<PAGE> 1
REGISTRATION STATEMENT NO. 333-94293
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 1, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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>
205 NORTH MICHIGAN AVENUE
SUITE 1500
CHICAGO, ILLINOIS 60601
(312) 228-4500
(Address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
KELLY D. CONWAY
ELOYALTY CORPORATION
205 NORTH MICHIGAN AVENUE
SUITE 1500
CHICAGO, ILLINOIS 60601
(312) 228-4500
(Name, address, including zip code and telephone number, including area code, of
agent for service)
---------------------
Please Send Copies of All Communications To:
<TABLE>
<S> <C>
JOHN M. O'HARE
PAUL R. PETERSON STEVEN SUTHERLAND
TECHNOLOGY SOLUTIONS COMPANY SIDLEY & AUSTIN
205 NORTH MICHIGAN AVENUE BANK ONE PLAZA
SUITE 1500 10 SOUTH DEARBORN STREET
CHICAGO, ILLINOIS 60601 CHICAGO, ILLINOIS 60603
(312) 228-4500 (312) 853-7000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
[TSC LETTERHEAD]
February , 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 will trade on
The Nasdaq National Market under the symbol "ELOY." The spin-off will occur on
or about February , 2000.
TSC will continue to be a public company and TSC common stock will continue
to trade on The Nasdaq National Market under the symbol "TSCC." TSC will focus
on its remaining business, the E-Solutions division. The E-Solutions division
provides consulting and systems integration services that help companies apply
technology to improve the way they do business, specifically in the areas of
eCommerce, supply chain management, computer based training and resource
planning.
If you own TSC common stock as of the close of business on February ,
2000, you will receive one share of eLoyalty common stock for every one share of
TSC common stock you own at that time. You should receive your eLoyalty shares
shortly after February , 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 received a ruling from the IRS that the spin-off will be tax-free to TSC and
its stockholders.
This information statement/prospectus 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 LOGO]
February , 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 Technology Solutions Company Board of
Directors announced its decision to spin-off eLoyalty into a separate, publicly
traded company. If you own Technology Solutions Company common stock on the
record date of February , 2000 you will become a stockholder in eLoyalty as
well as retain your ownership of Technology Solutions Company.
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 design solutions to help companies build loyalty across the various
ways that companies communicate with their customers;
- We offer a broad knowledge of electronic customer relationship management
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 improves the effectiveness of
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/prospectus 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 adapt to rapid technology 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
THE MATERIAL IN THIS INFORMATION STATEMENT/PROSPECTUS 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.
SUBJECT TO COMPLETION, DATED FEBRUARY 1, 2000
INFORMATION STATEMENT/PROSPECTUS
[ELOYALTY LOGO]
eLOYALTY CORPORATION
COMMON STOCK
We are furnishing you with this information statement/prospectus in
connection with the spin-off by Technology Solutions Company of all of the
outstanding shares of common stock of eLoyalty Corporation owned by Technology
Solutions Company to stockholders of Technology Solutions Company.
Technology Solutions Company will accomplish the spin-off by distributing
all issued and outstanding shares of our common stock owned by Technology
Solutions Company to holders of record of Technology Solutions Company common
stock. The distribution of eLoyalty common stock will be made on February ,
2000 to holders of record of Technology Solutions Company common stock at the
close of business on February , 2000. This spin-off will be accomplished
through a distribution of one share of common stock of eLoyalty for every one
share of Technology Solutions Company common stock. NO CONSIDERATION WILL BE
PAYABLE BY TECHNOLOGY SOLUTIONS COMPANY STOCKHOLDERS FOR THE ELOYALTY SHARES,
NOR WILL THEY BE REQUIRED TO SURRENDER OR EXCHANGE SHARES OF TECHNOLOGY
SOLUTIONS COMPANY 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. eLoyalty common stock has been approved for listing on
The Nasdaq National Market under the symbol "ELOY," subject to official notice
of issuance.
IN REVIEWING THIS INFORMATION STATEMENT/PROSPECTUS, YOU SHOULD CAREFULLY
CONSIDER THE MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" COMMENCING ON
PAGE 9.
---------------------
WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS INFORMATION STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
---------------------
THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS IS FEBRUARY , 2000
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 9
The Spin-Off................................................ 23
eLoyalty's Business......................................... 29
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 45
eLoyalty Capitalization..................................... 61
eLoyalty Financing.......................................... 62
eLoyalty Selected Financial Data............................ 63
eLoyalty's Relationship with Technology Solutions Company
After the Spin-Off........................................ 65
eLoyalty's Management....................................... 71
Ownership of eLoyalty Common Stock by Certain Beneficial
Owners.................................................... 80
Description of eLoyalty Capital Stock....................... 81
Certain Transactions........................................ 90
eLoyalty's 2001 Annual Meeting of Stockholders.............. 91
Legal Matters............................................... 91
Experts..................................................... 91
Additional Information...................................... 92
Index to Financial Statements and Schedule.................. F-1
Schedules................................................... S-1
Annex A -- Opinion of Credit Suisse First Boston............ A-1
</TABLE>
Until , 2000, all dealers that effect transactions in these
securities may be required to deliver this information statement/prospectus.
i
<PAGE> 6
SUMMARY
This summary highlights selected information from this information
statement/prospectus, 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/prospectus, "eLoyalty," "we," "our" and "us"
each refers to eLoyalty Corporation and the business we conducted as a division
of Technology Solutions Company.
QUESTIONS AND ANSWERS ABOUT ELOYALTY AND THE SPIN-OFF
What is the spin-off?........ The spin-off is designed to separate Technology
Solutions Company's E-Solutions and eLoyalty
businesses into separate publicly traded
companies. Technology Solutions Company will
accomplish the spin-off by distributing to
Technology Solutions Company stockholders as a
dividend all of the outstanding common stock of
eLoyalty owned by Technology Solutions Company.
For every share of Technology Solutions Company
common stock that you own of record on February
, 2000 you will receive one share of eLoyalty
common stock. For example, if you own 200 shares
of Technology Solutions Company common stock on
the record date, you will receive 200 shares of
eLoyalty common stock in the spin-off.
Why is Technology Solutions
Company effecting the
spin-off?.................. Technology Solutions Company's board of directors
and management believe that separating eLoyalty
from the rest of Technology Solutions Company's
business will allow both Technology Solutions
Company and eLoyalty to:
- focus their attention and financial
resources on their respective businesses;
- pursue different strategies;
- react quickly to changing market
environments;
- focus on each company's own strategic
plan;
- develop incentive programs tailored to
their own business; and
- have greater capital planning flexibility
and simplify their organizational and
internal reporting structures.
What is the business of
eLoyalty?.................... eLoyalty is a management consulting and
information technology services company that
provides solutions designed to improve customer
relationships for our clients.
eLoyalty is currently a subsidiary of Technology
Solutions Company and will become an independent
publicly traded company upon completion of the
spin-off.
What are customer
relationships?............... Companies build relationships with their
customers through a chain of events including
marketing, sales and post sale customer service.
During this chain of events, companies
communicate and interact with their customers in
a variety of different ways including:
- person to person;
- over the Internet;
1
<PAGE> 7
- by telephone;
- by e-mail; and
- by fax.
We believe the complexity increases as the
customer purchases more than one product or
service. Therefore, large companies are often
organized into separate product divisions that
communicate with customers independently of other
divisions. In addition, we believe each division
commonly separates the management of each
communication with the customer by creating
separate marketing, sales and customer service
groups. Furthermore, each of these groups may
then focus separate teams of employees (for
instance field sales force, eCommerce group, call
center, etc.) to respond to the different ways
companies interact with their customers. In many
cases these teams may have overlapping or
conflicting goals.
Companies may establish different policies,
personnel and management of customer
relationships in each distinct area. This
sometimes results in the purchase of different
software products to support each separate
business aim. In our experience, these software
products are not compatible with each other
without customization and technology integration.
The internal business and technology
infrastructure may serve to manage each function
of the company and the result can be a fragmented
picture of each customer.
The effect for the customer is the appearance of
a disjointed organization that does not fully
recognize the customer's specific needs. This
lack of understanding can lead to companies
losing their customers.
Why is it important to
improve customer
relationships?............. Improved customer relationships can lead to
higher revenues and improved profitability for
companies. Companies today are increasingly aware
of the significant financial impact associated
with losing high value customers, particularly in
the early stages of the relationship. 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."
What are loyalty
solutions?................... A loyalty solution is a combination of business
strategy and technology integration that seeks to
improve customer relationships. A loyalty
solution focuses on:
- improving the efficiency and effectiveness
of the communications with the customer;
and
- taking advantage of customer interactions
to sell more products and services to
customers.
We believe that several different and specialized
skills are required to create a loyalty solution.
These skills include:
- strategic business consulting to define a
company's policies for managing customers
in each division and group within the
organization;
2
<PAGE> 8
- technical knowledge of the different
products that a company needs to
communicate with their customers using the
Internet, telephone, e-mail and fax;
- integration techniques to enable each of
these software products to be tied
together; and
- ongoing support of their loyalty solution
to meet changing business requirements and
emerging technology.
What is new about loyalty
solutions?................. eLoyalty believes that loyalty solutions are the
next step in the customer relationship management
or CRM market. This market refers to consulting
services and software products that focus on
helping a company manage communications with its
customers.
With the emergence of the Internet, managing
customer relationships has become more complex.
The Internet is available at all times of the day
and night and almost anywhere in the world. This
freedom of access can create an expectation with
customers that they should be able to communicate
with any part of a company about any matter
relating to their products or services at any
time. To meet these new expectations, a company
needs to link their existing customer
relationship management solution with this new
electronic environment.
We define this market opportunity as electronic
customer relationship management or eCRM.
Electronic customer relationship management is an
expansion of customer relationship management to
further include the Internet, e-mail and web-chat
across each division of a company. We view a
loyalty solution as an electronic customer
relationship management business and technology
solution that is designed to:
- help companies build lasting relationships
with their customers;
- maximize the efficiency and effectiveness
of customer interactions; and
- capitalize on selling opportunities based
on customer information gathered during
these interactions.
What are eLoyalty's key
objectives?.................. eLoyalty's objective is to be the leading
international provider of loyalty solutions. We
intend to substantially increase our revenues and
profitability and to create an international
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 awareness;
- to invest in operational and management
systems; and
3
<PAGE> 9
- to expand our international presence.
What will be the relationship
between eLoyalty and
Technology Solutions
Company after the
spin-off?.................. After the spin-off, Technology Solutions Company
will not own any of our common stock. Technology
Solutions Company and eLoyalty will enter into
agreements in connection with the spin-off to
allocate responsibility for obligations arising
prior to the spin-off and for some obligations
that might arise in the future. Technology
Solutions Company will retain responsibility for
liabilities and obligations relating to its
business and we will assume responsibility for
liabilities and obligations relating to our
business. For a more complete discussion of the
obligations of eLoyalty and Technology Solutions
Company to each other after the spin-off, 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 Technology Solutions
Company stock certificates to receive eLoyalty
shares. Our transfer agent will send to you your
eLoyalty share certificates shortly after
February , 2000. The number of shares of
Technology Solutions Company 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 Technology Solutions Company
shares in your own name, your share certificates
will be mailed to you on or about February ,
2000. You should allow several days for the mail
to reach you. If you hold your Technology
Solutions Company shares through your
stockbroker, bank or other nominee, you are
probably not a stockholder of record. Your
receipt of eLoyalty shares depends on your
arrangements with the nominee that holds your
Technology Solutions Company shares for you. For
a more complete discussion of how the spin-off
will be accomplished, 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 Technology Solutions
Company and its United States stockholders.
Technology Solutions Company has received that
ruling (which has been received). 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 Technology Solutions
Company common stock.
Where will my shares of our
common stock trade?........ Currently, there is no public market for eLoyalty
common stock. eLoyalty common stock has been
approved for listing on The
4
<PAGE> 10
Nasdaq National Market under the symbol "ELOY,"
subject to official notice of issuance. We expect
that a "when-issued" trading market for eLoyalty
common stock will develop prior to February ,
2000, and that "regular-way" trading will begin
on that date. For a more complete discussion of
the public market for our shares following the
spin-off, see "The Spin-Off -- Market for
eLoyalty Common Stock."
What will happen to the
listing of Technology
Solutions Company's shares
on The Nasdaq National
Market?.................... Technology Solutions Company common stock will
continue to be listed on The Nasdaq National
Market under the symbol "TSCC." Technology
Solutions Company 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, Technology
Solutions Company 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: 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: Timothy J. Cunningham
(312) 228-4540
[email protected]
After the spin-off, the transfer agent and
registrar for the eLoyalty common stock will be
ChaseMellon Shareholder Services, L.L.C.
5
<PAGE> 11
RECENT DEVELOPMENTS
On January 26, 2000 we announced operating income of $0.3 million on
revenues of $38.4 million for the three months ended December 31, 1999.
eLOYALTY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE TWELVE MONTHS
MONTHS ENDED ENDED
DECEMBER 31, DECEMBER 31,
----------------- ---------------------
1999 1998 1999 1998
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Revenues................................................ $38,351 $27,550 $146,003 $105,235
Revenues less project personnel......................... 18,525 14,327 73,591 54,548
Operating income (loss)................................. 294 (1,234) 8,042 2,718
Net (loss) income....................................... $ (28) $ (947) $ 4,058 $ 1,067
Basic net (loss) income per common share................ $ (0.00) $ (0.02) $ 0.10 $ 0.03
Diluted net (loss) income per common share.............. $ (0.00) $ (0.02) $ 0.08 $ 0.02
Shares used to calculate basic net (loss) income per
share (in millions)(1)................................ 41.4 41.4 41.4 41.4
Shares used to calculate diluted net (loss) income per
share (in millions)(1)................................ 41.4 41.4 48.0 46.6
</TABLE>
- ---------------
(1) In December 1999, eLoyalty issued 41.4 million shares to Technology
Solutions Company. Basic earnings per share have been computed by dividing
the net income/(loss) for each period presented by the 41.4 million shares.
Diluted net earnings per share was computed by dividing the net
income/(loss) for each period presented by the 41.4 million shares plus the
estimated effect of dilutive stock options using the "treasury stock"
method. See Note 8 to the Notes to Combined Financial Statements for a
discussion of stock options.
6
<PAGE> 12
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/prospectus. 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/prospectus. They should be read in
conjunction with those financial statements and the notes. The statement of
operations data for the nine month periods ended September 30, 1999 and 1998 and
for the seven month period ended December 31, 1997 and for years ended May 31,
1995 and 1994 and the balance sheet data as of September 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, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE SEVEN
MONTH MONTH PERIODS
PERIODS ENDED ENDED
SEPTEMBER 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).......................... $107,652 $77,685 $64,415 $43,668 $84,488 $43,181 $26,516 $6,132 $1,333
Revenues less project personnel(1)... $ 55,066 $40,221 $33,113 $21,339 $43,159 $25,103 $14,842 $2,995 $ 618
Operating income (loss)(1, 2)........ $ 7,748 $ 3,952 $ (230) $ 911 $ 4,259 $ 4,808 $ 4,907 $ (179) $ (101)
Net income (loss)(1, 2).............. $ 4,086 $ 2,014 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050 $ (128) $ 2
Basic net income (loss) per common
share(3)........................... $ 0.10 $ 0.05 $ (0.01) $ 0.01 $ 0.05 $ 0.07 $ 0.07 $(0.00) $ 0.00
Diluted net income (loss) per common
share(3)........................... $ 0.09 $ 0.04 $ (0.01) $ 0.01 $ 0.05 $ 0.06 $ 0.07 $(0.00) $ 0.00
Shares used to calculate basic net
income (loss) per share (in
millions)(3)....................... 41.4 41.4 41.4 41.4 41.4 41.4 41.4 41.4 41.4
Shares used to calculate diluted net
income (loss) per share (in
millions)(3)....................... 47.6 46.5 41.4 45.8 46.8 46.6 45.5 41.4 46.0
</TABLE>
eLOYALTY
BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $10,654 $ 4,411
Working capital............................................. $51,932 $26,231
Total assets................................................ $92,792 $63,904
Stockholders' Equity........................................ $71,289 $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 $3,748, $2,704, $2,450, $1,856, $3,201 and
$376 for the nine month periods ended September 30, 1999 and 1998, the seven
month periods ended December 31, 1998 and 1997, and the years ended May 31,
1998
7
<PAGE> 13
and 1997, respectively, and amortization of capitalized software to be sold
of $320, $447, $206, $354 and $110 for the nine months ended September 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 nine month period
ended September 30, 1999 and the years ended May 31, 1996, 1995 and 1994.
(3) In December 1999, eLoyalty issued 41.4 million shares to Technology
Solutions Company. Basic earnings per share have been computed by dividing
the net income/(loss) for each period presented by the 41.4 million shares.
Diluted net earnings per share was computed by dividing the net
income/(loss) for each period presented by the 41.4 million shares plus the
estimated effect of dilutive stock options using the "treasury stock"
method. See Note 8 to the Notes to Combined Financial Statements for a
discussion of stock options.
All other share numbers in this information statement/prospectus, unless we
specifically state otherwise, assume that we have issued:
- 41.4 million shares of our common stock to Technology Solutions Company;
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 eLoyalty shares of common stock which Technology Solutions
Company will distribute in the spin-off will be equal to the number of common
shares of TSC outstanding as of the record date for the spin-off. 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 Technology Solutions Company when we issue
shares to these investors does not equal 41.4 million. After the adjustment each
of Sutter Hill Ventures and Technology Crossover Ventures will own about 2.75%
of our outstanding common stock immediately after the spin-off. 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 Technology
Solutions Company 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 first options under that plan.
------------------------
eLoyalty, 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.
------------------------
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RISK FACTORS
You should carefully consider each of the following risks and all of the
other information in this information statement/prospectus. 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.
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/prospectus 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/prospectus also contains
forward-looking statements attributed to third parties relating to their
estimates regarding, among other things, the growth of the customer relationship
management or 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/prospectus.
RISKS RELATING TO THE SPIN-OFF
We are subject to the following risks relating to the spin-off.
WE COULD INCUR SIGNIFICANT TAX LIABILITY IF THE CONTRIBUTION OR THE SPIN-OFF
DOES NOT QUALIFY FOR TAX FREE TREATMENT.
Technology Solutions Company and the Technology Solutions Company
stockholders could incur significant tax liability if the contribution of the
eLoyalty business or the spin-off does not qualify for tax-free treatment.
Should this occur, we could be jointly and severally liable for, and could be
required to indemnify and pay Technology Solutions Company for, taxes and
resulting liabilities imposed upon Technology Solutions Company with respect to
the contribution or the spin-off.
Technology Solutions Company has received a private letter ruling from the
IRS indicating that the contribution of the eLoyalty business assets by
Technology Solutions Company to eLoyalty will be tax-free to Technology
Solutions Company and the spin-off by Technology Solutions Company of all of the
shares of eLoyalty common stock owned by Technology Solutions Company to the
stockholders of Technology Solutions Company will not be taxable to Technology
Solutions Company or its stockholders. For a more complete discussion of the tax
consequences of the spin-off being taxable, see "The Spin-Off -- Material
Federal Tax Consequences." The ruling is based upon various factual
representations and assumptions, as well as upon undertakings that Technology
Solutions Company and we have made. 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. However, the ruling received from the IRS
might be invalid if:
- 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.
In addition, the spin-off may become taxable to Technology Solutions Company if:
- acquisitions involving 50% or more of eLoyalty stock (by vote or value)
are found to be part of a plan (or a series of related transactions) of
which the spin-off is a part; or
- acquisitions involving 50% or more of Technology Solutions Company stock
(by vote or value) are found to be part of a plan (or a series of related
transactions) of which the spin-off is a part.
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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 Technology Solutions Company (in the case of
the contribution or the spin-off) and Technology Solutions Company stockholders
(in the case of the spin-off only). In general, Technology Solutions Company
would be subject to tax as if it had sold the eLoyalty business in a taxable
sale and the Technology Solutions Company shareholders would generally 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. For a more complete
discussion of the tax consequences of the spin-off being taxable, see "The
Spin-Off -- Material Federal Tax Consequences."
Although the taxes described above generally would be imposed on Technology
Solutions Company and its stockholders, we would be liable for all or a portion
of such taxes in the circumstances described below. First, as part of the
spin-off, Technology Solutions Company and we will enter into a Tax Sharing and
Disaffiliation Agreement. This agreement will generally allocate, between
Technology Solutions Company and us, the taxes and liabilities relating to the
failure of the contribution or the spin-off to be tax-free. We will be liable
for such taxes or liabilities imposed as a result of:
- any inaccuracy or breach of specified representations, warranties or
covenants in the IRS ruling and the materials submitted to the IRS in
connection with that ruling, in each case, describing the eLoyalty Group
(generally, our affiliates and us) or the eLoyalty business;
- any action (or failure to take any reasonably available action) by any
member of the eLoyalty Group; or
- any acquisition or other transaction involving the capital stock of
eLoyalty (other than the distribution of the capital stock of eLoyalty in
the spin-off).
However, Technology Solutions Company will be required to indemnify us for
such taxes or liabilities imposed as a result of:
- any inaccuracy or breach of specified representations, warranties or
covenants in the IRS ruling and the materials submitted to the IRS in
connection with that ruling, in each case, describing the Technology
Solutions Company Group (generally, Technology Solutions Company and its
affiliates) or the business retained by Technology Solutions Company;
- any action (or failure to take any reasonably available action) by any
member of the Technology Solutions Company Group; or
- any acquisition or other transaction involving the capital stock of
Technology Solutions Company (other than the distribution of the capital
stock of eLoyalty in the spin-off).
For a more complete discussion of the circumstance where Technology Solutions
Company and eLoyalty will be liable for taxes paid by the other, see "eLoyalty's
Relationship with Technology Solutions Company After the Spin-Off -- Tax Sharing
and Disaffiliation Agreement."
The Tax Sharing and Disaffiliation Agreement also contains provisions where
we and Technology Solutions Company share taxes and other liabilities resulting
from the failure of the contribution or spin-off to be tax free where neither we
nor Technology Solutions Company otherwise has liability under the agreement or
where both otherwise have liability under the agreement. For a more complete
discussion of the circumstance where Technology Solutions Company and eLoyalty
will be liable for taxes paid by the other, see "eLoyalty's Relationship with
Technology Solutions Company After the Spin-Off -- Tax Sharing and
Disaffiliation Agreement."
Second, aside from the Tax Sharing and Disaffiliation Agreement, under
United States federal income tax laws, we and Technology Solutions Company would
be jointly and severally liable for Technology Solutions Company's federal
income taxes resulting from the spin-off being taxable. This means that even if
we do not have to indemnify Technology Solutions Company 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.
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OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY AND, THEREFORE, MAY NOT BE RELIABLE AS AN INDICATOR OF OUR
HISTORICAL OR FUTURE RESULTS
The historical financial information we have included in this information
statement/prospectus 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
Technology Solutions Company 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 Technology Solutions Company,
including tax, employee, transitional service matters and establishing
new offices.
For additional information about our past financial performance, 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 Technology Solutions
Company 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 Technology Solutions Company or that
we will obtain the same benefits. We will also lease and sub-lease office
facilities from Technology Solutions Company. 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
Technology Solutions Company. 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
Technology Solutions Company. For more information about these arrangements, see
"eLoyalty's Relationship with Technology Solutions Company After the Spin-Off."
WE WILL NOT BE ABLE TO RELY ON TECHNOLOGY SOLUTIONS COMPANY TO FUND FUTURE
CAPITAL REQUIREMENTS AND, THEREFORE, WE MAY NOT BE ABLE TO PROVIDE FOR OUR
CAPITAL NEEDS
In the past, our capital needs have been satisfied by Technology Solutions
Company. However, following the spin-off, Technology Solutions Company will no
longer provide funds to finance our working capital or other cash requirements
and (except as described under "eLoyalty Financing") will not guarantee our
financial or other obligations. 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 following
sources will provide sufficient capital to satisfy our cash requirements for the
foreseeable future:
- the net proceeds from the investment by the venture capital investors
described under "Certain Transactions;"
- current cash, cash equivalents and additional cash to be contributed by
Technology Solutions Company to eLoyalty prior to the spin-off;
- the revolving credit facility described under "eLoyalty Financing;" and
- cash flow from operations after the spin-off.
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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
some actions such as pay dividends, incur additional indebtedness or create
liens. We may not be able to obtain financing with interest rates as favorable
as those historically enjoyed by Technology Solutions Company. For a more
complete discussion of our plans to obtain adequate financing, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
IF WE ARE UNABLE TO OBTAIN 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 some
of Technology Solutions Company'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 from our vendors could make it significantly
more difficult or expensive to meet our obligations to our clients.
CREDITORS OF TECHNOLOGY SOLUTIONS COMPANY 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 Technology Solutions Company, such as a trustee in bankruptcy, were
to find that, among other reasons, at the time of the spin-off, Technology
Solutions Company or eLoyalty,
- was insolvent,
- was rendered insolvent by reason of the spin-off,
- was engaged in a business or transaction for which Technology Solutions
Company'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 Technology
Solutions Company or eLoyalty, as the case may be, to fund 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 Technology Solutions Company 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. Technology Solutions
Company and eLoyalty believe that each company will be solvent after the
spin-off.
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. We do not intend to obtain a
legal opinion that the dividend is valid
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under Delaware law but intend to rely on financial calculations by our officers,
as permitted by Delaware law.
THE COMBINED POST-SPIN-OFF VALUE OF TECHNOLOGY SOLUTIONS COMPANY AND ELOYALTY
SHARES MAY NOT EQUAL OR EXCEED THE PRE-SPIN-OFF VALUE OF TECHNOLOGY SOLUTIONS
COMPANY SHARES
After the spin-off, Technology Solutions Company common stock will continue
to be listed and traded on The Nasdaq National Market. eLoyalty common stock
will be listed and traded on The Nasdaq National Market. We cannot assure you
that the combined trading prices of Technology Solutions Company common stock
and eLoyalty common stock after the spin-off will be equal to or greater than
the trading price of Technology Solutions Company common stock prior to the
spin-off. Until the market has fully evaluated the business of Technology
Solutions Company without the business of eLoyalty, the price at which
Technology Solutions Company 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 MAY FACE SIGNIFICANT RISKS
AND UNCERTAINTIES DUE TO OUR RELATIVELY LIMITED HISTORY
We commenced our business as a separate business unit within Technology
Solutions Company 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 which means that we may not have the experience
necessary handle problems in an efficient manner. These risks include our
potential inability to:
- attract, retain and motivate qualified personnel particularly given the
shortage of qualified personnel in our industry;
- increase the scale of our operations;
- maintain sufficiently high employee utilization;
- continue to develop and upgrade our solutions to satisfy the changing
needs of our clients; and
- replace the transitional services necessary for the conduct of our
business that Technology Solutions Company has agreed to provide to us
for a limited period after the completion of the spin-off.
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 38.6%
for the nine month period ended September 30, 1999 compared to the first nine
months of 1998. Our employees increased from 518 full-time employees at December
31, 1998 to 653 at September 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.
Our quarterly revenues for the year ended December 31, 1997 were $11
million, $15 million, $19 million and $19 million; for the year ended December
31, 1998 were $24 million, $26 million, $28 million and $28 million; and for the
three quarters ended September 30, 1999 were $31 million, $36 million and $40
million, respectively.
OUR INDUSTRY IS VERY COMPETITIVE AND, IF WE FAIL TO SUCCESSFULLY COMPETE, OUR
MARKET SHARE AND BUSINESS WILL BE ADVERSELY AFFECTED
The CRM market has been in existence for some time. We define the CRM
market as the consulting services and software products that focus on helping a
company manage communications with its customers. The electronic customer
relationship management or eCRM market in which we compete is an expansion of
customer CRM to further include the Internet, e-mail and web-chat across each
division of a company. The eCRM market 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
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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, Cambridge Technology Partners, Sapient
Corporation, Diamond Technology Partners and Whittman-Hart, Inc.;
- Internet and eCommerce 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 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.
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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 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
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 some 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.
WE MUST ADAPT TO RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS IN
ORDER TO MAINTAIN THE GROWTH OF OUR BUSINESS
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 knowledge;
- - enhance our current solutions;
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- - remain knowledgeable on emerging eCRM technology including the Internet,
e-mail, telephony and other 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;
- - 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.
In addition, our competitors could also learn, use and integrate software
packages developed by third-parties and develop relationships with these
third-party vendors. By offering similar solutions, these competitors could
prevent us from obtaining new clients or could cause us to lose existing
clients.
WE MUST PROTECT OUR INTELLECTUAL PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES IN
ORDER TO REMAIN COMPETITIVE IN OUR INDUSTRY
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.
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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 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 nine month period ended September 30, 1999, 22.5% 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 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.
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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 CAUSE US TO LOSE CLIENTS OR IMPAIR THE
GROWTH OF 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 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 existing business relationships or prevent us from
getting new clients:
- 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 CAUSE US TO HAVE SUBSTANTIAL, UNEXPECTED COSTS AND
DISRUPTIONS
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 Technology Solutions Company,
we will be relying on Technology Solutions Company 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 Technology Solutions Company could have a material
adverse effect on our business, financial condition or results of operations.
Technology Solutions Company 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 Technology Solutions Company is not currently aware are required and are
not completed on time, or if the cost of any required updating, modification or
replacement of Technology Solutions Company'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 cause
us to have substantial, unexpected costs and disruptions.
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 either our contingency plan or Technology Solutions Company's 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, some clients have requested and
received such warranties. In such cases, we do not
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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.
IF GROWTH IN THE USE OF THE INTERNET AND ECRM TECHNOLOGIES DECLINES, DEMAND FOR
OUR SERVICES MAY DECREASE
Internet and eCRM technologies are central to many of our solutions. Our
business depends upon continued growth in the use of these 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." As of the date of this
prospectus/information statement, an aggregate of 7,410,000 shares of our common
stock have been reserved for issuance under our stock incentive plan. On 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 will be added to the
number of shares available under that plan. As of September 30, 1999 we have
issued options to purchase an aggregate of
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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 Technology Solutions
Company options then held by our employees and directors and some of the
Technology Solutions Company options then held by Technology Solutions Company
employees and directors. As of December 31, 1999, options to purchase 4,236,768
shares of Technology Solutions Company stock granted before June 22, 1999 were
held by persons who will continue as employees or directors of Technology
Solutions Company after the spin-off, or who will not be employees or directors
of either Technology Solutions Company or eLoyalty after the spin-off. As of the
spin-off, these options will be converted into options to purchase the same
number of shares of eLoyalty stock. In addition, as of December 31, 1999,
options to purchase 3,138,385 shares of Technology Solutions Company stock held
by persons who will be employees or directors of eLoyalty after the spin-off
(and who will not also be directors of Technology Solutions Company) will be
converted as of the spin-off into a greater number of options to purchase
eLoyalty stock, based on the trading prices of Technology Solutions Company and
eLoyalty at the time of the spin-off. For a more complete discussion of how the
stock options of Technology Solutions Company and eLoyalty will be allocated to
the employees of each company, 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
500,000 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 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.
We have entered into a common stock purchase and sale agreement with Sutter
Hill Ventures and Technology Crossover Ventures. Sutter Hill Ventures is an
affiliate of Mr. Tench Coxe, who will be our chairman of the board of directors.
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 (which has been received) to the
effect that the spin-off will be tax-free to Technology Solutions Company and
its stockholders for United States federal income tax purposes and other
customary conditions. 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
that Tench Coxe will be our chairman of the board. We expect that Technology
Crossover Ventures to nominate Jay Hoag as its designee on our board.
PROVISIONS IN OUR CORPORATE DOCUMENTS, AND FEDERAL INCOME TAX CONSIDERATIONS,
COULD DELAY OR PREVENT A CHANGE IN CONTROL OF ELOYALTY, 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 eLoyalty, which could
adversely affect the price of our common stock. Our certificate of incorporation
and bylaws contain provisions that may make the acquisition of control of
eLoyalty 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 eLoyalty 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."
Some 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 Technology Solutions Company 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
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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 Technology Solutions Company 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. For a more complete discussion of the consequences of the spin-off
being taxable, 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
Technology Solutions Company was organized in 1988 and became a public
company in 1991. Technology Solutions Company's businesses originally consisted
of the design, development and implementation of custom client/server computer
systems for large corporate clients. Technology Solutions Company's first
engagements in the customer relationship management or 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 Technology Solutions Company has
evolved in related but distinct directions, which led to the establishment of
two divisions within Technology Solutions Company:
- the eLoyalty division, which represents the business formerly conducted
as the Enterprise Customer Management business unit within Technology
Solutions Company; and
- the E-Solutions division, which comprises the remaining business
currently conducted by Technology Solutions Company.
Technology Solutions Company's E-Solutions division provides consulting and
systems integration services that help companies apply technology to improve the
way they do business. The E-Solutions division specializes in the areas of
eCommerce, supply chain management, computer based training and resource
planning. Historically, the E-Solutions division has focused on the integration
of packaged software applications. Currently, E-Solutions is applying this
expertise in the high growth areas of eBusiness.
The principal market in which the E-Solutions division operates is the more
established information technology services market, which is distinct from the
market targeted by eLoyalty. As a result, eLoyalty and E-Solutions have
developed different growth characteristics and strategic priorities.
Over the past year, Technology Solutions Company'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,
Technology Solutions Company announced its intention to spin-off eLoyalty
through the tax-free distribution of eLoyalty shares to Technology Solutions
Company stockholders.
The spin-off is designed to separate the E-Solutions and eLoyalty
businesses. We expect that important benefits will accrue to Technology
Solutions Company 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 federal income tax considerations. For a
more complete discussion of restrictions on our use of our stock for
acquisitions, see "-- Material Federal Tax Consequences." The eLoyalty
business will no longer have to compete with other business units in
Technology Solutions Company 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 Technology Solutions
Company 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
Technology Solutions Company will accomplish the spin-off by distributing
all of the outstanding common stock of eLoyalty owned by Technology Solutions
Company to Technology Solutions Company stockholders as a dividend. Technology
Solutions Company's board of directors has declared the dividend necessary to
effect the spin-off. Each Technology Solutions Company stockholder of record as
of the close of business on February , 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 the stated conditions are
satisfied, we expect that the spin-off will take place on or about February ,
2000. For a more complete discussion of the conditions required for the spin-off
to occur, see "-- Conditions to the Spin-Off."
As soon as possible on or after the spin-off date, Technology Solutions
Company will deliver to the spin-off agent, as agent for Technology Solutions
Company 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 Technology Solutions Company 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 Technology Solutions Company
common stock in order to receive eLoyalty common stock. Accordingly, eLoyalty
will not receive any proceeds from the distribution of eLoyalty shares in the
spin-off.
RESULTS OF THE SPIN-OFF
After the spin-off, Technology Solutions Company and eLoyalty will be
separate, independent public companies. Our management, fundamentals, growth
characteristics and strategic priorities will be different from those of
Technology Solutions Company.
The number and identity of our stockholders immediately after the spin-off
will be the number and identity of Technology Solutions Company'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 1,228 holders of record of
our common stock and approximately 43,350,000 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.
Our board of directors has adopted a rights plan, which will entitle each
eLoyalty stockholder 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. For a more complete discussion of the shareholder rights plan, see
"Description of eLoyalty Capital Stock -- Rights Plan." Unless the context
otherwise requires, references in this information statement/prospectus to our
common stock include the related rights to be issued under our rights plan.
The spin-off will not affect the rights of the holders of outstanding
shares of Technology Solutions Company or the rights associated with those
shares.
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/prospectus, 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.
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The tax treatment of a Technology Solutions Company stockholder may vary
depending upon the stockholder's particular situation, and some Technology
Solutions Company stockholders (including insurance companies, tax-exempt
organizations, financial institutions, broker-dealers, persons who do not hold
Technology Solutions Company stock as capital assets, employees of Technology
Solutions Company, and individuals who hold Technology Solutions Company 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.
Technology Solutions Company has received 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 Technology Solutions Company or
eLoyalty upon the transfer of the eLoyalty business assets by Technology
Solutions Company to eLoyalty (and the assumption by eLoyalty of some
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 Technology Solutions Company upon
the distribution of all of its shares of eLoyalty common stock to the
stockholders of Technology Solutions Company;
- No gain or loss will be recognized by (and no amount will be included in
the income of) the Technology Solutions Company 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 Technology
Solutions Company stock will be apportioned between the Technology
Solutions Company 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 Technology Solutions Company stock
with respect to which the eLoyalty common stock will be distributed,
provided the Technology Solutions Company stock is held as a capital
asset on the date of the spin-off.
The private letter ruling is generally binding on the IRS. However, the
ruling is based upon various factual representations and assumptions, as well as
upon undertakings that Technology Solutions Company and we have agreed to. We
are not aware of any facts or circumstances that would cause the representations
and 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.
Some acquisitions of the stock of eLoyalty or Technology Solutions Company
prior to, or following, the spin-off might cause the spin-off to be taxable, for
federal income tax purposes, to Technology Solutions Company (but not its
stockholders) if the acquisitions involve, in the aggregate, 50% or more (by
vote or value) of the stock of eLoyalty or Technology Solutions Company 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 Technology Solutions Company
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 Technology Solutions Company. Such a tax
would generally be based on the excess of the gross fair market value of the
eLoyalty business over the tax basis of the assets included in that business
(which tax basis is expected to be insignificant relative to the fair market
value). If the spin-off were not to qualify for tax-free treatment for United
States 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 Technology
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Solutions Company stockholders. In general, a Technology Solutions Company
stockholder would be treated as having received a distribution equal to the fair
market value of the eLoyalty stock on the date of distribution. The distribution
would be taxed as ordinary dividend income to the extent not in excess of
Technology Solutions Company's current and accumulated earnings and profits.
Thereafter, the distribution would decrease (but not below zero) a Technology
Solutions Company stockholder's tax basis in his or her Technology Solutions
Company stock. Thereafter, the distribution would be taxed as gain from the sale
or exchange of Technology Solutions Company stock.
Under United States federal income tax laws, Technology Solutions Company
and eLoyalty would be jointly and severally liable for Technology Solutions
Company'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 Technology Solutions Company and
eLoyalty relating to tax sharing and other tax matters, including
indemnification by Technology Solutions Company 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 Technology Solutions
Company stockholder to attach to its United States federal income tax return for
the year of the spin-off a detailed statement setting forth 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, Technology Solutions
Company will provide Technology Solutions Company stockholders with the
information necessary to comply with these 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
Technology Solutions Company, will not specifically address the tax basis
allocation rules applicable to Technology Solutions Company stockholders who
hold blocks of Technology Solutions Company stock with different per share tax
bases and these stockholders should consult their own tax advisors in that
regard. ALL TECHNOLOGY SOLUTIONS COMPANY 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/ PROSPECTUS.
MARKET FOR ELOYALTY COMMON STOCK
See "Risk Factors" for a discussion of 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. Our
common stock has been approved for listing on The Nasdaq National Market under
the symbol "ELOY," subject to official notice of issuance. "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.
Technology Solutions Company 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 some 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.
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CONDITIONS TO THE SPIN-OFF
The spin-off is conditioned on, among other things, declaration of the
spin-off by the Technology Solutions Company board of directors. Other
conditions to the spin-off include:
- Technology Solutions Company's receipt of the private letter ruling from
the IRS as described under "-- Material Federal Tax Consequences (which
has been received);"
- the receipt by Technology Solutions Company's board of directors of
opinions of Technology Solutions Company's financial advisor regarding
the fairness to stockholders of Technology Solutions Company of the
spin-off and the viability of Technology Solutions Company and eLoyalty
after the spin-off (which opinions have been received);
- 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 Act and the
Securities Exchange Act of 1934 (the "Exchange Act") (which registrations
have not yet been effected); and
- approval for listing on The Nasdaq National Market of our common stock
(which approval has been received).
Even if all the conditions to the spin-off are satisfied, Technology
Solutions Company has reserved the right to amend or terminate the
reorganization agreement providing for the spin-off and the related
transactions. The Technology Solutions Company board of directors has not
attempted to identify or establish objective criteria for evaluating the
particular types of events or conditions that would cause it to consider
amending or terminating the spin-off. Although the conditions described above
may be waived by Technology Solutions Company to the extent permitted by law,
the Technology Solutions Company board of directors presently has no intention
to proceed with the spin-off unless each of these conditions is satisfied.
OPINIONS OF FINANCIAL ADVISOR
Technology Solutions Company has engaged Credit Suisse First Boston
Corporation as a financial advisor in connection with the spin-off. As provided
for in an engagement letter dated November 1, 1999, Credit Suisse First Boston
has delivered to the Technology Solutions Company board of directors its written
opinion with respect to:
- the fairness of the spin-off from a financial point of view to the
stockholders of Technology Solutions Company; and
- whether the spin-off should materially and adversely affect the ability
of Technology Solutions Company (after the completion of the spin-off)
and eLoyalty to meet their respective projected operating and capital
expenditures immediately following the spin-off through December 31, 2000
as set forth in the financial forecasts provided to Credit Suisse First
Boston by the management of Technology Solutions Company.
The Technology Solutions Company board of directors considered this opinion in
deciding to formally declare the spin-off dividend.
The full text of the Credit Suisse First Boston opinion sets forth, among
other things, assumptions made, procedures followed, matters considered and
limitations set on the scope of the review undertaken by Credit Suisse First
Boston in rendering its opinion. The full text of the opinion has been attached
as Annex I to this information statement/prospectus and is incorporated by
reference in its entirety. The Credit Suisse First Boston opinion addresses only
the fairness of the spin-off from a financial point of view to the stockholders
of Technology Solutions Company and as to whether the spin-off should materially
and adversely affect the ability of Technology Solutions Company (after the
completion of the spin-off) and eLoyalty to meet their respective projected
operating and capital expenditures immediately following the spin-off through
December 31, 2000, as set forth in the financial forecasts provided to Credit
Suisse First
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Boston by the management of Technology Solutions Company. The opinion is
addressed to the Technology Solutions Company board of directors and does not
constitute a recommendation to any stockholder of Technology Solutions Company
as to whether such stockholder should buy, sell or continue to hold shares of
Technology Solutions Company common stock or, following the spin-off, eLoyalty
common stock.
As provided for in the engagement letter, Technology Solutions Company has
agreed to pay Credit Suisse First Boston a customary fee, which will be paid
upon the completion of the spin-off. Technology Solutions Company has agreed to
reimburse Credit Suisse First Boston for its out-of-pocket expenses, including
attorney's fees, incurred in connection with its engagement. Technology
Solutions Company has also agreed to indemnify Credit Suisse First Boston and
related persons against specified liabilities and expenses arising out of or in
conjunction with its rendering of services under its engagement, including
liabilities arising under the federal securities laws.
Credit Suisse First Boston was selected by the Technology Solutions Company
board of directors based on Credit Suisse First Boston's qualifications,
expertise and reputation, as well as its familiarity with Technology Solutions
Company. Credit Suisse First Boston is an internationally recognized investment
banking and advisory firm. Credit Suisse First Boston, as part of its investment
banking business, is continuously engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. In the ordinary course of its business, Credit Suisse First Boston and
its affiliates may actively trade the debt and equity securities of Technology
Solutions Company and eLoyalty for their own accounts and for the accounts of
their customers and, accordingly, may at any time hold a long or short position
in such securities.
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eLOYALTY'S BUSINESS
OUR HISTORY
eLoyalty was founded in 1994 as a business unit within Technology Solutions
Company and was incorporated in Delaware in May 1999.
Technology Solutions Company's core business originally consisted of the
design, development and implementation of custom client/server computer systems
for large corporate clients. Technology Solutions Company's first engagements in
the customer relationship management or CRM area consisted of projects at two
Fortune 500 companies which involved the identification, integration and
implementation of various software products so that these clients could better
communicate with their customers by telephone from a centralized location. These
centralized locations are commonly referred to as call centers. The first of
these projects began in 1991. Kelly Conway, eLoyalty's President and Chief
Executive Officer, was hired by Technology Solutions Company in November 1993.
Drawing upon Technology Solutions Company's experience and his own background
and knowledge, Mr. Conway led the development of Technology Solutions Company's
expertise in call center and other CRM technologies.
