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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER ________
eLOYALTY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE 7373 36-4304577
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or organization) Classification Code Number) Identification No.)
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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)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, $.01 PER SHARE NASDAQ
INDICATE BY CHECK MARK WHETHER THE REGISTRANT(1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES_ NO X
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10K [ X ]
THE AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF MARCH 24, 2000 WAS (BASED UPON THE PER SHARE CLOSING PRICE OF
$30.8125 ON MARCH 24, 2000, AND, FOR THE PURPOSE OF THIS CALCULATION ONLY, THE
ASSUMPTION THAT ALL REGISTRANT'S DIRECTORS AND EXECUTIVE OFFICERS ARE
AFFILIATES) WAS APPROXIMATELY $1,315,000,000.
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, $.01 PAR
VALUE PER SHARE AS OF MARCH 24, 2000 WAS 46,955,678.
DOCUMENTS INCORPORATED BY REFERENCE
CERTAIN EXHIBITS LISTED IN THIS ANNUAL REPORT ON FORM 10-K ARE INCORPORATED
BY REFERENCE FROM PRIOR FILINGS MADE BY THE REGISTRANT UNDER THE SECURITIES ACT
OF 1933.
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TABLE OF CONTENTS
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PART I
Item 1. Business........................................ 1
Item 2. Properties...................................... 16
Item 3. Legal Proceedings............................... 16
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 16
PART II.
Item 5. Market for the Registrants' Common Equity and
Related Stockholder Matters..................... 17
Item 6. Selected Financial Data......................... 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 19
Item 8. Financial Statements and Supplementary Data..... 28
Item 9. Charges in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 49
PART III.
Item 10. Directors and Executive Officers of the
Registrant...................................... 49
Item 11. Executive Compensation.......................... 53
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................. 56
Item 13. Certain Relationships and Related
Transactions.................................... 58
PART IV.
Item 14. Exhibits, Financial Statements Schedules and
Reports on 8K................................... 62
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K ("Form 10-K") 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 Form 10-K 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 Form 10-K.
INTRODUCTION
eLoyalty Corporation (together with its subsidiaries "eLoyalty," "we" or
the "Company") was incorporated as a Delaware corporation in May 1999. The
Company was founded in May 1994 as a call center business unit within Technology
Solutions Company. To reflect the broader scope and strategic, enterprise-wide
focus of the solutions developed and offered by the group, 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.
In February 2000 the Board of Directors of Technology Solutions approved a
spin-off of a separate company comprised of substantially all of the businesses
previously operated within the Customer Relationship Management (CRM) group. To
effectuate the transaction, the Board of Directors of Technology Solutions
Company declared a dividend payable to the holders of record of Technology
Solutions Company as of February 9, 2000, based upon a ratio of one share of,
the Company's common stock, par value of $.01 per share (the "Common Stock") for
every one share of Technology Solutions Common Stock owned on the record date.
Effective February 15, 2000 (the "Distribution Date") all of the outstanding
shares of Common Stock were distributed to Technology Solutions Company
stockholders.
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;
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- 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
[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 we are 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(TM), 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 for our support offering.
- 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
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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 $219 per hour for the three
months ended December 31, 1999.
- 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 year ended December 31, 1999, 22.3% 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 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
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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 Foundation (or 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
Foundation 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 Cisco
Systems, Siebel Systems, and Nortel-Clarify 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 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.
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In our five years of operation, the success of our human resources
management is reflected in the average tenure of our employees. As of
December 31, 1999 the average tenure of our senior management was 49.8
months, Vice Presidents 40.0 months and other professionals about 23.7
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 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(TM), 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
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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 Foundation 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 December 31, 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(TM) -- 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.
- LOYALTY REPOSITORY(TM) -- 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(TM) -- 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
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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(TM) -- 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(TM) -- 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(TM) -- 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(TM) -- 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
During 1999, eLoyalty's five and twenty largest clients accounted for 22.2%
and 54.8% respectively, of our revenues. No single client accounted for more
than 10% of our total revenues in any quarter during that period. For the year
ended December 31, 1999, 45 clients each accounted for over $1 million of
revenues. Revenues for professional services and support services represent
approximately 99% of our total revenues. 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 revenues have not been significant in the past, they may
increase as we expand internationally.
The following is a representative list of companies for which we provided
solutions for the year ended December 31, 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.
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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.
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.
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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.
- 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 December 31, 1999, eLoyalty had 20
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.
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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 significant investments to build our research and development
over the last four years and we plan to continue these investments. As of
December 31, 1999, 40 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 $5.1
million and $3.6 million on research and development for years ended December
31, 1999 and December 31, 1998 respectively.
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.
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- 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, and Diamond Technology Partners;
- 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. 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 or hosting 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
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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 December 31, 1999, eLoyalty employed 715 persons of which 556 were
billable employees. Of the 715 employees, 589 were located in North America, 107
in Europe and 19 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 17.1%. None of our employees is represented by a union. Most of
our European employees have employment agreements generally requiring three
months' notice of termination by us. In addition, the laws and regulations of
the foreign countries in which we operate may increase the cost of terminating
employees in those countries. We maintain various programs and strategies to
retain and recruit employees.
