined results of operations, cash flows and financial
position for the period prior to February 15, 2000, when the Company operated
within Technology Solutions Company and subsequent to February 15, 2000, as it
operated as a separate publicly traded company.
Revenues for the first quarter of 2000 were $46.2 million compared to
revenues of $31.5 million for the first quarter of 1999. The operating loss for
the current quarter was $0.1 million compared to operating earnings of $1.6
million for the year-ago quarter. Net income for the current quarter totaled
$0.2 million, or $0.00 per basic and diluted earnings per share, compared to net
income of $0.7 million, or $0.02 per basic and diluted earnings per share, for
the year-ago quarter.
REVENUES
Revenues increased $14.7 million, or 46.6%, to $46.2 million in the first
quarter of 2000 from $31.5 million in the prior-year quarter. Professional
service fee revenues increased $10.6 million in the quarter-over-quarter
comparison to $41.4 million in first quarter of 2000 from $30.8 million in the
year-ago quarter. Revenues from software sales increased $3.3 million to $3.7
million in the current year quarter from $0.4 million in the prior-year quarter.
Support revenues increased $0.8 million to $1.1 million in the current year
period from $0.3 million in the prior-year period.
The $14.7 million increase in revenues is due primarily to an increase in
the average size of client projects as well as higher average billing rates in
the period-over-period comparison. Quarter-over-quarter revenues increased in
the United States, Australia and Canada by approximately 71.3%, 50.2% and 28.5%,
respectively, while revenues declined 31.3% in Europe over the same period.
PROJECT PERSONNEL COSTS
Project personnel costs increased $7.1 million, or 50.6%, to $21.2 million
in the first quarter of 2000 from $14.1 million in the prior-year quarter. The
current year increase in project personnel costs is primarily due to a 41.3%
increase in the number of billable employees in the period-over-period
comparison. Project personnel costs as a percentage of revenues increased to
45.9% in the current year period compared to 44.8% in the prior-year period
primarily due to an increase in nonbillable hours as a result of the orientation
and training of newly hired engageable consultants.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $9.4 million, or
91.9%, to $19.6 million in the first quarter of 2000 from $10.2 million in the
prior-year quarter. Selling and marketing expenses increased
quarter-over-quarter as a result of the Company's decision to invest in the
brand building of eLoyalty as a new stand-alone company and to expand and grow
the business development and sales and marketing groups. The Company hired 51
new sales and marketing professionals between the first quarter of 1999 and the
first quarter of 2000.
6
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General and administrative expenses increased in the period-over-period
comparison primarily due to the build-out of the Company's corporate
infrastructure which includes finance, treasury, legal, human resources,
technical support and executive personnel. As a result of the foregoing,
selling, general and administrative expenses increased as a percentage of
revenues to 42.5% in the current year period from 32.5% in the prior-year
period.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $0.8 million, or 72.4%, to $2.0
million in first quarter of 2000 from $1.2 million in the prior-year quarter.
Research and development expenses increased as a percentage of revenues from
3.7% in the first quarter of 1999 to 4.4% in the current year quarter primarily
due to the Company's increased investment in the Loyalty Lab by hiring 24
additional developers between the first quarter of 1999 and the first quarter of
2000.
TECHNOLOGY SOLUTIONS COMPANY CORPORATE SERVICES EXPENSES
Technology Solutions Company (TSC) corporate services expenses decreased
$0.9 million, or 29.9%, to $2.2 million in the first quarter of 2000 from $3.1
million in the prior-year quarter. Technology Solutions Company corporate
services expenses decreased as a percentage of total revenues to 4.8% in the
current year quarter from 10.0% in the prior-year quarter primarily due to the
elimination of the TSC senior management salary allocation to the Company in the
current year quarter.
GOODWILL AMORTIZATION
Goodwill amortization expenses remained relatively flat at $1.3 million in
both the first quarters of 2000 and 1999, respectively. Goodwill amortization as
a percentage of revenues declined in the first quarter of 2000 to 2.7% from 4.0%
in the prior-year quarter primarily due to the increase in revenues in the
current year quarter over the prior-year quarter.