Mr. Conway established the call center business unit within Technology
Solutions Company 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 business unit
in 1997. In June 1999, the Enterprise Customer Management business unit was
named the eLoyalty division of Technology Solutions Company. Since 1994, this
group within Technology Solutions Company 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 electronic customer relationship management or eCRM market.
OVERVIEW
We are a management consulting and information technology services company
providing solutions that are designed to improve customer relationships for our
clients. We define these solutions as loyalty solutions.
We believe that loyalty solutions are the next step in the CRM market. The
CRM market refers to consulting services and software products designed to help
companies better communicate with their customers. The CRM market focuses
primarily on the person to person (for instance through field sales and field
service) and telephone (for instance through call center) as the means of
communication.
With the emergence of the Internet, managing customer relationships has
become more complex. The Internet is available at all times of the day and night
and almost anywhere in the world. This freedom of access can create an
expectation with customers that they should be able to communicate with any part
of a company about any matter relating to their products or services at any
time. To meet these new expectations, a company needs to link the policies and
technologies of their existing CRM solution into this new electronic
environment.
We define the market opportunity created by this business need as eCRM.
eCRM is an expansion of CRM to further include the Internet, e-mail and web-chat
across each division of a company. Our key services to build a loyalty solution
include:
- strategic and business consulting to define a company's policy for
managing customer relationships;
- technical knowledge of the software products available from third party
vendors in this area;
- proprietary software and methodologies to tie together the different
software products; and
- ongoing support to meet the changing business requirements of our clients
as well as to update their solutions as technology advances.
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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. New technologies are helping companies 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 communicate
(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 their 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 their interactions
with customers more personal and relevant to the customer. By personalizing
these contacts with their customers, companies hope to build a stronger
relationship with each customer -- a relationship that will increase that
customer's loyalty to the company's products or services. This 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 the telephone. In addition, call centers were often not
integrated with back office transaction processing systems. As a result,
significant amounts of manual processing were necessary 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, customer
expectations have increased, barriers to market entry have decreased and
competitors are only a click away. The Internet also enables companies to obtain
additional customer information and feedback at considerably reduced costs. To
meet new customer expectations, ward off competitors and make use of new
customer information, companies need to link their existing CRM solution into
this new electronic environment. We define the market opportunity created by
this business need as eCRM. eCRM is therefore an expansion of CRM to further
include the Internet, e-mail and web-chat across each division of a company.
Currently, no single software product can provide all of the capabilities
needed to effectively address the eCRM market. To see why this is true, we need
to examine the components of the eCRM market. The eCRM market can be separated
into six significant components: Channel Management, eCommerce, Customer
Segmentation, CRM Applications, Back Office and Call Center Technology.
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Companies today require these software products to be integrated into an
enterprise-wide solution that incorporates all the various ways that companies
communicate with their customers including the 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 Gartner Group, an information technology research firm, predicts
that the market for CRM services will grow from $2.9 billion in 1998 to $20.8
billion in 2003. The following diagram illustrates those six components grouped
by their functionality, as well as examples of third party vendors who provide
software in each category.
Significant Components of the eCRM Market
[COMPONENTS OF THE eCRM MARKET GRAPHIC]
CHANNEL MANAGEMENT CUSTOMER SEGMENTATION CRM APPLICATIONS
eCOMMERCE CRITICAL VOID BACK OFFICE
CALL CENTER TECHNOLOGY
eLOYALTY APPROACH
While a well-defined technical system design is needed to successfully
integrate these software products, the value of an eCRM solution is derived from
combining this technical system design with an effective business strategy. The
business strategy defines the policies for managing customer relationships and
involves grouping customers into value segments and analyzing potential customer
interactions. Business rules need to be created to define the specific actions
that should be taken each time a customer interaction occurs. The results of
these actions then need to be analyzed to ensure that the customers' loyalty has
increased due to the interaction.
A loyalty solution is an eCRM business and technology solution that is
designed to help companies build lasting relationships with their customers,
maximize the efficiency of customer interactions and capitalize on selling
opportunities based on customer information gathered during these interactions.
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THE ELOYALTY DIFFERENCE
We believe that we can be considered a leading provider of loyalty
solutions for the following reasons:
- ACTION-ORIENTED APPROACH TO CREATING LOYALTY
We help our clients by identifying appropriate customer loyalty goals,
improving customer retention, increasing up-selling and cross-selling
opportunities, reducing sales costs and increasing 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 help
organize the company's approach to its customers based on the results of
our analysis. Our approach is designed to translate the customer loyalty
goals of our clients into operational business rules. The business rules
prescribe a set of specific actions to be used by our client to help
increase customer loyalty. In essence, we work with our clients to help
them create practical steps to optimize everyday customer interactions.
- ABILITY TO DESIGN AND INTEGRATE MULTI-CHANNEL ENTERPRISE-WIDE SOLUTIONS
We provide our clients with the necessary skills to develop
enterprise-wide loyalty solutions. We understand the technology, software
applications and components across the Internet, e-mail, web-chat,
telephone and fax. We are able to design 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
design a comprehensive 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 design. To maintain
optimal operating performance, a wide breadth of knowledge 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 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.
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- 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.
This group is led by two to three Vice Presidents and complemented by a
similar number of supporting 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 100 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. This level of experience has helped
us to realize an average billing rate of $211 per hour and $215 per hour
for the nine months and three months ended September 30, 1999,
respectively.
- ABILITY TO SERVE CLIENTS ON AN INTERNATIONAL BASIS
We are an international company with a large presence in North America and
we also have offices in London, Cologne, Paris, Sydney and Toronto. We
have an established presence in Europe and are now expanding in Asia
Pacific. For the nine month period ended September 30, 1999, 22.5% 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 be the leading international provider of loyalty
solutions. We intend to substantially increase our revenues and profitability
and to create an international 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 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 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.
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
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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 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 design 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 collaborate 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 more
formal arrangements with them.
- CONTINUE TO BUILD BRAND AWARENESS
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.
- 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
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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 average tenure of our employees. As of
September 30, 1999 the average tenure of our senior management was about
52 months, Vice Presidents about 44 months and other professionals about
27 months.
- EXPAND OUR INTERNATIONAL PRESENCE
We expect our plans for international 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 an international 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 that our 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, technical system design 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 four-step methodology to translate high-level
strategy into an implementation design:
- DEFINE: Identify the specific situation of a customer at any point in
time;
- RECOGNIZE: Create rules that prescribe the actions to be taken by the
client when these specific circumstances have been identified;
- EXECUTE: Enable the client to execute these actions across any of the
various ways that companies communicate with their customers 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, organizations can influence behavior resulting in
greater customer loyalty.
Competencies
Successful loyalty solutions generally require a combined knowledge of
business strategy and technology application. To provide our clients with a
complete solution, we have developed capabilities in many key business
consulting disciplines, technology integration and system design. Our
competencies
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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
performance measures 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 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 our 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.
- TECHNICAL DESIGN AND SYSTEMS INTEGRATION -- This competency allows us to
implement the technical aspects of our loyalty solutions. We design a
loyalty solution 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
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 September 30, 1999, we had implemented
components of our Loyalty Suite to over 30 of our 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 specific 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 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 nine months and three months ended September 30, 1999, eLoyalty's
five largest clients accounted for 21.8% and 23.6% of our revenue, respectively;
our twenty largest clients accounted for 54.8% and 62.4%, respectively, of our
revenue. No single client accounted for more than 10% of our total revenue in
any quarter during that period. For the nine months ended September 30, 1999, 34
clients each accounted for over $1 million of revenues.
For the three months ended September 30, 1999, 89.9% and 51.1% of our
revenues came from clients who were also clients during the three months ended
June 30, 1999 and the three months ended September 30, 1998, respectively.
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The following is a representative list of companies for which we were
providing solutions on November 30, 1999:
- ADAC Laboratories, Inc.
- A&E Signature Services, a Division of Montgomery Wards
- Agilent Technologies, Inc.
- Allina Health System
- Allstate Insurance Company
- Axel Springer Verlag AG
- Bank of America Corporation
- British Broadcasting Corporation (BBC)
- Club Mediterranee (Club Med)
- Deutsche Telekom AG
- Federal Kemper Life Assurance Company
- General Motors Corporation
- Intuit Inc.
- Lucent Technologies, Inc.
- News Limited
- Penn Treaty American
Corporation
- Sprint Communications Company, L.P.
- Union Bank of California, N.A.
- USA Group, Inc.
- U S WEST Communications, Inc.
- Virgin Atlantic Airways Limited
- Xerox Canada Ltd.
CASE STUDIES
The following are examples of actual client services we have provided. In
each case the client has given us permission to describe the solution that we
provided for them. These case studies therefore illustrate some of the solutions
that we have created for our clients.
PENN TREATY AMERICAN CORPORATION
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 streamlined 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 technical design 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 eCommerce. 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.
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FEDERAL KEMPER LIFE ASSURANCE 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.
- By implementing a consistent technical design 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 is credited with helping our client to realize multi-million
dollar cost savings and increased sales as well as a significant
reduction in employee attrition partially due to the introduction of
easy-to-use customer service desktops powered by the Loyalty Cockpit.
AXEL SPRINGER VERLAG AG
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 technical design
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 of the various ways that
companies communicate with their customers to ensure high quality service
and consistent management of their customers.
- Integrated the solution with the third-party order processing software
from SAP AG and legacy systems resulting in a seamless and consistent
technical design 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.
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- 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 goal is
to maintain long-term relationships with our clients in order to generate
recurring revenues.
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. As of September 30, 1999, eLoyalty had 17
business developers, each dedicated to a specific region.
SOLUTIONS MARKETING -- We are in the process of establishing more formal
arrangements with companies such as Lucent Technologies and DST Systems. We
expect that these relationships will provide us with 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
The market we operate in is constantly evolving due to changing business
needs and the increasing number of software products that are available. 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 we have made
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significant investments to build our research and development over the last four
years and we plan to continue these investments. As of September 30, 1999, 37
employees were working in our Loyalty Lab.
Our software, called the Loyalty Suite, provides our clients with
functionality that is not currently available from third party software vendors
as part of their standard product offering without additional development. Our
software helps to tie the components of the loyalty solution together and
capture important customer loyalty information. The Loyalty Suite has been
designed using the experience we have gained from developing loyalty solutions
for our clients over the past five years.
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 $3.6 million for the nine months ended September 30, 1999.
TECHNOLOGY EXPERIENCE -- We have collaborated with vendors to allow us to
more effectively integrate their software into our solutions. This experience
enhances our ability to provide a more complete solution. The relationships that
we have with these vendors are non-exclusive. The following list is an example
of some of these vendors:
- BroadVision, Inc.
- Cisco Systems, Inc.
- Clarify, Inc.
- DST Systems, Inc.
- 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.;
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- Internet and eCommerce 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 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. We believe that this involves a
combination of several different and specialized skills including:
- strategic business consulting to define a company's policies for managing
customers in each division and group within the organization;
- technical knowledge in each of the different products that a company
needs to communicate with their customers using the Internet, telephone,
e-mail and fax;
- integration techniques to enable each of these software products to be
tied together; and
- ongoing support of their loyalty solution to meet changing business
requirements and emerging technology.
INTELLECTUAL PROPERTY RIGHTS
A majority of our clients require 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
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 September 30, 1999, eLoyalty had 653 employees of which 515 were
billable employees. Of the 653 employees, 534 were located in North America, 102
in Europe and 17 in Australia. Our business is mainly of professional services
and is inherently people intensive. We believe we have a satisfactory
relationship with our employees. Our average annualized turnover of billable
employees was 17.9% and 16.6% for the nine months and three months ended
September 30, 1999, respectively. None of our
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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 expect that on or about March 1, 2000 we
will move our headquarters to Two Conway Park, 150 Field Drive, Lake Forest,
Illinois 60045. Our offices there will consist of approximately 20,816 square
feet. We also lease office space throughout the United States and abroad, in
some cases pursuant to subleases with Technology Solutions Company. 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
Technology Solutions Company, we will also have the ability to use, subject to
some restrictions, Technology Solutions Company offices in Atlanta, Georgia,
Dallas, Texas, Los Angeles, California, Minneapolis, Minnesota and New York City
through June 30, 2000 for no charge. Technology Solutions Company 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/prospectus. In addition to historical information,
the following discussion and other parts of this information
statement/prospectus 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 Technology Solutions Company and other
factors discussed under "Risk Factors" and elsewhere in this information
statement/prospectus. 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 3.0% of our total
revenues in any quarter and were 1.4% and 1.5% of our total revenues for the
first nine 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 1.5% of our total
revenues for the first nine months of 1999 and the twelve months ended December
31, 1998. Our revenues from support services may increase in the future. 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 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 additional risks and our
international sales growth will be limited if we are unable to manage those
risks. International operations represented 22.5% and 22.0% of total revenues in
the first nine months of 1999 and in the twelve months ended December 31, 1998,
respectively. International operations represented 10.3% and 12.5% of income
before income taxes in the first nine 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 15.2% and 17.5% of revenues for the first nine 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 21.8% and 54.8%, respectively, of revenues in the first nine
months of 1999 and 22.6% and 54.9%, respectively, of revenues in the twelve
months ended September 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 4.6% of total revenues in the first nine 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.
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 Technology Solutions Company 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 improves the effectiveness of our loyalty
solutions. 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 slightly to 3.3%
for the first nine 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 approximately 4.1% of
total revenues. Other overhead expenses consist of employee costs for training,
some
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travel expenses, laptop computer leases and other non-billable expenses not
directly related to projects, sales or research and development.
Technology Solutions Company corporate services allocation expenses relate
to all shared services provided to us by Technology Solutions Company, including
legal, information systems, finance and accounting, insurance, human resources,
benefits administration, stockholder services and corporate managerial services.
Technology Solutions Company 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 Technology Solutions Company. 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 some office expenses have been
transferred from Technology Solutions Company corporate services allocation
expenses to general and administrative expenses as the management of those
functions was transferred to us from Technology Solutions Company. 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
some 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 47.5% and 61.0% for the nine months
ended September 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 NINE MONTH FOR THE SEVEN MONTH
PERIODS ENDED FOR THE PERIODS FROM JUNE 1 TO
SEPTEMBER 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................... $107,652 $ 77,685 $105,235 $ 64,415 $ 43,668 $ 84,488 $ 43,181 $ 26,516
Project personnel.......... (52,586) (37,464) (50,687) (31,302) (22,329) (41,329) (18,078) (11,674)
-------- -------- -------- -------- -------- -------- -------- --------
REVENUES LESS PROJECT
PERSONNEL................ 55,066 40,221 54,548 33,113 21,339 43,159 25,103 14,842
-------- -------- -------- -------- -------- -------- -------- --------
OTHER COSTS AND EXPENSES
Sales and marketing........ 6,185 3,197 4,894 3,456 994 2,429 1,663 1,032
Research and development... 3,599 2,231 3,635 2,889 1,393 2,383 1,689 46
General and administrative
support.................. 22,554 18,912 26,326 16,438 10,641 20,216 11,539 5,559
Technology Solutions
Company corporate
services allocation...... 10,769 9,225 12,769 7,698 5,544 10,671 5,028 3,298
Equity in net loss of
unconsolidated
investee................. 463 -- 412 412 -- -- -- --
Goodwill amortization...... 3,748 2,704 3,794 2,450 1,856 3,201 376 --
-------- -------- -------- -------- -------- -------- -------- --------
47,318 36,269 51,830 33,343 20,428 38,900 20,295 9,935
-------- -------- -------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS).... 7,748 3,952 2,718 (230) 911 4,259 4,808 4,907
-------- -------- -------- -------- -------- -------- -------- --------
OTHER INCOME (EXPENSE)
Net investment income...... 83 56 95 116 39 68 15 --
Interest expense........... (55) (65) (74) (31) (53) (92) -- --
-------- -------- -------- -------- -------- -------- -------- --------
28 (9) 21 85 (14) (24) 15 --
-------- -------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.................... 7,776 3,943 2,739 (145) 897 4,235 4,823 4,907
INCOME TAX PROVISION....... 3,690 1,929 1,672 398 562 2,022 1,897 1,857
-------- -------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS).......... $ 4,086 $ 2,014 $ 1,067 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
48
<PAGE> 54
eLOYALTY
STATEMENTS OF OPERATIONS
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTH FOR THE SEVEN MONTH PERIOD
PERIODS ENDED YEAR ENDED FROM JUNE 1 TO FOR THE YEARS ENDED
SEPTEMBER 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.................... (48.8)% (48.2)% (48.2)% (48.6)% (51.1)% (48.9)% (41.9)% (44.0)%
----- ----- ----- ----- ----- ----- ----- -----
REVENUES LESS PROJECT PERSONNEL...... 51.2% 51.8% 51.8% 51.4% 48.9% 51.1% 58.1% 56.0%
----- ----- ----- ----- ----- ----- ----- -----
OTHER COSTS AND EXPENSES
Sales and marketing.................. 5.7% 4.1% 4.6% 5.4% 2.3% 2.9% 3.9% 3.9%
Research and development............. 3.3% 2.9% 3.5% 4.5% 3.2% 2.8% 3.9% 0.2%
General and administrative support... 21.0% 24.3% 25.0% 25.5% 24.3% 24.0% 26.6% 21.0%
Technology Solutions Company
corporate services allocation...... 10.0% 11.9% 12.1% 12.0% 12.7% 12.6% 11.6% 12.4%
Equity in net loss of unconsolidated
investee........................... 0.4% 0.0% 0.4% 0.5% 0.0% 0.0% 0.0% 0.0%
Goodwill amortization................ 3.5% 3.5% 3.6% 3.8% 4.3% 3.8% 0.9% 0.0%
----- ----- ----- ----- ----- ----- ----- -----
44.0% 46.7% 49.2% 51.7% 46.8% 46.1% 46.9% 37.5%
----- ----- ----- ----- ----- ----- ----- -----
OPERATING INCOME (LOSS).............. 7.2% 5.1% 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.... 7.2% 5.1% 2.6% (0.2)% 2.1% 5.0% 11.2% 18.5%
INCOME TAX PROVISION................. 3.4% 2.5% 1.6% 0.6% 1.3% 2.4% 4.4% 7.0%
----- ----- ----- ----- ----- ----- ----- -----
NET INCOME (LOSS).................... 3.8% 2.6% 1.0% (0.8)% 0.8% 2.6% 6.8% 11.5%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
This section discusses the first nine months of 1999 compared with the same
period in 1998. The first nine months of 1999 were significant as we launched
the eLoyalty brand and continued to focus on improving our operational
management systems. We also increased our investment in research and development
to increase our focus on the use of emerging technology.
REVENUES
Our revenues increased $30.0 million, or 38.6%, to $107.7 million in the
first nine months of 1999 from $77.7 million in the first nine months of 1998.
Revenues from professional services increased $28.6 million, or 36.9%, to $106.2
million in the first nine months of 1999 from $77.6 million in the first nine
months of 1998. Revenues generated using subcontractors was 4.6% of revenues for
the first nine months of 1999 compared to 2.7% in the first nine months of 1998.
Revenues from software were $1.5 million in the first nine months of 1999,
representing 1.4% of revenues in that period. We had revenues of $0.1 million
from sales of software in the first nine months of 1998.
The increase in our revenues of $30.0 million reflected increases in both
the size and number of client projects as well as higher average billing rates.
During the first nine months of 1999 our billable employees increased to 515, or
28.1%, from 402 for the first nine months of 1998. Our average billing rate for
the first
49
<PAGE> 55
nine months of 1999 increased by 5.7% from the first nine months of 1998.
Revenues from Europe and Australia increased to approximately 17.1% of our total
revenues in the first nine months of 1999, compared to 14.2% of total revenues
in the first nine months of 1998.
PROJECT PERSONNEL COSTS
Our project personnel costs increased $15.1 million, or 40.4%, to $52.6
million in the first nine months of 1999 from $37.5 million in the first nine
months of 1998. The increase in project personnel costs in the first nine months
of 1999 was primarily due to an increase in the use of subcontractors that were
required to meet demand. We expect that our use of subcontractors will decline
as we operate as a separate business. Our Gross Profit margin decreased slightly
to 51.2% in the first nine months of 1999 from 51.8% in the comparable period in
1998.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased $3.0 million, or 93.8%, to $6.2
million in the first nine months of 1999 from $3.2 million in the first nine
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 5.7% in the first nine months of 1999 from 4.1% in the comparable
period in 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses increased $1.4 million, or 63.6%, to
$3.6 million in the first nine months of 1999 from $2.2 million in the first
nine months of 1998. Research and development expenses increased as a percentage
of total revenues to 3.3% in the first nine months of 1999 from 2.9% for the
comparable period in 1998. In the first nine 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 $3.7 million, or
19.6%, to $22.6 million in the first nine months of 1999 from $18.9 million in
the first nine months of 1998. General and administrative expenses decreased as
a percentage of total revenues to 21.0% in the first nine months of 1999 from
24.3% 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 some office expenses from Technology Solutions Company corporate
services allocation expenses as the management of those functions was
transferred to us from Technology Solutions Company. In addition, we were able
to eliminate the duplication of expenses associated with The Bentley Group.
TECHNOLOGY SOLUTIONS COMPANY CORPORATE SERVICES ALLOCATION EXPENSES
Technology Solutions Company corporate services allocation expenses
increased $1.6 million, or 17.4%, to $10.8 million in the first nine months of
1999 from $9.2 million in the first nine months of 1998. Technology Solutions
Company corporate services allocation expenses decreased as a percentage of
total revenues to 10.0% in the first nine months of 1999 from 11.9% for the
comparable period in 1998. This decrease was a result of the reallocation of
recruiting and some office expenses into general and administrative support
expenses as described above.
50
<PAGE> 56
GOODWILL AMORTIZATION
Our goodwill amortization expenses increased $1.0 million or 37.0%, to $3.7
million in the first nine months of 1999 from $2.7 million in the first nine
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.
PROVISION FOR INCOME TAXES
Income tax expense represents combined federal, state and foreign taxes.
Our income tax provision increased to $3.7 million on pre-tax profits of $7.8
million at the end of the first nine months of 1999 compared to $1.9 million on
pre-tax profits of $3.9 million at the end of the comparable period in 1998. Our
effective tax rate was 47.5% in the first nine months of 1999 and 48.9% in the
comparable period in 1998. This decrease in the effective tax rate was primarily
the result of a lower 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 Technology Solutions
Company, the integration of the telecom business unit of Technology Solutions
Company 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 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
51
<PAGE> 57
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.
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 $5.8 million, or
54.7%, to $16.4 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 25.0% 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.
TECHNOLOGY SOLUTIONS COMPANY CORPORATE SERVICES ALLOCATION EXPENSES
Technology Solutions Company 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.
Technology Solutions Company 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 some 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.
During the seven months ended December 31, 1998, operations in some foreign
jurisdictions incurred taxable losses while other foreign jurisdictions had
taxable income. Since
52
<PAGE> 58
deferred tax assets are based on the individual tax jurisdictions in which
eLoyalty operates, net operating losses were generated during the period.
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 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
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.
TECHNOLOGY SOLUTIONS COMPANY CORPORATE SERVICES ALLOCATION EXPENSES
Technology Solutions Company 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. Technology Solutions Company 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
Technology Solutions Company's international expansion.
53
<PAGE> 59
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.
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
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.
54
<PAGE> 60
TECHNOLOGY SOLUTIONS COMPANY 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 Technology Solutions Company.
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.
55
<PAGE> 61
QUARTERLY PERIODS
The following table presents our quarterly results of operations for
calendar year 1998 and the three 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, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............... $ 23,643 $ 25,998 $ 28,044 $ 27,550 $ 31,491 $ 36,145 $ 40,016
Project personnel...... (11,710) (12,143) (13,611) (13,223) (15,276) (17,849) (19,461)
-------- -------- -------- -------- -------- -------- --------
REVENUES LESS PROJECT
PERSONNEL............ 11,933 13,855 14,433 14,327 16,215 18,296 20,555
-------- -------- -------- -------- -------- -------- --------
OTHER COSTS AND
EXPENSES
Sales and marketing.... 758 1,194 1,245 1,697 1,801 1,972 2,412
Research and
development.......... 466 649 1,116 1,404 1,086 1,221 1,292
General and
administrative
support.............. 5,645 6,044 7,223 7,414 6,080 7,368 9,106
Technology Solutions
Company corporate
services
allocation........... 2,806 3,377 3,042 3,544 4,385 3,555 2,829
Equity in net loss of
unconsolidated
investee............. -- -- -- 412 141 111 211
Goodwill
amortization......... 794 860 1,050 1,090 1,252 1,249 1,247
-------- -------- -------- -------- -------- -------- --------
10,469 12,124 13,676 15,561 14,745 15,476 17,097
-------- -------- -------- -------- -------- -------- --------
OPERATING INCOME
(LOSS)............... 1,464 1,731 757 (1,234) 1,470 2,820 3,458
OTHER (EXPENSE)
INCOME............... (7) 5 (7) 30 (1) 16 13
-------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES......... 1,457 1,736 750 (1,204) 1,469 2,836 3,471
INCOME TAX PROVISION
(BENEFIT)............ 629 842 458 (257) 742 1,356 1,592
-------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS)...... $ 828 $ 894 $ 292 $ (947) $ 727 $ 1,480 $ 1,879
======== ======== ======== ======== ======== ======== ========
</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
56
<PAGE> 62
adopted the disclosure-only provisions of the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 123.
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 Technology
Solutions Company. Technology Solutions Company has performed cash management
services for us, whereby our cash flow was directed to Technology Solutions
Company and Technology Solutions Company provided cash to us to fund our
operating expenses and capital expenditures. Following the spin-off, we will no
longer participate in Technology Solutions Company's cash management system and
Technology Solutions Company will no longer be obligated, and does not intend,
to provide additional funds to us to finance our operations or (except as
described under "eLoyalty Financing") provide guarantees of our financial or
other obligations.
In the first nine months of 1999, net cash used in operating activities
totaled $11.4 million. Cash was provided by $4.1 million of net income, $5.0
million from depreciation and amortization and $3.8 million related to an
increase in accrued compensation. This was offset by an $19.6 million increase
in receivables. The increase in receivables was mainly due to growth in
revenues. Receivables related to amounts billed to clients increased from $23.7
million to $38.4 million, or 61.6% from December 31, 1998 to September 30, 1999.
Receivables related to engagements in process increased from $4.3 million to
$7.7 million or 76.6% from December 31, 1998 to September 30, 1999. The increase
in engagements in process 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. In the first
nine months of 1998, net cash used in operating activities was $10.6 million,
driven by $2.0 million of net income and $3.9 million of depreciation and
amortization and offset by a $13.4 million increase in receivables.
Capital expenditures for the first nine months of 1999 were $1.6 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 Technology Solutions Company 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 nine months of 1999 and the twelve months ended
December 31, 1998, 15.2% 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
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<PAGE> 63
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 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 Technology Solutions Company,
we will be relying on Technology Solutions Company to provide a number of
transitional services to us, including among others accounting, tax, benefits
administration, human resources and information systems. Technology Solutions
Company 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 Technology Solutions
Company. 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 Technology Solutions Company could have a material adverse effect
on our business, financial condition or results of operations. The discussion of
the state of Technology Solutions Company's Year 2000 compliance efforts set
forth below is based on information furnished to us by Technology Solutions
Company.
Technology Solutions Company 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 Technology Solutions Company has
been purchased as packaged software. Technology Solutions Company'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 Technology Solutions Company and relied upon in the
administration of accounting and human resources functions, the licensor has
indicated to Technology Solutions Company that the version presently employed by
Technology Solutions Company is not currently Year 2000 compliant and,
therefore, Technology Solutions Company has advised us that it has replaced the
production and development versions with newer ones that are Year 2000
compliant. Technology Solutions Company 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, Technology Solutions Company believes
the expense associated with these efforts will not be material. Technology
Solutions Company expects that additional issues concerning Year 2000 compliance
will be reported by the licensor to Technology Solutions Company and updates
will be provided by the licensor. Technology Solutions Company 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, Technology Solutions Company does not expect
58
<PAGE> 64
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 Technology Solutions Company
that we will rely upon in whole or in part during the term of the Shared
Services Agreement between us and Technology Solutions Company, such as time and
expense reporting and labor distribution (and their associated back office
functions), are performed by legacy systems that Technology Solutions Company
has re-written to be Year 2000 compliant. Technology Solutions Company's
remaining office automation products have been inventoried and each vendor has
been contacted by Technology Solutions Company 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. Technology Solutions Company 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. Technology
Solutions Company 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.
Technology Solutions Company 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.
Technology Solutions Company 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 Technology Solutions Company is not currently aware are
required and are not completed on time, or if the cost of any required updating,
modification or replacement of Technology Solutions Company's information
systems exceeds its estimates, the Year 2000 issue could have a material adverse
impact on Technology Solutions Company'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 Technology Solutions Company's internal systems, Technology
Solutions Company relies on third-party vendors in the conduct of its business.
For example, third-party vendors handle the payroll function for Technology
Solutions Company and Technology Solutions Company 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. Technology Solutions Company 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, Technology Solutions Company is finalizing contingency plans to
mitigate the effects on the conduct of Technology Solutions Company's business
in the event the Year 2000 issue results in the unavailability of services. We
are relying on Technology Solutions Company's contingency plans with respect to
the availability of the transitional services covered by the Shared Services
Agreement, and are finalizing plans of our own for other potential Year 2000
issues that may affect our business. 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 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
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<PAGE> 65
inception as a business unit within Technology Solutions Company, 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 that 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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<PAGE> 66
eLOYALTY CAPITALIZATION
The following table sets forth, as of September 30, 1999, (a) the
historical capitalization of eLoyalty; (b) the pro forma capitalization to give
effect to the issuance of 41.4 million shares of eLoyalty to Technology
Solutions Company and the sale of 2.4 million shares to venture capital
investors as described in "Certain Transactions" and the contribution of $20
million from Technology Solutions Company to eLoyalty and (c) 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" and the contribution of $20 million from Technology Solutions
Company to eLoyalty. 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 SEPTEMBER 30, 1999 (UNAUDITED)
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ---------- ------------
<S> <C> <C> <C>
Cash........................................................ $10,654 $ 39,468 $ 39,468
------- -------- --------
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(3)............................... -- 91,439 99,815
Net advances from Technology Solutions Company.............. 71,439 -- --
Accumulated other comprehensive loss........................ (150) (150) (150)
------- -------- --------
Total stockholders' equity.................................. 71,289 91,703 100,103
------- -------- --------
Total capitalization.............................. $71,289 $100,103 $100,103
======= ======== ========
</TABLE>
- ---------------
(1) As described under "Certain Transactions," 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 Technology Solutions Company and its stockholders for United
States Federal income tax purposes and 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 Technology Solutions
Company 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 -- Technology Solutions Company Stock Options" and Note 8 of the
Notes to Consolidated Financial Statements.
(3) Technology Solutions Company has committed to contribute $20 million to
eLoyalty at the time of the spin-off.
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<PAGE> 67
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 $10 million 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/prospectus, we do not anticipate borrowing under the
facility, after the spin-off borrowings may be made under the facility for
general corporate purposes.
We believe that borrowings under the revolving credit facility will bear
interest at a rate not to exceed the prime rate plus 1%. We expect the credit
facility to contain customary representations, warranties, covenants and default
provisions, including working capital commitments and debt to equity ratios. The
revolving credit facility may be guaranteed by Technology Solutions Company
through December 31, 2000 in exchange for an appropriate fee to be paid by us to
Technology Solutions Company in an amount to be agreed upon by us and Technology
Solutions Company.
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<PAGE> 68
eLOYALTY SELECTED FINANCIAL DATA
The following tables summarize 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/prospectus. They should be read in conjunction
with those financial statements and the notes. The statement of operations data
for the nine month periods ended September 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
September 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, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE
MONTH PERIODS FOR THE YEAR SEVEN MONTH PERIODS
ENDED ENDED FROM JUNE 1 TO
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------------- ------------ ----------------------
1999 1998 1998 1998 1997
-------- -------- ------------ -------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................ $107,652 $ 77,685 $105,235 $ 64,415 $ 43,668
Project personnel.............. (52,586) (37,464) (50,687) (31,302) (22,329)
-------- -------- -------- -------- --------
REVENUES LESS PROJECT
PERSONNEL...................... 55,066 40,221 54,548 33,113 21,339
-------- -------- -------- -------- --------
OTHER COSTS AND EXPENSES:
Sales and marketing............ 6,185 3,197 4,894 3,456 994
Research and development....... 3,599 2,231 3,635 2,889 1,393
General and administrative..... 22,554 18,912 26,326 16,438 10,641
Technology Solutions Company
corporate services
allocation................... 10,769 9,225 12,769 7,698 5,544
Equity in net loss of
unconsolidated investee...... 463 -- 412 412 --
Goodwill amortization.......... 3,748 2,704 3,794 2,450 1,856
-------- -------- -------- -------- --------
47,318 36,269 51,830 33,343 20,428
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS)......... 7,748 3,952 2,718 (230) 911
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE).......... 28 (9) 21 85 (14)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 7,776 3,943 2,739 (145) 897
INCOME TAX PROVISION
(BENEFIT)...................... 3,690 1,929 1,672 398 562
-------- -------- -------- -------- --------
NET INCOME (LOSS)............... $ 4,086 $ 2,014 $ 1,067 $ (543) $ 335
======== ======== ======== ======== ========
<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
Technology Solutions Company
corporate services
allocation................... 10,671 5,028 3,298 1,527 197
Equity in net loss of
unconsolidated investee...... -- -- -- -- --
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
======== ======== ======== ======= ======
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
FOR THE NINE FOR THE
MONTH PERIODS FOR THE YEAR SEVEN MONTH PERIODS
ENDED ENDED FROM JUNE 1 TO
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------------- ------------ ----------------------
1999 1998 1998 1998 1997
-------- -------- ------------ -------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic net income (loss) per
common share(1)................. $ 0.10 $ 0.05 $ 0.03 $ (0.01) $ 0.01
Diluted net income (loss) per
common share(1)................ $ 0.09 $ 0.04 $ 0.02 $ (0.01) $ 0.01
Shares used to calculate basic
net income (loss) per share (in
millions)(1)................... 41.4 41.4 41.4 41.4 41.4
Shares used to calculate diluted
net income (loss) per share (in
millions(1).................... 47.6 46.5 46.6 41.4 45.8
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic net income (loss) per
common share(1)................. $ 0.05 $ 0.07 $ 0.07 $ (0.00) $ 0.00
Diluted net income (loss) per
common share(1)................ $ 0.05 $ 0.06 $ 0.0 7 $ (0.00) $ 0.00
Shares used to calculate basic
net income (loss) per share (in
millions)(1)................... 41.4 41.4 41.4 41.4 41.4
Shares used to calculate diluted
net income (loss) per share (in
millions(1).................... 46.8 46.6 45.5 41.4 46.0
</TABLE>
- ---------------
(1) In December 1999, eLoyalty issued 41.4 million shares to Technology
Solutions Company. Basic earnings per share have been computed by dividing
the net income/(loss) for each period presented by the 41.4 million shares.
Diluted net earnings per share was computed by dividing the net
income/(loss) for each period presented by the 41.4 million shares plus the
estimated effect of dilutive stock options using the "treasury stock"
method. See Note 8 to the Notes to the Combined Financial Statements for a
discussion of stock options.
eLOYALTY
BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF MAY 31,
SEPTEMBER 30, DECEMBER 31, -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------- ------------ ------- ------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash................. $10,654 $ 4,411 $ 4,726 $ 4,130 $ 321 $ -- $ --
Working capital...... $51,932 $26,231 $23,840 $13,506 $ 6,249 $3,130 $1,316
Total assets......... $92,792 $63,904 $54,118 $24,188 $14,008 $4,351 $2,119
Stockholder's
equity............. $71,289 $47,888 $40,893 $17,147 $ 9,312 $3,169 $1,346
</TABLE>
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<PAGE> 70
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 Technology Solutions Company. In addition, we have entered into or
will enter into ancillary agreements contemplated by the Reorganization
Agreement and other agreements that will govern various ongoing relationships
between us and Technology Solutions Company.
Below is a summary description of the Reorganization Agreement and some 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. Some 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/prospectus 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 Technology Solutions Company business, the spin-off
and other agreements governing the relationship between eLoyalty and Technology
Solutions Company after the spin-off.
Pursuant to the Reorganization Agreement, Technology Solutions Company 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 Technology
Solutions Company regarding those assets. Some international, intellectual
property, real property and other assets relating primarily to the business of
eLoyalty may still be held by Technology Solutions Company 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/prospectus, including our
financial statements, assumes the completion of all such transactions.
The Technology Solutions Company 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 Technology Solutions Company board of
directors. Other conditions to the spin-off include:
- Technology Solutions Company's receipt of the private letter ruling from
the IRS described under "The Spin-Off -- Material Federal Tax
Consequences (which has been received);"
- receipt by Technology Solutions Company's board of directors of an
opinion of Technology Solutions Company's financial advisor regarding the
fairness to stockholders of Technology Solutions Company of the spin-off
and the viability of Technology Solutions Company and eLoyalty after the
spin-off (which opinions have been received);
- 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 Act and the
Exchange Act (which registration has not yet been effected);
- approval for listing on The Nasdaq National Market of our common stock
(which approval has been received);
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<PAGE> 71
- no other events or developments shall have occurred that, in the judgment
of the Technology Solutions Company board, would result in the spin-off
having a material adverse effect on Technology Solutions Company or on
the stockholders of Technology Solutions Company; and
- final approval by Technology Solutions Company's board of directors of
the spin-off.
Even if all of the conditions to the spin-off are satisfied, Technology
Solutions Company has reserved the right to amend or terminate the
Reorganization Agreement and the related transactions. The Technology Solutions
Company board of directors has not attempted to identify or establish objective
criteria for evaluating the particular events or conditions that would cause the
Technology Solutions Company board of directors to consider amending or
terminating the spin-off. Although the conditions described above may be waived
by Technology Solutions Company to the extent permitted by law, the Technology
Solutions Company board of directors presently has no intention to proceed with
the spin-off unless each of these conditions is satisfied.
Subject to some exceptions, the Reorganization Agreement will provide for
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 Technology Solutions Company's retained
business with Technology Solutions Company. Specifically, eLoyalty has agreed to
assume liability for, and to indemnify Technology Solutions Company 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 Technology Solutions Company to eLoyalty. Technology
Solutions Company has agreed to indemnify eLoyalty against any and all
liabilities associated with Technology Solutions Company's retained business.
The Reorganization Agreement will provide for the allocation of benefits
between Technology Solutions Company 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
Technology Solutions Company will use its reasonable efforts to maintain
directors' and officers' insurance at substantially the level of Technology
Solutions Company's current directors' and officers' insurance policy for a
period of three years with respect to the directors and officers of Technology
Solutions Company 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 Technology
Solutions Company and eLoyalty will be granted access to some records and
information in the possession of the other. This requires the retention by
Technology Solutions Company 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 one year after the expiration of the applicable statute of limitations.
The Reorganization Agreement will also provide that for 18 months starting
December 1, 1999, neither Technology Solutions Company 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 some former and current eLoyalty employees and
their beneficiaries and dependents. These provisions of the Reorganization
Agreement contemplate that eLoyalty will establish retirement savings and
welfare plans. The Reorganization Agreement will provide that the account
balances (including outstanding loans) of all eLoyalty employees participating
in Technology Solutions Company'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
specified claims incurred on or before the spin-off. Moreover,
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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
Technology Solutions Company common stock and will maintain an employee stock
purchase plan substantially similar to Technology Solutions Company'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 limitations on discovery
rights of the parties. These procedures are intended to produce an expeditious
resolution of any such dispute, controversy or claim.
TECHNOLOGY SOLUTIONS COMPANY STOCK OPTIONS
eLoyalty Employees and Directors. Technology Solutions Company and eLoyalty
have agreed that as of the spin-off, each outstanding option to purchase
Technology Solutions Company 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 Technology Solutions Company) 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 Technology Solutions Company common stock before the spin-off, which includes
the value of eLoyalty common stock, and the trading price of eLoyalty common
stock after the spin-off. The substitute option will take into account all
employment with both Technology Solutions Company 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 Technology
Solutions Company option. As of December 31, 1999, there were outstanding
options to purchase 3,138,385 shares of Technology Solutions Company stock that
would be converted in this manner.
Technology Solutions Company Employees and Directors, and Former Employees
and Directors. Each outstanding nonqualified Technology Solutions Company option
granted before June 22, 1999 to a person who will continue as an employee or
director of Technology Solutions Company after the spin-off, or who will not be
an employee or director of either Technology Solutions Company or eLoyalty after
the spin-off, will be converted into both an adjusted Technology Solutions
Company option and a substitute eLoyalty option. These Technology Solutions
Company options will be converted in a manner that preserves the aggregate
exercise price of each option, which will be allocated between the adjusted
Technology Solutions Company option and the substitute eLoyalty option based on
a comparison of the trading price of Technology Solutions Company common stock
and the trading price of eLoyalty common stock after the spin-off. 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 Technology Solutions Company common
stock subject to an adjusted Technology Solutions Company option will be the
same as the number of shares subject to the existing Technology Solutions
Company option, and the current exercise price will be multiplied by the
following fraction:
Technology Solutions Company Stock Price (after the spin-off)
- --------------------------------------------------------------------------------
Technology Solutions Company Stock Price (before the spin-off)
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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 Technology Solutions Company common stock
subject to the existing Technology Solutions Company option. The exercise price
of the substitute eLoyalty option will equal the exercise price of the existing
Technology Solutions Company option multiplied by the following ratio:
eLoyalty Stock Price (after the spin-off)
- --------------------------------------------------------------------------------
TSC Stock Price (before the spin-off)
Employment with Technology Solutions Company 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 Technology Solutions Company option. As
of December 31, 1999, there were outstanding options to purchase 4,236,768
shares of Technology Solutions Company stock that would be converted in this
manner.
Options Granted After June 21, 1999. Each outstanding nonqualified
Technology Solutions Company option granted after June 21, 1999 to a person who
will continue as an employee or director of Technology Solutions Company after
the spin-off, or who will not be an employee or director of either Technology
Solutions Company 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 Technology Solutions Company common stock. Each of these options will
be adjusted to reflect the spin-off, based on a comparison of the trading price
of Technology Solutions Company common stock before the spin-off and the trading
price of Technology Solutions Company common stock after the spin-off and will
preserve 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 Technology Solutions Company and eLoyalty Tax Sharing and
Disaffiliation Agreement will set forth the rights and obligations of Technology
Solutions Company 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, in effect 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) Technology
Solutions Company, under 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 Technology Solutions Company against any taxes
(other than Restructuring Taxes) that are attributable to the business carried
on by eLoyalty. eLoyalty will indemnify Technology Solutions Company against
these taxes even though they may have been incurred prior to the formation of
eLoyalty. Technology Solutions Company will indemnify eLoyalty against any taxes
(other than Restructuring Taxes) that are attributable to the business retained
by Technology Solutions Company. 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 Technology Solutions Company.
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:
- any inaccuracy or breach of specified representations, warranties, or
covenants in the IRS ruling and the material submitted to the IRS in
connection with that ruling, in each case, describing the eLoyalty Group
(generally, our affiliates and us) or the eLoyalty business;
- any action (or failure to take any reasonably available action) by any
member of the eLoyalty Group; or
- any acquisition or other transaction involving the capital stock of
eLoyalty (other than the distribution of the capital stock of eLoyalty in
the spin-off).
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Under that agreement, Technology Solutions Company will, in general, be
liable for any Restructuring Taxes imposed by reason of any "Technology
Solutions Company Tainting Act," which means:
- any inaccuracy or breach of specified representations, warranties, or
covenants in the IRS ruling and the materials submitted to the IRS in
connection with that ruling, in each case, describing the Technology
Solutions Company Group (generally, Technology Solutions Company and its
affiliates) or the business retained by Technology Solutions Company;
- any action (or failure to take any reasonably available action) by any
member of the Technology Solutions Company Group; or
- any acquisition or other transaction involving the capital stock of
Technology Solutions Company (other than the distribution of the capital
stock of eLoyalty in the spin-off).