ITEM 2. PROPERTIES
Our principal executive office is located at 205 North Michigan Avenue,
Suite 1500, Chicago, Illinois and consists of approximately 15,000 square feet
of leased office space. We expect that in April 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. In March 2000 we signed a new lease in Austin, Texas for
approximately 41,000 square feet. 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various pending or threatened claims arising out
of the normal course of business. Management believes that losses, if any,
arising from such claims will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter ended December
31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
In connection with establishing eLoyalty as a separate legal entity,
100,000,000 shares of common stock, $.01 par value, were authorized, of which a
total of 41,400,000 shares of common stock were issued to TSC. The Company also
has authorized 10,000,000 shares of preferred stock, $.01 par value, of which
none have been issued.
The Company's common stock began trading on February 16, 2000 on the NASDAQ
exchange under the symbol ELOY. On March 24, 2000 the common stock was held by
733 stockholders of record. On March 24, 2000 the reported last sales price for
a share of common stock was $30.8125.
Since the spin off, the Company has not declared any cash dividends or
distributions on its common stock. The Company currently intends to retain its
earnings to finance future growth and therefore has no present intention of
paying dividends. Any payment of dividends in the future is dependent upon the
financial condition, capital requirements, earnings of the Company and other
factors. The Company's dividend policy will be reviewed quarterly by the
Company's Board of Directors.
ITEM 6. 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 which are included elsewhere in this
Annual Report on Form 10-K. The statement of operations data for the year ended
December 31, 1999, for the seven month period ended December 31, 1998 and for
each of the three years ended May 31, 1998, 1997, 1996 and the balance sheet
data as of December 31, 1999 and 1998 and May 31, 1998 and 1997 below are
derived from the audited combined financial statements. The statement of
operations data for the year ended December 31, 1998, for the seven month period
ended December 31, 1997, and for the year ended May 31, 1995, and the balance
sheet data as of May 31, 1996 and 1995 are derived from unaudited combined
financial statements. In the opinion of management, the unaudited combined
financial statements discussed above, reflect all adjustments, consisting of
normal adjustments, necessary to present fairly eLoyalty's results of operations
for the year ended December 31, 1998, the seven month period ended December 31,
1997 and for the year ended May 31, 1995, and its financial position as of
December 31, 1996 and 1995.
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 periods presented.
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eLOYALTY
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS SEVEN MONTH PERIODS
ENDED FROM JUNE 1 TO
DECEMBER 31, DECEMBER 31, FOR THE YEARS ENDED MAY 31,
---------------------- ---------------------- --------------------------------------------
1999 1998 1998 1997 1998 1997 1996 1995
-------- ----------- -------- ----------- -------- -------- -------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES......................... $146,003 $105,235 $ 64,415 $ 43,668 $ 84,488 $ 43,181 $ 26,516 $ 6,132
Project personnel............... (72,412) (50,687) (31,302) (22,329) (41,329) (18,078) (11,674) (3,137)
-------- -------- -------- -------- -------- -------- -------- -------
GROSS PROFIT..................... 73,591 54,548 33,113 21,339 43,159 25,103 14,842 2,995
-------- -------- -------- -------- -------- -------- -------- -------
OTHER COSTS AND EXPENSES:
Sales and marketing............. 9,703 4,894 3,456 994 2,429 1,663 1,032 312
Research and development........ 5,093 3,635 2,889 1,393 2,383 1,689 46 --
General and administrative...... 31,916 26,326 16,438 10,641 20,216 11,539 5,559 1,335
Technology Solutions Company
corporate services
allocation.................... 13,378 12,769 7,698 5,544 10,671 5,028 3,298 1,527
Goodwill amortization........... 4,996 3,794 2,450 1,856 3,201 376 -- --
Equity in net loss of
unconsolidated investee....... 463 412 412 -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------
65,549 51,830 33,343 20,428 38,900 20,295 9,935 3,174
-------- -------- -------- -------- -------- -------- -------- -------
OPERATING INCOME (LOSS).......... 8,042 2,718 (230) 911 4,259 4,808 4,907 (179)
-------- -------- -------- -------- -------- -------- -------- -------
OTHER INCOME (EXPENSE):
Net investment income........... 127 95 116 39 68 15 -- --
Interest expense................ (72) (74) (31) (53) (92) -- -- --
-------- -------- -------- -------- -------- -------- -------- -------
55 21 85 (14) (24) 15 -- --
-------- -------- -------- -------- -------- -------- -------- -------
INCOME (LOSS) BEFORE INCOME
TAXES........................... 8,097 2,739 (145) 897 4,235 4,823 4,907 (179)
INCOME TAX PROVISION (BENEFIT)... 4,039 1,672 398 562 2,022 1,897 1,857 (51)
-------- -------- -------- -------- -------- -------- -------- -------
NET INCOME (LOSS)................ $ 4,058 $ 1,067 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050 $ (128)
======== ======== ======== ======== ======== ======== ======== =======
Basic net income (loss) per
common share(1)................. $ 0.10 $ 0.03 $ (0.01) $ 0.01 $ 0.05 $ 0.07 $ 0.07 $ (0.00)
Diluted net income (loss) per
common share(1)................. $ 0.09 $ 0.02 $ (0.01) $ 0.01 $ 0.05 $ 0.06 $ 0.07 $ (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 41.4 41.4 41.4
Shares used to calculate diluted
net income (loss) per share (in
millions)(1).................... 44.2 43.1 41.4 45.8 46.8 46.6 45.5 41.4
</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 DECEMBER 31, AS OF MAY 31,
-------------------------- ---------------------------------------------
1999 1998 1998 1997 1996 1995
----------- ------------ ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash........................... $13,462 $ 4,411 $ 4,726 $ 4,130 $ 321 $ --
Working capital................ $54,927 $26,231 $23,840 $13,506 $ 6,249 $3,130
Total assets................... $96,603 $63,904 $54,118 $24,188 $14,008 $4,351
Stockholder's equity........... $73,615 $47,888 $40,893 $17,147 $ 9,312 $3,169
</TABLE>
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ITEM 7. 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 Form 10-K. In addition to historical information, the following discussion
and other parts of this Form 10-K contain forward-looking information that
involves risks and uncertainties. eLoyalty's actual results could differ
materially from those anticipated by such forward-looking information for many
reasons, including competitive factors, risks associated with eLoyalty's
expansion plans, and transitional service agreements with Technology Solutions
Company. 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 correspond to the fiscal year ended May 31.