OTHER INCOME (EXPENSE)
The Company recognized nonoperating other income of $0.5 million in the
first quarter of 2000 compared to a nonoperating other loss of $0.1 million in
the prior-year quarter. The $0.6 million increase in nonoperating other income
is primarily due to a higher average balance in cash and cash equivalents in the
current-year period over the prior-year period.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased to $0.2 million in the first
quarter of 2000 compared to $0.7 million in the prior-year quarter.
Quarter-over-quarter the effective tax rate remained essentially flat at
approximately 50%.
7
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LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's principal capital requirements are to fund working capital
needs, capital expenditures and other investments in order to support revenue
growth. Prior to the February 15, 2000 spin-off from Technology Solutions
Company (TSC), these capital requirements were satisfied by funds provided by
TSC. TSC has performed cash management services for the Company, whereby the
Company's cash flow was directed to TSC, who in turn provided cash to the
Company to fund operating expenses and capital expenditures. Following the
spin-off, the Company no longer participates in TSC's cash management system,
and TSC no longer provides funds to the Company to finance its operations or
provide guarantees (except as described below) of its financial or other
obligations.
Net cash used in operations was $0.8 million in the first quarter of 2000,
compared with $9.7 million cash used in operations in the prior-year quarter.
The primary sources of cash from operations in the first quarter of 2000 include
$3.0 million from accounts payable, $1.9 million from depreciation and
amortization and $1.4 million from other current liabilities. The primary uses
of cash from operations include a $5.4 million increase in receivables and a
$2.6 million increase in deferred income taxes. The increase in receivables was
mainly due to growth in revenues. Unbilled revenues increased from $6.6 million
at December 31, 1999 to $13.7 million at March 31, 2000. Receivables related to
amounts billed to clients decreased from $39.6 million at December 31, 1999 to
$37.6 million at March 31, 2000. The increase in unbilled revenues resulted from
an increase in contracts that were invoiced based on the completion of phases of
a project as opposed to our standard monthly billing. This trend may continue in
the future. The primary sources of cash from operations in the prior-year
quarter were $1.9 million in depreciation and amortization, and $0.8 million in
other current liabilities offset by uses of $9.1 million in receivables, $2.2
million in deferred income taxes and $0.8 million in other current assets.
Capital expenditures for computer, furniture, equipment and leasehold
improvements for the period ended March 31, 2000 increased to $2.8 million from
$1.9 million in the prior-year period. Total capital expenditures are expected
to approximate between $15-$20 million in calendar year 2000, with the majority
of expenditures expected to occur over the second and third quarters of the
year. Actual expenditures may vary as leases are being pursued as a possible
alternative to purchasing assets.
Net cash provided by financing activities increased $22.0 million to $34.7
million in the current year quarter from $12.7 million in the prior-year
quarter. Cash from financing increased primarily as a result of an additional
$20 million cash contribution from Technology Solutions Company as part of the
spin-off on February 15, 2000. In addition, the Company received $8.4 million in
the first quarter of 2000 from the sale of 2.5 million shares of common stock.
Also, in connection with the spin-off, the Company has entered into a $10
million revolving credit facility with Bank of America to provide the cash
needed for short term operating obligations. Technology Solutions Company has
agreed to guarantee obligations under the facility through December 31, 2000.
The borrowings under the revolving credit facility bear interest at a rate of
LIBOR plus .75%. The credit revolving facility contains customary
representations, warranties, covenants and default provisions, including working
capital commitments and debt to equity ratios. To date, the Company has not been
required to use the credit facility to fund operating requirements.
On April 18, 2000, the Company signed a letter of intent with Technology
Crossover Ventures (TCV) to issue 2 million shares of common stock at $13.50 per
share, the closing market price on the signing date, for an investment of $27
million in eLoyalty. The issuance of stock is expected to close at the end of
the waiting period for the Hart-Scott-Rodino filing. The Company will use the
funding to continue its market expansion, build out infrastructure to support
its operations and to aggressively launch its application service provider model
with the newly announced Loyalty Foundation offering.
8
<PAGE> 11
The securities to be sold to TCV by the Company will not be registered
under the Securities Act of 1933, as amended, and may not be offered or sold in
the United States absent registration or an exemption from registration
requirements. Pursuant to the letter of intent, the Company will grant to TCV
registration rights customary for this transaction.