Under that agreement, eLoyalty and Technology Solutions Company are each
liable for 50% of Restructuring Taxes that are not imposed as a result of either
an eLoyalty Tainting Act or a Technology Solutions Company Tainting Act. If a
Restructuring Tax is imposed where there is both an eLoyalty Tainting Act and a
Technology Solutions Company Tainting Act, and each of the eLoyalty Tainting Act
and the Technology Solutions Company Tainting Act would alone be sufficient to
result in the imposition of such Restructuring Tax, eLoyalty and Technology
Solutions Company 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 Technology Solutions Company
Tainting Act, eLoyalty and Technology Solutions Company are each liable for such
Restructuring Tax to the extent the eLoyalty Tainting Act and the Technology
Solutions Company Tainting Act, respectively, contributed to the imposition of
such Restructuring Tax.
Option Deductions. Under the Tax Sharing and Disaffiliation Agreement,
Technology Solutions Company will generally be liable to us for an amount equal
to (A) any actual federal income tax reduction realized by Technology Solutions
Company as a result of a "Net Option Deduction," which term, in general, means
any federal income tax deduction or loss (to the extent in excess of any income
or gain) recognized by the Technology Solutions Company Affiliated Group
(generally, Technology Solutions Company and its subsidiaries that file on a
consolidated basis) upon the exercise of eLoyalty stock options by employees of
any member of such group minus (B) any employment (or similar) taxes borne by
any member of the Technology Solutions Company Affiliated Group with respect to
such taxable year as a result of the exercise of eLoyalty stock options by
employees of any member of the Technology Solutions Company Affiliated Group.
This liability arises only with respect to eLoyalty options exercised after the
date eLoyalty provides Technology Solutions Company with an opinion of tax
counsel concluding that a Net Option Deduction is available to the Technology
Solutions Company Affiliated Group. Technology Solutions Company may condition
its liability with respect to a taxable year upon confirmation from tax counsel
that no change in law or other circumstance has rendered the original tax
opinion's conclusion incorrect. We will be liable to Technology Solutions
Company for losses or expenses attributable to the reduction, elimination or
deferral of a Net Option Deduction for which Technology Solutions Company has
previously made payment to us.
Administrative matters. The Tax Sharing and Disaffiliation Agreement will
also set forth the obligations of eLoyalty and Technology Solutions Company with
respect to the filing of tax returns, the administration of tax contests and
other matters.
SHARED SERVICES AGREEMENT
Technology Solutions Company and eLoyalty will enter into a Shared Services
Agreement, pursuant to which Technology Solutions Company will provide to
eLoyalty administrative services that may be necessary to eLoyalty's business.
Technology Solutions Company will provide eLoyalty with, among other things,
accounting, tax, benefits administration, human resources, information systems,
insurance and legal 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 services Technology Solutions Company will
charge eLoyalty based on its percentage of the total number of Technology
Solutions Company and eLoyalty employees. For accounting, tax and insurance and
services Technology Solutions
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Company will charge eLoyalty based on its percentage of the total revenues of
Technology Solutions Company and eLoyalty.
TECHNOLOGY SOLUTIONS COMPANY INTELLECTUAL PROPERTY LICENSE AGREEMENT
Technology Solutions Company and eLoyalty will enter into a Technology
Solutions Company Intellectual Property Agreement, pursuant to which Technology
Solutions Company will grant to eLoyalty a nonexclusive, royalty-free,
worldwide, perpetual license in and to intellectual properties, processes, know-
how and technical information of Technology Solutions Company which are not used
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 Technology Solutions Company will enter into an eLoyalty
Intellectual Property Agreement, pursuant to which eLoyalty will grant to
Technology Solutions Company a nonexclusive, royalty-free, worldwide, perpetual
license in and to 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
Technology Solutions Company's businesses other than eLoyalty's business as of
the date of the spin-off.
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eLOYALTY'S MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below is 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
Technology Solutions Company in November 1993 as Senior Vice President, assumed
the position of Executive Vice President in July 1995 and became Group President
of Technology Solutions Company in October 1998. Prior to joining Technology
Solutions Company, 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 Technology Solutions Company's President and Chief Executive
Officer and has been a Director of Technology Solutions Company since June 1994.
He joined Technology Solutions Company 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
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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 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 Technology Solutions Company 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 Technology Solutions Company 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 Technology Solutions Company 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 has been eLoyalty's Senior Vice President and Chief
Financial Officer since November 15, 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 Technology Solutions Company in
October 1995 as Senior Vice President. Prior to joining Technology Solutions
Company 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 Technology Solutions Company 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
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JP Morgan Pinnacle Alliance in London from June 1995 to October 1997. Prior to
working for CSC, Mr. Bird spent two years 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 Technology
Solutions Company 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 Technology Solutions Company 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 Technology Solutions
Company for ten years, most recently as the Senior Vice President of Technology
Solutions Company's international recruiting organization, a role she assumed in
1994. Prior to joining Technology Solutions Company, 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 Technology Solutions Company 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
Technology Solutions Company, 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 Technology Solutions Company'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 Technology Solutions Company 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 Technology
Solutions Company 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. Coxe, Kohler and Purcell will be Class I directors,
with their terms of office expiring in 2003; Messrs. Hoag and Zucchini will be
Class II directors, with their terms of office expiring in 2001; and Messrs.
Conway and Murray 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.
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BOARD COMMITTEES
Prior to completion of the spin-off, our board intends to create an audit
committee and a compensation committee.
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 Technology Solutions Company 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
Technology Solutions Company'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. 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.
Some 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. For a more complete
discussion of stock options awards, see "-- Outstanding eLoyalty Stock Options."
In connection with the spin-off, each nonqualified option to purchase
Technology Solutions Company common stock held by an employee or director of
eLoyalty (1) who will not also be a director of Technology Solutions Company,
will be converted into a substitute option to purchase eLoyalty common stock,
and (2) who will also be a director of Technology Solutions Company, will be
converted into a substitute option to purchase eLoyalty common stock and an
adjusted Technology Solutions Company 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 -- Technology Solutions Company Stock Options" for a more complete
discussion of the treatment of options to purchase Technology Solutions Company
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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with respect to his or their shares. This information is based on our knowledge
of the number of shares of Technology Solutions Company common stock owned by
the persons as of January 1, 2000.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME NUMBER OF SHARES OUTSTANDING SHARES
- ---- ---------------- ------------------
<S> <C> <C>
Kelly D. Conway............................................. 504,561(1) 1.0%
Tench Coxe.................................................. 278,750(2) *
Jay C. Hoag................................................. 428,750(3) *
John T. Kohler.............................................. 692,715(4) 1.4%
Michael J. Murray........................................... 352,336(5) *
John R. Purcell............................................. 806,687(6) 1.6%
Michael R. Zucchini......................................... 39,052(7) *
Timothy J. Cunningham....................................... --(8) --
Craig B. Lashmet............................................ 125,732(9) *
All Directors and Executive Officers as a group (9
persons).................................................. 3,228,583(10) 6.5%
</TABLE>
- ---------------
* Less than one percent
(1) Includes 487,406 shares Mr. Conway has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days. Mr. Conway has indicated that he may sell up to 100,000 shares of
common stock of Technology Solutions Company after January 1, 2000 and
prior to the spin-off. The share amounts do not reflect that possible sale.
(2) Includes 278,750 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 453,660 shares Mr. Kohler has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days. Mr. Kohler has indicated that he may sell up to 552,500 shares of
common stock of Technology Solutions Company after January 1, 2000 and
prior to the spin-off. The share amounts do not reflect that possible sale.
(5) Includes 94,500 shares Mr. Murray has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days. Mr. Murray has indicated that he may sell up to 75,000 shares of
common stock of Technology Solutions Company after January 1, 2000 and
prior to the spin-off. The share amounts do not reflect that possible sale.
(6) Includes 94,500 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. Mr. Purcell has indicated that he may sell
up to 100,000 shares of common stock of Technology Solutions Company after
January 1, 2000 and prior to the spin-off. The share amounts do not reflect
that possible sale.
(7) Includes 31,500 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 15, 1999.
(9) Includes 123,062 shares Mr. Lashmet has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(10) Includes 1,284,628 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
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<PAGE> 81
directors will be reimbursed for out-of-pocket expenses incurred in connection
with attending board and committee meetings.
EXECUTIVE COMPENSATION
The following table sets forth compensation information paid by Technology
Solutions Company 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 Technology Solutions
Company 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 UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- --------------------------- ------ -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Kelly D. Conway........................ 1999 $480,000 $ -- (3) 625,000(4) 382,503(7)
President and Chief 1998(1) 266,667 120,000 65,000 --
Executive Officer 1998(2) 440,000 100,000 135,000 --
Craig B. Lashmet....................... 1999 $400,000 $ -- (3) 350,000(4) --
Senior Vice President, 1998(1) 266,667 90,000 97,750(5) --
North America 1998(2) 340,000 95,000 33,750(6) --
</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) The amount of bonus earned in this year have not been determined as of the
date of this prospectus/information statement.
(4) Subject to option provisions regarding termination of employment, one third
of these options become exercisable on July 1, 2000 and 1/36 of these
options become exercisable on the last day of each calendar month for 24
months.
(5) 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 Technology Solutions Company to all of its employees other than
its executive officers.
(6) 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 5.
(7) The other compensation consisted of principal and interest forgiven under a
Promissory Note dated November 12, 1998.
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<PAGE> 82
OPTION GRANTS IN LAST FISCAL YEAR
The following tables show all grants of options to acquire shares of
eLoyalty common stock granted to the Named Executive Officers in the year ended
December 31, 1999. In connection with the spin-off, each nonqualified option to
purchase Technology Solutions Company common stock held by an employee or
director of eLoyalty (1) who will not also be a director of Technology Solutions
Company, will be converted into a substitute option to purchase eLoyalty common
stock, and (2) who will also be a director of Technology Solutions Company, will
be converted into a substitute option to purchase eLoyalty common stock and an
adjusted Technology Solutions Company 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 -- Technology Solutions Company Stock Options" for a more complete
discussion of the treatment of options to purchase Technology Solutions Company
common stock in connection with the spin-off.
OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
----------------------------------------------------
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%(3) 10%(3)
- ---- ---------- ---------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kelly D. Conway............. 625,000(2) 12% 3.50 7/1/09 $ 1,375,707 $ 3,486,312
Craig B. Lashmet............ 350,000(2) 7% 3.50 7/1/09 770,396 1,952,335
Potential gain by all common
stockholders(4)........... $95,429,438 $ 241,836,931
</TABLE>
- ---------------
(1) Upon a sale of substantially all of the business and assets of the company,
the board may accelerate the exercise date of these options.
(2) Subject to option provisions regarding termination of employment, one third
of these options become exercisable on July 1, 2000 and 1/36 of these
options become exercisable on the last day of each calendar month for 24
months.
(3) 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.
(4) The future hypothetical value of one share of common stock based on a fair
market value of $3.50 on July 1, 1999, and assumed rates of appreciation of
five percent and ten percent through July 1, 2009, would be $5.70 and $9.08,
respectively. The potential realizable value for all holders of common stock
is based on 43,354,786 shares of common stock outstanding as of December 31,
1999.
EXERCISES OF STOCK OPTIONS AND FISCAL YEAR END OPTION VALUES
The following table shows aggregate exercises of options to purchase
Technology Solutions Company and eLoyalty common stock in the year ended
December 31, 1999 by the Named Executive Officers and other information
concerning the options to purchase Technology Solutions Company and eLoyalty
common stock held by each of them at the end of such period.
In connection with the spin-off, each nonqualified option to purchase
Technology Solutions Company common stock held by an employee or director of
eLoyalty (1) who will not also be a director of Technology Solutions Company,
will be converted into a substitute option to purchase eLoyalty common stock,
and (2) who will also be a director of Technology Solutions Company, will be
converted into a substitute option to purchase eLoyalty common stock and an
adjusted Technology Solutions Company 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 -- Technology Solutions
77
<PAGE> 83
Company Stock Options" for a more complete discussion of the treatment of
options to purchase TSC common stock in connection with the spin-off.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED DECEMBER 31, 1999 AT DECEMBER 31, 1999
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kelly D. Conway
Technology Solutions
Company Options........... -- -- 481,849 54,980 $11,348,742 $ 760,603
eLoyalty Options........ -- -- -- 625,000 -- $12,143,750
Craig B. Lashmet
Technology Solutions
Company Options......... -- -- 120,346 58,407 $ 2,938,809 $ 1,360,497
eLoyalty Options........ -- -- -- 350,000 -- $ 6,800,500
</TABLE>
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 Technology
Solutions Company common stock. See "eLoyalty's Relationship with Technology
Solutions Company After the Spin-Off -- Technology Solutions Company Stock
Options" for a more complete description of the treatment of options to purchase
Technology Solutions Company 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.
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<PAGE> 84
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, 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. Each purchase period will last for three months and will
coincide with each calendar quarter. The first purchase period will begin on the
first day on which eLoyalty common stock is traded on a "when-issued" basis (or
the first business day after the record date of the spin-off, if later) 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
Technology Solutions Company has entered into an employment agreement with
Mr. Kelly D. Conway to serve as its Group President. In connection with the
spin-off, this agreement will be assigned to, and assumed by, eLoyalty at which
time it will be amended to reflect Mr. Conway's position as our President and
Chief Executive Officer. The agreement does not have a fixed expiration date and
may be terminated by either party on 90 days' written notice. If Mr. Conway's
employment is terminated by eLoyalty, he will be entitled to receive his salary,
bonus and health insurance benefits for a two-year period following the
termination, or until he is re-employed. If, following a change in control of
eLoyalty (1) Mr. Conway's title, position, duties or salary are diminished and
he resigns within 90 days thereafter, or (2) his employment with eLoyalty is
terminated following his refusal to relocate for a period in excess of six
months to any location outside of the metropolitan area where he resides, he
will be entitled to receive his salary, bonus and health insurance benefits for
a two-year period following the termination.
79
<PAGE> 85
Each of Mr. Conway's options that is not then fully exercisable will become
exercisable in full upon a change in control of eLoyalty. If Mr. Conway's
employment with eLoyalty is terminated because of his death or disability, he or
his designated beneficiary will be entitled to receive his salary, bonus and
health insurance benefits for a one-year period following the termination. Mr.
Conway's current annual salary is $480,000.
TSC has entered into an employment agreement with Mr. Craig B. Lashmet to
serve as a Senior Vice President. In connection with the spin-off, this
agreement will be assigned to, and assumed by, eLoyalty. The agreement does not
have a fixed expiration date and may be terminated by either party on 90 days'
written notice. If Mr. Lashmet's employment is terminated by the Company, he
will be entitled to receive his salary, bonus and health insurance benefits for
a one-year period following the termination, or until he is re-employed. If Mr.
Lashmet's employment with eLoyalty is terminated because of his death or
disability, he or his designated beneficiary will be entitled to receive his
salary, bonus and health insurance benefits for a one-year period following the
termination. Mr. Lashmet's current annual salary is $400,000.
TSC has entered into an employment agreement with Timothy J. Cunningham to
serve as a Senior Vice President and Chief Financial Officer of eLoyalty.
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
Technology Solutions Company. In the spin-off, Technology Solutions Company
stockholders will receive one share of eLoyalty common stock per share of
Technology Solutions Company 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 Technology Solutions Company'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
Technology Solutions Company 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 Technology
Solutions Company common stock and sole dispositive power with respect to
4,806,779 shares of Technology Solutions Company 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 Technology Solutions Company common
stock and dispositive power with respect to 3,973,450 shares of Technology
Solutions Company 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 Technology Solutions Company 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 Technology Solutions Company 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 Technology Solutions
Company common stock and sole dispositive power with respect to 2,718,800
shares of Technology Solutions Company common stock.
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<PAGE> 86
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 43,350,000 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/PROSPECTUS 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 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.
Our common stock has been approved for listing on The Nasdaq National
Market, subject to notice of issuance, 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;
- the terms of redemption, if any;
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<PAGE> 87
- 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 circumstances, special meetings of stockholders can be called
only by the board pursuant to a resolution
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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 specified 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 specified 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;
- the name and address of the stockholder;
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- 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 approved 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 some 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. For a discussion of the rights plan adopted by our board of
directors, see "-- Rights Plan."
Amendment of 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 adopted 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 entitles 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 to be determined by our board of directors (or a
committee of our board of directors) at, or shortly after, 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/prospectus 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 15% 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
ten years from their issuance 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
related parties, whose Rights will automatically become null and void) will have
the right to receive, upon exercise, common stock, or, in some 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 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 specified 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 some 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
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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 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
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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. These agreements provide directors with, among other things,
specific contractual rights to the maximum indemnification permitted by Delaware
law.
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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. That price was determined by the board of directors of Technology
Solutions Company to be the fair value of the eLoyalty common stock on June 22,
1999 (the date on which the investors agreed to purchase those shares). 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 Technology Solutions Company and
its stockholders for United States federal income tax purposes and 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 Technology Solutions Company 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 Technology Solutions Company,
Technology Solutions Company 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, who will be our
chairman, and Technology Crossover Ventures to nominate Jay Hoag as its designee
on our board. For more information regarding Messrs. Coxe and Hoag, see
"eLoyalty's Management."
On November 12, 1998, Technology Solutions Company 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 Technology Solutions Company 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 note provides that the principal
amount of the loan (and interest accrued thereon) is to 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. In accordance with the terms of the note, as of
December 31, 1999, a total of $382,503 in principal and accrued interest has
been forgiven, and Mr. Conway's outstanding balance and accrued interest under
this note on that date was $875,299. On December 15, 1999, Technology Solutions
Company made an additional loan to Mr. Conway in the amount of $125,000. The
note representing this loan provides for an interest rate of 5.74% and a payment
date of March 1, 2000. We expect that the notes representing these loans will be
assigned to eLoyalty in connection with the separation of our business
operations from Technology Solutions Company.
The board of directors of eLoyalty intends to review and, if appropriate,
approve all material transactions between eLoyalty and its affiliates consistent
with the applicable provisions of Delaware law which provides in part that
transactions between eLoyalty and its affiliates are not void or voidable if the
material facts as to the director's or officer's relationship or interest in the
transaction are disclosed and the board in good faith authorizes the transaction
by the affirmative votes of a majority of disinterested directors or if the
transaction is fair to the corporation as of the time it is authorized by the
board.
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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 a date
determined by the eLoyalty board of directors, or, if the board does not set a
date, the first Thursday in May, 2001. We expect that our board of directors
will set May 3, 2001 as the date for this annual meeting. 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 March 16, 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 January 23, 2001 and on or
prior to February 19, 2001. For a more complete discussion regarding the
submission of stockholder proposals or nominations, see "Description of eLoyalty
Capital Stock -- Antitakeover Effects -- Advance notice provisions for
stockholder nominations and stockholder proposals."
LEGAL MATTERS
The validity of our common stock to be distributed in the spin-off will be
passed upon for us by Sidley & Austin, Chicago, Illinois.
EXPERTS
The financial statements of eLoyalty Corporation as of December 31, 1998
and May 31, 1998 and 1997, for the seven month period ended December 31, 1998
and for each of the three years in the period ended May 31, 1998 included in
this information statement/prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
The financial statements of The Bentley Group, Inc. for the period from
January 1, 1997 to May 31, 1997 included in this information
statement/prospectus has been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of NexCen Technologies, Inc. as of December 31,
1998 and for the period from July 17, 1998 (date of inception) to December 31,
1998 included in this information statement/prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
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ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the eLoyalty common stock to be distributed in
the spin-off. This information statement/ prospectus 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 some 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/prospectus 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 Technology Solutions Company 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/prospectus and other documents referred to in this information
statement/prospectus. TSC and eLoyalty have not authorized anyone to provide you
with information that is different. This information statement/prospectus is
being furnished by Technology Solutions Company solely to provide information to
Technology Solutions Company 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 Technology Solutions Company or
eLoyalty. Technology Solutions Company and eLoyalty believe that the information
presented herein is accurate as of the date hereof. Changes will occur after the
date hereof, and neither Technology Solutions Company 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 in it shall not be deemed to be incorporated into this
information statement/prospectus.
92
<PAGE> 98
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ELOYALTY CORPORATION
Report of Independent Accountants........................... F-2
Combined Balance Sheets as of September 30, 1999
(unaudited), December 31, 1998, May 31, 1998 and 1997..... F-3
Combined Statements of Operations for the nine month periods
ended September 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 nine month periods
ended September 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 nine month period
ended September 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
THE BENTLEY GROUP, INC.
Report of Independent Accountants........................... F-18
Statement of Operations and Accumulated Deficit for the
period from January 1, 1997 to May 31, 1997............... F-19
Statement of Cash Flows for the period from January 1, 1997
to May 31, 1997........................................... F-20
Notes to Financial Statements............................... F-21
NEXCEN TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE)
Report of Independent Accountants........................... F-24
Balance Sheet as of December 31, 1998....................... F-25
Statement of Operations for the period from July 17, 1998
(date of inception) to
December 31, 1998......................................... F-26
Statement of Stockholders' Deficit for the period from
July 17, 1998 (date of inception) to December 31, 1998.... F-27
Statement of Cash Flows for the period from July 17, 1998
(date of inception) to
December 31, 1998......................................... F-28
Notes to Financial Statements............................... F-29
SCHEDULES
Schedule II -- Valuation and Qualifying Accounts............ S-1
Report of Independent Accountants on Financial Statement
Schedule.................................................. S-2
</TABLE>
F-1
<PAGE> 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
of eLoyalty Corporation
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of cash flows and of changes in stockholder's
equity and comprehensive income (loss) 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 its operations and its 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 accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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> 100
eLOYALTY CORPORATION
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------- ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $10,654 $ 4,411 $ 4,726 $ 4,130
Marketable securities............................ 6,714 4,486 3,656 1,560
Receivables, net of allowances of $2,369
(unaudited), $2,638, $475 and $198............. 43,658 25,443 23,898 11,748
Deferred income taxes............................ 8,954 4,711 1,311 513
Prepaid expenses................................. 2,588 2,175 2,508 1,463
Other current assets............................. 867 1,021 966 835
------- ------- ------- -------
Total current assets................... 73,435 42,247 37,065 20,249
COMPUTERS, FURNITURE AND EQUIPMENT, NET.......... 2,035 1,581 1,432 245
GOODWILL......................................... 13,397 17,201 12,614 2,194
DEFERRED INCOME TAXES............................ 2,434 1,054 1,022 --
INVESTMENT....................................... -- 463 -- --
LONG-TERM RECEIVABLES AND OTHER.................. 1,491 1,358 1,985 1,500
------- ------- ------- -------
Total assets........................... $92,792 $63,904 $54,118 $24,188
======= ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................. $ 739 $ 994 $ 347 $ 768
Accrued compensation and related costs........... 11,056 7,304 6,528 3,054
Deferred compensation............................ 6,714 4,486 3,656 1,560
Other current liabilities........................ 2,994 3,232 2,694 1,361
------- ------- ------- -------
Total current liabilities.............. 21,503 16,016 13,225 6,743
------- ------- ------- -------
DEFERRED INCOME TAXES............................ -- -- -- 298
COMMITMENTS AND CONTINGENCIES.................... -- -- -- --
------- ------- ------- -------
STOCKHOLDER'S EQUITY:
Net advances from Technology Solutions Company... 71,439 48,475 41,241 17,420
Accumulated other comprehensive loss............. (150) (587) (348) (273)
------- ------- ------- -------
Total stockholder's equity............. 71,289 47,888 40,893 17,147
------- ------- ------- -------
Total liabilities and stockholder's
equity............................... $92,792 $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> 101
ELOYALTY CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTH FOR THE SEVEN MONTH
PERIODS ENDED PERIODS FROM
SEPTEMBER 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.......................... $107,652 $ 77,685 $ 64,415 $ 43,668 $ 84,488 $ 43,181 $ 26,516
Project personnel............... (52,586) (37,464) (31,302) (22,329) (41,329) (18,078) (11,674)
-------- -------- -------- -------- -------- -------- --------
REVENUES LESS PROJECT PERSONNEL... 55,066 40,221 33,113 21,339 43,159 25,103 14,842
-------- -------- -------- -------- -------- -------- --------
OTHER COSTS AND EXPENSES:
Sales and marketing............. 6,185 3,197 3,456 994 2,429 1,663 1,032
Research and development........ 3,599 2,231 2,889 1,393 2,383 1,689 46
General and administrative...... 22,554 18,912 16,438 10,641 20,216 11,539 5,559
Technology Solutions Company
corporate services
allocation.................... 10,769 9,225 7,698 5,544 10,671 5,028 3,298
Equity in net loss of
unconsolidated investee....... 463 -- 412 -- -- -- --
Goodwill amortization........... 3,748 2,704 2,450 1,856 3,201 376 --
-------- -------- -------- -------- -------- -------- --------
47,318 36,269 33,343 20,428 38,900 20,295 9,935
-------- -------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS)........... 7,748 3,952 (230) 911 4,259 4,808 4,907
-------- -------- -------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Net investment income........... 83 56 116 39 68 15 --
Interest expense................ (55) (65) (31) (53) (92) -- --
-------- -------- -------- -------- -------- -------- --------
28 (9) 85 (14) (24) 15 --
-------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES........................... 7,776 3,943 (145) 897 4,235 4,823 4,907
INCOME TAX PROVISION.............. 3,690 1,929 398 562 2,022 1,897 1,857
-------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS)................. $ 4,086 $ 2,014 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050
======== ======== ======== ======== ======== ======== ========
Basic net income (loss) per common
share........................... $ 0.10 $ 0.05 $ (0.01) $ 0.01 $ 0.05 $ 0.07 $ 0.07
Diluted net income (loss) per
common share.................... $ 0.09 $ 0.04 $ (0.01) $ 0.01 $ 0.05 $ 0.06 $ 0.07
Shares used to calculate basic net
income (loss) per share (in
millions)....................... 41.4 41.4 41.4 41.4 41.4 41.4 41.4
Shares used to calculate diluted
net income (loss) per share (in
millions)....................... 47.6 46.5 41.4 45.8 46.8 46.6 45.5
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
F-4
<PAGE> 102
ELOYALTY CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTH FOR THE SEVEN MONTH
PERIODS ENDED PERIODS FROM FOR THE YEARS ENDED
SEPTEMBER 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)................. $ 4,086 2,014 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050
Adjustments to reconcile net
income to net cash from
operating activities:
Depreciation and amortization... 4,987 3,946 3,509 2,275 3,874 617 60
Provisions for doubtful
receivables................... 1,395 1,285 2,652 577 531 453 272
Equity losses of unconsolidated
investee...................... 463 -- 412 -- -- -- --
Deferred income taxes........... (5,622) (2,045) (3,432) (1,330) (2,118) (315) (4,306)
Changes in assets and
liabilities:
Receivables................... (19,610) (13,443) (4,197) (3,441) (10,217) (3,453) (136)
Purchases of trading
securities related to
deferred compensation
program..................... (2,228) (1,426) (830) (1,275) (2,096) (799) (761)
Other current assets.......... (259) (2,265) 278 211 (1,079) (1,177) (531)
Accounts payable.............. (255) (47) 647 (1,076) (1,184) 229 467
Accrued compensation and
related costs............... 3,751 413 776 1,202 2,674 (217) 1,115
Deferred compensation funds
from employees.............. 2,228 1,426 830 1,275 2,096 799 761
Other current liabilities..... (239) 924 538 (2,983) (2,383) 1,335 1
Other assets.................. (133) (1,423) (11) (309) (815) (339) (1,270)
-------- -------- ------- -------- -------- ------- -------
Net cash (used in) provided
by operating activities... (11,436) (10,641) 629 (4,539) (8,504) 59 (1,278)
-------- -------- ------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures.............. (1,637) (1,829) (570) (607) (1,065) (182) (127)
Investment in unconsolidated
investee........................ -- -- (875) -- -- -- --
Acquired businesses............... -- (4,849) (6,625) (10,360) (10,741) (940) (1,367)
-------- -------- ------- -------- -------- ------- -------
Net cash used in investing
activities................ (1,637) (6,678) (8,070) (10,967) (11,806) (1,122) (1,494)
-------- -------- ------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Transfers from Technology
Solutions Company............... 18,878 17,340 7,777 17,288 21,608 5,182 3,093
-------- -------- ------- -------- -------- ------- -------
Net cash provided by
financing activities...... 18,878 17,340 7,777 17,288 21,608 5,182 3,093
-------- -------- ------- -------- -------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS......... 438 (1,433) (651) (782) (702) (310) --
-------- -------- ------- -------- -------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................... 6,243 (1,412) (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............................ $ 10,654 $ 3,718 $ 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> 103
eLOYALTY CORPORATION
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
(LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADVANCES ACCUMULATED
(TO) FROM OTHER
TECHNOLOGY COMPREHENSIVE TOTAL
SOLUTIONS INCOME STOCKHOLDER'S
COMPANY (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 Technology Solutions Company......... 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 Technology Solutions Company......... 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 Technology Solutions Company......... 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 Technology Solutions Company......... 7,777 -- 7,777
------- ----- -------
Balance, December 31, 1998.............................. 48,475 (587) 47,888
------- ----- -------
Net income (unaudited).................................. 4,086 -- 4,086
Foreign currency translation (unaudited)................ -- 437 437
-------
Comprehensive income (unaudited)...................... 4,523
Net transfers from Technology Solutions Company
(unaudited)........................................... 18,878 -- 18,878
------- ----- -------
Balance, September 30, 1999 (unaudited)................. $71,439 $(150) $71,289
======= ===== =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
F-6
<PAGE> 104
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 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 the Internet, e-mail, web-chat, telephone and fax 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 September 30, 1999 and the combined statements of operations and
combined statements of cash flows for the nine months ended September 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 nine month periods
ended September 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> 105
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 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 September 30,
1999, December 31, 1998, May 31, 1998 and 1997 was $9,752, $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> 106
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 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 transferred
from TSC primarily for operations and working capital requirements, offset by
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 do not have repayment terms and do not bear
interest.
Earnings (Loss) Per Common Share -- In December 1999, eLoyalty issued 41.4
million shares to TSC. Basic earnings per share have been computed by dividing
the net income/(loss) for each period presented by the 41.4 million shares.
Diluted net earnings per share was computed by dividing the net income/(loss)
for each period presented by the 41.4 million shares plus the estimated effect
of dilutive stock options using the "treasury stock" method. See Note 8, "Stock
Options" for a discussion of stock options.
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 September 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 nine-month period ended September 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
F-9
<PAGE> 107
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
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 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/INVESTMENTS
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.
During 1998, eLoyalty invested in NexCen Technologies, Inc. (NexCen), a
development stage enterprise. eLoyalty's investment in NexCen is comprised of
both Series A redeemable convertible preferred stock ("Series A Stock") and
warrants to purchase Series A Stock at an exercise price of $.01 per share
("Warrants").
Each share of Series A Stock in convertible into common stock at the option
of eLoyalty under a formula which currently results in a 1-for-1 conversion
rate. Each share of Series A Stock is entitled to the number of votes equal to
that number of shares of common stock into which shares of Series A Stock can be
converted. Assuming the conversion of all of the Series A Stock and Warrants
into common stock,
F-10
<PAGE> 108
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
eLoyalty's ownership in NexCen would approximate 27 percent. eLoyalty has also
elected one member to the NexCen Board of Directors.
eLoyalty has concluded that it has the ability to exercise significant
influence over the operating and financial policies of NexCen and thus, has
accounted for its investment under the equity method of accounting.
Notwithstanding the fact that eLoyalty does not own any of the common stock of
NexCen, eLoyalty has recorded 60 percent of NexCen's losses. NexCen, which was
incorporated in July, 1998, has funded its operating losses solely through the
sale of the Series A Stock and Warrants. The recording of 60 percent of the
losses represents eLoyalty's share of NexCen's total Series A Stock and
Warrants.
For the period from July 17, 1998 (date of inception) to December 31, 1998,
NexCen had no revenues, a $704 operating loss and a $684 net loss. Summarized
balance sheet information of NexCen at December 31, 1998 is as follows:
<TABLE>
<S> <C>
Current assets.............................................. $1,070
Noncurrent assets........................................... 58
Current liabilities......................................... 187
Redeemable stock............................................ $1,640
</TABLE>
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 $794 in the nine-month period
ended September 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 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
F-11
<PAGE> 109
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
presented. Such allocations of general corporate overhead expenses are included
in eLoyalty's combined statement of operations as follows:
<TABLE>
<CAPTION>
FOR THE NINE FOR THE SEVEN MONTH
MONTH PERIODS ENDED PERIODS FROM JUNE 1
SEPTEMBER 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 $ 1,005 $ 731 $ 405 $ 972 $ 586 $ 633
Technology Solutions Company
corporate services
allocation..................... 10,769 9,225 7,698 5,544 10,671 5,028 3,298
------- ------- ------ ------ ------- ------ ------
Total allocated general
corporate overhead.... $11,564 $10,230 $8,429 $5,949 $11,643 $5,614 $3,931
------- ------- ------ ------ ------- ------ ------
</TABLE>
On November 12, 1998, TSC made a loan of $1,200 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 in principal
per month for the next twelve months; $20 in principal per month for the next
twenty-four months; and $10 in principal per month for the next twelve months.
The amounts forgiven will be reflected as a compensation expense. Mr. Conway's
outstanding balance and accrued interest as of September 30, 1999 was $1,248. It
is expected that the note representing this loan will be assigned to eLoyalty.
NOTE 5 -- RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
AS OF AS OF AS OF MAY 31,
SEPTEMBER 30, DECEMBER 31, -----------------
1999 1998 1998 1997
------------- ------------ ------- -------
<S> <C> <C> <C> <C>
Amounts billed to clients........................ $38,356 $23,737 $20,712 $ 7,518
Engagements in process........................... 7,671 4,344 3,661 4,428
------- ------- ------- -------
46,027 28,081 24,373 11,946
Receivable allowances............................ (2,369) (2,638) (475) (198)
------- ------- ------- -------
$43,658 $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.
F-12
<PAGE> 110
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
NOTE 6 -- COMPUTERS, FURNITURE AND EQUIPMENT
Computers, furniture and equipment consist of the following:
<TABLE>
<CAPTION>
AS OF AS OF AS OF MAY 31,
SEPTEMBER 30, DECEMBER 31, ---------------
1999 1998 1998 1997
------------- ------------ ------- -----
<S> <C> <C> <C> <C>
Computers and software............................ $ 3,415 $ 2,486 $ 1,835 $ 547
Furniture and equipment........................... 1,464 756 743 27
------- ------- ------- -----
4,879 3,242 2,578 574
Accumulated depreciation.......................... (2,844) (1,661) (1,146) (329)
------- ------- ------- -----
$ 2,035 $ 1,581 $ 1,432 $ 245
======= ======= ======= =====
</TABLE>
Depreciation expense was $1,183, $773, $421, $308, $131 and $60 for the
nine month periods ended September 30, 1999 and 1998, the transition period
ended December 31, 1998 and for the fiscal years ended May 31, 1998, 1997, and
1996, respectively.
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>
F-13
<PAGE> 111
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
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>
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>
F-14
<PAGE> 112
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
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, (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 before and
after 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 1/3 of these
options vest on the second anniversary of the grant date and the remaining 2/3
vest ratably on a monthly basis over the next two 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.
F-15
<PAGE> 113
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
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 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 nine month
period ended September 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 NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 STATES CANADA AUSTRALIA TOTAL
- -------------------------------------------------- ------- ------ ---------- --------
<S> <C> <C> <C> <C>
Revenues.......................................... $83,392 $5,801 $18,459 $107,652
Identifiable Assets............................... $62,258 $3,645 $26,889 $ 92,792
</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>
F-16
<PAGE> 114
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
<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 $789, $524, $469, $738,
$133 and $0 for the nine month periods ended September 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 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> 115
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
of eLoyalty Corporation:
In our opinion, the accompanying statements of operations and accumulated
deficit and of cash flows for the period from January 1, 1997 to May 31, 1997,
present fairly, in all material respects, the results of operations and cash
flows of The Bentley Group, Inc. for the period from January 1, 1997 to May 31,
1997, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States,
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 audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
December 21, 1999
F-18
<PAGE> 116
THE BENTLEY GROUP, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
(IN THOUSANDS)
FOR THE PERIOD FROM JANUARY 1, 1997 TO MAY 31, 1997
<TABLE>
<S> <C>
Revenue..................................................... $4,630
------
Operating expenses:
Project personnel......................................... 3,079
Selling and marketing..................................... 352
General and administrative................................ 1,165
------
Total operating expenses............................... 4,596
------
Income from operations................................. 34
Interest expense............................................ 94
Other expense............................................... 16
------
Net loss and comprehensive loss........................ $ (76)
======
Accumulated deficit at January 1, 1997...................... $ (247)
Net loss.................................................. (76)
Distribution to stockholders.............................. (2)
------
Accumulated deficit at May 31, 1997......................... $ (325)
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE> 117
THE BENTLEY GROUP, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE PERIOD FROM JANUARY 1, 1997 TO MAY 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss............................................... $(76)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation......................................... 68
Loss on disposal of fixed assets..................... 16
Amortization of deferred debt issuance costs......... 17
Changes in assets and liabilities:
Accounts receivable............................... (294)
Other current assets.............................. (31)
Accounts payable.................................. 170
Accrued expenses.................................. 24
Deferred revenues................................. (106)
----
Net cash used in operating activities............. (212)
----
Cash flows from investing activities:
Purchases of property and equipment....................... (133)
Increase in other assets.................................. (32)
----
Net cash used in investing activities..................... (165)
----
Cash flows from financing activities:
Borrowings................................................ 411
Payments under capital lease obligations.................. (32)
Distribution to stockholders.............................. (2)
----
Net cash provided by financing activities................. 377
----
Net change in cash.......................................... --
Cash, beginning of period................................... --
----
Cash, end of period......................................... $ --
====
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 76
Supplement disclosure of noncash investing activities:
Acquisition of assets under capital lease obligations..... $116
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE> 118
THE BENTLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(1) OPERATIONS
The Bentley Group, Inc. (the Company) was founded in 1988. The Company is a
consulting and systems integration organization specializing in customer service
and support. The Company provides consulting services, system implementation and
integration, information services and other solutions for all facets of customer
services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from consulting services is recognized on a time and materials
basis as the services are performed or, for fixed price contracts, upon the
completion of certain project milestones. Deferred revenue represents amounts
collected by the Company in advance of services performed or the completion of
certain milestones.
DEPRECIATION AND AMORTIZATION
The Company provides for depreciation using the straight-line method by
charges to operations in amounts that allocate the cost of property and
equipment over their estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSETS CLASSIFICATION USEFUL LIFE
- --------------------- ------------------
<S> <C>
Computer equipment and software............................ 3-5 years
Office equipment........................................... 3-5 years
Capital lease assets....................................... Life of lease
Vehicles................................................... 3 years
Leasehold improvements..................................... Life of lease, or
useful life,
whichever is less
Furniture and fixtures..................................... 3-7 years
</TABLE>
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, requires disclosure of
any significant off-balance-sheet and credit risk concentration. The Company has
no significant off-balance-sheet concentration of credit risk such as foreign
currency exchange contracts or other hedging arrangements. Financial instruments
that subject the Company to credit risk consist of accounts receivable. To
reduce risk, the Company routinely assesses the financial strength of its
customers and, as a consequence, believes that its accounts receivable credit
risk exposure is limited. The Company maintains an allowance for potential
credit losses but has not experienced any significant losses related to
individual customers or groups of customers in any particular industry or
geographic area. For the period from January 1, 1997 to May 31, 1997, one
customer represented 24% of total revenues.
F-21
<PAGE> 119
THE BENTLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(3) INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
federal or state income taxes on its taxable income. Instead, the stockholders
are liable for the individual federal and state income taxes on their respective
share of the Company's taxable income. Pro forma results reflecting the
treatment of the Company as a tax paying entity are not included since the
Company incurred a net loss.
(4) STOCK OPTION PLAN
The Company maintains an incentive stock option plan (the Plan), which
allows for the granting of options to purchase up to 300 shares of the Company's
common stock. The Plan provides for incentive stock options to be granted to
employees and directors of the Company. The option price, which is determined by
the Board of Directors, may not be less than the fair market value of the stock
on the date of grant. The terms of exercise of the options are determined by the
Board of Directors and are not to exceed ten years (five years for 10% or
greater stockholders). A summary of all stock option activity for the period
from January 1, 1997 through May 31, 1997 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options at January 1, 1997.................................. 216 $1.26
Granted................................................... 42 4.73
--- -----
Options Outstanding at May 31, 1997......................... 258 $1.82
=== =====
Options Exercisable at May 31, 1997......................... 91 $1.20
=== =====
</TABLE>
The weighted average grant date fair value of options granted during the
period was $1.29.
In connection with the renewal of its line of credit in December 1996, the
Company issued warrants to purchase 30 shares of its common stock to a bank. The
warrants are immediately exercisable and have an exercise price of $3.00 per
share. The fair value of the warrants issued to the bank was determined to total
$30, and is being recorded as interest expense through September 30, 1997, which
represents the expiration of the related line of credit facility.
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value of stock options, including stock purchase plans,
or warrants granted to nonemployees and employees to be included in the
statement of operations or disclosed in the notes to financial statements. The
Company has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
elect the disclosure-only alternative under SFAS No. 123. The Company has
computed the pro forma disclosures required under SFAS No. 123 for options and
warrants granted in 1997, 1996 and 1995 using the Black-Scholes options pricing
model prescribed by SFAS No. 123. The weighted average assumptions used for
options and warrants granted in 1997 are:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Risk-free interest rate..................................... 6.47%-6.72%
Expected dividend yield..................................... --
Expected life............................................... 6.5 years
Expected volatility......................................... .01%
</TABLE>
F-22
<PAGE> 120
THE BENTLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Had the Company accounted for stock-based compensation using the fair value
approach permitted by SFAS No. 123, an additional $19 of compensation expense
would have been recognized during the period from January 1, 1997 to May 31,
1997.
The resulting pro forma compensation expense may not be representative of
the amount to be expected in future years as pro forma compensation expense may
vary based on the number of options and warrants granted.
(5) RELATED-PARTY TRANSACTION
The Company has a note payable due to a stockholder, which matured on
December 31, 1997 and bears interest at a rate of 9% per annum. At May 31, 1997,
the unpaid principal balance on the note was $60.
(6) LINE OF CREDIT
During 1996, the Company entered into a $2,000 line-of-credit agreement
with a bank. The first $1.0 million of borrowings under the line bear interest
at the bank's prime rate plus 1.0%. Borrowings in excess of $1.0 million bear
interest at the bank's prime rate plus 2.0%. At May 31, 1997, there was
approximately $1,673 outstanding under the line-of-credit agreement.
(7) 401(k) RETIREMENT PLAN
The Company maintains a qualified 401(k) retirement plan (the 401(k) Plan).
The 401(k) Plan covers substantially all employees who have satisfied a
three-month service requirement and have attained the age of 21. The 401(k) Plan
provides for an optional Company contribution for any plan year at the Company's
discretion. The Plan provides for immediate vesting of Company contributions.
There were no Company contributions to the plan for the period from January 1,
1997 through May 31, 1997.
(8) SUBSEQUENT EVENT
In June 1997, Technology Solutions Company acquired the Company.