OVERVIEW
Our revenues consist of fees generated for professional services and
support services, as well as license revenues 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 1.0% of our total revenues for the
years ended December 31, 1999 and 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 years ended December 31, 1999 and 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 revenues from international operations represent revenues 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 Pacific. Revenues from
international operations have 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 22.3% and 22.0% of revenues for the
years ended December 31, 1999 and 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 revenues have not been significant
in the past, they may increase as we expand internationally.
Revenues from our operations in the United Kingdom, Germany, Switzerland,
France, Australia and Canada are denominated in 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
revenues and costs will be denominated in foreign currencies in the future.
Historically, we have
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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 22.2% and 54.8%, respectively, of revenues for the year
ended December 31, 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 3.8% and 2.7% of total revenues for the years ended December
31, 1999 and 1998, respectively. 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 remained constant at 3.5%
for the years ended December 31, 1999, and 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 seven months ended December 31, 1998 otherwise referred to as the
transition period (largely from clients of The Bentley Group, an acquisition),
the total provisions for doubtful receivables rose to approximately 4% of total
revenues. Other overhead expenses consist of employee costs for training, some
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
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<PAGE> 23
January 1 through June 30, 2000, these services will be allocated as part of the
Shared Services Agreement described in item 13 "Certain Relationships and
Related Transactions" 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 (through 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 49.9% and 61.0% for the years ended
December 31, 1999 and 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.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
This section discusses the year ended December 31, 1999 compared with the
same period in 1998. The year ended December 31, 1999 was 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 $40.8 million, or 38.7%, to $146.0 million in 1999
from $105.2 million in 1998. Revenues from professional services increased $38.0
million, or 36.5%, to $142.2 million in 1999 from $104.2 million in 1998.
Revenues generated using subcontractors was 3.8% of revenues in 1999 compared to
1.6% of revenues in 1998. Revenues from software were $2.0 million in 1999, or
1.4% of revenues, compared to $1.0 million, or 1.0% of revenues, in 1998.
Revenues from support increased to $1.8 million in 1999 from $0.0 million in
1998 as the Company launched our support services this year.
The increase in our revenues of $40.8 million reflected increases in both
the size and number of client projects as well as higher average billing rates.
During 1999 our billable employees increased to 556 as of December 31, 1999, or
38.3%, from 402 for 1998. Revenues from Europe and Australia increased to
approximately 17.1% of our total revenues during 1999, compared to 16.5% of
total revenues in 1998.
PROJECT PERSONNEL COSTS
Our project personnel costs increased $21.7 million, or 42.9%, to $72.4
million in 1999 from $50.7 million in 1998. The increase in project personnel
costs in 1999 was primarily due to an increase in the use of subcontractors that
were required to meet demand. As a result our Gross Profit margin decreased
slightly to
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50.4% in 1999 from 51.8% in the comparable period in 1998. We expect that our
use of subcontractors will decline as we operate as a separate business.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased $4.8 million, or 98.3%, to $9.7
million in 1999 from $4.9 million in 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 6.6% in 1999 from 4.7% in 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses increased $1.5 million, or 40.1%, to
$5.1 million in 1999 from $3.6 million in 1998. Research and development
expenses remained constant as a percentage of revenues at 3.5% in both 1999 and
1998. In 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 $5.6 million, or
21.2%, to $31.9 million in 1999 from $26.3 million in 1998. General and
administrative expenses decreased as a percentage of total revenues to 21.9% in
1999 from 25.0% 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 $0.6 million, or 4.8%, to $13.4 million in 1999 from $12.8 million in
1998. Technology Solutions Company corporate services allocation expenses
decreased as a percentage of total revenues to 9.2% in 1999 from 12.1% 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.
GOODWILL AMORTIZATION
Our goodwill amortization expenses increased $1.2 million or 31.7% to $5.0
million in 1999 from $3.8 million in 1998. The increase was due to contingent
purchase price payments made in 1998 related to the acquisition of The Bentley
Group.
PROVISION FOR INCOME TAXES
Income tax expense represents combined federal, state and foreign taxes.