TCV is a venture capital firm based in Palo Alto, California. Jay Hoag, a
member of the Board of Directors of eLoyalty, is a general partner of TCV. At
March 31, 2000, TCV owned approximately 1.7 million shares, or 3.6% of shares
issued and outstanding.
On May 12, 2000, the Board of Directors approved the eLoyalty 2000 Stock
Incentive Plan. The plan is broadly based and is substantially identical to the
1999 Stock Incentive Plan, except that current employees at or above the level
of Senior Vice President and all Directors will be excluded from participation.
Option grants under the plan will generally be made at market prices and have
vesting periods of one to five years. A total of 2,400,000 shares of eLoyalty
common stock will be reserved and held available for issuance under the plan.
The purpose of the plan is to use equity incentives to help attract, retain, and
reward employees in a highly competitive market and eLoyalty believes equity
incentives are an important employee benefit.
LIQUIDITY
At March 31, 2000 the Company had cash and equivalents of $45.2 million, an
increase of $31.8 million from December 31, 1999, primarily due to increased
cash from financing activities as discussed earlier.
Management believes that current cash and cash equivalents anticipated TCV
stock sale, the revolving credit facility and cash flow from operations should
be sufficient to satisfy the Company's cash requirements for the foreseeable
future. The Company may obtain additional equity financing in 2000 through a
public offering. In addition, the Company may obtain additional capital through
a private placement of equity with strategic or other investors or through
additional debt financing. Management believes that in the future the Company
will be able to access the capital markets on terms and in amounts that will be
satisfactory to the Company, although there can be no assurance in that regard.
9
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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, 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. The Company
anticipates that the adoption of SFAS No. 133 will not have a significant effect
on our results of operations, financial position or cash flows.
The U.S. Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"),
which provides the SEC's views in applying generally accepted accounting
principles to selected revenue recognition issues. Adoption of SAB 101 is
required in the second quarter of 2000. The Company anticipates that the
adoption of SAB 101 will not have a significant effect on our results of
operations, financial position or cash flows.
YEAR 2000 ISSUE
The Company did not experience any significant Year 2000 disruptions and
none of the Company's suppliers or vendors have experienced Year 2000
disruptions that have had a significant impact on the Company.
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 periods ended March 31, 2000 and 1999, 23.5% and 24.7%,
respectively, of our revenues were 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 revenues 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.
- -------------------------------------------------------------------------------
The preceding discussion and other financial information in this Form 10-Q
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 and transitional service
agreements with Technology Solutions Company. For additional information refer
to the Company's Form 10-K filing for the calendar year ended December 31, 1999.
10
<PAGE> 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in various pending or threatened claims in the
normal course of business. Management believes that losses, if any, arising from
such claims will not have a material adverse affect on the Company's financial
position, results of operations or cash flows.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
The Company filed Form 8-K under Item 5 on April 25, 2000 which
announced the issuance of 2 million shares of common stock to
Technology Crossover Ventures at $13.50, the closing market price on
the signing date.
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on May 12, 2000.
eLOYALTY CORPORATION
/s/ TIMOTHY J. CUNNINGHAM Date: May 12, 2000
- ------------------------------
Timothy J. Cunningham
CHIEF FINANCIAL OFFICER
12
<PAGE> 15
INDEX TO EXHIBITS
Exhibit Number Exhibit Description
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 45,243
<SECURITIES> 9,380
<RECEIVABLES> 51,281
<ALLOWANCES> 2,646
<INVENTORY> 0
<CURRENT-ASSETS> 119,815
<PP&E> 8,112
<DEPRECIATION> 3,666
<TOTAL-ASSETS> 139,364
<CURRENT-LIABILITIES> 30,438
<BONDS> 0
0
0
<COMMON> 471
<OTHER-SE> 108,455
<TOTAL-LIABILITY-AND-EQUITY> 139,364
<SALES> 46,179
<TOTAL-REVENUES> 46,179
<CGS> 0
<TOTAL-COSTS> 46,312
<OTHER-EXPENSES> (461)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
<INCOME-PRETAX> 313
<INCOME-TAX> 157
<INCOME-CONTINUING> 156
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 156
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