F-23
<PAGE> 121
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of NexCen Technologies, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of NexCen Technologies, Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
period from July 17, 1998 (date of inception) to December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, 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 audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 20, 1999
F-24
<PAGE> 122
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,068
Prepaid and other current assets.......................... 2
------
Total current assets.............................. 1,070
Property and equipment, net (Note C)........................ 58
------
Total assets...................................... $1,128
======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
WARRANTS AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 45
Related party payable..................................... 125
Accrued expenses.......................................... 17
------
Total current liabilities......................... 187
------
Commitments and contingencies (Note D)
Series A redeemable convertible preferred stock, $.01 par
value, 909 shares authorized; 318 shares issued and
outstanding at (liquidation preference $890) (Note E)..... 890
Warrants -- Series A redeemable convertible preferred stock
(Note E).................................................. 750
------
Total redeemable convertible preferred stock and
warrants.......................................... 1,640
------
Stockholders' deficit:
Common stock $.01 par value, 3,000 shares authorized; 770
shares issued and outstanding (Note F)................. 8
Receivable for sale of stock.............................. (8)
Deficit accumulated during the development stage.......... (699)
------
Total stockholders' deficit....................... (699)
------
Total liabilities, redeemable convertible
preferred stock and warrants and stockholders'
deficit........................................... $1,128
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE> 123
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
(IN THOUSANDS)
FOR THE PERIOD FROM JULY 17, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
Marketing expenses.......................................... $ (80)
General and administrative expenses......................... (218)
Research and development expenses........................... (406)
-----
Loss from operations........................................ (704)
Interest income............................................. 20
Net loss and comprehensive loss............................. (684)
-----
Accrued dividends on Series A redeemable preferred stock.... (15)
Net loss attributable to common stockholders................ $(699)
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 124
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
FOR THE PERIOD FROM JULY 17, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK RECEIVABLE TOTAL
--------------- FOR SALE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT OF STOCK DEFICIT DEFICIT
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at July 17, 1998................. $ --
Common stock issued...................... 770 $8 $(8) --
Accrued dividends........................ $ (15) (15)
Net loss................................. (684) (684)
--- -- --- ----- -----
Balance at December 31, 1998............. 770 $8 $(8) $(699) $(699)
=== == === ===== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 125
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE PERIOD FROM JULY 17, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
Operating activities:
Net loss.................................................. $ (684)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 12
Changes in operating assets and liabilities:
Prepaid and other assets............................. (2)
Accounts payable..................................... 45
Related party payable................................ 125
Accrued expenses..................................... 17
------
Net cash used by operating activities....................... (487)
------
Investment activities:
Purchase of property and equipment........................ (70)
------
Financing activities:
Proceeds from issuance of redeemable preferred stock...... 875
Proceeds from issuance of preferred stock warrants........ 750
------
Net cash provided by financing activities................... 1,625
------
Net increase in cash and cash equivalents................... 1,068
Cash and cash equivalents at beginning of year.............. --
------
Cash and cash equivalents at end of year.................... $1,068
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE> 126
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
A. NATURE OF BUSINESS:
NexCen Technologies (a development stage enterprise) (the "Company"), was
incorporated in the State of Delaware on July 17, 1998. The Company is
developing customer relationship management software (CRM) that enables,
simplifies and tracks business-to-business transactions through the internet and
the telephone expenses.
The Company is subject to risks common to companies in the industry
including, but not limited to, new technological innovations, dependence on key
personnel, protection of proprietary technology, compliance with government
regulations, uncertainty of market acceptance of products and the need to obtain
additional financing.
The accompanying financial statements have been prepared on a basis which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The Company has generated no
revenues through December 31, 1998 and expects continued future losses. The
Company will require additional financing to continue its planned operations
beyond 1999. Management believes the Company has the ability to raise such
financing.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers investments with maturities of 90 days or less at the
time of acquisition to be cash equivalents. At December 31, 1998, cash and cash
equivalents includes cash on deposit and investments in money market type mutual
funds.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Expenditures for repairs and maintenance are charged to expense as incurred.
When assets are retired or disposed of, the assets and related accumulated
depreciation are eliminated from accounts and any resulting gain or loss is
reflected in income. Depreciation is calculated using the straight line method
over the estimated useful lives of the assets, which are as follows:
<TABLE>
<S> <C>
Computer equipment and software............................. 1-3 years
Office equipment............................................ 3 years
</TABLE>
RESEARCH AND DEVELOPMENT COSTS
Costs related to research, design and development of computer software are
charged to expense when incurred. Upon the establishment of technological
feasibility, eligible costs will be capitalized.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-29
<PAGE> 127
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) -- (CONTINUED)
RISKS AND UNCERTAINTIES
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of money market funds. The
Company maintains substantially all of its money market funds with one banking
institution.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
C. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31, 1998:
<TABLE>
<S> <C>
Computer equipment and software............................. $45
Office equipment............................................ 25
---
Total property and equipment.............................. 70
Less accumulated depreciation............................... 12
---
Property and equipment, net................................. $58
===
</TABLE>
D. COMMITMENTS AND CONTINGENCIES:
LEASE OBLIGATIONS
The Company leases office facilities leases. The facilities lease includes
tax and operating expense escalation clauses. Rental expense for operating
leases was $12 for the year ended December 31, 1998. Future annual payments
under operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASE
---------
<S> <C>
1999........................................................ $34
2000........................................................ 1
---
$35
===
</TABLE>
E. REDEEMABLE PREFERRED STOCK:
On August 28, 1998, the Company issued 318 shares at $2.75 per share of
Series A redeemable convertible preferred stock ("Series A Stock") for proceeds
of $875. Each share of Series A Stock is convertible into common stock at the
option of the holder under a formula which currently results in a 1-for-1
conversion rate. Each share of Series A Stock automatically converts into shares
of common stock under a formula, at the closing of an initial public offering
with an offering price of not less than $5.50 per share and gross proceeds of
not less than $10,000. An equivalent number of common shares is reserved for
conversion.
Each holder of a share of Series A Stock is entitled to the number of votes
equal to that number of shares of common stock into which such shares of Series
A Stock can be converted.
Each holder of Series A Stock is entitled to dividends at a cumulative rate
of five percent (5%) per year compounded annually before any dividends are paid
to common stockholders. These dividends
F-30
<PAGE> 128
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) -- (CONTINUED)
accumulate from the date of issue and are payable to holders on dates determined
by the Board. Accrued dividends at December 31, 1998 totaled $15.
The holders of the Series A Stock have preference as to the assets of the
Company upon liquidation in an amount equal to $2.75 per share, plus an amount
equal to all declared but unpaid dividends and a pro rata share of the remaining
assets on an as-converted basis.
The holders of the Series A Stock have the option to redeem for cash all or
any portion of the outstanding shares on or after August 28, 2005, at a
redemption price of $2.75 per share plus accrued and unpaid dividends whether or
not earned or declared.
In connection with the Series A Stock, the Company issued stock purchase
warrants to a holder of the Series A Stock for proceeds of $750, granting the
warrant-holder the right to purchase 279 shares of redeemable convertible
preferred stock of the Corporation at an exercise price of $.01 per share. The
warrants are exercisable beginning February 28, 1999 and expire August 28, 2015.
The warrants are recorded as redeemable securities on the balance sheet.
F. COMMON STOCK:
The Company issued a total of 770 shares of common stock in 1998 to the
four founders of the Company. Of this total, 220 shares were pursuant to
restricted stock agreements where the founders may not sell, transfer, or
dispose of the restricted shares of common stock prior to vesting of such stock.
The vesting period begins at date of issue and occurs over four years with 25%
vesting at the end of year one. The Company has a receivable related to this
issuance of $8.
G. INCOME TAXES:
The Company's deferred income taxes as of December 31, 1998 were as
follows:
<TABLE>
<S> <C>
Deferred income taxes assets:
Net operating losses...................................... $ 270
Other..................................................... 6
Tax credit carryforwards.................................. 4
-----
Net total deferred income tax assets........................ 280
Valuation allowance......................................... (280)
-----
Net deferred income taxes................................... $ --
=====
</TABLE>
At December 31, 1998, the Company has available net operating loss
carryforwards for federal and state tax purposes of approximately $671 which
begin to expire in 2018 and 2003, respectively. The Company also has available
research and experimental credit carryforwards to offset future federal income
taxes of approximately $4 which begin to expire in 2013. Under the provisions of
the Internal Revenue Code, certain substantial changes in NexCen's ownership may
have limited, or may limit in the future, the amount of net operating loss and
research and development tax credit carryforwards which could be used annually
to offset future taxable income and income tax liability. The amount of any
annual limitation is determined based upon NexCen's value prior to an ownership
change.
Management of the Company has evaluated the positive and negative evidence
bearing upon the realizability of its deferred tax assets, which are comprised
principally of net operating loss carryforwards. Due to the uncertainty of the
ability to use the net operating losses in the future, management has recorded a
full valuation allowance.
F-31
<PAGE> 129
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) -- (CONTINUED)
H. STOCK OPTION PLAN:
On August 26, 1998, the Board of Directors adopted the Stock Incentive Plan
(the "Plan"). The Plan enables the Company to grant options to purchase common
stock and restricted stock awards to employees, members of the Board of
Directors, and consultants of the Company. Stock options entitle the holder to
purchase common stock from the Company, for a specified exercise price, during a
period specified by the applicable option agreement. Generally, the options vest
over four years. The options expire on the date determined by the Board of
Directors, not to exceed 10 years following the date of the grant. The total
number of shares of common stock which may be issued under the Plan is 230. This
number can be increased by a Board resolution, subject to the approval of the
shareholders. All options granted to date vest over four years and expire ten
years from the date of the grant.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
WEIGHTED
AVERAGE
OPTIONS SHARES EXERCISE PRICE
- ------- ------ --------------
<S> <C> <C>
Outstanding of beginning of period.......................... -- --
Granted..................................................... 52 $0.22
Exercised................................................... -- --
Cancelled................................................... -- --
-- -----
Outstanding at December 31, 1998............................ 52 $0.22
== =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE PRICE
- ------------------------ -------------- ----------- ---------
<S> <C> <C> <C>
$0.10 -- 0.30......................................... 52,000 9.77 years $0.22
</TABLE>
There were no options exercisable at December 31, 1998.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related Interpretations in
accounting for the Plan and accordingly no compensation expense has been
recorded for options issued to employees since the option exercise prices were
set by the Board of Directors at the estimated fair market value at the date of
the grant.
Pursuant to the requirements of SFAS 123 the Company has estimated the
value of its stock options by applying a present value approach which does not
consider expected volatility of the underlying stock ("minimum value method")
using an assumed risk free interest rate of 4.67% and an assumed life of six
years and no expected dividends for the year ended December 31, 1998.
The pro forma compensation charge results of applying the SFAS 123
calculation did not have a material effect on the results of operations as
reported for the year ended December 31, 1998.
I. RELATED PARTIES:
The Company entered into a software license agreement with one of its
investors and owes the investor $125. This amount is included in accounts
payable as of December 31, 1998. This agreement has been subsequently amended as
described in footnote J.
F-32
<PAGE> 130
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) -- (CONTINUED)
J. SUBSEQUENT EVENTS:
On January 26, 1999 the Company adopted an employee benefit plan under
Section 401(k) of the Internal Revenue Code covering substantially all
employees. The plan allows employees to make contributions up to a specified
percentage of their compensation. The Company has not made any contributions to
the Plan to date.
In September 1999, the Company renegotiated its license agreement with one
of its investors (Note I). The Company entered into a $100 promissory note
maturing on August 15, 2014 which replaced the payable due at December 31, 1998
of $125. In addition to the promissory note, the Company entered an amended
royalty payment schedule based on the future software sales by the Company.
In September 1999, the Company entered into three Demand Convertible
Promissory Notes for a total of $500 plus interest of prime plus 2%. In
addition, warrants to purchase common stock were issued at $.30 per share. The
number of shares is determined as twenty percent of the value of the notes plus
accrued and unpaid interest divided by the per share price of the next round of
financing. If the next round of financing does not occur prior to March 1, 2000,
the notes and warrants convert to Series A Preferred Stock at $2.75 per share.
F-33
<PAGE> 131
ELOYALTY CORPORATION
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> 132
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholder
of eLoyalty Corporation:
Our audits of the combined financial statements of eLoyalty Corporation
referred to in our report dated September 10, 1999, appearing in this Form S-1
also included an audit of the financial statement schedule appearing on page S-1
of this Form S-1. In our opinion, this financial statement schedule present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related combined financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
September 10, 1999
S-2
<PAGE> 133
ANNEX A
[CSFS LETTERHEAD]
January 26, 2000
Board of Directors
Technology Solutions Company
205 North Michigan Avenue, Suite 1500
Chicago, IL 60601
Members of the Board:
We understand that Technology Solutions Company (the "Company") is
proposing to distribute (the "Distribution") to the holders (the "Stockholders")
of the common stock, par value $.01 per share (the "Company Common Stock"), of
the Company all of the outstanding shares of common stock, par value $.01 per
share (the "ELOY Common Stock"), of eLoyalty Corporation, a wholly owned
subsidiary of the Company ("ELOY"), upon the terms and subject to the conditions
set forth in the Company's Registration Statement on Form S-1, dated January 10,
2000 (the "Form S-1"). The Company after the Distribution is hereinafter
referred to as "New TSC" and the Company Common Stock after the Distribution is
hereinafter referred to as "New TSC Common Stock". You have asked us to advise
you with respect to (i) the fairness of the Distribution from a financial point
of view to the Stockholders and (ii) as to whether the Distribution should
materially and adversely affect the ability of New TSC and ELOY to meet their
respective projected operating and capital expenditures immediately following
the Distribution through December 31, 2000, as set forth in the Management
Forecasts (as defined below).
In arriving at our opinions, we have reviewed certain publicly available
business and financial information relating to the Company and ELOY, as well as
the Form S-1. We have also reviewed certain other information, including
financial forecasts, provided to us by the Company and ELOY, and have met with
the Company's and ELOY's managements to discuss the business and prospects of
the Company, ELOY and New TSC.
We have also considered certain financial and stock market data of the
Company and certain financial data of ELOY and New TSC and we have compared that
data with similar data for publicly held companies in businesses we deemed
similar to ELOY and New TSC. We also considered such other information,
financial studies, analyses and investigations and financial, economic and
market criteria which we deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information (including the
information contained in the Form S-1) and have relied on its being complete and
accurate in all material respects. With respect to the financial forecasts
(including the quarterly forecast income statement and cash flow statement for
each of ELOY and New TSC through December 31, 2000, as well as the projected
balance sheet for each of ELOY and New TSC as of December 31, 1999 pro forma for
the Distribution (collectively the "Management Forecasts")), we have assumed,
with your consent, that they have been reasonably prepared on bases reflecting
the best currently available estimates and judgments of the Company's management
as to the future financial performance of ELOY and New TSC and as to the
potential benefits anticipated to result from the Distribution and that the
Management Forecasts will be realized in the amounts and at the times indicated
therein. We assume no responsibility for and express no views as to such
forecasts or the assumptions on which they are based.
A-1
<PAGE> 134
[CSFS LETTERHEAD]
We have relied upon the assessments of the Company's and ELOY's managements
with respect to the business, operational and strategic risks of the
Distribution. We have not been requested to analyze, and did not analyze or
evaluate, the potential benefits of alternatives to the Distribution.
Consequently, this letter does not address the merits of the Distribution as
compared to available alternatives, nor does this letter constitute a
recommendation as to whether the Company should effect the Distribution. We have
not been requested to make, and have not made, an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of the Company
or ELOY, nor have we been furnished with any such evaluations or appraisals.
This letter also does not address the solvency of the Company or following the
Distribution, ELOY or New TSC or their respective abilities to access the
capital markets at any time prior to or after the Distribution. Our views are
necessarily based upon financial, economic, market and other conditions as they
exist and can be evaluated on the date hereon.
We have assumed that all necessary governmental and regulatory approvals,
consents and filings and any required consents of third parties have been or
will be timely obtained or made and that no such governmental or regulatory
authority or third party will impose any terms or conditions that will have a
material adverse effect on ELOY or New TSC. On your instructions, we have
assumed that, for federal and state income tax purposes, no income, gain or loss
will be recognized by the Company or, by the Stockholders as a result of the
Distribution. We have also assumed that the Distribution will occur in the
manner set forth in the Form S-1 and that, after the Distribution, ELOY will be
accounted for as an entity independent of New TSC. With your consent, we have
also assumed that (i) there has been no material adverse change in the business,
operations, condition (financial and otherwise) or prospects of the Company or
ELOY since the date of the most recent financial information regarding the
Company and ELOY, as applicable, provided to us by the Company and (ii) that the
capitalization of, and the amounts and sources of financing for, New TSC and
ELOY following the Distribution will be as set forth in the Management
Forecasts.
We are not expressing any view as to the actual value of New TSC Common
Stock following the Distribution or of ELOY Common Stock when issued to the
Stockholders pursuant to the Distribution or the prices at which New TSC Common
Stock and ELOY Common Stock will trade subsequent to the Distribution. The
actual values of and prices at which New TSC Common Stock and ELOY Common Stock
will trade following the Distribution will depend on a variety of factors
including, without limitation, prevailing interest rates, dividend rates, market
conditions, general economic conditions and other factors which generally
influence the prices of securities. This letter does not address whether the
aggregate market value of the outstanding shares of New TSC Common Stock and
ELOY Common Stock following the Distribution will exceed the aggregate market
value of the outstanding shares of Company Common Stock at any time prior to the
Distribution or the aggregate market value of the outstanding shares of Company
Common Stock in the absence of the Distribution. The ELOY Common Stock and the
New TSC Common Stock may, after the Distribution, initially trade at prices
below those at which they would trade on a fully distributed basis.
As we have previously advised you, we are generally of the view that a
tax-free pro rata distribution of a subsidiary's common stock to the holders of
the common stock of the subsidiary's parent is inherently fair because the
holders of the parent company's common stock merely receive what they already
own in a different form. With your consent, we have evaluated the fairness of
the Distribution to the Stockholders solely using this criteria and we have
assumed that the Distribution will not result in the loss of any synergies by,
or the creation of any additional financial burdens on, New TSC or ELOY other
than as reflected in the Management Forecasts referred to above.
A-2
<PAGE> 135
[CSFS LETTERHEAD]
We have acted as financial advisor to the Company in connection with the
Distribution and will receive a fee for our services which is contingent upon
the consummation of the Distribution. In the ordinary course of our business, we
and our affiliates may actively trade the debt and equity securities of the
Company for our and such affiliates' own accounts and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
It is understood that this letter is for the information of the Board of
Directors of the Company in connection with its consideration of the
Distribution, does not constitute a recommendation to any stockholder of the
Company as to whether such stockholder should buy, sell or continue to hold
Company Common Stock or, following the Distribution, New TSC Common Stock or
ELOY Common Stock and is not to be quoted or referred to, in whole or in part,
in any registration statement, prospectus or proxy statement, or in any other
document used in connection with the offering or sale of securities, nor shall
this letter be used for any other purposes, without our prior written consent,
except that, provided we are given a reasonable opportunity to review any
amendment to the Form S-1 after the date hereof before any submission or
distribution thereof, and this letter may be attached in its entirety as an
exhibit to the Form S-1 relating to the Distribution.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, (i) the Distribution is fair to the Stockholders from a financial
point of view and (ii) the Distribution should not materially and adversely
affect the ability of New TSC and ELOY to meet their respective projected
operating and capital expenditures immediately following the Distribution
through December 31, 2000 as set forth in the Management Forecasts.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
By: /s/ JOE JOSEPHSON
---------------------------------------
Joe Josephson
Managing Director
A-3
<PAGE> 136
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the
Registrant in connection with the securities being registered.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ *
Nasdaq National Market Listing Fee.......................... *
Printing Costs.............................................. *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Blue Sky Fees and Expenses.................................. *
Transfer Agent and Registrar Fees........................... *
Miscellaneous............................................... *
-------
Total............................................. *
=======
</TABLE>
- ---------------
* Technology Solutions Company is paying the costs and expenses of the
Registrant in connection with the securities being offered. The Registrant is
not paying any of these costs and expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
Delaware corporation to indemnify any persons who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person was an officer or director of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe his
conduct was illegal. A Delaware corporation may indemnify officers and directors
in an action by or in the right of the corporation under the same conditions,
except that no indemnification is permitted without judicial approval if the
officer or director is adjudged to be liable to the corporation in the
performance of his duty. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
The company's bylaws provide that it will indemnify its 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 the board of directors. The 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 the Certificate of
Incorporation, bylaws, agreements, vote of stockholders or disinterested
directors or otherwise. The bylaws also permit the company to secure insurance
on 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.
In accordance with Section 102(b)(7) of the DGCL, the company's amended
Certificate of Incorporation provides that directors shall not be personally
liable for monetary damages for breaches of their fiduciary duty as directors
except for (i) breaches of their duty of loyalty to the company or its
stockholders, (ii) acts of omissions not in good faith or which involve
intentional misconduct or knowing
II-1
<PAGE> 137
violations of law, (iii) certain transactions under Section 174 of the DGCL
(unlawful payment of dividends or unlawful stock purchases or redemptions) or
(iv) transactions from which a director derives an improper personal benefit.
The effect of this provision is to eliminate the personal liability of directors
for monetary damages for actions involving a breach of their fiduciary duty of
care, including any actions involving gross negligence.
The company has directors' and officers' liability insurance which
provides, subject to certain policy limits, deductible amounts and exclusions,
coverage for all persons who have been, are or may in the future be, directors
or officers of the company, against amounts which such persons may pay resulting
from claims against them by reason of their being such directors or officers
during the policy period for certain breaches of duty, omissions or other acts
done or wrongfully attempted or alleged. Such policies provide coverage to
certain situations where the company cannot directly provide indemnification
under the DGCL.
In addition, we intend to enter into an indemnification agreement with each
of our directors, a form of which has been filed with this registration
statement. This agreement provides each director with, among other things,
specific contractural rights to the maximum identification permitted by the
DGCL.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
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.
In December 1999, we issued to TSC an aggregate of 41,400,000 shares of our
common stock for an aggregate consideration of $414,000. The purchase and sale
of our common stock to TSC was exempt from registration under Section 4(2) of
the Securities Act because the transaction did not involve a public offering.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
2.1+ Form of Reorganization Agreement between TSC and eLoyalty
3.1 Certificate of Incorporation of eLoyalty, as amended
3.2+ Bylaws of eLoyalty
4.1+ Form of Rights Agreement between eLoyalty and ChaseMellon
Shareholder Services, L.L.C. as Rights Agent
5 Opinion of Counsel
10.1+ 1999 Stock Incentive Plan and Amendment Number One
10.2+ 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
</TABLE>
II-2
<PAGE> 138
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.7+ Form of TSC (Licensor) Intellectual Property License
Agreement
10.8+ Form of eLoyalty (Licensor) 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
10.12+ Kelly D. Conway Promissory Note dated November 12, 1998
10.13 Office Lease -- Two Conway Park made as of December 6, 1999
by and between Riggs & Company as Landlord and eLoyalty as
Tenant
10.14 eLoyalty Corporation Executive Deferred Compensation Plan
dated January 1, 2000
10.15 Form of Indemnification Agreement between eLoyalty and each
director of eLoyalty
21+ Subsidiaries of eLoyalty
23.1 Consent of PricewaterhouseCoopers LLP, Chicago, Illinois,
Independent Accountants
23.2 Consent of PricewaterhouseCoopers LLP, Boston Massachusetts,
Independent Accountants
23.2 Consent of Counsel (included in Exhibit 5)
24.1 Power of Attorney from John T. Kohler, Director
24.2 Power of Attorney from Michael J. Murray, Director
24.3 Power of Attorney from John R. Purcell, Director
24.4 Power of Attorney from Michael R. Zucchini, Director
27+ Financial Data Schedule
</TABLE>
- ---------------
+ Previously filed.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 139
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on January 31, 2000.
ELOYALTY CORPORATION
By: /s/ KELLY D. CONWAY
----------------------------------
Kelly D. Conway
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ KELLY D. CONWAY Director, President and Chief January 31, 2000
- ----------------------------------------------------- Executive Officer (principal
Kelly D. Conway executive officer)
/s/ TIMOTHY J. CUNNINGHAM Chief Financial Officer January 31, 2000
- ----------------------------------------------------- (principal financial officer
Timothy J. Cunningham and principal accounting
officer)
/s/ JOHN T. KOHLER Director, Interim Chairman of January 31, 2000
- ----------------------------------------------------- the Board of Directors
John T. Kohler
/s/ MICHAEL J. MURRAY Director January 31, 2000
- -----------------------------------------------------
Michael J. Murray
/s/ JOHN R. PURCELL Director January 31, 2000
- -----------------------------------------------------
John R. Purcell
/s/ MICHAEL R. ZUCCHINI Director January 31, 2000
- -----------------------------------------------------
Michael R. Zucchini
</TABLE>
II-4
<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
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<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
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<PAGE> 10
eLOYALTY CORPORATION
(A DELAWARE CORPORATION)
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
eLOYALTY CORPORATION
eLOYALTY CORPORATION, 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 XV of the Certificate of Incorporation of the
Corporation is hereby amended to read in its entirety as follows:
"The Corporation expressly elects to be governed by Section
203 of the General Corporation Law of the State of Delaware,
as amended."
2. That, in accordance with the applicable provisions of
Section 242 of the General Corporation Law of the State of Delaware,
the aforesaid Amendment was duly adopted by the unanimous written
consent of the Board of Directors and the sole stockholder of the
Corporation.
IN WITNESS WHEREOF, eLOYALTY CORPORATION has caused this
Certificate of Amendment to be executed on its behalf by its President, Kelly D.
Conway, this 20th day of January, 2000.
eLOYALTY CORPORATION
By: /s/ KELLY D. CONWAY
-------------------------
Kelly D. Conway
President
<PAGE> 1
[S&A Letterhead]
EXHIBIT 5
February 1, 2000
eLoyalty Corporation
205 N. Michigan Avenue
Chicago, Illinois 60601
Re: 44,000,000 Shares of Common Stock, $.01 par value and
44,000,000 Preferred Stock Purchase Rights associated
therewith
Dear Gentlemen:
We refer to the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission (the "Commission") by eLoyalty
Corporation, a Delaware corporation (the "Company"), under the Securities Act of
1933, as amended, on January 10, 2000, as amended by Amendment No. 1 to the
Registration Statement filed with the Commission on February 1, 2000, as may
further be amended or supplemented (collectively, the "Registration Statement")
with respect to the distribution (the "Distribution") of up to 44,000,000 shares
of the Company's Common Stock, $.01 par value (the "Shares") together with
44,000,000 Preferred Stock Purchase Rights of the Company associated therewith
(the "Rights"), by Technology Solutions Company, a Delaware corporation ("TSC"),
in a spin-off transaction. The terms of the Rights will be set forth in a Rights
Agreement substantially in the form of Exhibit 4.1 to the Company's Registration
Statement on Form S-1, File Number 333-94293 (the "Rights Agreement"), to be
entered into between the Company and ChaseMellon Shareholder Services, L.L.C.,
as Rights Agent.
The Shares include 41.4 million shares currently held by TSC
(the "Existing Shares") and up to 2.6 million shares (the "Adjustment Shares")
to be issued to TSC prior to the Distribution based on the difference between
the number of shares of common stock of TSC outstanding as of the record date
for the Distribution and 41.4 million.
We are familiar with the proceedings to date with respect to
the proposed Distribution of the Shares and the Rights and have examined such
records, documents and questions of law, and satisfied ourselves as to such
matters of fact, as we have considered relevant and necessary as a basis for
this opinion letter.
Based on the foregoing, we are of the opinion that:
1. The Company is duly incorporated and validly existing under
the laws of the State of Delaware.
2. The Existing Shares are legally issued, fully paid and
non-assessable.
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<PAGE> 2
3. The Adjustment Shares will be legally issued, fully paid
and non-assessable when (i) the Company's Board of Directors or a duly
authorized committee thereof shall have duly adopted final resolutions
authorizing the issuance and sale to TSC of the Adjustment Shares, and (ii)
certificates representing the Adjustment Shares shall have been duly executed,
countersigned and registered and duly delivered to TSC against payment of the
agreed consideration therefor.
4. The Rights associated with the Existing Shares and the
Adjustment Shares will be validly issued when (i) the Rights Agreement shall
have been duly executed by the parties thereto, (ii) such Rights have been duly
issued in accordance with the terms of the Rights Agreement, and (iii)
certificates representing the Existing Shares and the Adjustment Shares shall
have been duly executed, countersigned and registered and duly delivered to TSC
against payment of the agreed consideration therefor.
This opinion letter is limited to the General Corporation Law
of the State of Delaware and the federal laws of the United States of America.
We do not find it necessary for purposes of this opinion
letter to cover, and accordingly we express no opinion as to, the application
of the securities or blue sky laws of the various states or the District of
Columbia to the Distribution of the Shares or the Rights.
We hereby consent to the filing of this opinion letter as an
Exhibit to the Registration Statement and to all references to our firm
included in or made a part of the Registration Statement.
Very truly yours,
Sidley & Austin
<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
Technology Solutions Company, a Delaware corporation doing business as
TSC, and KELLY D. CONWAY ("Employee") enter into this Employment Agreement
("Agreement") as of January 19, 1996.
In consideration of the agreements and covenants contained in this
Agreement, TSC and Employee agree as follows:
1. EMPLOYMENT DUTIES: TSC shall employ Employee as an Executive Vice
President. Employee shall have such responsibilities, duties and authority as
the President and Chief Executive Officer may reasonably designate and are
commensurate with the position of Executive Vice President. Employee shall
perform faithfully the duties assigned to him to the best of his ability and
shall devote his full and undivided business time and attention to the
transaction of TSC's business.
2. TERM OF EMPLOYMENT: The term of employment ("Term of Employment")
covered by this Agreement shall commence as of the effective date of this
Agreement and continue until terminated pursuant to Paragraph 3 below.
3. TERMINATION: This Agreement may be terminated as follows:
(a) TSC may terminate Employee's employment and this Agreement for any
reason upon giving Employee 90 days notice of termination. TSC may make the
termination effective at any time within the 90 day notice period ("Termination
Date"). During this period Employee shall make a good faith effort to satisfy
those professional obligations requested to be performed b TSC, which may
include transferring duties and assisting in the transition of client
responsibilities, including meeting with clients and transferring confidential
material. TSC must, however, for a period of two years following the Termination
Date, unless Employee is terminated for Serious Misconduct, continue Employee's
base salary on the Termination Date ("Current Salary"); provide a bonus equal to
the average annual bonus earned during the two years immediately preceding the
termination ("Average Bonus") for each of the two years, payable each year when
annual bonuses are paid; and continue his health insurance benefits until the
end of the two year period or until Employee is re-employed, whichever comes
first. (These payments are referred to collectively as "Termination Payments").
(b) TSC may terminate Employee's employment and this Agreement
immediately without notice and with no salary and benefit continuation if
Employee engages in "Serious Misconduct." For purposes of this Agreement,
"Serious Misconduct" means embezzlement or misappropriation of corporate funds,
other acts of dishonesty, significant activities materially harmful to TSC's
reputation, or any significant violation of any statutory or common law duty of
loyalty to TSC.
<PAGE> 2
(c) If, following a Change in Control, Employee's title, position,
salary, or benefits is reduced or Employee's duties or status is materially
reduced, and Employee resigns within 90 days after the reduction becomes
effective, or if Employee is ordered to relocate his residence for a period in
excess of six months to any location outside of the metropolitan area where he
resides when the Change in Control occurs and Employee declines and is
terminated, Employee shall receive his Termination Payments. Notwithstanding
anything to the contrary in any of Employee's stock option agreements.
Employee's unvested TSC shares at option shall vest automatically upon a Change
in Control. (A Change in Control is defined as (i) the acquisition by any
individual, entity or group, of beneficial ownership (within the meaning of Rule
13 d-3 promulgated under the Securities Exchange Act of 1934) of 40% or more of
the outstanding shares of the common stock of TSC; (ii) the approval of the
stockholders of TSC of a merger, where immediately after the merger, persons who
were the holders of a majority of TSC's outstanding common stock immediately
prior to the merger fail to own at least a majority of the outstanding common
stock of the surviving entity in substantially the same proportions as their
holdings of TSC common stock immediately prior to the merger; or (iii) the sale
of substantially all the assets of TSC other than to a corporation in which more
than 60% of the outstanding shares are beneficially owned by the individuals and
entities who are the beneficial owners of the Company stock prior to the
acquisition.
(d) If Employee dies, TSC must continue Employee's Current Salary and
health insurance benefits for a period of one year following the date of his
death, and, in addition, provide an Average Bonus, all payable to Employee's
estate. If Employee becomes permanently disabled and unable to continue to work
at TSC, TSC must pay Employee's Current Salary, health insurance benefits and an
Average Bonus, for a period of one year following the date Employee is declared
permanently disabled.
(e) If either party materially breaches this Agreement and fails to cure
the breach within 30 days after receiving notice of the breach from the
breached party, the breached party may consider this Agreement as terminated by
the breaching party.
(f) Employee may terminate his employment upon giving TSC 90 days
notice. TSC may make the termination effective at any time within the 90 day
notice period. During this period Employee shall make a good faith effort to
satisfy those professional obligations requested to be performed by TSC, which
may include transferring duties and assisting in the transition of client
responsibilities, including meeting with clients.
(g) Notwithstanding anything in the foregoing to the contrary, if any of
the payments to Employee provided for in this Agreement, together with any other
payments which Employee has the right to receive from TSC or any corporation
which is a member of an "affiliated group" as defined in Section 1504(a) of the
Code without regard to Section 1504(b) of the Internal Revenue Code) of which
TSC is a member, would constitute a "parachute payment" (as defined in Section
280G(b)(2) of the Internal Revenue Code). the payments pursuant to this
Agreement shall be reduced to the largest amount as will result in no portion of
such payments being subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code; provided, however, that in determining whether any
reduction in the payments under this Agreement pursuant to this sentence is
necessary, the mutually agreed upon value for the non-compete provision as
2
<PAGE> 3
determined by an outside expert shall be deducted from the value of the
parachute payment. If after applying the value for the non-compete provision, a
reduction in payment is still necessary, the Employee shall determine what
portion of the parachute payment shall be reduced, and such determination shall
be conclusive and binding on TSC with respect to its treatment of the payment
for tax reporting purposes.
4. SALARY: As compensation for his services, TSC shall pay Employee a
base salary of not less than the amount listed in Exhibit A to this Agreement.
Employee's base salary shall be subject to annual review and may, at the
discretion of TSC's management, be adjusted from that listed in Exhibit A
according to Employee's responsibilities, capabilities and performance during
the preceding year.
5. BONUS AND STOCK OPTIONS: Employee shall participate in TSC's Vice
Presidents Compensation Program, as amended from time to time, which includes
base salary, annual bonus, and equity.
6. EMPLOYEE BENEFITS: During the Term of Employment, Employee shall be
entitled to participate in such employee benefit plans, including group pension,
life and health insurance and other medical benefits, and shall receive all
other fringe benefits as TSC may make available generally to its Vice
Presidents.
7. BUSINESS EXPENSES: TSC shall reimburse Employee for all reasonable
and necessary business expenses incurred by Employee in performing his duties.
Employee shall provide TSC with supporting documentation sufficient to satisfy
reporting requirements of the Internal Revenue Service and TSC. TSC's
determination as to reasonableness and necessary shall be final.
8. NONCOMPETITION AND NONDISCLOSURE: Employee acknowledges that the
successful development and marketing of TSC's professional services and products
require substantial time and expense. Such efforts generate for TSC valuable and
proprietary information ("Confidential Information") which gives TSC a business
advantage over others who do not have such information. Confidential Information
of TSC and its clients and prospects includes, but is not limited to, the
following: business strategies and plans; proposals; deliverables; prospects and
customer lists; methodologies; training materials; and computer software.
Employee acknowledges that during the Term of Employment, he will obtain
knowledge of such Confidential Information. Accordingly, Employee agrees to
undertake the following obligations which he acknowledges to be reasonably
designed to protect TSC's legitimate business interests without unnecessarily or
unreasonably restricting Employee's post-employment opportunities:
(a) Upon termination of the Term of Employment for any reason, Employee
shall return all TSC property, including but not limited to computer programs,
files, notes, records, charts, or other documents or things containing in whole
or in part any of TSC's Confidential Information;
3
<PAGE> 4
(b) During the Term of Employment and subsequent to termination,
Employee agrees to treat all such Confidential Information as confidential and
to take all necessary precautions against disclosure of such information to
third parties during and after Employee's employment with TSC. Employee shall
refrain from using or disclosing to any person, without the prior written
approval of TSC's Chief Executive Officer, any Confidential Information unless
at that time the information has become generally and lawfully known to TSC's
competitors;
(c) Without limiting the obligations of Paragraph 8(b), Employee shall
not, for himself or as an agent, partner or employee of any person, firm or
corporation: (i) for a period of two years following his termination of
employment for any reason, engage in the practice of consulting or related
services for any client of TSC for whom Employee performed services, or
prospective TSC client to whom Employee submitted, or assisted in the submission
of a proposal during the two year period preceding his termination of
employment; or (ii) for a period of two years following any involuntary
termination for any reason or for a period of six months following Employee's
voluntary termination from TSC so long as TSC continues to pay his salary during
the six month period, participate in or have a financial, management or other
interest in any business enterprise that engages in, or within two years of the
termination of Employee's employment has plans to engage in, substantial and
direct competition with TSC if such participation will likely involve the use by
Employee of business plans, strategies and other confidential TSC business
information developed or acquired by Employee during his employment as a senior
officer of TSC;
(d) During a two year period immediately following Employee's
termination of employment for any reason, Employee shall not induce or assist in
the inducement of any TSC employee away from TSC's employ or from the faithful
discharge of such employee's contractual and fiduciary obligations to serve
TSC's interests with undivided loyalty;
(e) For two years following his termination of employment for any
reason, Employee shall keep TSC currently advised in writing of the name and
address of each business organization for which he acts as agent. partner,
representative or employee.
9. REMEDIES: Employee recognizes and agrees that a breach of any or all of
the provisions of Paragraph 8 will constitute immediate and irreparable harm to
TSC's business advantage, including but not limited to TSC's valuable business
relations, for which damages cannot be readily calculated and for which damages
are an inadequate remedy. Accordingly, Employee acknowledges that TSC shall
therefore be entitled to an order enjoining any further breaches by the
Employee. Employe agrees to reimburse TSC for all costs and expenses, including
reasonable attorneys' fees incurred by TSC in connection with the enforcement of
its rights under any provision of this Agreement.
10. INTELLECTUAL PROPERTY: During the Term of Employment, Employee shall
disclose to TSC all ideas, inventions and business plans which he develops
during the course of his employment with TSC which relate directly or indirectly
to TSC's business, including but not limited to any computer programs,
processes, products or procedures which may, upon application, be protected by
patent or copyright. Employee agrees that any such ideas, inventions
4
<PAGE> 5
or business plans shall be the property of TSC and that Employee shall at TSC's
request and cost, provide TSC with such assurances as is necessary to secure a
patent or copyright.
11. PRINCIPLES AND POLICIES: Employee agrees to be bound by TSC's
principles and policies, including Principles and Policies of Business Conduct,
as amended from time to time, which is incorporated herein by reference.
12. ASSIGNMENT: Employee acknowledges that the services to be rendered
pursuant to this Agreement are unique and personal. Accordingly, Employee may
not assign any of his rights or delegate any of his duties or obligations under
this Agreement. Subject to Paragraph 3(c) above, TSC may assign its rights,
duties or obligations under this Agreement to a subsidiary or affiliated company
of TSC or purchaser or transferee of a majority of TSC's outstanding capital
stock or a purchaser of all, or substantially all, of the assets of TSC.
13. NOTICES: All notices shall be in writing, except for notice of
termination of employment, which may be oral if confirmed in writing within 14
days. Notices intended for TSC shall be sent by registered or certified mail
addressed to it at 205 North Michigan Avenue, 15th Floor, Chicago, Illinois
60601 or its current principal office, and notices intended for Employee shall
be either delivered personally to him or sent by registered or certified mail
addressed to his last known address.
14. ENTIRE AGREEMENT: This Agreement and Exhibit A attached hereto
constitute the entire agreement between TSC and Employee. Neither Employee nor
TSC may modify this Agreement by oral agreements, promises or representations.
The parties may modify this Agreement only by a written instrument signed by the
parties.
15. APPLICABLE LAW: This Agreement shall be governed by and construed in
accordance with the laws of the State of Illinois.
16. MEDIATION OF DISPUTES: Neither party shall initiate arbitration or
other legal proceedings (except for any claim under Paragraph 8 of this
Agreement), against the other party, or, in the case of TSC, any of its
directors, officers, employees, agents, or representatives, relating in any way
to this Agreement, to Employee's employment with TSC, the termination of his
employment or any or all other claims that one party might have against the
other party until 30 days after the party against whom the claim[s] is made
("Respondent") receives written notice from the claiming party of the specific
nature of any purported claim and the amount of any purported damages. Employee
and TSC further agree that if Respondent submits the claiming party's claim to
the Center for Public Resources, 680 Fifth Avenue, New York, New York 10019, for
nonbinding mediation prior to the expiration of such 30 day period, the claiming
party may not institute arbitration or other legal proceedings against
Respondent until the earlier of (i) the completion of nonbinding mediation
efforts, or (ii) 90 days after the date on which the Respondent received written
notice of the claimant's claim.
5
<PAGE> 6
17. BINDING ARBITRATION: Employee and TSC agree that all claims or
disputes relating to his employment with TSC or the termination of such
employment, and any and all other claims that Employee might have against TSC,
any TSC director, officer, employee, agent, or representative, and any and all
claims or disputes that TSC might have against Employee (except for any claims
under Paragraph 8 of this Agreement) shall be resolved by expedited arbitration.
The party pursuing a claim should submit the claim to Jarns/Endispute, Inc.,
Three First National Plaza, 70 West Madison. Suite 200, Chicago, IL 60602. Such
arbitration shall be conducted in Chicago before a single arbitrator within
twenty days of the submission of a claim. The parties shall select an arbitrator
by mutual agreement from a panel of arbitrators proposed by Jams/Endispute, Inc.
The panel shall consist of former judges experienced in arbitrating employment
disputes. If the parties are unable to agree on an arbitrator. Jams/Endispute,
Inc. shall select an arbitrator in accordance with its procedures.
The parties shall exchange documents relevant to the claims alleged, but
shall undertake no additional discovery. The parties may submit pre-hearing
briefs only. The arbitration proceeding shall not be transcribed or otherwise
recorded. The arbitrator shall render an award within seven days of completion
of the hearing. Both parties agree that the arbitrator's award shall be final
and binding, and the parties waive any right to appeal.
18. SEVERABILITY: Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
19. Employee acknowledges that he has read, understood and accepts the
provisions of this Agreement.
Technology Solutions Company KELLY D. CONWAY
By: John T. Kohler Kelly D. Conway
----------------------------- ----------------------------
Position: CEO
----------------------
Date: Jan 25, 1996 Date: 1/19/96
-------------------------- ----------------------
6
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
Technology Solutions Company, a Delaware corporation doing business as TSC,
and Timothy J. Cunningham ("Employee") enter into this Employment Agreement
("Agreement") as of November 15, 1999.
In consideration of the agreements and covenants contained in this
Agreement, TSC and Employee agree as follows:
1. Employment Duties: TSC shall employ Employee as a Senior Vice President
and Chief Financial Officer of its eLoyalty Corporation division ("eLoyalty").
Employee shall have the such responsibilities, duties and authority as the
President of eLoyalty may reasonably designate. Employee shall perform
faithfully the duties assigned to him to the best of his ability and shall
devote his full undivided business time and attention to the transaction of
TCS's business.
2. TERM OF EMPLOYMENT: The term of employment ("Term of Employment")
covered by this Agreement shall commence as of the effective date of this
Agreement and continue until the following July 31, subject to the provisions of
paragraph 3 below (the "Initial Term of Employment"). Upon expiration of the
Initial Term of Employment, this Agreement shall be renewed automatically for
successive terms of one year each, unless TSC notifies Employee of its intention
not to renew at least 90 days prior to the expiration of the current term.
3. TERMINATION: Notwithstanding the provisions of paragraph 2 of this
Agreement, upon giving Employee 180 days notice, TSC may terminate Employee's
employment for any reason. TSC may make such termination effective at any time
within such 180 day notice period. TSC must, however, continue Employee's normal
salary and health insurance benefits until the end of the 180 day notice period
unless Employee begins employment with another employer during such time, in
which case TSC's obligations shall cease. In addition, TSC may terminate
Employee's employment and this Agreement immediately without notice and with no
salary and benefit continuation if Employee engages in "Serious Misconduct." For
purposes of this Agreement, "Serious Misconduct" means embezzlement or
misappropriation of corporate funds, other acts of dishonesty, significant
activities materially harmful to TSC's reputation, willful refusal to perform or
substantial disregard of Employee's assigned duties (including, but limited to,
refusal to travel or work the requested hours), or any significant violation of
any statutory or common law duty of loyalty to TSC
If following a Change in Control (which is defined as (i) the acquisition by
any individual, entity or group, of beneficial ownership (within the meaning of
Rule 13 d-3 promulgated under the Securities Exchange Act of 1934) of 40% or
more of the outstanding shares of the common stock of TSC; (ii) the approval of
the stockholders of TSC of a merger, where immediately after the merger, persons
who were the holders of a majority of TCS's outstanding common stock immediately
prior to the merger fail to own
<PAGE> 2
at least a majority of the outstanding common stock of the surviving entity in
substantially the same proportions as their holdings of TSC common stock
immediately prior to the merger; or (iii) the sale of substantially all the
assets of TSC other than to a corporation in which more that 60% of the
outstanding shares are beneficially owned by the individuals and entities who
are the beneficial owners of the Company stock prior to the acquisition),
Employee's title, position, duties, or salary is diminished and Employee resigns
within 90 days after the diminishment becomes effective, or if Employee is
ordered to relocate permanently to any location outside of the Chicago
metropolitan area and employee declines and is terminated, Employee shall be
entitled to Employee's normal salary, and health insurance benefits for a
one-year period following his resignation or termination and a bonus equivalent
to 50% of his base salary in effect at the time of his resignation or
termination. Notwithstanding anything to the contrary in any of Employee's
option agreements, Employee's unvested options which would otherwise vest
during a two year period following the effective date of the Change in Control
shall automatically vest in the event of a Change in Control.