Our income tax provision increased to $4.0 million on pre-tax profits of $8.1
million in 1999, compared to $1.7 million on pre-tax profits of $2.7 million in
1998. Our effective tax rate was 49.9% for the 1999 and 61.0% for 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.
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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
seven month transition period ended December 31, 1998, from $43.7 million in the
seven month transition 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 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.
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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 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
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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.
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. The Company 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 no
longer participate in Technology Solutions Company's cash management system and
Technology Solutions Company no longer provide funds to us to finance our
operations, provide guarantees (except as described below) of our financial or
other obligations.
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In the year ended December 31, 1999, net cash used in operating activities
totaled $11.0 million. Cash was provided by $4.1 million of net income, $6.4
million from depreciation and amortization and $4.5 million related to an
increase in accrued compensation. This was offset by an $21.5 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 $39.6 million, or 66.6% from December 31, 1998 to December 31, 1999.
Unbilled Revenues increased from $4.3 million to $6.6 million or 51.7% from
December 31, 1998 to December 31, 1999. The increase in Unbilled Revenues
resulted from an increase in contracts that were invoiced based on the
completion of phases of a project as opposed to our standard monthly billing.
This trend may continue in the future. For the twelve months ended December 31,
1998, net cash used in operating activities was $3.8 million, driven by $1.1
million of net income and $4.9 million of depreciation and amortization and
offset by a $11.1 million increase in receivables.
Capital expenditures for the year ended December 31, 1999 were $2.2 million
for computer, furniture, equipment and leasehold improvements. Capital
expenditures for 2000 are budgeted at $15-$20 million. The amount may vary as
leases are being pursued as a possible alternative to purchasing assets. Of this
amount approximately $12-$15 million is related to infrastructure for facilities
and information technology and $3-$5 million is expected to be invested in the
Loyalty Lab, Hosting and Support.
In connection with the spin-off the Company received an additional $20
million of cash from Technology Solutions Company as part of the reorganization
agreement. Also, the Company received $8.4 million of proceeds from sales of 2.5
million shares of common stock to certain venture capital investors. See also
Note 13 to the Combined Financial Statements (Item 8).
Also, in connection with the spin-off, we have entered into a $10 million
revolving credit facility with Bank of America to provide the cash needed for
short term operating obligations. Pursuant to the Reorganization Agreement and
certain other agreements relating to the spin-off, Technology Solutions Company
has agreed to guarantee obligations under the facility through December 31,
2000. The borrowings under the revolving credit facility bear interest at a rate
of LIBOR plus .75%. The credit revolving facility contains customary
representations, warranties, covenants and default provisions, including working
capital commitments and debt to equity ratios.
We believe that current cash and cash equivalents, the revolving credit
facility and cash flow from operations should be sufficient to satisfy our cash
requirements for the foreseeable future. Also, we intend on obtaining additional
equity financing in 2000 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 years ended December 31, 1999 and 1998, 22.3% and 22.0%,
respectively, of our revenues were denominated in foreign currencies such as
Pound Sterling, Deutsche Marks, French Francs, Swiss Francs, Euros, Australian
dollars and Canadian dollars. We believe that an increasing portion of our
international revenues and costs will be denominated in foreign currencies in
the future. As a result of our exposure to foreign currencies, our financial
results could be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in those foreign markets. Revenues of
our foreign subsidiaries are currently realized or received in U.S. dollars or
in various foreign currencies. To the extent that we bill clients in a currency
other than their local currency, exchange rate fluctuations that strengthen the
currency in which we bill relative to their local currency could make our
services less competitive to those clients. Historically, we have not
experienced material fluctuations in our results of operations due to foreign
currency exchange rate changes.
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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, 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 ISSUE
The Company did not experience any significant Year 2000 disruptions and
none of the Company's suppliers or vendors have experienced Year 2000
disruptions that have had a significant impact on the Company.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
Report of Independent Accountants........................... 29
Combined Balance Sheets as of December 31, 1999 and 1998.... 30
Combined Statements of Operations for the years ended
December 31, 1999 and 1998 (unaudited), the seven month
period from June 1, 1998 to December 31, 1998, and for
each of the two years in the period ended May 31, 1998.... 31
Combined Statements of Cash Flows for the years ended
December 31, 1999 and 1998 (unaudited), the seven month
period from June 1, 1998 to December 31, 1998, and for
each of the two years in the period ended May 31, 1998.... 32
Combined Statements of Changes in Stockholder's Equity and
Comprehensive Income (Loss) for the year ended December
31, 1999, the seven month period ended December 31, 1998,
and for each of the two years in the period ended May 31,
1998...................................................... 33
Notes to Combined Financial Statements...................... 34
</TABLE>
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C>
48
Schedule II -- Valuation and Qualifying Accounts............
</TABLE>
28
<PAGE> 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of eLoyalty Corporation:
In our opinion, the combined financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of eLoyalty Corporation (the "Company") as of December 31, 1999 and
1998, and the results of its operations and its cash flows for the year ended
December 31, 1999, for the seven month period from June 1, 1998 to December 31,
1998 and for each of the two years in the period ended May 31, 1998, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related combined financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
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
February 15, 2000
Chicago, Illinois
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<PAGE> 32
eLOYALTY CORPORATION
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................... $13,462 $ 4,411
Marketable securities....................................... 7,175 4,486
Receivables, net............................................ 44,056 25,443
Deferred income taxes....................................... 9,057 4,711
Prepaid expenses............................................ 3,093 2,175
Other current assets........................................ 1,072 1,021
------- -------
Total current assets.............................. 77,915 42,247
COMPUTERS, FURNITURE AND EQUIPMENT, NET..................... 2,284 1,581
GOODWILL, NET............................................... 12,129 17,201
DEFERRED INCOME TAXES....................................... 2,387 1,054
LONG-TERM RECEIVABLES AND OTHER............................. 1,888 1,821
------- -------
Total assets...................................... $96,603 $63,904
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 640 $ 994
Accrued compensation and related costs...................... 11,687 7,304
Deferred compensation....................................... 7,175 4,486
Other current liabilities................................... 3,486 3,232
------- -------
Total current liabilities......................... 22,988 16,016
------- -------
COMMITMENTS AND CONTINGENCIES............................... -- --
STOCKHOLDER'S EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none issued and outstanding................... -- --
Common stock, $.01 par value; 100,000,000 shares authorized;
41,400,000 shares issued and outstanding as of December
31, 1999.................................................. 414 --
Additional paid-in capital.................................. 963 --
Net advances from Technology Solutions Company.............. 74,048 48,475
Accumulated other comprehensive loss........................ (847) (587)
Unearned compensation....................................... (963) --
------- -------
Total stockholder's equity........................ 73,615 47,888
------- -------
Total liabilities and stockholder's equity........ $96,603 $63,904
======= =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
30
<PAGE> 33
eLOYALTY CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
SEVEN MONTH
FOR THE YEARS ENDED PERIOD FROM FOR THE YEARS ENDED
DECEMBER 31, JUNE 1 TO MAY 31,
---------------------- DECEMBER 31, -------------------
1999 1998 1998 1998 1997
-------- ----------- ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES.................................................... $146,003 $105,235 $ 64,415 $ 84,488 $ 43,181
Project personnel......................................... (72,412) (50,687) (31,302) (41,329) (18,078)
-------- -------- -------- -------- --------
GROSS PROFIT................................................ 73,591 54,548 33,113 43,159 25,103
-------- -------- -------- -------- --------
OTHER COSTS AND EXPENSES:
Sales and marketing....................................... 9,703 4,894 3,456 2,429 1,663
Research and development.................................. 5,093 3,635 2,889 2,383 1,689
General and administrative................................ 31,916 26,326 16,438 20,216 11,539
Technology Solutions Company corporate services
allocation.............................................. 13,378 12,769 7,698 10,671 5,028
Goodwill amortization..................................... 4,996 3,794 2,450 3,201 376
Equity in net loss of unconsolidated investee............. 463 412 412 -- --
-------- -------- -------- -------- --------
65,549 51,830 33,343 38,900 20,295
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS)..................................... 8,042 2,718 (230) 4,259 4,808
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Net investment income..................................... 127 95 116 68 15
Interest expense.......................................... (72) (74) (31) (92) --
-------- -------- -------- -------- --------
55 21 85 (24) 15
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... 8,097 2,739 (145) 4,235 4,823
INCOME TAX PROVISION........................................ 4,039 1,672 398 2,022 1,897
-------- -------- -------- -------- --------
NET INCOME (LOSS)........................................... $ 4,058 $ 1,067 $ (543) $ 2,213 $ 2,926
======== ======== ======== ======== ========
Basic net income (loss) per common share.................... $ 0.10 $ 0.03 $ (0.01) $ 0.05 $ 0.07
Diluted net income (loss) per common share.................. $ 0.09 $ 0.02 $ (0.01) $ 0.05 $ 0.06
Shares used to calculate basic net income (loss) per share
(in millions)............................................. 41.4 41.4 41.4 41.4 41.4
Shares used to calculate diluted net income (loss) per share
(in millions)............................................. 44.2 43.1 41.4 46.8 46.6
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
31
<PAGE> 34
eLOYALTY CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
SEVEN MONTH
FOR THE YEARS ENDED PERIOD FROM FOR THE YEARS ENDED
DECEMBER 31, JUNE 1 TO MAY 31,
---------------------- DECEMBER 31, --------------------
1999 1998 1998 1998 1997
-------- ----------- ------------ --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 4,058 $ 1,067 $ (543) $ 2,213 $ 2,926
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Depreciation and amortization................ 6,355 4,947 3,509 3,874 617
Provisions for doubtful receivables.......... 2,059 2,684 2,652 531 453
Equity losses of unconsolidated investee..... 463 412 412 -- --
Deferred income taxes........................ (5,763) (4,212) (3,432) (2,118) (315)
Changes in assets and liabilities:
Receivables................................ (21,496) (10,811) (4,197) (10,217) (3,453)
Purchases of trading securities related to
deferred compensation program........... (2,689) (1,651) (830) (2,096) (799)
Other current assets....................... (1,038) (995) 278 (1,079) (1,177)
Accounts payable........................... (313) 520 647 (1,184) 229
Accrued compensation and related costs..... 4,517 1,838 776 2,674 (217)
Deferred compensation funds from
employees............................... 2,689 1,651 830 2,096 799