If Employee dies, TSC must continue Employee's normal salary, bonus and health
insurance benefits for a period of one year following the date of his death.
Salary and bonus continuation will be paid to Employee's designated
beneficiary.
If Employee becomes permanently disabled and unable to continue to work, at
TSC, TSC must continue Employee's normal salary, bonus and health insurance
benefits for a period of one year following the date of his permanent
disability.
Employee may terminate his employment upon giving TSC 90 days prior written
notice. Upon receiving notice, TSC may waive its rights under this paragraph
and make Employee's termination effective immediately or anytime before the 90
day notice period ends.
Not withstanding the forgoing, if eLoyalty Corporation does not become subject
to the reporting requirements under the Securities Exchange Act of 1934, as
amended, on or before [December 31, 2000], and thereafter employee resigns, then
for a period of one year after such resignation TSC must continue Employee's
normal salary and health insurance benefits unless Employee begins employment
with another employer during such time, in which case TSC's obligations shall
cease.
4. SALARY: As compensation for his services, TSC shall pay Employee a base
salary in the amount listed in Exhibit A to this Agreement. Employee's base
salary shall be subject to annual review and may, at the discretion of TSC's
management, be adjusted from that listed in Exhibit A according to Employee's
responsibilities, capabilities and performance during the preceding year.
5. BONUSES: TSC may elect to pay Employee annual bonuses. Payment of such
bonuses, if any, shall be at the sole discretion of TSC.
6. EMPLOYEE BENEFITS: During the Term of Employment, Employee shall be
entitled to participate in such employee benefit plans, including group
pension, life and
<PAGE> 3
health insurance and other medical benefits, and shall receive all other fringe
benefits as TSC may make available generally to its Senior Vice Presidents.
7. BUSINESS EXPENSES: TSC shall reimburse Employee for all
reasonable and necessary business expenses incurred by Employee in performing
his duties. Employee shall provide TSC with supporting documentation
sufficient to satisfy reporting requirements of the Internal Revenue Service
and TSC. TSC's determination as to reasonableness and necessary shall be final.
8. NONCOMPETITION AND NONDISCLOSURE: Employee acknowledges that the
successful development and marketing of TSC's professional services and
products require substantial time and expense. Such efforts generate for TSC
valuable and proprietary information ("Confidential Information") which gives
TSC a business advantage over others who do not have such information.
Confidential Information of TSC and its clients and prospects includes, but is
not limited to, the following: business strategies and plans; proposals;
deliverables; prospects and customer lists; methodologies; training materials;
and computer software. Employee acknowledges that during the Term of
Employment, he will obtain knowledge of such Confidential Information.
Accordingly, Employee agrees to undertake the following obligations which he
acknowledges to be reasonably designed to protect TSC's legitimate business
interests without unnecessarily or unreasonably restricting Employee's
post-employment opportunities:
(a) Upon termination of the Term of Employment for any reason,
Employee shall return all TSC property, including but not limited to computer
programs, files, notes, records, charts, or other documents or things
containing in whole or in part any of TSC's Confidential Information;
(b) During the Term of Employment and subsequent to termination,
Employee agrees to treat all such Confidential Information as confidential and
to take all necessary precautions against disclosure of such information to
third parties during and after Employee's employment with TSC. Employee shall
refrain from using or disclosing to any person, without the prior written
approval of TSC's Chief Executive Officer any Confidential Information unless
at that time the information has become generally and lawfully known to TSC's
competitors;
(c) Without limiting the obligations of paragraph 8(b), Employee
shall not, for a period of one year following his termination of employment for
any reason, for himself or as an agent, partner or employee of any person, firm
or corporation, engage in the practice of consulting or related services for
any client of TSC for whom Employee performed services, or prospective TSC
client to whom Employee submitted, or assisted in the submission of a proposal
during the one year period preceding his termination of employment;
(d) During a one year period immediately following Employee's
termination of employment for any reason. Employee shall not induce or assist
in the inducement of any TSC employee away from TSC's employ or from the
faithful discharge of such
<PAGE> 4
employee's contractual and fiduciary obligations to serve TSC's interests with
undivided loyalty;
(e) For one year following his termination of employment for any reason,
Employee shall keep TSC currently advised in writing of the name and address of
each business organization for which he acts as agent, partner, representative
or employee.
9. REMEDIES: Employee recognizes and agrees that a breach of any or all
of the provisions of paragraph 8 will constitute immediate and irreparable harm
to TSC's business advantage, including but not limited to TSC's valuable
business relations, for which damages cannot be readily calculated and for which
damages are an inadequate remedy. Accordingly, Employee acknowledges that TSC
shall therefore be entitled to an order enjoining any further breaches by the
Employee. Employee and TSC agree to reimburse the prevailing party for all
costs and expenses, including reasonable attorneys' fees incurred by the
prevailing party in connection with the enforcement of either party's' rights
under any provision of this Agreement.
10. INTELLECTUAL PROPERTY: During the Term of Employment, Employee shall
disclose to TSC all ideas, inventions and business plans which he develops
during the course of his employment with TSC which relate directly or
indirectly to TSC's business, including but not limited to any computer
programs, processes, products or procedures which may, upon application, be
protected by patent or copyright. Employee agrees that any such ideas,
inventions or business plans shall be the property of TSC and that Employee
shall at TSC's request and cost, provide TSC with such assurances as is
necessary to secure a patent or copyright.
11. ASSIGNMENT: Employee acknowledges that the services to be rendered
pursuant to this Agreement are unique and personal. Accordingly, Employee may
not assign any of his rights or delegate any of his duties or obligations under
this Agreement. TSC may assign its rights, duties or obligations under this
Agreement to a subsidiary or affiliated company of TSC or purchaser or
transferee of a majority of TSC's outstanding capital stock or a purchaser of
all, or substantially all, of the assets of TSC.
12. NOTICES: All notices shall be in writing, except for notice of
termination of employment, which may be oral if confirmed in writing within 14
days. Notices intended for TSC shall be sent by registered or certified mail
addressed to it at 205 North Michigan Avenue, 15th Floor, Chicago, Illinois
60601 or its current principal office, and notices intended for Employee shall
be either delivered personally to him or sent by registered or certified mail
addressed to his last known address.
13. ENTIRE AGREEMENT: This Agreement and Exhibit A attached hereto
constitute the entire agreement between TSC and Employee. Neither Employee nor
TSC may modify this Agreement by oral agreements, promises or representations.
The parties may modify this Agreement only by a written instrument signed by
the parties.
14. APPLICABLE LAW: This Agreement shall be governed by and construed in
accordance with the laws of the State of Illinois.
<PAGE> 5
TECHNOLOGY SOLUTIONS COMPANY TIMOTHY J. CUNNINGHAM
By: /s/ Kelly Conway /s/ Timothy J. Cunningham
-------------------------- -----------------------------
Position: CEO eLoyalty Senior Vice President and Chief
-------------------- Financial Officer of eLoyalty
Corporation
Date: 11/15/99 Date: 11/15/99
------------------------ ------------------------
<PAGE> 1
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
Technology Solutions Company, a Delaware corporation doing business as
TSC, and Craig B. Lashmet ("Employee") enter into this Employment Agreement
("Agreement") as of October 20, 1998.
In consideration of the agreements and covenants contained in this
Agreement, TSC and Employee agree as follows:
1. EMPLOYMENT DUTIES: TSC shall employ Employee as a Senior Vice
President - Group Executive. Employee shall have such responsibilities, duties
and authority as the Group President may reasonably designate and are
commensurate with the position of Senior Vice President - Group Executive.
Employee shall perform faithfully the duties assigned to him to the best of his
ability and shall devote his full and undivided business time and attention to
the transaction of TSC's business.
2. TERM OF EMPLOYMENT: The term of employment ("Term of Employment")
covered by this Agreement shall commence as of the effective date of this
Agreement and continue until terminated pursuant to Paragraph 3 below.
3. TERMINATION: This Agreement may be terminated as follows:
(a) TSC may terminate Employee's employment and this Agreement for
any reason upon giving Employee 90 days notice of termination. TSC may make the
termination effective at any time within the 90 day notice period ("Termination
Date"). During this period Employee shall make a good faith effort to satisfy
those professional obligations requested to be performed by TSC, which may
include transferring duties and assisting in the transition of client
responsibilities, including meeting with clients and transferring confidential
material. TSC must, however, for a period of one year following the Termination
Date, unless Employee is terminated for Serious Misconduct, continue Employee's
base salary on the Termination Date ("Current Salary"); provide a bonus equal to
the average annual bonus earned during the two years immediately preceding the
termination ("Average Bonus") for one year payable when annual bonuses are paid;
and continue his health insurance benefits until the end of the one year period
or until Employee is re-employed, whichever comes first. (These payments are
referred to collectively as "Termination Payments").
(b) TSC may terminate Employee's employment and this Agreement
immediately without notice and with no salary and benefit continuation if
Employee engages in "Serious Misconduct." For purposes of this Agreement,
"Serious Misconduct" means embezzlement or misappropriation of corporate funds,
other acts of dishonesty, significant activities materially harmful to TSC's
reputation, or any significant violation of any statutory or common law duty of
loyalty to TSC.
<PAGE> 2
(c) If Employee dies, TSC must continue Employee's Current Salary
and health insurance benefits for a period of one year following the date of his
death, and, in addition, provide an Average Bonus, all payable to Employee's
estate. If Employee becomes permanently disabled and unable to continue to work
at TSC, TSC must pay Employee's Current Salary, health insurance benefits and an
Average Bonus, for a period of one year following the date Employee is declared
permanently disabled.
(d) If either party materially breaches this Agreement and fails to
cure the breach within 30 days after receiving notice of the breach from the
breached party, the breached party may consider this Agreement as terminated by
the breaching party.
(e) Employee may terminate his employment upon giving TSC 90 days
notice. TSC may make the termination effective at any time within the 90 day
notice period. During this period Employee shall make a good faith effort to
satisfy those professional obligations requested to be performed by TSC, which
may include transferring duties and assisting in the transition of client
responsibilities, including meeting with clients.
4. SALARY: As compensation for his services, TSC shall pay Employee a
base salary of the amount listed in Exhibit A to this Agreement. Employee's base
salary shall be subject to annual review and may, at the discretion of TSC's
management, be adjusted from that listed in Exhibit A according to Employee's
responsibilities, capabilities and performance during the preceding year.
5. BONUS AND STOCK OPTIONS: Employee shall participate in TSC's Vice
Presidents Compensation Program, as amended from time to time, which includes
base salary, annual bonus, and equity.
6. EMPLOYEE BENEFITS: During the Term of Employment, Employee shall be
entitled to participate in such employee benefit plans, including group pension,
life and health insurance and other medical benefits, and shall receive all
other fringe benefits as TSC may make available generally to its Vice
Presidents.
7. BUSINESS EXPENSES: TSC shall reimburse Employee for all reasonable
and necessary business expenses incurred by Employee in performing his duties.
Employee shall provide TSC with supporting documentation sufficient to satisfy
reporting requirements of the Internal Revenue Service and TSC. TSC's
determination as to reasonableness and necessary shall be final.
8. NONCOMPETITION AND NONDISCLOSURE: Employee acknowledges that the
successful development and marketing of TSC's professional services and
products require substantial time and expense. Such efforts generate for TSC
valuable and proprietary information ("Confidential Information") which gives
TSC a business advantage over others who do not have such information.
Confidential Information of TSC and its clients and prospects includes, but is
not limited to, the following: business strategies and plans; proposals;
deliverables; prospects and customer lists; methodologies; training materials;
and computer software. Employee acknowledges that during the Term of Employment,
he will obtain knowledge of such Confidential Information. Accordingly, Employee
agrees to undertake the following obligations
2
<PAGE> 3
which he acknowledges to be reasonably designed to protect TSC's legitimate
business interests without unnecessarily or unreasonably restricting Employee's
post-employment opportunities:
(a) Upon termination of the Term of Employment for any reason,
Employee shall return all TSC property, including but not limited to computer
programs, files, notes, records, charts, or other documents or things containing
in whole or in part any of TSC's Confidential Information;
(b) During the Term of Employment and subsequent to termination,
Employee agrees to treat all such Confidential Information as confidential and
to take all necessary precautions against disclosure of such information to
third parties during and after Employee's employment with TSC. Employee shall
refrain from using or disclosing to any person, without the prior written
approval of TSC's Chief Executive Officer, any Confidential Information unless
at that time the information has become generally and lawfully known to TSC's
competitors;
(c) Without limiting the obligations of Paragraph 8(b), Employee
shall not, for himself or as an agent, partner or employee of any person, firm
or corporation: (i) for a period of one year following his termination of
employment for any reason, engage in the practice of consulting or related
services for any client of TSC for whom Employee performed services, or
prospective TSC client to whom Employee submitted, or assisted in the submission
of a proposal during the two year period preceding his termination of
employment; or (ii) for a period of one year following any involuntary
termination for any reason, or for a period of six months following any
voluntary termination so long as TSC continues to pay his salary during the six
month period, participate in or have a financial, management or other interest
in any business enterprise that engages in, or within one year of the
termination of Employee's employment has plans to engage in, substantial and
direct competition with TSC if such participation will likely involve the use by
Employee of business plans, strategies and other confidential TSC business
information developed or acquired by Employee during his employment as a senior
officer of TSC;
(d) During a one year period immediately following Employee's
termination of employment for any reason, Employee shall not induce or assist in
the inducement of any TSC employee away from TSC's employ or from the faithful
discharge of such employee's contractual and fiduciary obligations to serve
TSC's interests with undivided loyalty;
(e) For one year following his termination of employment for any
reason, Employee shall keep TSC currently advised in writing of the name and
address of each business organization for which he acts as agent, partner,
representative or employee.
9. REMEDIES: Employee recognizes and agrees that a breach of any or
all of the provisions of Paragraph 8 will constitute immediate and irreparable
harm to TSC's business advantage, including but not limited to TSC's valuable
business relations, for which damages cannot be readily calculated and for which
damages are an inadequate remedy. Accordingly, Employee acknowledges that TSC
shall therefore be entitled to an order enjoining any further breaches by the
Employee. Employee agrees to reimburse TSC for all costs and expenses, including
reasonable attorneys' fees incurred by TSC in connection with the enforcement of
its rights under any provision of this Agreement.
3
<PAGE> 4
10. INTELLECTUAL PROPERTY: During the Term of Employment, Employee
shall disclose to TSC all ideas, inventions and business plans which he develops
during the course of his employment with TSC which relate directly or indirectly
to TSC's business, including but not limited to any computer programs,
processes, products or procedures which may, upon application, be protected by
patent or copyright. Employee agrees that any such ideas, inventions or business
plans shall be the property of TSC and that Employee shall at TSC's request and
cost, provide TSC with such assurances as is necessary to secure a patent or
copyright.
11. PRINCIPLES AND POLICIES: Employee agrees to be bound by TSC's
principles and policies, including Principles and Policies of Business Conduct,
as amended from time to time, which is incorporated herein by reference.
12. ASSIGNMENT: Employee acknowledges that the services to be rendered
pursuant to this Agreement are unique and personal. Accordingly, Employee may
not assign any of his rights or delegate any of his duties or obligations under
this Agreement. Subject to Paragraph 3(c) above, TSC may assign its rights,
duties or obligations under this Agreement to a subsidiary or affiliated company
of TSC or purchaser or transferee of a majority of TSC's outstanding capital
stock or a purchaser of all, or substantially all, of the assets of TSC.
13. NOTICES: All notices shall be in writing, except for notice of
termination of employment, which may be oral if confirmed in writing within 14
days. Notices intended for TSC shall be sent by registered or certified mail
addressed to it at 205 North Michigan Avenue, 15th Floor. Chicago, Illinois
60601 or its current principal office, and notices intended for Employee shall
be either delivered personally to him or sent by registered or certified mail
addressed to his last known address.
14. ENTIRE AGREEMENT: This Agreement and Exhibit A attached hereto
constitute the entire agreement between TSC and Employee. Neither Employee nor
TSC may modify this Agreement by oral agreements, promises or representations.
The parties may modify this Agreement only by a written instrument signed by the
parties.
15. APPLICABLE LAW: This Agreement shall be governed by and construed
in accordance with the laws of the State of Illinois.
16. MEDIATION OF DISPUTES: Neither party shall initiate arbitration or
other legal proceedings (except for any claim under Paragraph 8 of this
Agreement), against the other party, or, in the case of TSC, any of its
directors, officers, employees, agents, or representatives, relating in any way
to this Agreement, to Employee's employment with TSC, the termination of his
employment or any or all other claims that one party might have against the
other party until 30 days after the party against whom the claim[s] is made
("Respondent") receives written notice from the claiming party of the specific
nature of any purported claim and the amount of any purported damages. Employee
and TSC further agree that if Respondent submits the claiming party's claim to
the Center for Public Resources, 680 Fifth Avenue, New York, New York 10019,
for nonbinding mediation prior to the expiration of such 30 day period, the
claiming party may not institute arbitration or other legal proceedings against
Respondent until the earlier of (i)
4
<PAGE> 5
the completion of nonbinding mediation efforts, or (ii) 90 days after the date
on which the Respondent received written notice of the claimant's claim.
17. BINDING ARBITRATION: Employee and TSC agree that all claims or
disputes relating to his employment with TSC or the termination of such
employment, and any and all other claims that Employee might have against TSC,
any TSC director, officer, employee, agent, or representative, and any and all
claims or disputes that TSC might have against Employee (except for any claims
under Paragraph 8 of this Agreement) shall be resolved by expedited arbitration.
The party pursuing a claim should submit the claim to Jams/Endispute, Inc.,
Three First National Plaza, 70 West Madison, Suite 200, Chicago, IL 60602. Such
arbitration shall be conducted in Chicago before a single arbitrator within
twenty days of the submission of a claim. The parties shall select an arbitrator
by mutual agreement from a panel of arbitrators proposed by Jams/Endispute, Inc.
The panel shall consist of former judges experienced in arbitrating employment
disputes. If the parties are unable to agree on an arbitrator, Jams/Endispute,
Inc. shall select an arbitrator in accordance with its procedures.
The parties shall exchange documents relevant to the claims alleged,
but shall undertake no additional discovery. The parties may submit pre-hearing
briefs only. The arbitration proceeding shall not be transcribed or otherwise
recorded. The arbitrator shall render an award within seven days of completion
of the hearing. Both parties agree that the arbitrator's award shall be final
and binding, and the parties waive any right to appeal.
18. SEVERABILITY: Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
19. Employee acknowledges that he has read, understood and accepts the
provisions of this Agreement.
Technology Solutions Company Employee
By: /s/ JOHN T. KOHLER /s/ CRAIG B. LASHMET
-------------------------------- ------------------------------------
Position: CEO
--------------------------
Date: October 20, 1998 Date: October 20, 1998
------------------------------ -------------------------------
5
<PAGE> 1
EXHIBIT 10.13
OFFICE LEASE -- TWO CONWAY PARK
THIS OFFICE LEASE (this "Lease") is made as of December 6, 1999, by and between
"Landlord" Riggs & Company, a division of Riggs Bank, N.A. as Trustee of the
Multi-Employer Property Trust, a trust organized under 12 C.F.R.
Section 9.18
and
"Tenant" eLoyalty Corporation
<PAGE> 2
SECTION A: TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1: DEFINITIONS .............................................................................................1
SECTION 2: PREMISES AND TERM .......................................................................................5
2.1 Lease of Premises ...........................................................................................5
2.2 Lease Term ..................................................................................................5
2.3 Intentionally Omitted .......................................................................................5
2.4 Intentionally Omitted .......................................................................................5
2.5 Intentionally Omitted .......................................................................................5
2.6 Tenant Contribution to Tenant Improvement Costs .............................................................5
2.7 Ownership and Removal of Tenant Improvement .................................................................5
2.8 Landlord Delays .............................................................................................5
2.9 Memorandum of Commencement Date .............................................................................5
2.10 Use and Conduct of Business .................................................................................5
2.11 Compliance with Governmental Requirements and Rules and Regulations .........................................6
2.12 Renewal Option ..............................................................................................6
2.13 Right of First Opportunity ..................................................................................7
SECTION 3: BASE RENT, ADDITIONAL RENT AND OTHER SUMS PAYABLE UNDER LEASE ...........................................8
3.1 Payment of Rental ...........................................................................................8
3.2 Base Rent ...................................................................................................8
3.3 Intentionally Omitted .......................................................................................8
3.4 Additional Rent .............................................................................................8
3.5 Utilities ..................................................................................................11
3.6 Holdover ...................................................................................................12
3.7 Late Charge ................................................................................................12
3.8 Default Rate................................................................................................12
SECTION 4: GENERAL PROVISIONS .....................................................................................12
4.1 Maintenance and Repair by Landlord .........................................................................12
4.2 Maintenance and Repair by Tenant ...........................................................................13
4.3 Common Areas/Security ......................................................................................13
4.4 Building Services ..........................................................................................13
4.5 Tenant Alterations .........................................................................................15
4.6 Tenant's Work Performance ..................................................................................16
4.7 Surrender of Possession ....................................................................................16
4.8 Removal of Property ........................................................................................16
4.9 Access .....................................................................................................17
4.10 Damage or Destruction ......................................................................................17
4.11 Condemnation ...............................................................................................18
4.12 Intentionally Omitted ......................................................................................19
4.13 Indemnification ............................................................................................19
4.14 Tenant Insurance ...........................................................................................19
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
4.15 Landlord's Insurance ........................................................................................20
4.16 Waiver of Subrogration ......................................................................................20
4.17 Assignment and Subletting by Tenant .........................................................................21
4.18 Assignment by Landlord ......................................................................................23
4.19 Estoppel Certificates and Financial Statements ..............................................................23
4.20 Modification for Lender .....................................................................................24
4.21 Hazardous Substances ........................................................................................24
4.22 Access Laws .................................................................................................25
4.23 Quiet Enjoyment .............................................................................................26
4.24 Signs .......................................................................................................26
4.25 Subordination ...............................................................................................26
4.26 Intentionally Omitted .......................................................................................26
4.27 Brokers .....................................................................................................27
4.28 Exculpation and Limitation of Liability .....................................................................27
4.29 ERISA Representations .......................................................................................27
4.30 Mechanic's Liens and Tenant's Personal Property Taxes .......................................................27
4.31 Landlord's Security Interest ................................................................................28
SECTION 5: DEFAULT AND REMEDIES ...................................................................................28
5.1 Events of Default ............................................................................................28
5.2 Remedies .....................................................................................................29
5.3 Right to Perform .............................................................................................31
5.4 Landlord's Default ...........................................................................................31
SECTION 6: MISCELLANEOUS PROVISIONS ...............................................................................31
6.1 Notices ......................................................................................................31
6.2 Attorney's Fees and Expenses .................................................................................32
6.3 No Accord and Satisfaction ...................................................................................32
6.4 Successors; Joint and Several Liability . ....................................................................32
6.5 Choice of Law ................................................................................................32
6.6 No Waiver of Remedies ........................................................................................32
6.7 Offer to Lease ...............................................................................................33
6.8 Force Majeure ................................................................................................33
6.9 Landlord's Consent ...........................................................................................33
6.10 Severability; Captions ......................................................................................33
6.11 Interpretation ..............................................................................................33
6.12 Incorporation of Prior Agreement: Amendments ................................................................33
6.13 Authority ...................................................................................................33
6.14 Time of Essence .............................................................................................34
6.15 Survival of Obligations .....................................................................................34
6.16 Consent to Service ..........................................................................................34
6.17 Landlord's Authorized Agents ................................................................................34
6.18 Waiver of Jury Trial ........................................................................................34
</TABLE>
-ii-
<PAGE> 4
LISTING OF EXHIBITS
- -------------------
Exhibit A Legal Description of the Land
Exhibit B Drawing Showing Location of the Premises
Exhibit C Tenant Improvements or Workletter, as applicable
Exhibit D Form of Memorandum of Commencement Date
Exhibit E Rules and Regulations
Exhibit F Description of Cleaning Services
Exhibit G Opportunity Space
Attachment Guaranty of Lease made by Technology Solutions Company
-iii-
<PAGE> 5
SECTION 1: DEFINITIONS
1.1 DEFINITION: Each underlined term in this section shall have the
meaning set forth next to that underlined term. Capitalized terms that are used
in this Lease without definition but are defined in any of the Exhibits to this
Lease shall have the meanings ascribed to those terms in the applicable Exhibit.
1.2 ACCESS LAWS: The Americans With Disabilities Act of 1990 (including
the Americans with Disabilities Act Accessibility Guidelines for Building and
Facilities) and all other Governmental Requirements relating to the foregoing.
1.3 ADDITIONAL RENT: Defined in paragraph 3.4 captioned "Additional
Rent".
1.4 BASE AMOUNT ALLOCABLE TO THE PREMISES: Defined in paragraph 3.4
captioned "Additional Rent".
1.5 BASE RENT: Base Rent shall be as follows:
(a) March 1, 2000 through August 31, 2000; $23,705.00 per month;
(b) September 1, 2000 through February 28, 2001; $30,996.67 per
month;
(c) March 1, 2001 through February 28, 2002; $31,926.57 per month;
(d) March 1, 2002 through February 28, 2003; $32,884.36 per month;
(e) March 1, 2003 through February 29, 2004; $33,870.89 per month;
(f) March 1, 2004 through February 28, 2005; $34,887.02 per month;
(g) March 1, 2005 through July 31, 2005; $35,933.63 per month.
1.6 BROKERS: Tenant was represented in this transaction by Burns &
Company, a licensed real estate broker. Landlord was represented in this
transaction by Insignia/ESG, Inc., a licensed real estate broker.
1.7 BUILDING: The building located on the Land at 150 Field Drive, Lake
Forest, Illinois 60045 commonly known as Two Conway Park and containing
approximately 119,997 rentable square feet.
1.8 BUSINESS DAY: Calendar days, except for Saturdays and Sundays and the
following holidays: New Year's Day, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
1.9 BUSINESS HOURS: From 8:00 a.m. to 6:00 p.m. on Monday through Friday
and from 9:00 a.m. to 1:00 p.m. on Saturday.
1.10 CLAIMS: An individual and collective reference to any and all
claims, demands, damages, injuries, losses, liens, liabilities, penalties,
fines, lawsuits, actions, other proceedings and expenses
<PAGE> 6
(including reasonable attorneys' fees and expenses incurred in connection with
the proceeding whether at trial or on appeal).
1.11 COMMENCEMENT DATE: The earlier to occur of: (a) March 1, 2000,
subject to Landlord Delays (as defined in Section 2.8 hereof); or (b) the first
date upon which Tenant conducts its business within any part or portion of the
Premises.
1.12 ERISA: The Employee Retirement Income Security Act of 1974. as now or
hereafter amended, and the regulations promulgated under it.
1.13 ESTIMATED OPERATING COSTS ALLOCABLE TO THE PREMISES: Defined in
paragraph captioned "Additional Rent".
1.14 EVENTS OF DEFAULT: One or more of those events or states of facts
defined in the paragraph captioned "Events of Default".
1.15 FORCE MAJEURE: Any one or more of the following: act of God, strike,
lockout, labor trouble or dispute, inability to procure or shortage of material
or labor, failure of power or utility, delay in transportation, fire, vandalism,
accident, flood, severe weather, other casualty, Governmental Requirements
(including mandated changes in the Plans or the Tenant Improvements resulting
from changes in pertinent Governmental Requirements or interpretations thereof),
riot, insurrection, civil commotion, sabotage, explosion, war, natural or local
emergency, act or omission of others, including Tenant, or other reasons of a
similar or dissimilar nature, provided that in all cases the occurrence is not
solely the fault of, or under the exclusive control of, Landlord.
1.16 GOVERNMENTAL AGENCY: The United States of America, the State in which
the Land is located, any county, city, district, municipality or other
governmental subdivision, court or agency or quasi-governmental agency having
jurisdiction over the Land and any board, agency or authority associated with
any such governmental entity, including the fire department having jurisdiction
over the Land.
1.17 GOVERNMENTAL REQUIREMENTS: Any and all statutes, ordinances, codes,
laws, rules, regulations, orders and directives of any Governmental Agency as
now or later amended.
1.18 HAZARDOUS SUBSTANCE(S): Asbestos, PCBs, petroleum or petroleum-based
chemicals or substances, urea formaldehyde or any chemical, material, element,
compound, solution, mixture, substance or other matter of any kind whatsoever
which is now or later defined, classified, listed, designated or regulated as
hazardous, toxic or radioactive by any Governmental Agency.
1.19 LAND: The land upon which the Building is located in Lake County,
State of Illinois, as legally described in Exhibit A attached to this Lease.
1.20 LANDLORD: The trust named on the first page of this Lease, or its
successors and assigns as provided in paragraph captioned "Assignment by
Landlord".
1.21 LANDLORD'S AGENTS: Any and all partners, officers, contractors,
subcontractors, licensees, concessionaires, agents, servants, employees, guests,
invitees (excluding other tenants at the Building), visitors, trustees,
investment advisors and consultants of Landlord.
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1.22 LEASE TERM: Commencing on the Commencement Date, and ending
sixty-five (65) months later, provided that, if the Commencement Date is a date
other than the first day of a calendar month, the Lease Term shall be extended
by the number of calendar days remaining in the month in which the Commencement
Date occurs.
1.23 MANAGER: Insignia/ESG, Inc., or its replacement as specified by
written notice from Landlord to Tenant.
1.24 MANAGER'S ADDRESS: 311 South Wacker Drive, Chicago, Illinois 60606,
which address may be changed by written notice from Landlord to Tenant.
1.25 OPERATING COSTS: Defined in paragraph captioned "Additional Rent".
1.26 OPERATING COSTS ALLOCABLE TO THE PREMISES: Defined in paragraph
captioned "Additional Rent ".
1.27 PERMITTED USE: General office uses consistent with Governmental
Requirements and first-class buildings of the same or similar use as the
Building located in the City of Lake Forest, Illinois.
1.28 PLANS: Those certain plans and specifications for the Tenant
Improvements to be prepared in accordance with the Workletter attached hereto
as Exhibit C.
1.29 PREPAID RENT: $23,705.00, to be applied toward Base Rent for the
first full calendar month of the Lease Term; provided that if Landlord does not
approve Tenant's Plans for the Premises after the execution of this Lease,
Tenant may terminate this Lease. Landlord shall refund said Prepaid Rent to
Tenant in full, this Lease shall be null and void and the parties shall have no
further obligations to each other.
1.30 PREMISES: The portion of the Building depicted on the plan attached
to this Lease as Exhibit B which consists of approximately 20,816 square feet;
provided that Landlord shall measure the square footage of the Tenant's space on
or about the Commencement Date and the measurement of such square footage, in
accordance with BOMA standards, shall be the square footage of the Premises for
all purposes of this Lease, except as may be modified pursuant to the expansion
option granted herein.
1.31 PRIME RATE: Defined in paragraph captioned "Default Rate".
1.32 PROPERTY TAXES: (a) Any form of ad valorem real or personal property
tax or assessment imposed by any, Governmental Agency on the Land, Building,
related improvements or any personal property owned by Landlord directly related
to such Land, Building or improvements; (b) any other form of tax or assessment,
license fee, license tax, tax or excise on rent or any other levy, charge.
expense or imposition made or required by any Governmental Agency on any,
interest of Landlord in such Land, Building, related improvements or personal
property; (c) any fee for services charged by any Governmental Agency for any
services such as fire protection, street, sidewalk and road maintenance, refuse
collection, school systems or other services provided or formerly provided to
property owners and residents within the general area of the Land; (d) any
governmental impositions allocable to or measured by the area of any or all of
such Land, Building, related improvements or personal property or the amount of
any base rent, additional rent or other sums payable under any lease for any or
all of such Land, Building, related
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improvements or personal property, including any tax on gross receipts or any
excise tax or other charges levied by any Governmental Agency with respect to
the possession, leasing, operation, maintenance, alteration, repair, use or
occupancy of any or all of such Land, Building, related improvements, personal
property or the rent earned by any part of or interest in such Land, Building,
related improvements or personal property; (e) any impositions by any
Governmental Agency on any transaction evidenced by a lease of any or all of
such Land, Building, related improvements or personal property used at the Land
or Building with respect to any document to which Landlord is a party creating
or transferring an interest or an estate in any or all of such Land, Building,
related improvements or personal property used at the Land or Building; and (f)
any increase in any of the foregoing based upon construction of improvements or
change of ownership of any, or all of such Land, Building, related improvements
or personal property. Property Taxes shall not include taxes on Landlord's net
income or any inheritance, estate or gift taxes.
1.33 PUNCH LIST WORK: Minor items of repair, correction, adjustment or
completion as such phrase is commonly understood in the construction industry in
the northern suburbs of Chicago-, provided that in no event shall any such items
render any portion of the Premises untenantable.
1.34 SECURITY DEPOSIT: None.
1.35 SCHEDULED COMMENCEMENT DATE: March 1, 2000.
1.36 INTENTIONALLY OMITTED.
1.37 TENANT: The person or entity named on the first page of this Lease.
1.38 TENANT ALTERATIONS: Defined in paragraph captioned "Tenant
Alterations".
1.39 INTENTIONALLY OMITTED.
1.40 TENANT IMPROVEMENT ALLOWANCE: The maximum amount to be expended by
Landlord for the cost of Tenant Improvements (including architectural,
engineering, permitting, space planning, and construction management fees),
which maximum shall not exceed Seven Hundred Twenty-eight Thousand Five Hundred
Sixty Dollars ($728,560.00).
1.41 TENANT IMPROVEMENTS: Those alterations or improvements to the
Premises as appear and are depicted in the Plans, or as are otherwise set forth
in Exhibit C.
1.42 TENANT'S AGENT: Any and all officers, partners, contractors,
subcontractors, consultants, licensees, agents, concessionaires, subtenants,
servants, employees, customers, guests, invitees or visitors of Tenant.
1.43 TENANT'S PRO RATA SHARE is Seventeen and 3471/10,000 percent
(17.3471%).
1.44 YEAR: A calendar year commencing January 1 and ending December 31.
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SECTION 2: PREMISES AND TERM
2.1 LEASE OF PREMISE. Landlord leases the Premises to Tenant, and Tenant
leases the Premises from Landlord, upon the terms and conditions set forth in
this Lease.
2.2 LEASE TERM. The Lease Term shall be for the period stated in the
definition of that term, unless earlier terminated or extended as provided in
this Lease.
2.3 INTENTIONALLY OMITTED.
2.4 INTENTIONALLY OMITTED.
2.5 INTENTIONALLY OMITTED.
2.6 TENANT CONTRIBUTION TO TENANT IMPROVEMENT COSTS. If the cost of the
Tenant Improvements exceeds the Tenant Improvement Allowance, Tenant shall be
responsible to pay such excess cost in accordance with the terms and provisions
of Exhibit C hereto.
2.7 OWNERSHIP AND REMOVAL OF TENANT IMPROVEMENTS. All Tenant Improvements,
regardless of which party constructed them, shall be the property of Landlord
and shall remain upon and be surrendered with the Premises upon the expiration
or earlier termination of this Lease: provided that, at Landlord's election and
upon written notice to Tenant within ten (10) Business Days of Landlord's first
receipt of any of the sets of Plans as identified in Exhibit C as the case may
be, Tenant shall be required to remove all or any portion of the Tenant
Improvements upon the expiration or earlier termination of this Lease. Said
written notice to Tenant shall specify which Tenant Improvements are required to
be removed upon the expiration or earlier termination of this Lease.
Notwithstanding anything contained in this Lease to the contrary, Tenant shall
retain ownership of, and may remove from the Premises at any time during the
term or upon expiration of the Lease, those certain moveable walls (which are
not being attached or affixed to the Premises), which Landlord acknowledges are
being paid for by and are the personal property of Tenant.
2.8 LANDLORD DELAYS. A "Landlord Delay" is (a) any delay by Landlord or
Landlord's Agents in the approval or requested revision of any of the Plans
delivered to Landlord by Tenant or Tenant's Agents; provided that in each case
Landlord shall have not less than five (5) Business Days to approve or request
revisions to such documents, (b) any delay in the construction of the Tenant
Improvements caused by a negligent or intentionally wrongful act or omission of
Landlord or any of Landlord's Agents, or (c) any delay caused by revisions to
space plans and documents included as part of the workletter attached as Exhibit
C which are requested by Landlord after Landlord's final approval.
2.9 MEMORANDUM OF COMMENCEMENT DATE. At Landlord's election and request,
Tenant shall execute a Memorandum of Commencement Date in the form attached as
Exhibit D. In no event shall Tenant record this Lease or the Memorandum of
Commencement Date.
2.10 USE AND CONDUCT OF BUSINESS. The Premises are to be used only for the
Permitted Uses, and for no other business or purpose without the prior consent
of Landlord, which consent shall not be unreasonably withheld or delayed.
Landlord represents and warrants to Tenant that the Building and
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Premises are suitable for general office uses. Landlord makes no representation
or warranty as to the suitability of the Premises for Tenant's specific intended
use. Tenant shall, at its own cost and expense, use commercially reasonable
efforts to obtain and maintain any and all licenses, permits, and approvals
necessary or appropriate for its use, occupation and operation of the Premises.
Tenant's inability to obtain or maintain any, such license, permit or approval
necessary or appropriate for its use, occupation or operation of the Premises
shall not relieve it of its obligations under this Lease, including the
obligation to pay Base Rent and Additional Rent: unless Tenant's inability to
obtain such license, permit or approval is the direct result of an act or
omission of Landlord or Landlord's Agents or a Governmental Requirement enacted
by a Governmental Agency having jurisdiction over the Building which
Governmental Requirement prohibits business activity which includes Tenant's
Permitted Use hereunder or prohibits the construction of the Tenant
Improvements. in which event Tenant may terminate this Lease upon thirty (30)
days prior written notice to Landlord. No act shall be done in or about the
Premises that is unlawful or that will increase the existing rate of insurance
on any or all of the Land or Building. Tenant shall not commit or allow to be
committed or exist: (a) any waste upon the Premises, (b) any public or private
nuisance, or (c) any act or condition which disturbs the quiet enjoyment of any
other tenant in the Building, violates any of Landlord's contracts affecting any
or all of the Land or Building, creates or contributes to any work stoppage,
strike, picketing, labor disruption or dispute, interferes in any way with the
business of Landlord or any other tenant in the Building or with the rights or
privileges of any contractors, subcontractors, licensees, agents,
concessionaires, subtenants, servants, employees, customers, guests, invitees or
visitors or any other persons lawfully in and upon the Land or Building, or
causes any impairment or reduction of the good will or reputation of the Land or
Building. After construction of the Tenant Improvements, Tenant shall not,
without the prior consent of Landlord, use any apparatus, machinery or device,
in or about the Premises which will cause any substantial noise or vibration
or any increase in the normal consumption level of electric power. After
construction of the Tenant Improvements, if any of Tenant's machines and
equipment should disturb the quiet enjoyment of any other tenant in the
Building, then Tenant shall provide, at its sole cost and expense, adequate
insulation or take other such action, including removing such machines and
equipment, as may be necessary to eliminate the disturbance.
2.11 COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS AND RULES AND REGULATIONS.
Tenant shall comply with all Governmental Requirements relating to its use,
occupancy and operation of the Premises and shall observe such reasonable rules
and regulations as may be adopted and published by Landlord from time to time
for the safety, care and cleanliness of the Premises, the Building and the Land,
and for the preservation of good order in the Building, including the Rules and
Regulations attached to this Lease as Exhibit E.
2.12 RENEWAL OPTION. Provided an Event of Default has not occurred and is
not then continuing, Tenant shall have the right and option to renew this Lease
(the "Renewal Option") for one (1) sixty (60) month lease term (the "Renewal
Term") by providing Landlord written notice thereof, (a "Renewal Option Exercise
Notice") not less than one hundred eighty (180) days prior to the expiration of
the initial Lease Term (the "Renewal Option Exercise Date"). If Landlord does
not receive a Renewal Option Exercise Notice by the Renewal Option Exercise
Date, the Renewal Option shall expire and be null and void thereafter. If a
Renewal Option Exercise Notice is received by Landlord by the Renewal Option
Exercise Date, then Landlord shall within thirty (30) days reasonably and in
good faith determine what it believes to be the current market rental rate (the
"CMRR") for a renewal lease including comparable lease terms (such as, without
limitation, duration of lease, tenant improvement allowances, inducements and
credits) in comparable first class office buildings in Lake Forest, Illinois,
and deliver written notice thereof (the "CMRR Notice") to Tenant within said 30
day period. Within thirty (30) days of Tenant's receipt of the
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CMRR Notice, Tenant shall, in a writing delivered to Landlord, either (i) elect
to exercise the Renewal Option, which election shall be irrevocable by Tenant
and binding upon Tenant and Landlord, or (ii) elect not to exercise the Renewal
Option, in which event Tenant's right to exercise the Renewal Option shall be
deemed to be null and void and of no further force or effect. If Tenant elects
to exercise the Renewal Option within the time period set forth herein, the Base
Rent shall be adjusted for the first annual period of the Renewal Term to an
amount which is equal to the CMRR, and for each succeeding annual period of the
Renewal Term, the Base Rent shall be adjusted to one hundred three percent
(103%) of the immediately preceding annual Base Rent amount. If Tenant neither
elects to exercise its Renewal Option nor elects not to exercise its Renewal
Option, such inaction shall be deemed an election to not exercise the Renewal
Option.
2.13 RIGHT OF FIRST OPPORTUNITY. Provided an Event of Default has not
occurred and is not then continuing, Tenant shall have a right of first
opportunity ("Opportunity Right"), to add to the Premises, prior to Landlord
leasing such space to a third party, that certain space as shown on Exhibit G
("Opportunity Space"). Tenant's Opportunity Right shall be subject to the
following terms and conditions:
(a) If Landlord accepts a proposal or enters into a customary letter of
intent from, a bona-fide third party prospect for all or any portion of the
Opportunity Space. Landlord shall notify Tenant of same in writing ("Offer
Notice"). The Offer Notice shall set forth as Base Rent for the Opportunity
Space the then current rate and tenant improvement allowance, together with any
underground reserved parking spaces as may then be available, that Landlord is
willing to offer to Tenant for comparable space in the Building and for a period
of time which corresponds to the remaining Lease Term hereof.
(b) Tenant shall have five (5) Business Days following its receipt of the
Offer Notice to notify Landlord, in writing, that Tenant elects to lease all
(but Tenant shall have no right to elect to lease less than all) of the
Opportunity Space. If Tenant fails to notify Landlord within such five (5)
Business Day period, Tenant shall be deemed to have elected not to exercise its
Opportunity Right and Landlord shall be free to lease the applicable Opportunity
Space to any third party within one hundred twenty (120) days following
delivery of the Offer Notice; provided that Landlord shall not grant any
renewal rights beyond an initial term with respect to any lease of the
Opportunity Space, and this Section 2.13 will continue to apply upon expiration
of any lease of the Opportunity Space to a third party.