Other current liabilities.................. 653 1,002 538 (2,383) 1,335
Other assets............................... (536) (216) (11) (815) (339)
-------- -------- ------- -------- -------
Net cash (used in) provided by operating
activities............................ (11,041) (3,764) 629 (8,504) 59
-------- -------- ------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (2,175) (1,174) (570) (1,065) (182)
Investment in unconsolidated investee.......... -- -- (875) -- --
Acquired businesses............................ -- (7,911) (6,625) (10,741) (940)
-------- -------- ------- -------- -------
Net cash used in investing activities... (2,175) (9,085) (8,070) (11,806) (1,122)
-------- -------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Transfers from Technology Solutions Company.... 21,929 12,366 7,777 21,608 5,182
-------- -------- ------- -------- -------
Net cash provided by financing
activities............................ 21,929 12,366 7,777 21,608 5,182
-------- -------- ------- -------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS.................................... 338 (236) (651) (702) (310)
-------- -------- ------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 9,051 (719) (315) 596 3,809
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... 4,411 5,130 4,726 4,130 321
-------- -------- ------- -------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD......... $ 13,462 $ 4,411 $ 4,411 $ 4,726 $ 4,130
======== ======== ======= ======== =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
32
<PAGE> 35
eLOYALTY CORPORATION
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
(LOSS)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADVANCES ACCUMULATED
(TO) FROM OTHER
COMMON STOCK ADDITIONAL TECHNOLOGY COMPREHENSIVE TOTAL
------------------- PAID IN SOLUTIONS INCOME UNEARNED STOCKHOLDER'S
SHARES AMOUNT CAPITAL COMPANY (LOSS) COMPENSATION EQUITY
---------- ------ ---------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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.............. 4,058 4,058
Foreign currency
translation........... ..... (260) (260)
-------
Comprehensive income.. 3,798
Net transfers from
Technology Solutions
Company............... 21,929 21,929
Issuance of common
stock................. 41,400,000 $414 (414)
Issuance of compensatory
stock options......... $963 $(963) --
---------- ---- ---- ------- ----- ----- -------
Balance, December 31,
1999.................. 41,400,000 $414 $963 $74,048 $(847) $(963) $73,615
========== ==== ==== ======= ===== ===== =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
33
<PAGE> 36
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 -- THE COMPANY
eLoyalty Corporation ("eLoyalty" or the "Company") 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.
On February 15, 2000 Technology Solutions Company ("TSC" or the "Parent")
successfully completed its spin-off of its eLoyalty division into a separate
publicly traded company (the "Distribution"). To effectuate the transaction, the
Board of Directors of Technology Solutions Company declared a dividend payable
to the holders of record of Technology Solutions Company as of February 9, 2000,
based upon a ratio of one share of the Company's common stock, par value of $.01
per share for every one share of Technology Solutions Common Stock owned on the
record date. Effective February 15, 2000 all of the outstanding shares of Common
Stock were distributed to Technology Solutions Company stockholders.
eLoyalty and TSC have entered into certain agreements governing various
interim and ongoing relationships between eLoyalty and TSC before and after the
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 were transferred to eLoyalty from TSC in the
Distribution (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 as they were operated within
TSC.
The combined statements of operations include all of the related costs of
doing business including an allocation of certain general corporate expenses of
TSC which were not directly related to the Company's operations, including
legal, information systems, finance, insurance, human resources, benefits
administration, stockholders' services and corporate management services. These
costs were allocated to eLoyalty primarily on a proportional cost allocation
method based on revenues and headcount. Management believes these allocations
were made on a reasonable basis.
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 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 year ended December 31, 1998 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 revenues as services are performed,
based on hourly billing rates. For fixed fee engagements, revenues are
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
34
<PAGE> 37
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
in client engagements. Revenues generated through subcontractors are 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.
Software license fee revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the license fee is fixed and
determinable and the collection of the fee is probable. Fees from licenses sold
together with consulting services are generally recognized upon delivery
provided that the above criteria have been met and payment of the license fees
is not dependent upon the performance of the consulting services. In those
instances when it is determined that the payment of the license fee is dependent
upon the performance of consulting services, both the license and consulting
fees are recognized under the percentage of completion method of contract
accounting. Revenues from post-contract support are recognized ratably over the
term of the maintenance contract on a straight-line basis. To date, software
revenues have not exceeded 3% of total revenues for any quarterly period and
represented 1.4% and 1.0% of our total revenues for the years ended December 31,
1999 and 1998, respectively. 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 operations. Realized gains or
losses are determined on the specific identification method. The Company
recognized net gains of $730, $167, $823 and $183 for the year ended December
31, 1999, the seven month transition period and December 31, 1998 and the fiscal
years ended May 31, 1998 and 1997, respectively. Since the trading securities
relate to the Company's executive deferred compensation plan, a corresponding
charge to earnings is included in the Statements of Operations to recognize the
Company's increase liability for the deferred compensation plan.
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.
Maintenance and repair costs are expensed as incurred. The cost and related
accumulated depreciation of assets sold or disposed of are moved from the
account and resulting gain or loss is included in operations. The carrying value
of computers, furniture and equipment is periodically reviewed to asses
recoverability based on future cash flows.
Goodwill -- Goodwill is amortized on a straight-line basis, typically over
a five-year period. Accumulated amortization of goodwill as of December 31, 1999
and 1998 and May 31, 1998 and 1997 was $10,971, $6,042, $3,573 and $371,
respectively. The carrying value of goodwill is periodically reviewed to assess
recoverability based on undiscounted cash flows.
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.
35
<PAGE> 38
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. There are no capitalized software development costs included on
eLoyalty's combined balance sheets as of December 31, 1999 and 1998.
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 year ended
December 31, 1999.
Stockholder's Equity -- Stockholder's equity includes common stock issued
to TSC, advances (to) from TSC, other comprehensive income (loss) related to
foreign currency translation and unearned compensation related to stock-based
compensation. Advances from TSC represent transfers to eLoyalty 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 (loss) 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 dilutive effect of common stock equivalents using the "treasury stock"
method. For the seven month transition period ended December 31, 1998, common
stock equivalents were not included in diluted loss per share as they were anti-
dilutive. The Company's common stock equivalents relate to stock options. See
Note 8, "Stock Options" for a discussion of stock options.
Foreign Currency Translation -- The functional currencies for eLoyalty's
foreign subsidiaries are their local currencies. 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.
Fair Value of Financial Instruments -- The carrying values of current
assets and liabilities and long-term receivables approximated their fair values
as of December 31, 1999 and 1998, respectively.
Concentration of Credit Risk -- No client accounted for 10 percent or more
of revenues during the year ended December 31, 1999, the transition period ended
December 31, 1998, fiscal 1998 or fiscal 1997. No client accounted for 10
percent or more of gross accounts receivables as of December 31, 1999 or
December 31, 1998.
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. Compensation costs for employee stock options is measured as
the excess, if any, of the fair value of the Company's stock or TSC's stock at
the date of grant over the amount an employee must pay to acquire the stock. In
the event stock options are granted at a price lower than the fair value on the
date of grant, the difference is recorded as unearned compensation. Unearned
compensation is
36
<PAGE> 39
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
amortized over the vesting period of the stock options. The unearned
compensation recorded at December 31, 1999 relates solely to eLoyalty
stock-based awards.
Income Taxes -- Historically, eLoyalty's results have been included in
TSC's consolidated federal and state income tax returns. The income tax
provision is calculated and deferred tax assets and liabilities are recorded as
if eLoyalty had operated as an independent entity. eLoyalty uses an asset and
liability approach to financial accounting and reporting for income taxes.
Deferred income taxes are provided when tax laws and financial accounting
standards differ with respect to the amount of income for a year and the basis
of assets and liabilities and for tax loss carryforwards. 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, 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, the disclosures 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.
NOTE 3 -- ACQUISITIONS/INVESTMENTS
In June 1997, eLoyalty acquired The Bentley Group, Inc. (Bentley), a
business and operations consulting firm. Total consideration aggregated $17,500,
including cash of $12,000, 44,303 shares of TSC Common Stock and stock options.
Goodwill of approximately $18,100 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 $1,400, including cash
of $1,000 and 37,962 shares of TSC's Common Stock. Goodwill of approximately
$1,000 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
$3,400. Goodwill of approximately $3,500 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.
In August 1998, eLoyalty invested $875 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.
37
<PAGE> 40
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Assuming the conversion of all of the Series A Stock and Warrants into common
stock, 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 recorded 60 percent of NexCen's losses until such time that
eLoyalty had reduced the carrying value of its investment in NexCen to $0.
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. As of December 31, 1999, the carrying value of eLoyalty's
investment in NexCen was $0.
NOTE 4 -- RELATED PARTY TRANSACTIONS
Employees of eLoyalty were eligible to participate in the TSC 401(k)
Savings Plan (the "Plan") through the date of Distribution. 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 $1,131 in the year ended December 31, 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. In connection with the Distribution the Company has
established a 401(k) Savings Plan ("eLoyalty Plan") and transferred all Plan
assets related to eLoyalty employees into the eLoyalty Plan.
eLoyalty participated in TSC's nonqualified executive deferred compensation
plan through the date of Distribution. All eLoyalty executives (defined as Vice
Presidents and above) were 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 implemented a similar plan in connection with the
Distribution.