(c) If Tenant does exercise its Opportunity Right by providing written
notice to Landlord within such five (5) Business Day period, the Opportunity
Space shall be added to the Premises at the equivalent Base Rent amount (on a
per square foot basis) then being paid by Tenant to Landlord under this Lease,
and with Tenant being entitled to a pro-rated portion of the Tenant Improvement
Allowance (if the Opportunity Right is exercised during the initial Term only,
but not during any Renewal Term). With respect to the Tenant Improvement
Allowance, by way of illustration, if the Opportunity Right is exercised with 13
months left in the initial Term of this Lease, Tenant will be entitled to an
allowance equal to $7.00 for each square foot of the Opportunity Space (13/65
months = .20 x $35.00 = $7.00). Except as set forth herein, the Opportunity
Space shall be leased to Tenant on all of the same terms and conditions set
forth in this Lease.
(d) Subject to Landlord providing an improvement allowance as set forth in
Landlord's Offer Notice, any Opportunity Space shall be leased to Tenant "as-is"
and any improvements desired by Tenant shall be constructed subject to the terms
and conditions set forth elsewhere in this Lease. The commencement date for the
Opportunity Space shall be the earlier of sixty (60) days after Landlord makes
the applicable
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Opportunity Space available to Tenant for the construction of leasehold
improvements or the date Tenant begins conducting business in the Opportunity
Space.
(e) Notwithstanding anything contained in this Section 2.1 to the contrary,
unless Tenant has exercised its Renewal Option pursuant to Section 2.12 hereof,
the Opportunity Right granted herein shall expire automatically on the Renewal
Option Exercise Date.
SECTION 3: BASE RENT, ADDITIONAL RENT AND OTHER SUMS PAYABLE UNDER LEASE
3.1 PAYMENT OF RENTAL. Tenant agrees to pay Base Rent, Additional Rent and
any other sum due under this Lease to Landlord without demand, deduction,
credit, adjustment or offset of any kind or nature, in lawful money of the
United States when due under this Lease, at the offices of Manager at Manager's
Address, or to such other party or at such other place as Landlord may from time
to time designate in writing. If this Lease does not specify a due date with
respect to any sum payable by Tenant hereunder, such sum shall be due ten (10)
calendar days after written demand for such payment is given to Tenant.
3.2 BASE RENT. Tenant agrees to pay Base Rent to Landlord without demand,
in advance on or before the first day of each calendar month of the Lease Term.
Base Rent for any partial month at the beginning or end of the Lease Term shall
be prorated. On execution of this Lease, Tenant has paid to Landlord the amount
specified in the definition of Prepaid Rent for the month specified in the
definition of that term. Base Rent for any partial month at the beginning of the
Lease Term shall be paid by Tenant on the Commencement Date.
3.3 INTENTIONALLY OMITTED.
3.4 ADDITIONAL RENT. Definitions of certain terms used in this paragraph
are set forth in subparagraph 3.4.5. Tenant agrees to pay to Landlord additional
rent as computed in this paragraph (individually and collectively the
"Additional Rent"):
3.4.1 RENTAL ADJUSTMENT FOR ESTIMATED OPERATING COSTS. Landlord shall
furnish Tenant a written statement of Estimated Operating Costs Allocable to the
Premises for each Year and the amount payable monthly by Tenant for such Costs
shall be computed as follows: one-twelfth (1/12) of the amount, if any, by which
the Estimated Operating Costs Allocable to the Premises exceeds the Base Amount
Allocable to the Premises shall be Additional Rent and shall be paid monthly by
Tenant for each month during such Year after the Commencement Date. If Landlord
fails to deliver a written statement of the Estimated Operating Costs for any
Year, Tenant shall continue to make monthly payments on account of the Estimated
Operating Costs in an amount equal to the estimated monthly payment amount
established for the preceding Year. If any such written statement is furnished
after the commencement of the Year (or as to the first Year during the Lease
Term, after the Commencement Date), Tenant shall also make a retroactive
lump-sum payment to Landlord equal to the monthly payment amount multiplied by
the number of months during the Year (or as to the first Year during the Lease
Term, after the Commencement Date) prior to delivery of such written statement,
less any payments made by Tenant for Estimated Operating Costs Allocable to the
Premises for such period.
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3.4.2 ACTUAL COSTS. Within four (4) months after the close of each
Year, Landlord shall deliver to Tenant a written statement setting forth the
Operating Costs and the Operating Costs Allocable to the Premises during the
preceding Year. If such Operating Costs Allocable to the Premises for any Year
exceed the Estimated Operating Costs Allocable to the Premises paid by Tenant to
Landlord pursuant to subparagraph 3.4.1 for such Year, Tenant shall pay the
amount of such excess to Landlord within thirty (30) calendar days after receipt
of such statement by Tenant. If such statement shows the Operating Costs
Allocable to the Premises to be less than the Estimated Operating Costs
Allocable to the Premises paid by Tenant to Landlord pursuant to subparagraph
3.4.1, then the amount of such overpayment shall be paid by Landlord to Tenant
within thirty (30) calendar days following the date of such statement or, at
Landlord's option, shall be credited towards the installment(s) of Additional
Rent next coming due from Tenant.
3.4.3 DETERMINATION. The determination of Operating Costs Allocable to
the Premises shall be reasonably made by Landlord. Any sums payable under this
Lease pursuant to this paragraph shall be Additional Rent and, in the event of
nonpayment of such sums, Landlord shall have the same rights and remedies with
respect to such nonpayment as it has with respect to nonpayment of the Base Rent
due under this Lease. Tenant shall have the right to contest any determination
of Operating Costs Allocable to the Premises and the Base Amount allocable to
the Premises within 90 days after delivery of Landlord's statement of same to
Tenant. Landlord shall make its books and records available to Tenant and/or
Tenant's agent at Landlord's place of business during Landlord's normal business
hours. Notwithstanding the foregoing in the event such audit indicates
negligence or fraud on Landlord's part, and the Tenant overpaid by more than 5%
of the actual Operating Costs Allocable to the Premises. Landlord shall
reimburse Tenant for the cost of Tenant's inspection if Landlord's books and
records. In any event, if an audit reveals that any excess amount was
incorrectly charged to Tenant, such excess amount shall be promptly refunded by
Landlord to Tenant.
3.4.4 END OF TERM. If this Lease shall terminate on a day other than
the last day of a Year, (a) Landlord shall estimate the Operating Costs
Allocable to the Premises for such Year predicated on the most recent reliable
information available to Landlord; (b) the amount determined under clause (a) of
this sentence shall be prorated by multiplying such amount by a fraction, the
numerator of which is the number of calendar days within the Lease Term in such
Year and the denominator of which is 365; (c) the Base Amount Allocable to the
Premises shall be prorated in the manner described in clause (b); (d) the clause
(c) amount (i.e., the prorated Base Amount Allocable to the Premises) shall be
deducted from the clause (b) amount (i.e., the prorated Operating Costs
Allocable to the Premises); (e) if the clause (d) amount exceeds the Estimated
Operating Costs Allocable to the Premises paid by Tenant for the last Year in
the Lease Term, then Tenant shall pay the excess to Landlord within thirty (30)
calendar days after Landlord's delivery to Tenant of a statement for such
excess; and (f) if the Estimated Operating Costs Allocable to the Premises paid
by Tenant for the last Year in the Lease Term exceeds the clause (d) amount,
then Landlord shall refund to Tenant the excess within the thirty (30) calendar
day period described in clause (e). Landlord's and Tenant's obligations under
this paragraph shall survive the expiration or other termination of this Lease.
3.4.5 DEFINITIONS. Each underlined term in this subparagraph shall
have the meaning set forth next to that underlined term:
BASE AMOUNT ALLOCABLE TO THE PREMISES: ____ (Zero (0) if not filled
in).
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ESTIMATED OPERATING COSTS ALLOCABLE TO THE PREMISES: Landlord's
estimate of Operating Costs allocable to the Premises for a Year to be
given by Landlord to Tenant pursuant to subparagraph 3.4.1.
OPERATING COSTS: All reasonable expenses paid or incurred by Landlord
for maintaining, operating, and repairing any or all of the Land,
Building, related improvements, and the personal property used in
conjunction with such Land, Building and related improvements such as
lawn and garden equipment, snow removal equipment, tools and supplies,
including all expenses paid or incurred by Landlord for: (a)
utilities, including electricity, water, gas, sewers, refuse
collection, telephone charges, cable television or other electronic or
microwave signal reception, steam, heat, cooling or any other service
which is now or in the future considered a utility and which are not
payable directly by tenants in the Building; (b) supplies; (c)
cleaning and janitorial services (including window washing),
landscaping and landscaping maintenance (including irrigating,
trimming, moving, fertilizing, seeding and replacing plants), snow
removal and other services; (d) security services, if any; (e)
insurance (including deductible amounts); (f) commercially reasonable
management fees consistent with those of other first class office
buildings in Northern Lake County, Illinois for general and customary
real property management services; (g) Property Taxes, tax consultant
fees and expenses, and costs of appeals of any Property Taxes; (h)
services of independent contractors; (i) compensation (including
employment and fringe benefits) of all persons who perform duties in
connection with any service, repair, maintenance, replacement or
improvement or other work included in this subparagraph; (j) license,
permit and inspection fees; (k) assessments and special assessments
imposed by or arising in relation to the Conway Park Owners
Association; (l) rental of any machinery or equipment; (m) audit fees
and accounting services directly related to or for the Building,
whether allocated in whole or in part, as appropriate, and charges for
the computation of the rents and charges payable by tenants in the
Building (but only to the extent the cost of such fees and services
are in addition to the cost of the management fee); (n) maintenance
and service contracts; (o) cost of maintenance, repairs and
replacements (of non-capital items); (p) roof repairs, resurfacing and
replacements (with such replacements being amortized over their useful
lives, pursuant to generally accepted accounting principles, together
with market interest on their unamortized balances); (q) parking lot
maintenance, repairs, resurfacing and replacements (with such
replacements being amortized over their useful lives, pursuant to
generally accepted accounting principles, together with market
interest on their unamortized balances); (r) legal fees and other
similar expenses to the extent that they benefit the tenants or
Building generally; (s) costs incurred by Landlord for compliance with
Access Laws, except to the extent incurred as a result of Landlord's
or Landlord's Agents' negligence during the initial construction of
the Building, all as set forth in the paragraph captioned "Access
Laws"; (t) elevator service and repair, if any; and (u) any other
expense or charge which in accordance with generally accepted
accounting principles would be considered an expense of maintaining,
operating, or repairing the Building. Operating Costs shall also
include an amount necessary to amortize the cost of improvements
installed with reasonable expectations of improving operating
efficiency or to reduce or maintain Operating Costs, the cost to
replace carpeting, draperies and wall coverings for the common areas
of the Building following substantial completion of the Building and
the cost of all capital improvements required by governmental agencies
following substantial
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completion of the Building; all amortized over their useful lives
together with market interest on their unamortized balances.
Operating Costs shall not include any of the following: ground
rent; interest and amortization of funds borrowed by Landlord for
items other than capital improvements to the Building; leasing
commissions and advertising and space planning expenses incurred in
procuring tenants; structural corrections to defects in the
foundation, walls or roof of the Building; costs relating to the
preparation of Landlord's tax returns, franchise or any taxes payable
by Landlord based on Landlord's income, fines, penalties or interest
due to Landlord's negligence or inability to make payments when due;
legal fees or similar expenses relating to disputes or negotiations
with current or prospective or former tenants; and salaries, wages, or
other compensation paid to any employees of Landlord or Landlord's
Agents for services not directly related to management, maintenance or
repair of the Building, and remediation of Hazardous Substances at the
Building, or the Land if such Hazardous Substances are brought to the
Building or Land by Landlord. If less than ninety-five percent (95%)
of the net rentable area of the Building is occupied by tenants at all
times during any Year, then Operating Costs for such Year shall
include all additional costs and expenses that Landlord reasonably
determines would have been incurred had ninety-five percent (95%) of
the Building been occupied at all times during such Year by tenants;
it being understood that fixed expenses not dependent upon occupancy
levels, such as real estate taxes, shall not be included as part of
the foregoing computation.
OPERATING COSTS ALLOCABLE TO THE PREMISES: The product of Tenant's Pro
Rata Share times Operating Costs.
3.5 UTILITIES.
3.5.1 Landlord shall have the right from time to time to select the
company or companies providing local telephone and telecommunication services to
the Building. Tenant shall contract directly and pay for all telephone and other
telecommunication services used on or from the Premises together with any taxes,
penalties, surcharges or similar charges relating to such services. If Tenant
desires to use the services of a provider of local telephone or
telecommunication services whose equipment is not then servicing the Building,
no such provider shall be permitted to install its lines or other equipment
within the Building without the prior written consent of Landlord, which consent
shall not be unreasonably withheld or delayed.
3.5.2 Tenant shall, as part of the Tenant Improvements, install
necessary electricity meter reading devices and separately meter the Premises
for the provision of electricity to the Premises and may use the Landlord's
electrical distribution system with respect to such installation; provided,
however, that Landlord reserves the right to select the electric utility
provider to the Building and that the obligation of Landlord to make available
electricity or other utilities at the Building shall be subject to the rules and
regulations of the supplier of such utilities and of any municipal or other
governmental authority regulating the business of providing such utility
service. Tenant shall pay for electricity based on such meters directly and
shall pay any meter reading charges which may be incurred by Landlord. Tenant
shall not use any electrical equipment which may overload the wiring
installations or electrical load capacity of the system or interfere with the
use of electricity by Landlord or other tenants of the Building. Tenant shall
not at
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any time submeter the Premises without Landlord's prior written consent.
Notwithstanding anything contained herein to the contrary, in any and all
events. Tenant shall be responsible to pay for all electricity, other than
electricity which is used in connection with HVAC and which is included as part
of Tenant's Additional Rent payments hereunder, consumed in the Premises during
the Lease Term. If at any time during the Term the Premises are not separately
metered, or the Tenant's electricity is not being provided by or through such
separate metering, whether temporarily, sporadically or permanently, Tenant
shall pay for electricity based on Landlord's reasonable estimate of Tenant's
usage.
3.6 HOLDOVER. If Landlord agrees in writing that Tenant may hold
over after the expiration or termination of this Lease, and Landlord and Tenant
do not otherwise agree in writing on the terms of such holding over, then the
hold over tenancy shall be subject to termination by Landlord at any time upon
not less than thirty (30) days advance written notice, or by Tenant at any time
upon not less than thirty (30) days advance written notice, and all of the
other terms and provisions of this Lease shall be applicable during that period,
except that Tenant shall pay Landlord from time to time upon demand, as Base
Rent for the period of any hold over, an amount equal to 150% of the Base Rent
in effect on the termination date, computed on a daily basis for each day of the
hold over period. Such payment shall not release the Tenant from Tenant's
obligation to pay Additional Rent and any other sums due under this Lease. No
holding over by Tenant, whether with or without consent of Landlord, shall
operate to extend this Lease except as otherwise expressly, agreed by Landlord
in writing. The foregoing notwithstanding, if Landlord does not agree in writing
that Tenant may hold over after the expiration or termination of this Lease.
Tenant shall pay the daily Base Rent, Additional Rent and other sums during the
period of such holding over as set forth above, and Landlord shall be entitled
to pursue all remedies at law and in equity to which Landlord is entitled,
including, without limitation, rights to ejectment and damages.
3.7 LATE CHARGE. If Tenant fails to make any payment of Base Rent,
Additional Rent or other amount within five (5) days of the date when due under
this Lease. Tenant shall also pay a late charge equal to five percent (5%) of
the amount of any such payment; provided that Landlord agrees to waive the late
charge for the first late payment in any Year of this Lease. Landlord and Tenant
agree that this charge compensates Landlord for the administrative costs caused
by the delinquency. The parties agree that Landlord's damage would be difficult
to compute and the amount stated in this paragraph represents a reasonable
estimate of such damage. Assessment or payment of the late charge contemplated
in this paragraph shall not excuse or cure any Event of Default or breach by
Tenant under this Lease or impair any other right or remedy provided under this
Lease or under law.
3.8 DEFAULT RATE. Any Base Rent, Additional Rent or other sum payable
under this Lease which is not paid within five (5) days of the date when due
shall bear interest at a rate equal to the lesser of: (a) the published prime
rate of Riggs Bank, N.A. or such other national banking institution designated
by Landlord if such bank ceases to publish a prime rate (the "Prime Rate"), then
in effect, plus two (2) percentage points, or (b) the maximum rate of interest
per annum permitted by applicable law (the "Default Rate"), but the payment of
such interest shall not excuse or cure any Event of Default or breach by Tenant
under this Lease or impair any other right or remedy provided under this Lease
or under law.
SECTION 4: GENERAL PROVISIONS
4.1 MAINTENANCE AND REPAIR BY LANDLORD. Subject to the paragraphs
captioned "Damage or Destruction" and "Condemnation", Landlord shall maintain
the public and common areas of the Building
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in reasonably good order and condition, except for damage occasioned by the act
or omission of Tenant or Tenant's Agents which shall be paid for entirely by
Tenant upon demand by Landlord, and ordinary wear and tear. In the event any or
all of the Building becomes in need of maintenance or repair which Landlord is
required to make under this Lease, upon knowledge, discovery or intent to
undertake such maintenance or repair, Tenant or Landlord, as the case may be,
shall promptly give written notice to the other party; it being understood that
Landlord shall not be obligated in any way to commence such maintenance or
repairs until a reasonable time elapses after Landlord's receipt or delivery of
any such notice.
4.2 MAINTENANCE AND REPAIR BY TENANT. Except as is expressly set forth
as Landlord's responsibility pursuant to the paragraphs captioned "Maintenance
and Repair by Landlord" in paragraph 4.1 hereof, and "Building Service" in
paragraph 4.4 hereof. Tenant shall at Tenant's sole cost and expense keep and
maintain the Premises in good condition and repair. If Tenant fails to maintain
or repair the Premises in accordance with this paragraph, then Landlord may, but
shall not be required to, enter the Premises upon ten (10) calendar days prior
written notice to Tenant (or immediately without any notice in the case of an
emergency) to perform such maintenance or repair at Tenant's sole cost and
expense. Tenant shall pay to Landlord the reasonable cost of such maintenance or
repair within thirty (30) calendar days after written demand from Landlord.
4.3 COMMON AREAS/SECURITY/PARKING. The common areas of the Building
shall be subject to Landlord's sole management and control. Without limiting
the generality of the immediately preceding sentence, Landlord reserves the
exclusive right as it deems necessary or desirable to install, construct,
remove, maintain and operate lighting systems, facilities, improvements,
equipment and signs on, in or to all parts of the common areas; change the
number, size, height, layout, or locations of walks, driveways and truckways or
parking areas now or later forming a part of the Land or Building; make
alterations or additions to the Building or common area; close temporarily all
or any portion of the common areas to make repairs, changes or to avoid public
dedication: grant easements to which the Land will be subject, replat,
subdivide, or make other changes to the Land; place, relocate and operate
utility lines at the Land and Building; and use or permit the use of all or any
portion of the roofs of the Building. Landlord has no duty or obligation to
provide any security services in, on or around the Premises, Land or Building,
and Tenant recognizes that security services, if any, provided by Landlord will
be for the sole benefit of Landlord and the protection of Landlord's property
and under no circumstances shall Landlord be responsible for, and Tenant waives
any rights with respect to, Landlord providing security or other protection for
Tenant or Tenant's Agents or property in, on or about the Premises, Land or
Building. During the Lease Term, as may be extended, and provided that an Event
of Default has not occurred and is not then continuing, Tenant shall be entitled
to eight (8) underground reserved parking spaces at the Building. Landlord shall
maintain a 4.0/1,000 square foot ratio for outdoor surface parking spaces at the
Building and the Land; provided that Landlord reserves the right to relocate
parking areas and driveways and to build additional improvements in the common
areas of the Building and the Land; provided that the parking areas shall remain
in reasonably close proximity to the Building.
4.4 BUILDING SERVICES.
4.4.1 Landlord shall use all commercially reasonable efforts to
provide the following services and facilities to the Premises:
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(a) Heating, ventilating and air conditioning during Business Hours
subject to such regulations as the Department of Energy or other Governmental
Agency shall adopt from time to time. Tenant agrees to cooperate fully with
Landlord and to abide by all the rules and regulations which Landlord may
reasonably prescribe (which rules and regulations shall be uniformly prescribed
and applied) for the proper functioning and protection of the heating,
ventilating and air conditioning systems. If Tenant requires heating,
ventilation and air conditioning service at times other than Business Hours,
Landlord shall use diligent efforts to supply the same upon reasonable prior
notice, to be paid for by Tenant, within ten (10) calendar days of billing, at a
rate to be determined from time to time by Landlord, which rate shall equal
Landlord's reasonably estimated actual cost for such service, which the parties
acknowledge is currently equal to, and shall not in any event exceed, $75.00 per
hour.
(b) Subject to payment of the charges therefor by Tenant, electricity
for normal office use, including normal office equipment, in the Premises.
(c) Cleaning and maintenance of common areas in the Building in a
manner consistent with first class buildings in northern Lake County,
(d) Continuous passenger elevator service during Business Hours, and
service via at least one (1) elevator car at all other times, 24 hours per day,
each day of the Year.
(e) Janitorial services, including cleaning of the Premises, in
accordance with Exhibit E and consistent with first class buildings in northern
Lake County. Landlord shall furnish cleaning services to kitchens, lunchrooms
and non-Building standard lavatories in the Premises; provided that Landlord
shall not be required to provide cleaning services to any personal items
comprising such kitchens, lunchrooms, and non-Building standard lavatories,
including without limitation, washing dishes, stacking chairs, replacing
accouterments, etc.
(f) Water for lavatory and drinking purposes.
4.4.2 Tenant shall reimburse Landlord for any and all additional
cleaning expenses incurred by Landlord, including garbage and trash removal
expenses over and above the normal cleaning provided by Landlord or due to the
presence of a lunchroom or kitchen or food or beverage dispensing machines
within the Premises. No food or beverage dispensing machines shall be installed
by Tenant in the Premises without the prior written consent of Landlord, which
consent shall not be unreasonably withheld or delayed.
4.4.3 The services described in subparagraph 4.4.1 may be subject to
slowdown interruption or stoppage due to the order of any Governmental Agency,
Force Majeure, or the maintenance, repair, replacement or improvement of any of
the equipment involved in the furnishing of any such service. No such slowdown
interruption or stoppage of any such service shall be construed as an eviction,
actual or constructive, of Tenant, nor shall same cause any abatement of Base
Rent or Additional Rent or relieve Tenant from any of its obligations under this
Lease. Landlord agrees to use all commercially reasonable efforts to resume the
affected service promptly following any such slowdown interruption or stoppage.
Landlord will provide Tenant, whenever reasonably possible, advance notice of
any scheduled service slowdowns, interruptions or stoppages of which it has
knowledge. Notwithstanding anything to the contrary aforesaid, if, as a result
of the negligence of Landlord or Landlord's Agents, there is an interruption or
discontinuance in the furnishing by Landlord of any Building Services (as
described in
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<PAGE> 19
paragraph 4.4.1) to the Premises which results in Tenant being unable to
reasonably operate at the Premises or having vacated the Premises due to such an
interruption or discontinuance, in each case for a period in excess of seven (7)
consecutive full calendar days after notice to Landlord by Tenant, all regularly
payable Base Rent required under this Lease shall abate from the end of such
period until the earlier of the date Tenant reenters and reasonably uses the
Premises, or such time as Building Services are restored, such that Tenant is
again reasonably able to operate at the Premises. If only a portion of the
Premises is untenantable, Base Rent shall be abated in the proportion that the
untenantable rentable area of the Premises bears to the total rentable area of
the Premises.
4.4.4 Tenant shall be entitled to use a portion of the storage space
in the lower level of the Building (the "Storage Space"), to the extent then
available from time to time, as determined by Landlord in its reasonable
discretion. With respect to any Storage Space made available to Tenant, Tenant
shall pay to Landlord rent in an amount equal to $10.75 for each square foot of
storage space, escalating at a rate of 3% per annum. The rent to be paid for
the Storage Space shall be added to Base Rent and shall be due as and when Base
Rent is due and payable. Tenant shall not be liable to pay any Additional Rent
with respect to its occupancy of the Storage Space. Tenant shall occupy the
Storage Space in its "as is" condition, with all faults and with all risks;
provided, however that Tenant shall not be required to make any repairs or
improvements to the Storage Space unless Tenant causes damage thereto and
provided further that Tenant shall maintain the Storage Space in a good
condition and shall keep the Storage Space free of any rubbish, debris and other
waste materials. Landlord makes no representation or warranty regarding the
Storage Space whatsoever. Tenant's right to occupy the Storage Space shall
terminate automatically and immediately upon (i) the expiration or earlier
termination of this Lease, (ii) the occurrence of an Event of Default hereunder,
or (iii) at any time upon not less than thirty (30) days' prior written notice
from Tenant to Landlord. Upon termination of Tenant's occupancy of the Storage
Space. Tenant shall immediately vacate the Storage Space in a broom clean
condition.
4.5 TENANT ALTERATIONS. Tenant shall not make any alterations, additions or
improvements in or to the Premises, or make changes to locks on doors, or add,
disturb or in any way change any floor covering, wall covering, fixtures,
plumbing or wiring (individually and collectively "Tenant Alterations"), without
first obtaining the consent of Landlord which shall not be unreasonably withheld
or delayed. Tenant shall deliver to Landlord full and complete plans and
specifications for any proposed Tenant Alterations and, if consent by Landlord
is given, all such work shall be performed at Tenant's expense by Landlord or by
Tenant at Landlord's election. Tenant may select its own contractor to perform
the Tenant Alterations, subject to Landlord's reasonable approval and the
contractor's willingness to enter into Landlord's form of agreement with respect
to construction of the Tenant Alterations. Tenant shall reimburse Landlord, upon
receipt of demand therefor, for all out-of-pocket costs and expenses incurred by
Landlord related to its review of Tenant's plans and specifications (regardless
of whether Landlord approves Tenant's request). Upon completion of the Tenant
Alterations, Tenant shall pay Landlord an amount equal to Landlord's reasonable
out-of-pocket costs in connection with Landlord's coordination, administration
and inspection of such work. Without limiting the generality of the foregoing.
Landlord may require Tenant (if Landlord has elected to require Tenant to
perform the Tenant Alterations), at Tenant's sole cost and expense, to obtain
and provide Landlord with proof of insurance coverage and a payment and
performance bond, in forms, amounts and by companies acceptable to Landlord. All
Tenant Alterations to the Premises, regardless of which party constructed them,
shall become the property of Landlord (except for Tenant's trade fixtures, which
shall remain Tenant's property) and shall remain upon and be surrendered with
the Premises upon the expiration or earlier termination of this Lease; provided
that, upon the expiration or earlier termination of this Lease, at Landlord's
election and upon notice to Tenant (which
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<PAGE> 20
election shall be made and notice shall be given at the time of Landlord's
approval of the Tenant Alterations), Tenant shall be required to remove some or
all of the Tenant Alterations as designated in Landlord's notice to Tenant. If
Tenant fails to remove any such Tenant Alterations as required by Landlord's
consent, Landlord may do so and Tenant shall pay to Landlord the entire cost
thereof plus an administrative charge of five percent (5%) within ten (10)
calendar days after Tenant's receipt of Landlord's written demand therefor.
Nothing contained in this paragraph or the paragraph captioned "Tenant's Work
Performance" shall be deemed a waiver of the provisions of the paragraph
captioned "Mechanic's Liens".
4.6 TENANT'S WORK PERFORMANCE. If Landlord elects to allow Tenant to
perform the Tenant Alterations, then the Tenant Alterations shall be performed
by contractors employed by Tenant under one or more construction contracts, in
form and content approved in advance in writing by Landlord (which approval
shall be subject to Landlord's discretion (but shall not be unreasonably
withheld) and may include a requirement that the prime contractor and the
respective subcontractors: (a) be parties to, and bound by, a collective
bargaining agreement with a labor organization affiliated with the Building and
Construction Trades Council of the AFL-CIO and (b) employ only members of such
labor organizations to perform work within their respective jurisdictions).
Tenant's contractors, workers and suppliers shall work in harmony with and not
interfere with workers or contractors of Landlord or other tenants of Landlord.
If Tenant's contractors, workers or suppliers do, in the opinion of Landlord,
cause such disharmony or interference, Landlord's consent to the continuation of
such work may be withdrawn upon written notice to Tenant. All Tenant Alterations
shall be (1) completed in accordance with the plans and specifications approved
by Landlord, (2) completed in accordance with all Governmental Requirements; (3)
carried out promptly in a good and workmanlike manner; (4) of all new materials;
(5) free of defect in materials and workmanship; and (6) inspected for quality
control (punchlisted) by Landlord's construction manager. Any and all portions
of the Tenant Alterations not meeting Landlord's quality and building standards
shall be corrected by Tenant, at Tenant's expense, within thirty (30) days
after notification of such defects by Landlord. If Tenant fails to bring the
work in question up to the required standards within such 30 day period.
Landlord may complete such work (but shall have no obligation to do so) and
Tenant shall pay the entire cost thereof to Landlord within ten (10) calendar
days after Tenant's receipt of Landlord's written demand therefor. Tenant shall
pay for all damage to the Premises, Building and Land caused by Tenant or
Tenant's Agents. If Tenant performs the Tenant Alterations, Tenant shall
indemnify, defend and hold harmless Landlord and Landlord's Agents from any
Claims arising as a result of any defect in design, material or workmanship of
any Tenant Alterations.
4.7 SURRENDER OF POSSESSION. Subject to the last subparagraph of the
paragraph captioned "Insurance", Tenant shall, at the expiration or earlier
termination of this Lease, surrender and deliver the Premises to Landlord in as
good condition as when received by Tenant from Landlord or as later improved,
reasonable use and wear excepted. Tenant shall give notice to Landlord at least
twenty (20) calendar days prior to vacating the Premises and shall arrange to
meet with Landlord for a joint inspection of the Premises prior to vacating. In
the event of Tenant's failure to give such notice or arrange such joint
inspection, and after the further failure of Tenant to meet with Landlord for a
joint inspection within two (2) days of Landlord's written demand to Tenant for
a joint inspection, Landlord's inspection at or after Tenant's vacating the
Premises shall be conclusively deemed correct for purposes of determining
Tenant's responsibility for repairs and restoration.
4.8 REMOVAL OF PROPERTY. Upon expiration or earlier termination of this
Lease, Tenant may remove its trade fixtures, affixed personal property, office
supplies and office furniture and equipment if
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(a) such items are readily moveable, or if attached to the Premises are able to
be removed without permanent damage to the Premises; (b) such removal is
completed prior to the expiration or earlier termination of this Lease; (c) an
Event of Default by Tenant with respect to any covenant or condition of this
Lease has not occurred and is not then continuing at the time of such removal;
and (d) Tenant promptly repairs all damage caused by or resulting from such
removal; and Tenant shall promptly remove all such property if requested to do
so by Landlord. All other property in the Premises and any Tenant Alterations
(including, wall-to-wall carpeting, paneling, wall covering or lighting fixtures
and apparatus) or any other article affixed to the floor, walls, ceiling or any
other part of the Premises or Building, shall become the property of Landlord
and shall remain upon and be surrendered with the Premises, except as may be
otherwise provided in the paragraph captioned "Tenant Alterations" or the
paragraph captioned "Tenant's Contribution to Tenant Improvement Costs". Tenant
waives all rights to any payment or compensation for such property. If, at the
expiration or earlier termination of this Lease or at such time as Landlord
exercises its right of re-entry, Tenant has failed to remove any property from
the Premises, Building or Land which it is entitled or required to remove as
provided in this Lease, Landlord may, at its option, remove and store such
property without liability for loss of or damage to such property, such storage
to be for the account and at the expense of Tenant. If Tenant fails to pay the
cost of storing any such property, Landlord may, at its option, after
reasonable written notice providing an opportunity to cure to Tenant, sell or
permit to be sold, any or all such property at public or private sale (and
Landlord may become a purchaser at such sale), in such manner and at such times
and places as Landlord in its sole discretion may deem proper, without further
notice to Tenant, and Landlord shall apply the proceeds of such sale: first, to
the cost and expense of such sale, including reasonable attorney's fees actually
incurred; second, to the payment of the costs or charges for storing any such
property; third, to the payment of any other sums of money which may then be or
later become due Landlord from Tenant under this Lease; and, fourth, the
balance, if any, to Tenant.
4.9 ACCESS. Tenant shall permit Landlord and Landlord's Agents to enter
into the Premises at any reasonable time, and upon reasonable prior notice in
any non-emergency situation, for the purpose of inspecting the same or for the
purpose of repairing, altering or improving the Premises or the Building.
Nothing contained in this paragraph shall be deemed to impose any obligation
upon Landlord not expressly stated elsewhere in this Lease. When reasonably
necessary, Landlord may temporarily close Building or Land entrances, Building
doors or other facilities, without liability to Tenant by reason of such closure
and without such action by Landlord being construed as an eviction of Tenant or
as relieving Tenant from the duty of observing or performing any of the
provisions of this Lease. Landlord shall have the right to enter the Premises
for the purpose of showing the Premises to prospective tenants within the period
of one hundred eighty (180) calendar days prior to the expiration or sooner
termination of this Lease. Landlord shall not be liable for the consequences of
admitting by passkey, or refusing to admit to the Premises. Tenant or any of
Tenant's Agents, or other persons claiming the right of admittance.
4.10 DAMAGE OR DESTRUCTION.
4.10.1 If the Premises are damaged by fire, earthquake or other
casualty, Landlord shall, within forty-five (45) calendar days, estimate whether
the damage can be repaired within two-hundred-seventy (270) calendar days, and
if so, and if there are sufficient insurance proceeds available to repair such
damage, then Landlord shall proceed with reasonable diligence to restore the
Premises to substantially the condition which existed prior to the damage and
this Lease shall not terminate. If, in Landlord's estimation, the damage cannot
be repaired within such 270 day period or if there are insufficient insurance
proceeds available to repair such damage, Landlord may elect in its absolute
discretion to either:
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(a) terminate this Lease or (b) restore the Premises to substantially the
condition which existed prior to the damage and this Lease will continue. If
Landlord restores the Premises under this paragraph, then (1) Tenant shall pay
to Landlord, upon demand, Tenant's Pro Rata Share of any applicable deductible
amount specified under Landlord's insurance and (2) Landlord shall not be
required to repair or restore any or all furniture, fixtures, equipment,
inventory, improvements or other property which was in or about the Premises at
the time of the damage, Tenant Alterations or Tenant Improvements which are in
excess of the Tenant Improvement Allowance, unless Landlord or Landlord's Agents
caused the damage which requires such repair or restoration. Base Rent,
Additional Rent and any other sum due under this Lease during any reconstruction
period shall be abated as equitable under the circumstances. Tenant agrees to
look to the provider of Tenant's insurance for coverage for the loss of Tenant's
use of the Premises and any other related losses or damages incurred by Tenant
during any reconstruction period.
4.10.2 If the Building is damaged by fire, earthquake or other
casualty and more than fifty percent (50%) of the Building is rendered
untenantable, without regard to whether the Premises are affected by such
damage. Landlord may in its absolute discretion and without limiting any other
options available to Landlord under this Lease or otherwise, elect to terminate
this Lease by notice in writing to Tenant within sixty (60) calendar days after
the occurrence of such damage. Such notice shall be effective thirty (30)
calendar days after receipt by Tenant unless a later date is set forth in
Landlord's notice. If, within the last twelve (12) months of the Term of this
Lease, the Premises is damaged by fire, earthquake or other casualty and more
than one-third (33.33%) of the Premises is rendered untenantable. Tenant may
elect to terminate this Lease by notice in writing to Landlord within thirty
(30) calendar days after the occurrence of such damage, in which event this
Lease shall be null and void. Such notice shall be effective ten (10) calendar
days after receipt by Landlord unless a later date is set forth in Tenant's
notice.
4.10.3 Notwithstanding anything contained in this Lease to the
contrary, if there is damage to the Premises, or Building and the holder of any
indebtedness secured by a mortgage or deed of trust covering any such property
requires that the insurance proceeds be applied to such indebtedness, then
Landlord shall have the right to terminate this Lease by delivering written
notice of termination to Tenant within fifteen (15) calendar days after such
requirement is made by such holder.
4.11 CONDEMNATION. If all of the Premises, or such portions of the Building
as may be required for the Tenant's reasonable use of the Premises, are taken by
eminent domain or by conveyance in lieu thereof, this Lease shall automatically
terminate as of the date the physical taking occurs, and all Base Rent,
Additional Rent and other sums payable under this Lease shall be paid to that
date. In case of taking of a part of the Premises or a portion of the Building
not required for the Tenant's reasonable use of the Premises, then this Lease
shall continue in full force and effect and the Base Rent shall be equitably
reduced based on the proportion by which the floor area of the Premises is
reduced, such reduction in Base Rent to be effective as of the date the physical
taking occurs. Additional Rent and all other sums payable under this Lease shall
be abated and Tenant's Pro Rata Share may be redetermined as equitable under the
circumstances. Landlord reserves all rights to damages or awards for any taking
by eminent domain relating to the Premises, Building, Land and the unexpired
term of this Lease. Tenant assigns to Landlord any right Tenant may have to such
damages or award and Tenant shall make no claim against Landlord for damages for
termination of its leasehold interest or interference with Tenant's business.
Tenant shall have the right, however, to claim and recover from the condemning
authority compensation for any loss to which Tenant may be entitled; provided
that, such expenses or costs may be claimed only if they are awarded separately
in the eminent domain proceedings.
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4.12 INTENTIONALLY OMITTED.
4.13 INDEMNIFICATION. Except to the extent arising out of the negligence or
wilful misconduct of Landlord or Landlord's Agents or employees, Tenant shall
indemnify, defend and hold harmless Landlord and Landlord's Agents from and
against any and all third party Claims, arising in whole or in part out of (a)
the possession, use or occupancy of the Premises or the business conducted in
the Premises, (b) any act, omission or negligence of Tenant or Tenant's Agents,
or (c) any Event of Default under this Lease by Tenant. Except as expressly
provided to the contrary in the last sentence of this paragraph 4.13, neither
Landlord nor Landlord's Agents shall, to the extent permitted by law, have any
liability to Tenant, or to Tenant's Agents, for any Claims arising out of any
cause whatsoever, including repair to any portion of the Premises; interruption
in the use of the Premises or any equipment therein; any accident or damage
resulting from any use or operation by Landlord, Tenant or any person or entity
of heating, cooling, electrical, sewerage or plumbing equipment or apparatus:
termination of this Lease by reason of damage to the Premises or Building; fire,
robbery, theft, vandalism, mysterious disappearance or any other casualty;
actions of any other tenant of the Building or of any other person or entity;
inability to furnish any service required of Landlord as specified in this
Lease; or leakage in any part of the Premises or the Building from rain, ice or
snow, or from drains, pipes or plumbing fixtures in the Premises or the
Building: except for third party Claims arising solely out of the gross
negligence or willful misconduct of Landlord in failing to repair or maintain
the Building as required by this Lease after notice by Tenant as required by the
paragraph captioned "Maintenance and Repair by Landlord" provided that, in no
event shall Landlord be responsible for any interruption to Tenant's business or
for any indirect or consequential losses suffered by Tenant or Tenant's Agents.
The obligations of this paragraph shall be subject to the paragraph captioned
"Waiver of Subrogation". Notwithstanding the foregoing to the contrary, except
to the extent arising out of the intentional or negligent acts of Tenant or
Tenant's Agents, employees, Landlord shall indemnify and hold harmless Tenant
and Tenant's Agents from and against any and all third party Claims arising out
of the negligence or wilful misconduct of Landlord or Landlord's Agents or
employees.
4.14 TENANT INSURANCE.
4.14.1 Tenant shall throughout the Lease Term, at its own expense,
keep and maintain in full force and effect:
(a) A policy of commercial general liability insurance, including a
contractual liability endorsement covering Tenant's obligations under the
paragraph captioned "Indemnification", insuring against claims of bodily injury
and death or property damage or loss with a combined single limit at the
Commencement Date of this Lease of not less than Two Million Dollars
($2,000,000.00), which limit shall be reasonably increased during the Lease Term
at Landlord's request to reflect both increases in liability exposure arising
from inflation as well as from changing use of the Premises or changing legal
liability standards, which policy shall be payable on an "occurrence" rather
than a "claims made" basis, and which policy names Landlord and Manager and, at
Landlord's request Landlord's mortgage lender(s) or investment advisors, as
additional insureds; and
(b) A policy of extended property insurance (which is commonly called
"all risk") covering overstandard Tenant Improvements, Tenant Alterations, and
any and all furniture, fixtures, equipment, inventory, improvements and other
property in or about the Premises which is not owned by Landlord, for one
hundred percent (100%) of the then current replacement value of such property.
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4.14.2 All insurance policies required under this paragraph shall be
with companies having a Best's rating of A-VIII or better, and each policy shall
provide that it is not subject to cancellation or reduction in coverage except
after thirty (30) calendar days' written notice to Landlord. Tenant shall
deliver to Landlord and, at Landlord's request Landlord's mortgage lender(s),
prior to the Commencement Date and from time to time thereafter, certificates
evidencing the existence and amounts of all such policies.
4.14.3 If Tenant fails to acquire or maintain any insurance or provide
any certificate required by this paragraph, Landlord may, but shall not be
required to, obtain such insurance or certificates and the costs associated with
obtaining such insurance or certificates shall be payable by Tenant to Landlord
on demand.
4.15 LANDLORD'S INSURANCE. Landlord shall, throughout the Lease Term, keep
and maintain in full force and effect:
4.15.1 A policy of commercial general liability insurance, insuring
against claims of bodily injury and death or property damage or loss with a
combined single limit at the Commencement Date of not less than Five Million
Dollars ($5,000,000.00), which policy shall be payable on an "occurrence" rather
than a "claims made" basis; and
4.15.2 A policy of extended property insurance (what is commonly
called "all risk") covering the Building, Tenant Improvements and Landlord's
personal property, if any, located on the Land in the amount of one hundred
percent (100%) of the then current replacement value of such property.
Landlord may, but shall not be required to, maintain property
insurance coverage for earthquakes, floods and such other perils in such amounts
as Landlord deems appropriate. Such policies may be "blanket" policies which
cover other properties owned by Landlord and shall be with an insurance company
having a Best rating of A-VIII or better. The cost of all insurance policies
maintained by Landlord relating to the Land, Building or Premises or the income
derived from "loss of rent" insurance, as the case may be, shall be Operating
Costs. To the extent that any payment on an insurance claim under any Landlord's
policy is reduced by a deductible, such deductible shall be an Operating Cost.
4.16 WAIVER OF SUBROGATION. Notwithstanding anything in this Lease to the
contrary, Landlord and Tenant hereby each waive and release the other from any
and all Claims or any loss or damage that may occur to the Land, Building,
Premises, or personal property located therein, by reason of fire or other
casualty regardless of cause or origin, including the negligence or misconduct
of Landlord, Tenant, Landlord's Agents or Tenant's Agents, but only to the
extent of the insurance proceeds paid to such releasor under its policies of
insurance or if it fails to maintain the required policies, the insurance
proceeds that would have been paid to such releasor if it had maintained such
policies. Each party to this Lease shall promptly give to its insurance company
written notice of the mutual waivers contained in this subparagraph, and shall
cause its insurance policies to be properly endorsed, if necessary, to prevent
the invalidation of any insurance coverages by reason of the mutual waivers
contained in this subparagraph.
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4.17 ASSIGNMENT AND SUBLETTING BY TENANT.
4.17.1 Except for a sublease of all or a portion of the Premises or
an assignment of this Lease to (i) the survivor of a merger or consolidation
with Tenant, (ii) any entity acquiring all or substantially all of the voting
securities or assets of Tenant or (iii) an affiliate or wholly-owned subsidiary
of Tenant, which sublease or assignment shall be permitted hereunder and shall
not require Landlord's consent (provided that Tenant shall give Landlord prior
written notice, and a true and correct copy, of the sublease or assignment
document), and which sublease or assignment shall be subject to further
prohibitions against sublease or assignment in accordance with the terms of this
Section 4.17, Tenant shall not have the right to assign, transfer, mortgage or
encumber this Lease in whole or in part, nor sublet the whole or any part of the
Premises, nor allow the occupancy of all or any part of the Premises by another,
without first obtaining Landlord's consent, which shall not be unreasonably,
withheld or delayed but may be granted or withheld in accordance with the
provisions set forth in Section 4.17.3 hereof. Notwithstanding any permitted
assignment or subletting, Tenant shall at all times remain directly, primarily
and fully responsible and liable for the payment of all sums payable under this
Lease and for compliance with all of its other obligations as tenant under this
Lease. Upon the occurrence of an Event of Default, if the Premises or any part
of the Premises are then subject to an assignment or subletting, Landlord, in
addition to any other remedies provided in this Lease or by law, may at its
option collect directly from such assignee or subtenant all rents becoming due
to Tenant under such assignment or sublease and apply such rents against any
sums due to Landlord from Tenant under this Lease, and no such collection shall
be construed to constitute a novation or release of Tenant from the further
performance of Tenant's obligations under this Lease. Upon the occurrence of an
Event of Default, Tenant hereby makes an absolute assignment to Landlord of such
assignments and subleases and any rent, security deposits and other sums payable
under such assignments and subleases as collateral to secure the performance of
the obligations of Tenant under this Lease.
4.17.2 In the event Tenant desires to assign this Lease or to sublet
all or any portion of the Premises, except in the circumstances set forth herein
where consent is not required as contemplated and governed by paragraph 4.17.1,
Tenant shall give written notice of such desire to Landlord setting forth the
name of the proposed subtenant or assignee, the proposed term, the proposed
commencement date of the assignment or sublease, the nature of the proposed
subtenant's or assignee's business to be conducted on the Premises, the rental
rate, and any other particulars of the proposed subletting or assignment that
Landlord may reasonably request. Without limiting the preceding sentence, Tenant
shall also provide Landlord with: (a) such financial information as Landlord may
reasonably request concerning the proposed subtenant or assignee, including
recent financial statements certified as accurate, complete and prepared in
conformance with generally accepted accounting principles by the president,
managing partner or other appropriate officer of the proposed subtenant or
assignee; (b) proof reasonably satisfactory to Landlord that the proposed
subtenant or assignee will promptly occupy and thereafter use the entire
Premises (or any sublet portion of the Premises) for the remainder of the Lease
Term (or for the entire term of the sublease, if shorter) in compliance with the
terms of this Lease, and (c) a copy of the proposed sublease or assignment or
letter of intent. At the same time that Tenant provides Landlord with notice of
its desire to assign or sublease, Tenant shall pay to Landlord the reasonable
cost incurred by Landlord (not to exceed the sum of $750) in connection with
processing such proposed assignment and sublease, including attorneys' fees
incurred by Landlord with respect to such processing. Receipt of such fee shall
not obligate Landlord to approve the proposed assignment or sublease.
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4.17.3 In determining whether to grant or withhold consent to a
proposed assignment or sublease, Landlord may consider, and weigh, any
commercially reasonable factor it deems relevant. Without limiting what may be
construed as a factor considered by Landlord in good faith, Tenant agrees that
any one or more of the following will be proper grounds for Landlord's
disapproval of a proposed assignment or sublease:
(a) The proposed assignee or subtenant is or will be unwilling or
unable to execute and deliver to Landlord an ERISA Certificate in a form
consistent with the provisions of the paragraph captioned "ERISA
Representations", as may be updated by Landlord, or Landlord believes that the
proposed assignment or sublease will constitute a prohibited transaction under
or otherwise violate ERISA;
(b) The proposed assignee or subtenant does not, in Landlord's good
faith judgment, have sufficient financial worth to insure the full and timely
performance under this Lease;
(c) Landlord has received insufficient evidence of the financial
worth or creditworthiness of the proposed assignee or subtenant to make the
determination set forth in clause (b);
(d) The proposed assignee or subtenant has a reputation for disputes
in contractual relations, for failure to observe and perform its contractual
obligations in a timely and complete manner or for negative business relations
in the business community as a tenant of property or otherwise;
(e) Landlord has received from any prior lessor of the proposed
assignee or subtenant a negative report, in writing concerning such prior
lessor's experience with the proposed assignee or subtenant;
(f) Landlord has had prior negative leasing experience with the
proposed assignee or subtenant;
(g) The use of the Premises by the proposed assignee or subtenant
will not be substantially similar to the Permitted Use;
(h) In Landlord's reasonable judgment the proposed assignee or
subtenant is engaged in a business, or the Premises or any part of the Premises
will be used in a manner, that is not in keeping with the then standards of the
Building, or that is inappropriate for the Building, or that will violate any
negative covenant as to use contained in any other lease of space in the
Building;
(i) The use of the Premises by the proposed assignee or subtenant
will violate any Governmental Requirement or create a violation of Access Laws;
or
(j) An Event of Default (after expiration of any cure period) by
Tenant under this Lease has occurred and is then continuing, or an Event of
Default (after expiration of any cure period) by Tenant under this Lease has
occurred on three (3) or more occasions during the twenty-four (24) months
preceding the date that Tenant shall request such consent.
4.17.4 Within fifteen (15) calendar days after Landlord's receipt of
all required information to be supplied by Tenant pursuant to this paragraph,
Landlord shall notify Tenant of Landlord's approval, disapproval or conditional
approval of any proposed assignment or subletting, or of Landlord's
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election to recapture the space as provided in subparagraph 4.17.7. Landlord
shall have no obligation to respond unless and until all required information
has been submitted. In the event Landlord approves of any proposed assignment or
subletting, Tenant and the proposed assignee or sublessee shall execute and
deliver to Landlord an assignment (or subletting) and assumption agreement in
form and content satisfactory to Landlord.
4.17.5 If Landlord consents to any assignment or sublease and Tenant
receives rent or any other consideration, either initially or over the term of
the assignment or sublease, in excess of the Base Rent and Additional Rent,
Tenant shall pay to Landlord, after deducting Tenant's reasonable out-of-pocket
costs incurred in connection with such assignment or sublease, one-half of the
excess rent or other consideration derived therefrom.
4.17.6 If Tenant delivers a notice to Landlord requesting approval
of a proposed assignment or sublease, then Landlord may elect to terminate this
Lease as of the date set forth in that notice, with respect to that portion of
the Premises covered by the proposed assignment or sublet, for the proposed
commencement date of the assignment or the sublease, provided that, if no date
is set forth in Tenant's notice, then Landlord may elect to terminate this Lease
as of a date at least sixty (60) calendar days after the date of the notice.
Landlord shall exercise its rights under this subparagraph by written notice to
Tenant no later than fifteen (15) calendar days after its receipt of the last of
the materials delivered by Tenant to Landlord under this paragraph 4.17.
4.18 ASSIGNMENT BY LANDLORD. Landlord shall have the right to transfer and
assign, in whole or in part, its rights and obligations under this Lease and in
any and all of the Land or Building. If Landlord sells or transfers any or all
of the Building, including the Premises, Landlord and Landlord's Agents shall,
upon consummation of such sale or transfer, be released automatically from any
liability relating to obligations or covenants under this Lease to be performed
or observed after the date of such transfer (provided and to the extent the
transferee or purchaser assumes such obligations and covenants to be performed
or observed after the date of such transfer), and in such event, Tenant agrees
to look solely to Landlord's successor-in-interest with respect to such
liability; provided that, as to the Security Deposit, if any, and Prepaid Rent,
Landlord shall not be released from liability therefor unless Landlord has
delivered (by direct transfer or credit against the purchase price) the Security
Deposit, if any, or Prepaid Rent to its successor-in-interest.
4.19 ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS. Tenant shall, from
time to time, upon the written request of Landlord, execute, acknowledge and
deliver to Landlord or its designee a written statement stating: (a) the date
this Lease was executed and the date it expires; (b) the date Tenant entered
into occupancy of the Premises; (c) the amount of monthly Base Rent and
Additional Rent and the date to which such Base Rent and Additional Rent have
been paid; and (d) certifying that (1) this Lease is in full force and effect
and has not been assigned, modified, supplemented or amended in any way (or
specifying the date of the agreement so affecting this Lease); (2) Landlord is
not in breach of this Lease (or, if so, a description of each such breach) and
that no event, omission or condition has occurred which would result, with the
giving of notice or the passage of time, in a breach of this Lease by Landlord;
(3) this Lease represents the entire agreement between the parties with respect
to the Premises; (4) all required contributions by Landlord to Tenant on account
of Tenant Improvements have been received; (5) on the date of execution, there
exist no defenses or offsets which the Tenant has against the enforcement of
this Lease by the Landlord, (6) no Base Rent, Additional Rent or other sums
payable under this Lease have been paid in advance except for Base Rent and
Additional Rent for the then current month, (7) no security
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has been deposited with Landlord (or, if so, the amount of such security): (8)
it is intended that any Tenant's statement may be relied upon by a prospective
purchaser or mortgagee of Landlord's interest or an assignee of any such
mortgagee; (9) the representations in the paragraph captioned "ERISA
Representations" remain true and correct; and (10) such other information as may
be reasonably requested by Landlord. If Tenant fails to respond within ten (10)
Business Days of its receipt of a written request by Landlord as provided in
this paragraph, such shall be a breach of this Lease and Tenant shall be deemed
to have admitted the accuracy of any information supplied by Landlord to a
prospective purchaser, mortgagee or assignee. In addition, Tenant shall, from
time to time, upon the written request of Landlord, deliver to or cause to be
delivered to Landlord or its designee then current financial statements
(including a statement of operations and balance sheet) certified as accurate,
complete and prepared in conformance with generally accepted accounting
principles by the president, managing partner or other appropriate officer for
(i) Tenant, (ii) any entity which owns a controlling interest in Tenant, (iii)
any entity the controlling interest of which is owned by Tenant, (iv) any
successor entity to Tenant by merger or operation of law, and (v) any guarantor
of this Lease.
4.20 MODIFICATION FOR LENDER. If, in connection with obtaining
construction, interim or permanent financing for the Building or Land,
Landlord's lender, if any, shall request reasonable modifications to this Lease
as a condition to such financing. Tenant will not unreasonably withhold or delay
its consent to such modifications; provided that such modifications do not
increase the obligations of Tenant under this Lease or adversely affect Tenant's
rights under this Lease.
4.21 HAZARDOUS SUBSTANCES.
4.21.1 Tenant agrees that neither Tenant, any of Tenant's Agents nor
any other person acting at the direction or being under the control of Tenant or
any of Tenant's Agents will store, place, generate, manufacture, refine, handle,
or locate on, in, under or around the Land or Building any Hazardous Substance,
except for storage, handling and use of reasonable quantities and types of
cleaning fluids and office supplies in the Premises in the ordinary course and
the prudent conduct of Tenant's business in the Premises, provided that, (a) the
storage, handling and use of such permitted Hazardous Substances must at all
times conform to all Governmental Requirements and to applicable fire, safety
and insurance requirements; (b) the types and quantities of permitted Hazardous
Substances which are stored in the Premises must be reasonable and appropriate
to the nature and size of Tenant's operation in the Premises and reasonable and
appropriate for a first-class building of the same or similar use and in the
same market area as the Building; (c) no Hazardous Substance shall be spilled or
disposed of on, in, under or around the Land or Building or otherwise discharged
from the Premises or any area adjacent to the Land or Building; and (d) in no
event will Tenant be permitted to store, handle or use on, in, under or around
the Premises any Hazardous Substance which will increase the rate of fire or
extended coverage insurance on the Land or Building, unless: (1) such Hazardous
Substance and the expected rate increase have been specifically disclosed in
writing to Landlord; (2) Tenant has agreed in writing to pay any rate increase
related to each such Hazardous Substance; and (3) Landlord has approved in
writing each such Hazardous Substance, which approval shall be subject to
Landlord's sole discretion.
4.21.2 Tenant shall indemnify, defend and hold harmless Landlord and
Landlord's Agents from and against any and all Claims arising out of any breach
of any provision of this paragraph, which expenses shall also include laboratory
testing fees, personal injury claims, clean-up costs and environmental
consultants' fees. Tenant agrees that Landlord may be irreparably harmed by
Tenant's breach of this paragraph and that a specific performance action may
appropriately be brought by Landlord; provided that,
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Landlord's election to bring or not bring any such specific performance action
shall in no way limit, waive, impair or hinder Landlord's other remedies against
Tenant.
4.21.3 As of the execution date of this Lease, Tenant represents and
warrants to Landlord that, except as otherwise disclosed by Tenant to Landlord,
Tenant has no intent to bring any Hazardous Substances on, in or under the
Premises except for the type and quantities authorized in the first paragraph of
the paragraph captioned "Hazardous Substances."
4.21.4 Landlord represents and warrants to Tenant that, to the best
of its knowledge, no Hazardous Substances exist at the Building or the Land in
violation of any Governmental Requirements pertaining to Hazardous Substances.
Landlord shall indemnify, defend and hold harmless Tenant from and against any
and all Claims incurred by Tenant arising out of or in connection with Landlord
or Landlord's Agents bringing any Hazardous Substances onto the Land or Building
in violation of Governmental Requirements.
4.22 ACCESS LAWS.
4.22.1 Tenant agrees to notify Landlord immediately if Tenant
receives notification or otherwise becomes aware of: (a) any condition or
situation on, in, under or around the Land or Building which may constitute a
violation of any Access Laws or (b) any threatened or actual lien, action or
notice that the Land or Building is not in compliance with any Access Laws. If
Tenant is responsible for such condition, situation, lien, action or notice
under this paragraph. Tenant's notice to Landlord shall include a statement as
to the actions Tenant proposes to take in response to such condition, situation,
lien, action or notice.
4.22.2 Tenant shall not alter or permit any assignee or subtenant or
any other person to alter the Premises in any manner which would violate any
Access Laws or increase Landlord's responsibilities for compliance with Access
Laws, without the prior approval of the Landlord. In connection with any such
approval, Landlord may require a certificate of compliance with Access Laws from
an architect, engineer or other person acceptable to Landlord. Tenant agrees to
pay the reasonable fees incurred by such architect, engineer or other third
party in connection with the issuance of such certificate of compliance.
Landlord's consent to any proposed Tenant Alteration shall (a) not relieve
Tenant of its obligations or indemnities contained in this paragraph or this
Lease or (b) be construed as a warranty that such proposed alteration complies
with any Access Law.
4.22.3 Tenant shall be solely responsible for all costs and expenses
relating to or incurred in connection with: (a) failure of Tenant's use of the
Premises to comply with Access Laws; and (b) bringing the Building and the
common areas of the Building into compliance with Access Laws, if and to the
extent such failure or noncompliance arises out of or relates to: (1) Tenant's
use of the Premises in violation of this Lease; or (2) Tenant Alterations to the
Premises.
4.22.4 Landlord shall be responsible for all costs and expenses
relating to or incurred in connection with bringing the common areas of the
Building into compliance with Access Laws, unless such costs and expenses are
Tenant's responsibility as provided in the preceding subparagraph. Any cost or
expense paid or incurred by Landlord after initial construction to bring the
Premises or common areas of the Building into compliance with Access Laws which
is not Tenant's responsibility under the preceding subparagraphs and which is
not required as a result of Landlord's negligence (which shall be Landlord's
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sole expense), shall be amortized over the useful economic life of the
improvements using an amortization rate reasonably determined by Landlord, and
shall be an Operating Cost for purposes of this Lease.
4.22.5 Tenant agrees to indemnify, defend and hold harmless Landlord
and Landlord's Agents from and against any and all Claims arising out of or
relating to any failure of Tenant or Tenant's Agents to comply with Tenant's
obligations under this paragraph 4.22. Landlord agrees to indemnify, defend and
hold harmless Tenant and Tenant's Agents from and against any and all Claims
arising out of or relating to any failure of Landlord or Landlord's Agents to
comply with Landlord's obligations under this paragraph 4.22.
4.22.6 The provisions of this paragraph shall supersede any other
provisions in this Lease regarding Access Laws, to the extent inconsistent with
the provisions of any other paragraphs.
4.23 QUIET ENJOYMENT. Landlord covenants that Tenant, upon paying Base
Rent, Additional Rent and all other sums payable under this Lease and performing
all covenants and conditions required of Tenant under this Lease shall and may
peacefully have, hold and enjoy the Premises without hindrance or molestation
by Landlord or Landlord's Agents.
4.24 SIGNS. Tenant shall not install any signs on the Building exterior
or inscribe, post, place, or in any manner display any sign, notice, picture,
placard or poster, or any advertising matter whatsoever, anywhere in or about
the Land or Building (including without limitation the interior of the Premises)
at places visible (either directly or indirectly as an outline or shadow on a
glass pane) from anywhere outside the Premises without first obtaining
Landlord's consent, which shall not be unreasonably withheld. Notwithstanding
the foregoing, Landlord shall provide to Tenant, at Landlord's expense, standard
identification signage on the main directory in the lobby of the Building.
4.25 SUBORDINATION. Tenant subordinates this Lease and all rights of
Tenant under this Lease to any mortgage, deed of trust, ground lease or similar
instrument which may from time to time be placed upon the Premises (and all
renewals, modifications, replacements and extensions of such encumbrances), and
each such mortgage, deed of trust, ground lease or other instrument shall be
superior to and prior to this Lease. Notwithstanding the foregoing, the holder
or beneficiary of such mortgage, deed of trust, ground lease, or similar
instrument shall have the right to subordinate or cause to be subordinated any
such mortgage, deed of trust, ground lease, or similar instrument to this Lease.
Tenant further covenants and agrees that if the lender or ground lessor acquires
the Premises as a purchaser at any foreclosure sale or otherwise, Tenant shall
recognize and attorn to such party as landlord under this Lease, and shall make
all payments required hereunder to such new landlord without deduction or
set-off and, upon the request of such purchaser or other successor, execute,
deliver and acknowledge documents confirming such attornment. Tenant waives the
provisions of any law or regulation, now or hereafter in effect, which may give
or purport to give Tenant any right to terminate or otherwise adversely affect
this Lease or the obligations of Tenant hereunder in the event that any such
foreclosure or termination or other proceeding is prosecuted or completed.
Notwithstanding the foregoing to the contrary, Landlord shall use best efforts
to deliver to Tenant a non-disturbance agreement, in reasonable and customary
form and substance, from any lender or ground lessor, whether now existing or in
the future. Landlord represents and warrants to Tenant that, as of the date of
this Lease, there is no mortgage recorded against the Building.
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4.26 INTENTIONALLY OMITTED.
4.27 BROKERS. Landlord covenants and agrees to pay the Brokers with
respect to this Lease pursuant to separate agreements with the Brokers. Each
party to this Lease shall indemnify, defend and hold harmless the other party
from and against any and all Claims asserted against such other party by any
real estate broker, finder or intermediary relating to any act of the
indemnifying party in connection with this Lease.
4.28 EXCULPATION AND LIMITATION OF LIABILITY. Landlord has executed this
Lease by its trustee signing solely in a representative capacity.
Notwithstanding anything contained in this Lease to the contrary, Tenant
confirms that the covenants of Landlord are made and intended, not as personal
covenants of the trustee, or for the purpose of binding the trustee personally,
but solely in the exercise of the representative powers conferred upon the
trustee by its principal. Liability with respect to the entry and performance of
this Lease by or on behalf of Landlord, however it may arise, shall be asserted
and enforced only against the Landlord's estate and interest in the Building and
Landlord shall have no personal liability in the event of any claim against
Landlord arising out of or in connection with this Lease, the relationship of
Landlord and Tenant or Tenant's use of the Premises. Further, in no event
whatsoever shall any Landlord's Agent have any liability or responsibility
whatsoever arising out of or in connection with this Lease, the relationship of
Landlord and Tenant or Tenant's use of the Premises. Any and all personal
liability, if any, beyond that which may be asserted under this paragraph, is
expressly waived and released by Tenant and by all persons claiming by, through
or under Tenant.
4.29 ERISA REPRESENTATIONS. Tenant represents to Landlord that with the
exception of this Lease, neither the Tenant nor any affiliate of the Tenant is a
tenant under a lease or any other tenancy arrangement (1) with (a) Riggs and
Company, a division of Riggs Bank N.A., as trustee of the Multi-Employer
Property Trust, (b) Riggs Bank N.A. as trustee of the Multi-Employer Property
Trust; (c) the Multi-Employer Property Trust; (d) the National Bank of
Washington Multi-Employer Property Trust, the previous name of the
Multi-Employer Property Trust; (e) The Riggs National Bank of Washington, D.C.,
as trustee of the Multi-Employer Property Trust; (f) the Harman International
Business Campus Joint Venture; (g) the Corporate Drive Corporation as trustee of
the Corporate Drive Nominee Realty Trust; (h) Goldbelt Place Joint Venture; (i)
Arboretum Lakes-I, L.L.C., a Delaware limited liability company; (j) Village
Green of Rochester Hills Associates L.L.C.; (k) Pine Street Development, L.L.C.;
(l) MEPT Realty LLC; (m) MEPT, L.L.C.; (n) Cabrillo Properties LLC; (o) Valencia
LLC; or (p) Mission Trails LLC; or (2) involving any property in which any one
or more of the entities named in clauses (1) (a) through (e) are known by the
Tenant to have an ownership interest.
4.30 MECHANIC'S LIENS AND TENANT'S PERSONAL PROPERTY TAXES.
4.30.1 Tenant shall have no authority, express or implied, to create
or place any lien or encumbrance of any kind or nature whatsoever upon, or in
any manner to bind, the interest of Landlord or Tenant in the Premises or to
charge the rentals payable under this Lease for any Claims in favor of any
person dealing with Tenant, including those who may furnish materials or perform
labor for any construction or repairs. Tenant shall pay or cause to be paid all
sums legally due and payable by it on account of any labor performed or
materials furnished in connection with any work performed on the Premises on
which any lien is or can be validly and legally asserted against its leasehold
interest in the Premises and Tenant shall indemnify, defend and hold harmless
Landlord from any and all Claims arising out of any such asserted Claims.
Tenant agrees to give Landlord immediate written notice of any such Claim.
Notwithstanding the foregoing to the contrary, Tenant may pay any materialmen or
other lien
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claimant under protest in satisfaction of this paragraph, without being deemed
to have waived any rights Tenant may have at law or equity against such
materialmen or lien claimant.
4.30.2 Tenant shall be liable for all taxes levied or assessed
against personal property, furniture or fixtures placed by Tenant in the
Premises. If any such taxes for which Tenant is liable are levied or assessed
against Landlord or Landlord's property and Landlord elects to pay them or if
the assessed value of Landlord's property is increased by inclusion of such
personal property, furniture or fixtures and Landlord elects to pay the taxes
based on such increase, Tenant shall reimburse Landlord for the sums so paid by
Landlord, upon demand by Landlord.
4.31 LANDLORD'S SECURITY INTEREST. In addition to any statutory lien
for rent in Landlord's favor, Landlord shall have and Tenant hereby grants to
Landlord a continuing security interest for all Base Rent, Additional Rent and
other sums becoming due under this Lease from Tenant, upon all goods, wares,
equipment, fixtures, furniture, inventory, accounts, intangibles, chattel paper
and other personal property of Tenant situated in or arising out of the
Premises, and such property shall not be removed therefrom without the consent
of Landlord until all arrearages in Base Rent, Additional Rent and other sums
due under this Lease shall first have been paid and discharged. On the
occurrence of an Event of Default, Landlord shall have, in addition to any other
remedies provided herein or by law, all rights and remedies under the Uniform
Commercial Code, including, the right to sell the property described in this
paragraph at public or private sale upon five (5) calendar days notice to
Tenant. Tenant hereby agrees to execute such financing statements and other
instruments necessary or desirable in Landlord's discretion to perfect the
security interest hereby created. Any statutory lien for rent is not waived, and
the express contractual lien granted in this paragraph constitutes a security
agreement and is in addition and supplementary to such statutory lien.
SECTION 5: DEFAULT AND REMEDIES
5.1 EVENTS OF DEFAULT.
5.1.1 The occurrence of any one or more of the following events
shall constitute a material default and breach of this Lease by Tenant ("EVENT
OF DEFAULT"):
(a) vacation or abandonment of the Premises, together with the
failure to pay Base Rent, Additional Rent or any other sum payable by Tenant
under this Lease in accordance with the provisions governing the payment
thereof;
(b) failure by Tenant to make any payment of Base Rent, Additional
Rent or any other sum payable by Tenant under this Lease after it is past due
and within five (5) days of written notice thereof;
(c) an assignment of this Lease by Tenant or a sublease of any or
all of the Premises without Landlord's permission;
(d) failure by Tenant to observe or perform any covenant or
condition of this Lease, other than the making of payments, where such failure
shall continue for a period of thirty (30) calendar days after written notice
from Landlord, and provided that if such failure requires more than 30 days to
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cure, Tenant shall have such additional time as is necessary to cure such
failure so long as Tenant has promptly commenced to cure and diligently pursues
such cure to completion; provided that in no event shall such cure period extend
beyond ninety (90) days;
(e) (1) the making by Tenant of any general assignment or general
arrangement for the benefit of creditors; (2) the filing by or against Tenant of
a petition in bankruptcy, including reorganization or arrangement, unless, in
the case of a petition filed against Tenant, the same is dismissed within
forty-five (45) calendar days; (3) the appointment of a trustee or receiver to
take possession of substantially all of Tenant's assets located in the Premises
or of Tenant's interest in this Lease; (4) any execution, levy, attachment or
other process of law against any property of Tenant or Tenant's interest in this
Lease, unless the same is dismissed within forty-five (45) calendar days; (5)
adjudication that Tenant is bankrupt; (6) the making by Tenant of a transfer in
fraud of creditors; or (7) the failure of Tenant to generally pay its debts as
they become due; or
(f) any information furnished by or on behalf of Tenant to Landlord
in connection with the entry of this Lease is determined to have been materially
false when made.
5.1.2 Tenant shall notify Landlord promptly of any Event of Default
or any facts, conditions or events which, with the giving of notice or passage
of time or both, would constitute an Event of Default.
5.1.3 If a petition in bankruptcy is filed by or against Tenant, and
if this Lease is treated as an "unexpired lease" under applicable bankruptcy law
in such proceeding, then Tenant agrees that Tenant shall not attempt nor cause
any trustee to attempt to extend the applicable time period within which this
Lease must be assumed or rejected.
5.2 REMEDIES. If any Event of Default occurs, Landlord may at any time
after such occurrence, with notice and the expiration of the cure period as
provided in paragraph 5.1.1 of this Lease, and without limiting Landlord in the
exercise of any right or remedy at law which Landlord may have by reason of
such Event of Default, exercise the rights and remedies, either singularly or in
combination, as are specified or described in the subparagraphs of this
paragraph.
5.2.1 Landlord may terminate this Lease and all rights of Tenant
under this Lease either immediately or at some later date by giving Tenant
written notice that this Lease is terminated. If Landlord so terminates this
Lease, then Landlord may recover from Tenant the sum of:
(a) the unpaid Base Rent, Additional Rent and all other sums
payable under this Lease which have been earned at the time of termination;
(b) interest at the Default Rate on the unpaid Base Rent,
Additional Rent and all other sums payable under this Lease which have been
earned at the time of termination; plus
(c) the amount by which the unpaid Base Rent, Additional Rent and
all other sums payable under this Lease which would have been earned after
termination until the time of award exceeds the amount of such rental loss, if
any, as Tenant affirmatively proves could have been reasonably avoided and
interest on such excess at the Default Rate; plus
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<PAGE> 34
(d) the amount by which the aggregate of the unpaid Base Rent,
Additional Rent and all other sums payable under this Lease for the balance of
the Lease Term after the time of award exceeds the amount of such rental loss,
if any, as Tenant affirmatively proves could be reasonably avoided, with such
difference being discounted to present value at the Prime Rate at the time of
award; plus
(e) any other amount necessary to compensate Landlord for the
detriment proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease or which, in the ordinary course of things, would be likely to
result from such failure, including, leasing commissions, tenant improvement
costs, renovation costs and advertising costs; plus
(f) all such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable law.
5.2.2 Landlord shall also have the right, with or without
terminating this Lease, to re-enter the Premises and remove all persons and
property from the Premises. Landlord may cause property so removed from the
Premises to be stored in a public warehouse or elsewhere at the expense and for
the account of Tenant.
5.2.3 Landlord shall also have the right, without terminating this
Lease, to accelerate and recover from Tenant the sum of all unpaid Base Rent,
Additional Rent and all other sums payable under the then remaining term of the
Lease, discounting such amount to present value at the Prime Rate.
5.2.4 If Tenant vacates, abandons or surrenders the Premises without
Landlord's consent, or if Landlord re-enters the Premises as provided in
subparagraph 5.2.2 or takes possession of the Premises pursuant to legal
proceedings or through any notice procedure provided by law, then, if Landlord
does not elect to terminate this Lease, Landlord may, from time to time, without
terminating this Lease, either (a) recover all Base Rent, Additional Rent and
all other sums payable under this Lease as they become due or (b) relet the
Premises or any part of the Premises on behalf of Tenant for such term or terms,
at such rent or rents and pursuant to such other provisions as Landlord, in its
reasonable discretion, may deem commercially reasonable, all with the right, at
Tenant's cost, to make reasonably necessary alterations and repairs to the
Premises and recover any deficiency from Tenant as set forth in subparagraph
5.2.5.
5.2.5 None of the following remedial actions, singly or in
combination, shall be construed as an election by Landlord to terminate this
Lease unless Landlord has in fact given Tenant written notice that this Lease is
terminated: an act by Landlord to maintain or preserve the Premises; any efforts
by Landlord to relet the Premises; any repairs or alterations made by Landlord
to the Premises; re-entry, repossession or reletting of the Premises by Landlord
pursuant to this paragraph; or the appointment of a receiver, upon the
initiative of Landlord, to protect Landlord's interest under this Lease. If
Landlord takes any of the foregoing remedial action without terminating this
Lease, Landlord may nevertheless at any time after taking any such remedial
action terminate this Lease by written notice to Tenant.
5.2.6 If Landlord relets the Premises, Landlord shall apply the
revenue from such reletting as follows: first, to the payment of any
indebtedness of Tenant to Landlord other than Base Rent, Additional Rent or any
other sums payable by Tenant under this Lease; second, to the payment of any
cost of reletting (including finders' fees and leasing commissions limited to
the then remaining term of this Lease); third, to the payment of the cost of any
reasonably necessary alterations, improvements, maintenance and repairs to the
Premises; and fourth, to the payment of Base Rent, Additional Rent and
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other sums due and payable and unpaid under this Lease. Landlord shall hold and
apply the residue, if any, to payment of future Base Rent, Additional Rent and
other sums payable under this Lease as the same become due, and shall deliver
the eventual balance, if any, to Tenant. Should revenue from letting during any
month, after application pursuant to the foregoing provisions, be less than the
sum of the Base Rent, Additional Rent and other sums payable under this Lease
and Landlord's expenditures for the Premises during such month, Tenant shall be
obligated to pay such deficiency to Landlord as and when such deficiency arises.
5.2.7 Pursuit of any of the foregoing remedies shall not preclude
pursuit of any of the other remedies provided in this Lease or by law (all such
remedies being cumulative), nor shall pursuit of any remedy provided in this
Lease constitute a forfeiture or waiver of any Base Rent, Additional Rent or
other sum payable under this Lease or of any damages accruing to Landlord by
reason of the violation of any of the covenants or conditions contained in this
Lease.
5.2.8 Notwithstanding anything contained in this Lease to the
contrary, Landlord shall use reasonable efforts to mitigate its damages upon the
occurrence of an Event of Default by Tenant under this Lease.
5.3 RIGHT TO PERFORM. If Tenant shall fail to perform any act on its part
to be performed under this Lease, and such failure shall continue for thirty
(30) calendar days after notice of such failure by Landlord, or such shorter
time if reasonable under the circumstances, Landlord may, but shall not be
obligated to, and without waiving or releasing Tenant from any obligations of
Tenant, make such payment or perform such other act on Tenant's part to be made
or performed as provided in this Lease. Landlord shall have (in addition to any
other right or remedy of Landlord) the same rights and remedies in the event of
the nonpayment of sums due under this paragraph as in the case of default by
Tenant in the payment of Base Rent.
5.4 LANDLORD'S DEFAULT. In the event that Landlord defaults under or
breaches this Lease, Tenant shall notify Landlord of such default or breach in
writing, and Tenant shall not exercise any right or remedy which Tenant may have
under this Lease or at law if Landlord commences to cure such default or breach
within thirty (30) calendar days after receipt of Tenant's notice and thereafter
diligently prosecutes the cure to completion.
SECTION 6: MISCELLANEOUS PROVISIONS
6.1 NOTICES. Any notice, request or written communication required or
permitted to be delivered under this Lease shall be: (a) in writing; (b)
transmitted by personal delivery, express or courier service, United States
Postal Service in the manner described below, or electronic means of
transmitting written material; and (c) deemed to be delivered on the earlier of
the date received or four (4) calendar days after having been deposited in the
United States Postal Service, postage prepaid. Such writings shall be addressed
to Landlord or Tenant, as the case may be, at the respective designated
addresses set forth opposite their signatures, or at such other address(es) as
they may, after the execution date of this Lease, specify by written notice
delivered in accordance with this paragraph, with copies to the persons at the
addresses, if any, designated opposite each party's signature. Those notices
which contain a notice of breach or default or a demand for performance may be
sent by any of the methods described in clause (b)
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above, but if transmitted by personal delivery or electronic means, shall also
be sent concurrently by certified or registered mail, return receipt requested.
6.2 ATTORNEY'S FEES AND EXPENSES. In the event either party requires the
services of an attorney in connection with enforcing the terms of this Lease, or
in the event suit is brought for the recovery of Base Rent, Additional Rent or
any other sums paid or payable under this Lease or for the breach of any
covenant or condition of this Lease, or for the restitution of the Premises to
Landlord or the eviction of Tenant during the Lease Term or after the expiration
or earlier termination of this Lease, the prevailing party shall be entitled to
its reasonable attorney's and paralegal's fees, expenses and court costs,
including those relating to any appeal.
6.3 NO ACCORD AND SATISFACTION. No payment by Tenant or receipt by
Landlord of an amount less than the Base Rent or Additional Rent or any other
sum due and payable under this Lease shall be deemed to be other than a payment
on account of the Base Rent, Additional Rent or other such sum, nor shall any
endorsement or statement on any check or any letter accompanying any check or
payment be deemed an accord and satisfaction, nor preclude Landlord's right to
recover the balance of any amount payable or Landlord's right to pursue any
other remedy provided in this Lease or at law.
6.4 SUCCESSORS; JOINT AND SEVERAL LIABILITY. Except as provided in the
paragraph captioned "Exculpation and Limitation of Liability" and subject to the
paragraph captioned "Assignment and Subletting by Landlord", all of the
covenants and conditions contained in this Lease shall apply to and be binding
upon Landlord and Tenant and their respective heirs, executors, administrators,
successors and assigns. In the event that more than one person, partnership,
company, corporation or other entity is included in the term "Tenant," then each
such person, partnership, company, corporation or other entity shall be jointly
and severally liable for all obligations of Tenant under this Lease.
6.5 CHOICE OF LAW. This Lease shall be construed and governed by the laws
of the state in which the Land is located. Tenant consents to Landlord's choice
of venue for any legal proceeding brought by Landlord or Tenant to enforce the
terms of this Lease.
6.6 NO WAIVER OF REMEDIES. The waiver by Landlord or Tenant of any
covenant or condition contained in this Lease shall not be deemed to be a waiver
of any subsequent breach of such covenant or condition nor shall any custom or
practice which may develop between the parties in the administration of this
Lease be construed to waive or lessen the rights of Landlord or Tenant to insist
on the strict performance by the other party of all of the covenants and
conditions of this Lease. No act or thing done by Landlord or Landlord's Agents
during the Lease Term shall be deemed an acceptance or a surrender of the
Premises, and no agreement to accept a surrender of the Premises shall be valid
unless made in writing and signed by Landlord. The mention in this Lease of any
particular remedy shall not preclude Landlord or Tenant from any other remedy it
might have, either under this Lease or at law, nor shall the waiver of or
redress for any violation of any covenant or condition in this Lease or in any
of the rules or regulations attached to this Lease or later adopted by Landlord,
prevent a subsequent act, which would have originally constituted a violation,
from having all the force and effect of an original violation. The receipt by
Landlord of Base Rent, Additional Rent or any other sum payable under this Lease
with knowledge of a breach of any covenant or condition in this Lease shall not
be deemed a waiver of such breach. The payment by Tenant of any sum or amount
due or payable under this Lease may be made under protest and shall not be
deemed a waiver of any breach or default by Landlord under this Lease. The
failure of Landlord to enforce any of the rules and regulations attached to this
Lease or later adopted,
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against Tenant or any other tenant in the Building, shall not be deemed a
waiver. Any waiver by Landlord must be in writing and signed by Landlord to be
effective.
6.7 OFFER TO LEASE. The submission of this Lease to Tenant or its broker
or other agent does not constitute an offer to Tenant to lease the Premises.
This Lease shall have no force or effect until: (a) it is executed and delivered
by Tenant to Landlord; and (b) it is executed and delivered by Landlord to
Tenant.
6.8 FORCE MAJEURE. In the event that Landlord shall be delayed, hindered
in or prevented from the performance of any act or obligation required under
this Lease by reason of Force Majeure, then performance of such act or
obligation shall be excused for the period of the delay and the period for the
performance of any such act or obligation shall be extended for the period
equivalent to the period of such delay.
6.9 LANDLORD'S CONSENT. Unless otherwise provided in this Lease, whenever
Landlord's consent, approval or other action is required under the terms of this
Lease, such consent, approval or action shall be subject to Landlord's
reasonable judgment or discretion, not unreasonably withheld, exercised in good
faith and shall be delivered in writing.
6.10 SEVERABILITY; CAPTIONS. If any clause or provision of this Lease is
determined to be illegal, invalid, or unenforceable under present or future
laws, the remainder of this Lease shall not be affected by such determination,
and in lieu of each clause or provision that is determined to be illegal,
invalid or unenforceable, there be added as a part of this Lease a clause or
provision as similar in terms to such illegal, invalid or unenforceable clause
or provision as may be possible and be legal, valid and enforceable. Headings or
captions in this Lease are added as a matter of convenience only and in no way
define, limit or otherwise affect the construction or interpretation of this
Lease.
6.11 INTERPRETATION. Whenever a provision of this Lease uses the term (a)
"include" or "including", that term shall not be limiting but shall be construed
as illustrative, (b) "covenant", that term shall include any covenant,
agreement, term or provision, (c) "at law", that term shall mean at law or in
equity, or both, and (d) "day", that uncapitalized word shall mean a calendar
day. This Lease shall be given a fair and reasonable interpretation of the words
contained in it without any weight being given to whether a provision was
drafted by one party or its counsel. For purposes of this Lease, any reference
to Landlord's "knowledge" shall mean, refer and be limited to the actual
knowledge, without imputation of knowledge, of officers of the trustee of
Landlord having responsibility for the Building.
6.12 INCORPORATION OF PRIOR AGREEMENT; AMENDMENTS. This Lease contains all
of the agreements of the parties to this Lease with respect to any matter
covered or mentioned in this Lease, whether oral or written, and no prior or
contemporaneous agreement or understanding pertaining to any such matter shall
be effective for any purpose. No provision of this Lease may be amended or added
to except by an agreement in writing signed by the parties to this Lease or
their respective successors in interest.
6.13 AUTHORITY. If Tenant is a partnership, company, corporation or other
entity, each individual executing this Lease on behalf of Tenant represents and
warrants to Landlord that he or she is duly authorized to so execute and deliver
this Lease and that all partnership, company, corporation or other entity
actions and consents required for execution of this Lease have been given,
granted or obtained. If Tenant is a partnership, company, corporation or other
business organization, it shall, within ten (10)
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calendar days after demand by Landlord, deliver to Landlord satisfactory
evidence of the due authorization of this Lease and the authority of the person
executing this Lease on its behalf. Landlord represents and warrants to Tenant
that the person executing this Lease on behalf of Landlord is duly authorized to
so execute and deliver this Lease and that all consents required for execution
of this Lease, if any, have been given, granted or obtained.
6.14 TIME OF ESSENCE. Time is of the essence with respect to the
performance of every covenant and condition of this Lease.
6.15 SURVIVAL OF OBLIGATIONS. Notwithstanding anything contained in this
Lease to the contrary or the expiration or earlier termination of this Lease,
any and all obligations of either party accruing prior to the expiration or
termination of this Lease shall survive the expiration or earlier termination of
this Lease, and either party shall promptly perform all such obligations whether
or not this Lease has expired or terminated. Such obligations shall include any
and all indemnity obligations set forth in this Lease.
6.16 CONSENT TO SERVICE. Tenant irrevocably consents to the service of
process of any action or proceeding at the address of the Premises, unless
Tenant has vacated the Premises and provided Landlord with written notice of
another address in which event service of process may be made at such other
address for Tenant. Nothing in this paragraph shall affect the right to serve
process in any other manner permitted by law.
6.17 LANDLORD'S AUTHORIZED AGENTS. Notwithstanding anything contained in
the Lease to the contrary, including without limitation, the definition of
Landlord's Agents, only officers of Riggs Bank, N.A. are authorized to amend,
renew or terminate this Lease, or to compromise any of Landlord's claims under
this Lease or to bind Landlord in any manner. Without limiting the effect of the
previous sentence, no property manager or broker shall be considered an
authorized agent of Landlord to amend, renew or terminate this Lease or to
compromise any of Landlord's claims under this Lease or to bind Landlord in any
manner.
6.18 WAIVER OF JURY TRIAL. Landlord and Tenant agree to waive trial by
jury in any action, proceeding or counterclaim brought by either against the
other on any matter arising out of or relating in any way to this Lease.
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IN WITNESS WHEREOF, this Lease has been executed the day and year first
above set forth.
<TABLE>
<CAPTION>
LANDLORD: TENANT:
- -------- ------
<S> <C>
Riggs and Company, a division of Riggs Bank, eLoyalty Corporation
N.A. as Trustee of the Multi-Employer Property --------------------
Trust, a trust organized under 12 C.F.R. Section
9.18. -----------------------------------------
By: /s/ SAMUEL KUBIAK By: /s/ KELLY D. CONWAY
------------------------------------- -------------------------------------
Name: Samuel Kubiak Name: Kelly D. Conway
----------------------------- -----------------------------------
Its: Managing Director Its: President and CEO
------------------------------ -----------------------------------
Designated Address for Landlord: Designated Address for Tenant:
- ------------------------------- -----------------------------
c/o Riggs and Company -----------------------------------------
Attn: Samuel Kubiak -----------------------------------------
808 17th Street, N.W. -----------------------------------------
Washington, DC 20006 -----------------------------------------
Facsimile: 202-835-6887
Facsimile:
------------------------------
with copy to Manager at:
-----------------------
Insignia/ESG, Inc.
311 South Wacker Drive
Chicago, IL 60606
Attn:
---------------------
</TABLE>
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<PAGE> 1
EXHIBIT 10.14
ELOYALTY CORPORATION
EXECUTIVE DEFERRED COMPENSATION PLAN
January 1, 2000
<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<S> <C>
1. PURPOSE; EFFECTIVE DATE 1
2. DEFINITIONS 1
3. PARTICIPATION AND DEFERRALS 3
4. DEFERRED COMPENSATION ACCOUNT 4
5. PLAN BENEFITS 6
6. BENEFICIARY DESIGNATION 9
7. ADMINISTRATION 10
8. CLAIMS PROCEDURE 11
9. AMENDMENT AND TERMINATION OF PLAN 12
10. MISCELLANEOUS 13
</TABLE>
<PAGE> 3
1. PURPOSE; EFFECTIVE DATE
The purpose of this Executive Deferred Compensation Plan is to provide
current tax planning opportunities as well as supplemental funds for retirement
or death for certain employees of eLoyalty Corporation. It is intended that the
Plan will aid in attracting and retaining employees of exceptional ability by
providing them with these benefits. The Plan shall be effective as of January 1,
2000 (the "Effective Date"), and shall constitute a continuation of the
Technology Solutions Company Executive Deferred Compensation Plan with respect
to employees of the Company and its subsidiaries who participated in such plan
prior to the spin-off of the Company by Technology Solutions Company ("TSC") to
its stockholders.
2. DEFINITIONS
Whenever used in this document, the following terms shall have the
meanings set forth in this Section unless a contrary or different meaning is
expressly provided:
2.1 Account. "Account" means the device used by the Employer to measure
and determine the amounts to be paid to a Participant under the Plan.
Each Account shall consist of one or more Subaccounts.
2.2 Beneficiary. "Beneficiary" means the person, persons or entity
entitled under Section 6 to receive any Plan benefits payable after a
Participant's death.
2.3 Board. "Board" means the Board of Directors of the Company.
2.4 Committee. "Committee" means the Committee appointed by the Board
to administer the Plan pursuant to Article 7.
2.5 Company. "Company" means eLoyalty Corporation.
2.6 Compensation. "Compensation" means base salary, commissions, bonus,
and bonus retention payments paid in cash. Elective pre-tax
contributions made to the Plan shall be included in Compensation.
Income from the exercise of stock options or the vesting of restricted
stock, the amount of "gross-up" of expense items, and other items that
the Committee determines should be excluded for administrative
convenience, shall be excluded from Compensation.
1
<PAGE> 4
2.7 Deferral Period. "Deferral Period" means the twelve (12) month
period beginning January 1 and ending December 31.
2.8 Disability. "Disability" shall have the same meaning as under the
Company's group long term disability plan in effect at the time that
Participant is declared to be disabled.
2.9 Earnings. "Earnings" for each Subaccount means the growth credited
or debited to the Subaccount at the rates described in the definition
of Investment Index (Section 2.11). "Earnings" for an Account shall
mean the aggregate Earnings for each Subaccount making up the Account.
2.10 Employer. "Employer" means the Company and any subsidiary or
affiliate of the Company designated by the Committee.
2.11 Investment Index. "Investment Index" means each index selected by
a Participant to be used as an earnings index pursuant to Article 3.
Each Investment Index shall be a phantom investment fund, which shall
be credited with earnings (whether a gain or a loss) at the same rate
as the investment funds or such other similar indexes as the Committee
may select from time to time and shown in Appendix A attached.
2.12 Participant. "Participant" means any individual eligible under
Section 3.1 who has elected to defer Compensation under this Plan.
2.13 Participation Agreement. "Participation Agreement" means the
agreement submitted by a Participant to the Committee prior to the
beginning of a Deferral Period, specifying the amount to be deferred
for such Deferral Period.
2.14 Plan. "Plan" means this eLoyalty Corporation Executive Deferred
Compensation Plan as amended from time to time.
2.15 Retirement. "Retirement" means any voluntary termination of
employment with the Company by the Participant (i) on or after
attaining age fifty-five (55) and after completing at least five (5)
years of service with an Employer or with TSC or (ii) on or after
attaining age sixty-five (65). "Retirement" shall also mean any
termination of employment by a Participant that is deemed to be a
Retirement by the Committee.
2.16 Subaccount. "Subaccount" means the device used by the Employer to
measure and determine the amount of Deferrals allocated to each
Investment Index selected by the Participant, and the Earnings
allocated thereto.
2
<PAGE> 5
2.17 Termination. "Termination" means any involuntary termination or
any voluntary termination of employment with the Company other than on
account of Retirement, Disability or death.
2.18 TSC Plan. "TSC Plan" means the Technology Solutions Company
Executive Deferred Compensation Plan, as in effect immediately prior to
the Effective Date.
3. PARTICIPATION AND DEFERRALS
3.1 Eligibility and Participation
3.1.1 Eligibility. Eligibility to participate in the Plan shall be
limited to those employees selected by the Plan Committee as being
eligible to participate. Each employee of an Employer who was a
participant in the TSC Plan immediately prior to the Effective Date
shall be a Participant in this Plan as of the Effective Date.
3.1.2 Participation. An eligible individual may elect to
participate in the Plan with respect to any Deferral Period by
submitting a Participation Agreement to the Committee prior to the
beginning of the Deferral Period.
3.1.3 Part-Year Participation. When an individual first becomes
eligible to participate during a Deferral Period, a Participation
Agreement may be submitted to the Employer no later than thirty
(30) days after the employee becomes eligible to participate. Such
Participation Agreement will be effective only with regard to
Compensation to be paid following submission of the Participation
Agreement to the Employer.
3.2 Form of Deferral. A Participant may elect a deferral in the
Participation Agreement as follows. A deferral shall be a portion of
the Compensation payable by the Employer to the Participant during the
Deferral Period. The amount of Compensation to be deferred shall be
stated as a flat percentage, a flat dollar amount, or a percentage
amount above a flat dollar amount not to exceed the maximums and not to
be less than the minimums described in Section 3.3.
3.3 Limitations on Deferrals. The following limitations shall apply to
deferrals.
3
<PAGE> 6
3.3.1 Maximum. The maximum percentage of Compensation deferred
shall be fifty percent (50%) for base salary and commissions and
one-hundred percent (100%) for bonuses and retention bonuses.
3.3.2 Minimum. The minimum deferral amount shall be five thousand
dollars ($5,000) for each Deferral Period.
3.3.3 Changes in Minimum or Maximum. The Committee may change the
minimum or maximum deferral amounts from time to time by giving
written notice to all Participants. No such change may affect the
amount of deferral specified in a Participation Agreement made
prior to the Committee's action.
3.4 Termination of Employment. If a Participant terminates employment
with Employer prior to the end of the Deferral Period, the Deferral
Period shall end at the date of termination.
3.5 Continuation of Deferral Amount. Once a Participant has filed a
Participation Agreement, the elected deferral amount shall remain in
effect for the applicable Deferral Period. The election shall be
irrevocable except as provided in Section 5.1 relating to hardship
withdrawals.
3.6 Change in Employment Status. The Committee reserves the right to
terminate an employee's participation in the plan if such employee no
longer meets the eligibility requirements set by the Committee. Account
balances will remain in the Plan and the employee will be deemed a
Participant for purposes of those Accounts.
4. DEFERRED COMPENSATION ACCOUNT
4.1 Account. The amounts deferred by a Participant under the Plan, and
any Earnings, shall be credited to the Participant's Account. Separate
Subaccounts will be maintained to reflect Investment Index selections.
The Account and Subaccounts shall be bookkeeping devices utilized for
the sole purpose of determining the benefits payable under the Plan and
shall not constitute a separate fund of assets. As of the Effective
Date, each Participant's Account shall also be credited with the amount
credited to such Participant's account under the TSC Plan, which amount
shall thereafter be paid pursuant to the terms of this Plan, and not
the TSC Plan.
4.2 Selection of Investment Index
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<PAGE> 7
4.2.1 At the time a Participant elects a deferral for a Deferral
Period, the Participant shall also select the Investment Index or
Indexes in which the Participant wishes to have the deferrals
deemed invested. The Participant may select any combination of one
or more of the Investment Indexes as long as at least ten percent
(10%) is allocated to each of the Investment Indexes selected.
4.2.2 At the time the Participant selects Investment Index(es) for
new deferrals, a different allocation may be selected among
Investment Funds for current Account balances, which may be
different from the allocation for new deferrals. A Participant may
change his or her investment allocation at any time, but not more
frequently than once in any 30-day period, in accordance with the
electronic, telephonic, or other methods designated by the
Committee.
4.3 Timing of Credits; Withholding. A Participant's deferred
Compensation shall be credited to the Account and Subaccounts at the
time it would have been payable to the Participant. Any withholding of
taxes or other amounts with respect to deferred Compensation that is
required by state, federal or local law shall be withheld from the
Participant's corresponding nondeferred Compensation.
4.4 Determination of Accounts and Subaccounts. Each Participant's
Account shall consist of the balance of such Participant's account
under the TSC Plan immediately prior to the Effective Date increased by
any deferred Compensation credited to such Participant's Account
pursuant to Section 3, reduced by any benefits distributed to the
Participant and increased or decreased by the Earnings credited on the
balance in the Account as of each day on which the Nasdaq National
Market or the New York Stock Exchange is open.
4.5 Vesting of Accounts. Each Participant shall be one hundred percent
(100%) vested at all times in the amounts credited to such
Participant's Account, Subaccount and Earnings thereon, for amounts
attributable to deferrals.
4.6 Statement of Accounts. The Committee shall give to each Participant
a statement showing the balances in the Participant's Account and
Subaccount(s) on a quarterly basis and at such other times as may be
determined by the Committee.
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<PAGE> 8
5. PLAN BENEFITS
5.1 Early Withdrawals. A Participant's Account may be distributed to
the Participant before termination of employment as follows:
5.1.1 Election for In-Service Distribution. A Participant may elect
in the Participation Agreement to have returned to such Participant
any portion of the principal amount deferred by the Participation
Agreement as soon as administratively practicable after the
beginning of the fifth year following the commencement of the
Deferral Period. The portion of the principal amount to be returned
shall be elected in the Participation Agreement. The amount
distributed shall be limited to the Account balance, if it is less
than the principal amount deferred.
5.1.2 Hardship Withdrawal. Upon a finding that a Participant or
Beneficiary has suffered an Unforeseeable Emergency, the Committee
may, in its sole discretion, make distributions from the
Participant's Account. "Unforeseeable Emergency" means an
unanticipated emergency that is caused by an event beyond the
control of the Participant or Beneficiary and that would result in
severe financial hardship to the individual if early withdrawal
were not permitted. In no event shall declining earnings rates be
considered an Unforeseeable Emergency. Any early withdrawal
approved by the Committee shall be limited to the amount necessary
to meet the emergency. If a Participant is deemed eligible to
receive a hardship withdrawal, no additional deferrals shall be
made for the Participant for the remainder of the Deferral Period
in which withdrawal is made or for the immediately succeeding
Deferral Period.
5.1.3 Form of Payment. Withdrawals shall be paid in a lump sum and
shall be charged to the Participant's Account as a distribution.
5.2 Termination of Employment. If a Participant terminates employment
with Employer for any reason, including death or disability, the
Employer shall pay to the Participant (or the Participant's
Beneficiary, in case of death) benefits equal to the balance in the
Account.
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<PAGE> 9
5.3 Form of Benefits. Except as provided below, benefits payable as a
result of termination of employment shall be paid in the form elected
by the Participant prior to the beginning of the first Deferral Period
or as thereafter changed pursuant to Section 5.4. If the Participant
participated in the TSC Plan prior to the Effective Date, benefits
payable to the Participant hereunder shall be paid in the form elected
under the TSC Plan. If a Participant's termination of employment is a
Retirement or Disability, the form of benefit shall be, as elected by
the Participant:
5.3.1 A lump sum amount which is equal to the applicable Account
balance; or
5.3.2 Equal monthly installments of the Account amortized over a
period of sixty (60), one hundred twenty (120), or one hundred
eighty (180) months. Earnings on the unpaid balance shall continue
to be credited to Subaccounts at the appropriate Investment Fund
rate; or
5.3.3 Equal annual installments of the Account amortized over a
period of five (5), ten (10), or fifteen (15) years. Earnings on
the unpaid balance shall continue to be credited to Subaccounts at
the appropriate Investment Fund rate.
If a Participant's termination of employment is a Termination, the form
of benefit shall be, as elected by the Participant:
5.3.4 A lump sum amount which is equal to the applicable Account
balance; or
5.3.5 Equal monthly installments of the Account amortized over a
period of twelve (12), twenty-four (24), or thirty-six (36) months.
Earnings on the unpaid balance shall continue to be credited to
Subaccounts at the appropriate Investment Fund rate; or
5.3.6 Equal annual installments of the Account amortized over a
period of one (1), two (2), or three (3) years. Earnings on the
unpaid balance shall continue to be credited to Subaccounts at the
appropriate Investment Fund rate.
Benefits payable due to a Participant's death shall be distributed as
follows:
5.3.7 If the Participant's death occurs before benefit payments
have commenced, the Participant's Beneficiary shall receive payment
in a lump sum.
5.3.8 If the Participant's death occurs after benefit payments have
commenced, the Participant's Beneficiary shall continue to receive
payments in the form elected by the Participant.
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<PAGE> 10
Notwithstanding the form elected, if the Participant's total Account is
five thousand dollars ($5,000) or less as of the date the Participant's
employment terminates, the benefit shall be paid in a lump sum.
5.4 Change in Form of Benefits. A Participant may amend the form of
benefit distribution previously selected at any time prior to the
calendar year in which the Participant's employment terminates so long
as the amendment does not increase the number of years during which
payment is to be made. Notwithstanding the above, the Participant may
not amend any distribution election made pursuant to Section 5.1.1,
Election for In-Service Distribution.
5.5 Disability Payments. If a Participant is to receive payments from
the Plan due to Disability, and wishes to alter the form of benefit
payment previously elected, the Participant shall submit a request to
postpone payments until the Participant would have otherwise qualified
for Retirement had the Participant remained employed at the Company in
the full capacity of his or her duties. Amendment of the form of
payment shall be subject to approval by the Committee. Any alteration
of the elected payment shall be at the sole discretion of the Committee
and the Committee reserves the right to deny any application to alter
the elected payment form.
5.6 Withholding Payroll Taxes. The Employer shall withhold from
payments hereunder any taxes required to be withheld from such payments
under federal, state or local law. A Beneficiary, however, may elect
not to have withholding of federal income tax pursuant to Section 3405
of the Internal Revenue Code, or any successor provision thereto.
5.7 Valuation. The amount of a lump sum, monthly installment, or annual
installment payment shall be based on the value of the Participant's
Account on the date the Participant's employment terminates. Except as
provided in Section 5.8, payments shall be made or commence within
ninety (90) days after such date.
5.8 Covered Employee. Notwithstanding Section 5.7, if any portion of a
payment in a calendar year would be disallowed as a deduction to the
Employer because the Participant is a "covered employee" for that
calendar year under Section 162(m) of the Internal Revenue Code, that
portion shall instead be paid in the immediately following
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<PAGE> 11
calendar year, by January 30. This Section does not apply to early
withdrawals under Section 5.1.
5.9 Payment to Guardian. If a distribution is payable to a minor or to
a person declared incompetent or to a person incapable of handling the
disposition of property, the Committee may direct payment to the
guardian, legal representative, or person having the care and custody
of such minor, incompetent, or person. The Committee may require proof
of incompetence, minority, incapacity or guardianship as it may deem
appropriate prior to distribution. Such distribution shall completely
discharge the Committee from all liability with respect to such
benefit.
6. BENEFICIARY DESIGNATION
6.1 Beneficiary Designation. Each Participant shall have the right at
any time to designate one or more persons or an entity as Beneficiary
(both primary as well as secondary) to whom benefits under this Plan
shall be paid in the event of a Participant's death prior to complete
distribution of the Participant's Account. Each Beneficiary designation
shall be in a written form prescribed by the Committee and will be
effective only when filed with the Committee during the Participant's
lifetime. The Beneficiary designated by a Participant under the TSC
Plan shall continue in effect under this Plan until changed by such
Participant. Designation by a married Participant of a Beneficiary
other than the Participant's spouse shall not be effective unless the
spouse executes a written consent that acknowledges the effect of the
designation and is witnessed by a notary public, or the consent cannot
be obtained because the spouse cannot be located.
6.2 Amendments. Except as provided below, any nonspousal designation of
Beneficiary may be changed by a Participant without the
consent of such Beneficiary by the filing of a new designation with the
Committee. The filing of a new designation shall cancel all
designations previously filed.
6.3 Change in Marital Status. If the Participant's marital status
changes after the Participant has designated a
Beneficiary, the following shall apply:
6.3.1 If the Participant is married at death but was unmarried when
the designation was made, the designation shall be void unless the
spouse has consented to it in the manner prescribed above.
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<PAGE> 12
6.3.2 If the Participant is unmarried at death but was married when
the designation was made:
6.3.2.1 The designation shall be void if the spouse was named as
Beneficiary.
6.3.2.2 The designation shall remain valid if a nonspouse
Beneficiary was named.
6.3.3 If the Participant was married when the designation was made
and is married to a different spouse at death, the designation
shall be void unless the new spouse has consented to it in the
manner prescribed above.
6.4 No Beneficiary Designation. If any Participant fails to designate a
Beneficiary in the manner provided above, or if the Beneficiary
designated by a deceased Participant dies before the Participant or
before complete distribution of the Participant's benefits, the
Participant's Beneficiary shall be the person in the first of the
following classes in which there is a survivor:
6.4.1 The Participant's surviving spouse;
6.4.2 The Participant's children in equal shares, except that if
any of the children predeceases the Participant but leaves issue
surviving, then such issue shall take by right of representation
the share the parent would have taken if living;
6.4.3 The Participant's estate.
7. ADMINISTRATION
7.1 Committee; Duties. This Plan shall be administered by the Committee
which shall be comprised of the outside directors serving on the
Board's Compensation Committee or a committee of at least two members
composed of non-Participants, designated by the Board's Compensation
Committee. The Committee shall have the authority to make, amend,
interpret and enforce all appropriate rules and regulations for the
administration of the Plan and decide or resolve any and all questions,
including interpretations of the Plan, as may arise in such
administration. A majority vote of the
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<PAGE> 13
Committee members shall control any decision. Members of the Committee
may be Participants under this Plan.
7.2 Agents. The Committee may, from time to time, employ agents and
delegate to them such administrative duties as it sees fit, and may
from time to time consult with counsel who may be counsel to the
Company.
7.3 Binding Effect of Decisions. The decision or action of the
Committee with respect to any question arising out of or in connection
with the administration, interpretation and application of the Plan and
the rules and regulations promulgated hereunder shall be final,
conclusive and binding upon all persons having any interest in the
Plan.
7.4 Indemnity of Committee. The Company shall indemnify and hold
harmless the members of the Committee to the fullest extent authorized
by the Delaware General Corporation Law pursuant to "Article VIII
Indemnification" of the Company's By-Laws.
8. CLAIMS PROCEDURE
8.1 Claim. Any person claiming a benefit, requesting an interpretation
or ruling under the Plan, or requesting information under the Plan
shall present the request in writing to the Committee, which shall
respond in writing as soon as practicable.
8.2 Denial of Claim. If the claim or request is denied, the written
notice of denial shall state:
8.2.1 The reasons for denial, with specific reference to the Plan
provisions on which the denial is based.
8.2.2 A description of any additional material or information
required and an explanation of why it is necessary.
8.2.3 An explanation of the Plan's claim review procedure.
8.3 Review of Claim. Any person whose claim or request is denied or who
has not received a response within thirty (30) days may request review
by notice given in writing to the Committee. The claim or request shall
be reviewed by the Committee which may, but shall not be required to,
grant the claimant a hearing. On review, the claimant may have
representation, examine pertinent documents, and submit issues and
comments in writing.
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<PAGE> 14
8.4 Final Decision. The decision on review shall normally be made
within sixty (60) days. If any extension of time is required for a
hearing or other special circumstances, the claimant shall be notified
and the time limit shall be one hundred twenty (120) days. The decision
shall be in writing and shall state the reasons and the relevant Plan
provisions. All decisions on review shall be final and bind all parties
concerned.
9. AMENDMENT AND TERMINATION OF PLAN
9.1 Amendment. The Board may at any time amend the Plan by written
instrument, notice of which shall be given to all Participants and to
Beneficiaries receiving installment payments, subject to the following:
9.1.1 Preservation of Account Balance. No amendment shall reduce
the amount accrued in any Account to the date such notice of the
amendment is given.
9.1.2 Changes in Investment Indexes. The Committee may change the
Investment Indexes available to Participants for any date
subsequent to the date of such change.
9.2 Employer's Right to Terminate. The Board may at any time partially
or completely terminate the Plan if, in its judgment, the tax,
accounting, or other effects of the continuance of the Plan, or
potential payments thereunder would not be in the best interest of the
Employer.
9.2.1 Partial Termination. The Board may partially terminate the
Plan by instructing the Committee not to accept any additional
Participation Agreements. If such a partial termination occurs, the
Plan shall continue to operate and be effective with regard to
Participation Agreements entered into prior to the effective date
of such partial termination.
9.2.2 Complete Termination. The Board may completely terminate the
Plan by instructing the Committee not to accept any additional
Participation Agreements, and by terminating all ongoing
Participation Agreements. If such a complete termination occurs,
the Plan shall cease to operate and the Employer shall pay out each
Account. Unless the Committee determines otherwise, payment shall
be made as a lump sum or in equal monthly installments over the
following period, based on the Account balance:
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<PAGE> 15
Account Balance Payout Period
--------------- -------------
$50,000 or less Lump Sum
More than $50,000 but less than $250,000 3 Years
$250,000 or More 5 Years
Earnings at the appropriate rate shall continue to be credited on the
unpaid balance in each Account. The Employer reserves the right to pay
each Account in a lump sum, notwithstanding the above schedule.
10. MISCELLANEOUS
10.1 Unfunded Plan. This Plan is an unfunded Plan maintained primarily
to provide deferred compensation benefits for a select group of
"management or highly-compensated employees" within the meaning of
Sections 201, 301 and 401 of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and therefore is exempt from the
provisions of Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the
Board may terminate the Plan and make no further benefit payments or
remove certain employees as Participants if it is determined by the
United States Department of Labor, a court of competent jurisdiction,
or an opinion of counsel that the Plan constitutes an employee pension
benefit Plan within the meaning of Section 3(2) of ERISA (as currently
in effect or hereafter amended) which is not so exempt.
10.2 Unsecured General Creditor. Participants and their Beneficiaries,
heirs, successors, and assigns shall have no secured legal or equitable
rights, interest or claims in any property or assets of the Employer,
nor shall they be Beneficiaries of, or have any rights, claims or
interest in any assets or financial instruments which may be acquired
by the Employer. Except as provided in Section 10.3, such assets of the
Employer shall not be held under any trust for the benefit of
Participant, their Beneficiaries, heirs, successors or assigns, or held
in any way as collateral security for the fulfilling of the obligations
of the Employer under this Plan. Any and all of the Employer's assets
and policies shall be, and remain, the general, unpledged, unrestricted
assets of the Employer. The Employer's obligation under the Plan shall
be that of an unfunded and unsecured promise to pay money in the
future.
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<PAGE> 16
10.3 Trust Fund. At its discretion, the Employer may establish one or
more trusts, with such trustees as the Board may approve, for the
purpose of providing for the payment of benefits owed under the Plan.
Although such a trust shall be irrevocable, its assets shall be held
for payment of all the Employer's general creditors in the event of
insolvency. To the extent any benefits provided under the Plan are paid
from any such trust, the Employer shall have no further obligation to
pay them. If not paid from the trust, such benefits shall remain the
obligation of the Employer. Notwithstanding the existence of such a
trust, it is intended that the Plan be unfunded for tax purposes and
for purposes of Title I of ERISA.
10.4 Nonassignability. Neither a Participant nor any other person shall
have any right to commute, sell, assign, transfer, pledge, anticipate,
mortgage or otherwise encumber, transfer, hypothecate or convey in
advance of actual receipt the amounts, if any, payable hereunder, or
any part thereof, which are, and all rights to which are, expressly
declared to be unassignable and nontransferable. No part of the amounts
payable shall, prior to actual payment, be subject to seizure or
sequestration for the payment of any debts, judgments, alimony or
separate maintenance owed by a Participant or any other person, nor be
transferable by operation of law in the event of a Participant's or any
other person's bankruptcy or insolvency.
10.5 Not a Contract of Employment. This Plan shall not constitute a
contract of employment between the Employer and the Participant.
Nothing in this Plan shall give a Participant the right to be retained
in the service of the Employer or to interfere with the right of the
Employer to discipline or discharge a Participant at any time.
10.6 Protective Provisions. A Participant will cooperate with the
Employer by furnishing any and all information requested by the
Employer as the Employer may reasonably require.
10.7 Governing Law. The provisions of this Plan shall be construed and
interpreted according to the laws of the State of Illinois, except as
preempted by federal law.
10.8 Validity. In case any provision of this Plan shall be held illegal
or invalid for any reason, said illegality or invalidity shall not
affect the remaining parts hereof, but this Plan shall be construed and
enforced as if such illegal and invalid provision had never been
inserted herein.
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<PAGE> 17
10.9 Notice. Any notice required or permitted under the Plan shall be
sufficient if in writing and hand delivered or sent by registered or
certified mail. Such notice shall be deemed as given as of the date of
delivery or, if delivery is made by mail, as of the date shown on the
postmark on the receipt for registration or certification. Mailed
notice to the Committee shall be directed to the Company's address.
Mailed notice to a Participant or Beneficiary shall be directed to the
individual's last known address in the Employer's records.
10.10 Successors. The provisions of this Plan shall bind and inure to
the benefit of the Employer and its successors and assigns. The term
successors as used herein shall include any corporate or other business
entity which shall, whether by merger, consolidation, purchase or
otherwise acquire all or substantially all of the business and assets
of the Employer, and successors of any such corporation or other
business entity.
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<PAGE> 1
EXHIBIT 10.15
INDEMNIFICATION AGREEMENT
AGREEMENT made this ___ day of __________, ____, between
eLoyalty Corporation, a Delaware corporation (the "Company"), and
_______________ (the "Indemnitee").
WHEREAS, it is essential to the Company and its stockholders
to attract and retain qualified and capable directors, officers, employees,
agents and fiduciaries;
WHEREAS, the Certificate of Incorporation of the Company (the
"Certificate of Incorporation") requires the Company to indemnify and advance
expenses to its directors and officers to the extent not prohibited by law;
WHEREAS, historically, basic protection against undue risk of
personal liability of directors and officers has been provided through insurance
coverage affording reasonable protection at reasonable cost;
WHEREAS, it is presently uncertain whether, and to what
extent, such insurance is or will continue to be available to the Company at a
reasonable cost for the protection of Indemnitee;
WHEREAS, in recognition of Indemnitee's need for protection
against personal liability in order to induce Indemnitee to serve or continue to
serve the Company in an effective manner, and, in the case of directors and
officers, to supplement or replace the Company's directors' and officers'
liability insurance coverage, and in part to provide Indemnitee with specific
contractual assurance that the protection promised by the Certificate of
Incorporation will be available to Indemnitee (regardless of, among other
things, any amendment to or revocation of the Certificate of Incorporation or
any change in the composition of the Company's Board of Directors or any
acquisition transaction relating to the Company), the Company wishes to provide
the Indemnitee with the benefits contemplated by this Agreement; and
WHEREAS, as a result of the provision of such benefits
Indemnitee has agreed to serve or to continue to serve the
Company;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Definitions. The following terms, as used herein, shall
have the following respective meanings:
<PAGE> 2
(a) Claim: means any threatened, pending or completed action,
suit, arbitration or proceeding, or any inquiry or investigation, whether
brought by or in the right of the Company or otherwise, that Indemnitee in good
faith believes might lead to the institution of any such action, suit,
arbitration or proceeding, whether civil, criminal, administrative,
investigative or other, or any appeal therefrom.
(b) D&O Insurance: means any valid directors' and officers'
liability insurance policy maintained by the Company for the benefit of the
Indemnitee, if any.
(c) Determination: means a determination, and Determined means
a matter which has been determined based on the facts known at the time, by: (i)
a majority vote of a quorum of disinterested directors, or (ii) if such a quorum
is not obtainable, or even if obtainable, if a quorum of disinterested directors
so directs, by independent legal counsel in a written opinion, or (iii) a
majority of the disinterested stockholders of the Company, or (iv) a final
adjudication by a court of competent jurisdiction.
(d) Excluded Claim: means any payment for Losses or Expenses
in connection with any Claim: (i) based upon or attributable to Indemnitee
gaining in fact any personal profit or advantage to which Indemnitee is not
entitled; or (ii) for the return by Indemnitee of any remuneration paid to
Indemnitee without the previous approval of the stockholders of the Company
which is illegal; or (iii) for an accounting of profits in fact made from the
purchase or sale by Indemnitee of securities of the Company within the meaning
of Section 16 of the Securities Exchange Act of 1934, as amended, or similar
provisions of any state law; or (iv) resulting from Indemnitee's knowingly
fraudulent, dishonest or willful misconduct; or (v) the payment of which by the
Company under this Agreement is not permitted by applicable law.
(e) Expenses: means any reasonable expenses incurred by
Indemnitee as a result of a Claim or Claims made against Indemnitee for
Indemnifiable Events including, without limitation, attorneys' fees and all
other costs, expenses and obligations paid or incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in any Claim
relating to any Indemnifiable Event.
(f) Fines: means any fine, penalty or, with respect to an
employee benefit plan, any excise tax or penalty assessed with respect thereto.
(g) Indemnifiable Event: means any event or occurrence,
occurring prior to or after the date of this
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<PAGE> 3
Agreement, related to the fact that Indemnitee is, was or has agreed to serve
as, a director or officer of the Company, or is or was serving at the request of
the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise;
provided that the Indemnitee acted in good faith and in a manner the Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, the Indemnitee
had no reasonable cause to believe his conduct was unlawful.
(h) Losses: means any amounts or sums which Indemnitee is
legally obligated to pay as a result of a Claim or Claims made against
Indemnitee for Indemnifiable Events including, without limitation, damages,
judgments and sums or amounts paid in settlement of a Claim or Claims, and
Fines.
2. Basic Indemnification Agreement. In consideration of, and
as an inducement to, the Indemnitee rendering valuable services to the Company,
the Company agrees that in the event Indemnitee is or becomes a party to or
witness or other participant in, or is threatened to be made a party to or
witness or other participant in, a Claim by reason of (or arising in part out
of) an Indemnifiable Event, the Company will indemnify Indemnitee to the fullest
extent authorized by law, against any and all Losses and Expenses (including all
interest, assessments and other charges paid or payable in connection with or in
respect of such Losses and Expenses) of such Claim, whether or not such Claim
proceeds to judgment or is settled or otherwise is brought to a final
disposition, subject in each case, to the further provisions of this Agreement.
3. Limitations on Indemnification. Notwithstanding the
provisions of Section 2, Indemnitee shall not be indemnified and held harmless
from any Losses or Expenses (a) which have been Determined, as provided herein,
to constitute an Excluded Claim; (b) to the extent Indemnitee is indemnified by
the Company and has actually received payment pursuant to the Certificate of
Incorporation, D&O Insurance or otherwise; or (c) other than pursuant to the
last sentence of Section 4(d) or Section 12, in connection with any claim
initiated by Indemnitee, unless the Board of Directors has authorized such
claim.
4. Indemnification Procedures.
(a) Promptly after receipt by Indemnitee of notice of any
Claim, Indemnitee shall, if indemnification with respect thereto may be sought
from the Company under this Agreement, notify the Company of the commencement
thereof; provided, however, that the failure to give such notice promptly shall
not affect or limit the Company's obligations with respect to the matters
described in the notice of such Claim, except to the
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<PAGE> 4
extent that the Company is prejudiced thereby. Indemnitee agrees further not to
make any admission or effect any settlement with respect to such Claim without
the consent of the Company, except any Claim with respect to which the
Indemnitee has undertaken the defense in accordance with the second to last
sentence of Section 4(d).
(b) If, at the time of the receipt of such notice, the Company
has D&O Insurance in effect, the Company shall give prompt notice of the
commencement of Claim to the insurers in accordance with the procedures set
forth in the respective policies. The Company shall thereafter take all
necessary or desirable action to cause such insurers to pay, on behalf of
Indemnitee, all Losses and Expenses payable as a result of such Claim.
(c) To the extent the Company does not, at the time of the
Claim have applicable D&O Insurance, or if a Determination is made that any
Expenses arising out of such Claim will not be payable under the D&O Insurance
then in effect, the Company shall be obligated to pay the Expenses of any Claim
in advance of the final disposition thereof and the Company, if appropriate,
shall be entitled to assume the defense of such Claim, with counsel satisfactory
to Indemnitee, upon the delivery to Indemnitee of written notice of its election
so to do. After delivery of such notice, the Company will not be liable to
Indemnitee under this Agreement for any legal or other Expenses subsequently
incurred by Indemnitee in connection with such defense other than reasonable
Expenses of investigation; provided that Indemnitee shall have the right to
employ its counsel in such Claim but the fees and expenses of such counsel
incurred after delivery of notice from the Company of its assumption of such
defense shall be at the Indemnitee's expense; provided further that if: (i) the
employment of counsel by Indemnitee has been previously authorized by the
Company, (ii) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (iii) the Company shall not, in fact, have employed counsel to
assume the defense of such action, the reasonable fees and expenses of counsel
shall be at the expense of the Company.
(d) All payments on account of the Company's indemnification
obligations under this Agreement shall be made within sixty (60) days of
Indemnitee's written request therefor unless a Determination is made that the
Claims giving rise to Indemnitee's request are Excluded Claims or otherwise not
payable under this Agreement, provided that all payments on account of the
Company's obligation to pay Expenses under Section 4(c) of this Agreement prior
to the final disposition of any Claim shall be made within 20 days of
Indemnitee's written request therefor and such obligation shall not be subject
to any such Determination but shall be subject to Section 4(e) of this
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<PAGE> 5
Agreement. In the event the Company takes the position that Indemnitee is not
entitled to indemnification in connection with the proposed settlement of any
Claim, Indemnitee shall have the right at his own expense to undertake defense
of any such Claim, insofar as such proceeding involves Claims against the
Indemnitee, by written notice given to the Company within 10 days after the
Company has notified Indemnitee in writing of its contention that Indemnitee is
not entitled to indemnification; provided, however, that the failure to give
such notice within such 10-day period shall not affect or limit the Company's
obligations with respect to any such Claim if such Claim is subsequently
determined not to be an Excluded Claim or otherwise to be payable under this
Agreement, except to the extent that the Company is prejudiced thereby. If it is
subsequently determined in connection with such proceeding that the
Indemnifiable Events are not Excluded Claims and that Indemnitee, therefor, is
entitled to be indemnified under the provisions of Section 2 hereof, the Company
shall promptly indemnify Indemnitee.
(e) Indemnitee hereby expressly undertakes and agrees to
reimburse the Company for all Losses and Expenses paid by the Company in
connection with any Claim against Indemnitee in the event and only to the extent
that a Determination shall have been made by a court of competent jurisdiction
in a decision from which there is no further right to appeal that Indemnitee is
not entitled to be indemnified by the Company for such Losses and Expenses
because the Claim is an Excluded Claim or because Indemnitee is otherwise not
entitled to payment under this Agreement.
(f) In connection with any Determination as to whether
Indemnitee is entitled to be indemnified hereunder the burden of proof shall be
on the Company to establish that Indemnitee is not so entitled.
5. Settlement. The Company shall have no obligation to
indemnify Indemnitee under this Agreement for any amounts paid in settlement of
any Claim effected without the Company's prior written consent. The Company
shall not settle any Claim in which it takes the position that Indemnitee is not
entitled to indemnification in connection with such settlement without the
consent of Indemnitee, nor shall the Company settle any Claim in any manner
which would impose any Fine or any obligation on Indemnitee, without
Indemnitee's written consent. Neither the Company nor Indemnitee shall
unreasonably withhold its or his consent to any proposed settlement.
6. No Presumption. For purposes of this Agreement, the
termination of any Claim by judgment, order, settlement (whether with or without
court approval) or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not, of itself, create a presumption that Indemnitee did not
meet any particular
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<PAGE> 6
standard of conduct or have any particular belief or that a court has determined
that indemnification is not permitted by applicable law.
7. Non-exclusivity, Etc. The rights of Indemnitee hereunder
shall be in addition to any other rights Indemnitee may have under the
Certificate of Incorporation, the Company's By- laws, the Delaware General
Corporation Law, any vote of stockholders or disinterested directors or
otherwise, both as to action in Indemnitee's official capacity and as to action
in any other capacity by holding such office, and shall continue after
Indemnitee ceases to serve the Company as a director or officer for so long as
Indemnitee shall be subject to any Claim by reason of (or arising in part out
of) an Indemnifiable Event. To the extent that a change in the Delaware General
Corporation Law (whether by statute or judicial decision) permits greater
indemnification by agreement than would be afforded currently under the
Certificate of Incorporation and this Agreement, it is the intent of the parties
hereto that Indemnitee shall enjoy by this Agreement the greater benefits so
afforded by such change.
8. Liability Insurance. To the extent the Company maintains an
insurance policy or policies providing directors' and officers' liability
insurance, Indemnitee, if an officer or director of the Company, shall be
covered by such policy or policies, in accordance with its or their terms, to
the maximum extent of the coverage available for any director or officer of the
Company.
9. Subrogation. In the event of payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
10. Partial Indemnity, Etc. If Indemnitee is entitled under
any provision of this Agreement to indemnification by the Company for some or a
portion of the Losses and Expenses of a Claim but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion thereof to which Indemnitee is entitled. Moreover, notwithstanding
any other provision of this Agreement, to the extent that Indemnitee has been
successful on the merits or otherwise in defense of any or all Claims relating
in whole or in part to any Indemnifiable Event or in defense of any issue or
matter therein, including dismissal without prejudice, Indemnitee shall be
indemnified against all Expenses incurred in connection therewith.
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<PAGE> 7
11. Liability of Company. Indemnitee agrees that neither the
stockholders nor the directors nor any officer, employee, representative or
agent of the Company shall be personally liable for the satisfaction of the
Company's obligations under this Agreement and Indemnitee shall look solely to
the assets of the Company for satisfaction of any claims hereunder.
12. Enforcement.
(a) Indemnitee's right to indemnification and other rights
under this Agreement shall be specifically enforceable by Indemnitee only in the
state or Federal courts of the States of Delaware or Illinois and shall be
enforceable notwithstanding any adverse Determination by the Company's Board of
Directors, independent legal counsel or the Company's stockholders and no such
Determination shall create a presumption that Indemnitee is not entitled to be
indemnified hereunder. In any such action the Company shall have the burden of
proving that indemnification is not required under this Agreement.
(b) In the event that any action is instituted by Indemnitee
under this Agreement, or to enforce or interpret any of the terms of this
Agreement, Indemnitee shall be entitled to be paid all court costs and
reasonable expenses, including reasonable counsel fees, incurred by Indemnitee
with respect to such action, unless the court determines that each of the
material assertions made by Indemnitee as a basis for such action was not made
in good faith or was frivolous.
13. Severability. In the event that any provision of this
Agreement is determined by a court to require the Company to do or to fail to do
an act which is in violation of applicable law, such provision (including any
provision within a single section, paragraph or sentence) shall be limited or
modified in its application to the minimum extent necessary to avoid a violation
of law, and, as so limited or modified, such provision and the balance of this
Agreement shall be enforceable in accordance with their terms to the fullest
extent permitted by law.
14. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
agreements made and to be performed entirely within such State.
15. Consent to Jurisdiction. The Company and Indemnitee each
hereby irrevocably consents to the jurisdiction of the courts of the States of
Delaware and Illinois for all purposes in connection with any action
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<PAGE> 8
or proceeding which arises out of or relates to this Agreement and agrees that
any action instituted under this Agreement shall be brought only in the state
and Federal courts of the States of Delaware and Illinois.
16. Notices. All notices or other communications required or
permitted hereunder shall be sufficiently given for all purposes if in writing
and personally delivered, telegraphed, telexed, sent by facsimile transmission
or sent by registered or certified mail, return receipt requested, with postage
prepaid addressed as follows, or to such other address as the parties shall have
given notice of pursuant hereto:
(a) If to the Company, to:
------------------------------
------------------------------
------------------------------
------------------------------
(b) If to Indemnitee, to:
------------------------------
------------------------------
------------------------------
------------------------------
17. Counterparts. This Agreement may be signed in
counterparts, each of which shall be an original and all of which, when taken
together, shall constitute one and the same instrument.
18. Successors and Assigns. This Agreement shall be (i)
binding upon all successors and assigns of the Company, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, and (ii) binding
upon and inure to the benefit of any successors and assigns, heirs, and personal
or legal representatives of Indemnitee.
19. Amendment; Waiver. No amendment, modification, termination
or cancellation of this Agreement shall be effective unless made in a writing
signed by each of the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
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<PAGE> 9
IN WITNESS WHEREOF, the Company and Indemnitee have executed
this Agreement as of the day and year first above written.
By:
--------------------------------
ATTEST:
By:
---------------------------
Title:
------------------------------
(Indemnitee)
WITNESS:
- ------------------------------
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<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated September 10, 1999 relating to the financial statements and
financial statement schedule of eLoyalty Corporation and our report dated
December 21, 1999 relating to the financial statements of The Bentley Group,
Inc., which appear in such Registration Statement. We also consent to the
reference to us under the headings "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 28, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated December 20, 1999 relating to the financial statements of NexCen
Technologies, Inc., which appears in such Registration Statement. We also
consent to the reference to us under the headings "Experts" in such Registration
Statement.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 28, 2000
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of eLoyalty Corporation, a
Delaware corporation (the "Corporation"), does hereby constitute and appoint
TIMOTHY J. CUNNINGHAM OR KELLY D. CONWAY his or her true and lawful
attorney-in-fact and agent, with full power and authority to execute in the name
and on behalf of the undersigned as such Director and/or Officer, a Registration
Statement on Form S-1 under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the registration under the Securities Act of
the offer and distribution of up to 44,000,000 shares of the Corporation's
Common Stock, par value $.01, and the associated Preferred Stock Purchase Rights
issuable in accordance therewith, and to execute any and all amendments to such
Registration Statement, whether filed prior or subsequent to the time such
Registration Statement becomes effective, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission. The undersigned hereby grants unto each such
attorney-in-fact and agent, full power of substitution and revocation in the
premises and hereby ratifies and confirms all that each such attorney-in-fact
and agent, or his substitute or substitutes, may do or cause to be done by
virtue of these presents.
Dated this 24th day of January, 2000.
/s/ John T. Kohler
<PAGE> 1
EXHIBIT 24.2
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of eLoyalty Corporation, a
Delaware corporation (the "Corporation"), does hereby constitute and appoint
TIMOTHY J. CUNNINGHAM OR KELLY D. CONWAY his or her true and lawful
attorney-in-fact and agent, with full power and authority to execute in the name
and on behalf of the undersigned as such Director and/or Officer, a Registration
Statement on Form S-1 under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the registration under the Securities Act of
the offer and distribution of up to 44,000,000 shares of the Corporation's
Common Stock, par value $.01, and the associated Preferred Stock Purchase Rights
issuable in accordance therewith, and to execute any and all amendments to such
Registration Statement, whether filed prior or subsequent to the time such
Registration Statement becomes effective, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission. The undersigned hereby grants unto each such
attorney-in-fact and agent, full power of substitution and revocation in the
premises and hereby ratifies and confirms all that each such attorney-in-fact
and agent, or his substitute or substitutes, may do or cause to be done by
virtue of these presents.
Dated this 24th day of January, 2000.
/s/ Michael J. Murray
<PAGE> 1
EXHIBIT 24.3
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of eLoyalty Corporation, a
Delaware corporation (the "Corporation"), does hereby constitute and appoint
TIMOTHY J. CUNNINGHAM OR KELLY D. CONWAY his or her true and lawful
attorney-in-fact and agent, with full power and authority to execute in the name
and on behalf of the undersigned as such Director and/or Officer, a Registration
Statement on Form S-1 under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the registration under the Securities Act of
the offer and distribution of up to 44,000,000 shares of the Corporation's
Common Stock, par value $.01, and the associated Preferred Stock Purchase Rights
issuable in accordance therewith, and to execute any and all amendments to such
Registration Statement, whether filed prior or subsequent to the time such
Registration Statement becomes effective, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission. The undersigned hereby grants unto each such
attorney-in-fact and agent, full power of substitution and revocation in the
premises and hereby ratifies and confirms all that each such attorney-in-fact
and agent, or his substitute or substitutes, may do or cause to be done by
virtue of these presents.
Dated this 24th day of January, 2000.
/s/ John R. Purcell
<PAGE> 1
EXHIBIT 24.4
POWER OF ATTORNEY
The undersigned, a Director and/or Officer of eLoyalty Corporation, a
Delaware corporation (the "Corporation"), does hereby constitute and appoint
TIMOTHY J. CUNNINGHAM OR KELLY D. CONWAY his or her true and lawful
attorney-in-fact and agent, with full power and authority to execute in the name
and on behalf of the undersigned as such Director and/or Officer, a Registration
Statement on Form S-1 under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the registration under the Securities Act of
the offer and distribution of up to 44,000,000 shares of the Corporation's
Common Stock, par value $.01, and the associated Preferred Stock Purchase Rights
issuable in accordance therewith, and to execute any and all amendments to such
Registration Statement, whether filed prior or subsequent to the time such
Registration Statement becomes effective, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission. The undersigned hereby grants unto each such
attorney-in-fact and agent, full power of substitution and revocation in the
premises and hereby ratifies and confirms all that each such attorney-in-fact
and agent, or his substitute or substitutes, may do or cause to be done by
virtue of these presents.
Dated this 24th day of January, 2000.
/s/ Michael R. Zucchini