Project expenses have been recorded on an individual project basis. The
financial statements include expenses which have been allocated to eLoyalty by
TSC on a specific identification basis. Further, eLoyalty shares certain
employees and other resources with TSC. Allocations from TSC for indirect
expenses for such shared resources have been made primarily on a proportional
cost allocation method based on revenues and headcount. Management believes
these allocations are reasonable and that such expenses would not have differed
materially had eLoyalty operated on a stand-alone basis for all periods
presented. Such allocations of general corporate overhead expenses are included
in eLoyalty's combined statement of operations as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE SEVEN MONTH FOR THE YEAR
ENDED PERIODS FROM JUNE 1 ENDED MAY 31,
DECEMBER 31, TO DECEMBER 31, ----------------
1999 1998 1998 1997
------------ ------------------- ------- ------
<S> <C> <C> <C> <C>
Sales and marketing........................................ $ 795 $ 731 $ 972 $ 586
Technology Solutions Company corporate services
allocation............................................... 13,378 7,698 10,671 5,028
------- ------ ------- ------
Total allocated general corporate overhead........ $14,173 $8,429 $11,643 $5,614
======= ====== ======= ======
</TABLE>
38
<PAGE> 41
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, including eLoyalty. 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) is being forgiven
over a five-year period as follows: 25% of the principal amount was forgiven on
November 12, 1999; $25 in principal per month is being forgiven for the next
twelve months; $20 in principal per month will be forgiven for the next
twenty-four months; and $10 in principal per month will be forgiven for the next
twelve months. The amounts forgiven are reflected as a compensation expense. In
accordance with the terms of the note, as of December 31, 1999, a total of $383
in principal and accrued interest has been forgiven and the outstanding balance
and accrued interest under this note on that date was $875. On December 15,
1999, Technology Solutions Company made an additional loan to Mr. Conway in the
amount of $125. The note representing this loan provides for an interest rate of
5.74% and a payment date of March 1, 2000. The outstanding balance and accrued
interest on this note as of December 31, 1999 was $126.
Pursuant to the Distribution on February 15, 2000, eLoyalty entered into
certain contractual arrangements with TSC whereby TSC will provide eLoyalty
certain administrative support through June 30, 2000.
NOTE 5 -- RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Amounts billed to clients................................... $39,552 $23,737
Unbilled revenues........................................... 6,588 4,344
------- -------
46,140 28,081
Receivable allowances....................................... (2,084) (2,638)
------- -------
$44,056 $25,443
======= =======
</TABLE>
Amounts billed to clients represent professional fees and reimbursable
project-related expenses. Unbilled revenues represents professional fees,
project-related expenses, materials and subcontractor costs which have not yet
been billed. A substantial amount of unbilled revenues at the end of any
reporting period is billed in the month following the reporting period. Amounts
billed to clients are unsecured and primarily due within 30 days.
NOTE 6 -- COMPUTERS, FURNITURE AND EQUIPMENT
Computers, furniture and equipment consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Computers and software...................................... $ 3,636 $ 2,486
Furniture and equipment..................................... 1,735 756
------- -------
5,371 3,242
Accumulated depreciation.................................... (3,087) (1,661)
------- -------
$ 2,284 $ 1,581
======= =======
</TABLE>
Depreciation expense was $1,502, $421, $308 and $131 for the year ended
December 31, 1999, the transition period ended December 31, 1998 and for the
fiscal years ended May 31, 1998 and 1997, respectively.
39
<PAGE> 42
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 7 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE SEVEN MONTH
FOR THE YEAR PERIOD FROM FOR THE YEARS
ENDED JUNE 1 TO ENDED MAY 31,
DECEMBER 31, DECEMBER 31, ---------------
1999 1998 1998 1997
------------ ------------------- ------ ------
<S> <C> <C> <C> <C>
Current:
Federal............................. $ 4,546 $(1,929) $ 115 $1,427
State............................... 1,059 (275) 16 204
Foreign............................. 1,876 (830) (227) (49)
------- ------- ------ ------
Total current............... 7,481 (3,034) (96) 1,582
------- ------- ------ ------
Deferred:
Federal............................. (2,008) 1,941 1,357 256
State............................... (478) 277 194 37
Foreign............................. (956) 1,214 567 22
------- ------- ------ ------
Total deferred.............. (3,442) 3,432 2,118 315
------- ------- ------ ------
Provision for income taxes............ $ 4,039 $ 398 $2,022 $1,897
======= ======= ====== ======
</TABLE>
Total income tax provision differed from the amount computed by applying
the federal statutory income tax rate to income from continuing operations due
to the following:
<TABLE>
<CAPTION>
FOR THE SEVEN MONTH
PERIOD FROM FOR THE YEARS
FOR THE YEAR ENDED JUNE 1 TO ENDED MAY 31,
DECEMBER 31, DECEMBER 31, ---------------
1999 1998 1998 1997
------------------ ------------------- ------ ------
<S> <C> <C> <C> <C>
Federal tax provision (benefit),
at statutory rate............... $2,834 $(50) $1,475 $1,688
State tax provision (benefit), net
of Federal benefit.............. 405 (6) 211 241
Effect of foreign tax rate
differences..................... 406 303 34 (58)
Nondeductible expenses............ 134 61 96 48
Nondeductible goodwill............ 279 170 172 150
Other............................. (19) (80) 34 (172)
------ ---- ------ ------
Income tax provision.............. $4,039 $398 $2,022 $1,897
====== ==== ====== ======
</TABLE>
40
<PAGE> 43
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Deferred tax assets and liabilities were comprised of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 1998
-------- -------
<S> <C> <C>
Deferred tax assets:
Deferred compensation and bonuses......................... $ 2,870 $1,794
Equity losses of unconsolidated investee.................. 341 215
Receivable allowances..................................... 918 844
Other accruals............................................ 936 743
Net operating loss carryforwards.......................... 4,996 1,803
Depreciation and amortization............................. 2,387 1,054
------- ------
Total deferred tax assets......................... 12,448 6,453
------- ------
Deferred tax liabilities:
Prepaid expenses.......................................... (1,004) (688)
------- ------
Total deferred tax liabilities.................... (1,004) (688)
------- ------
Net deferred tax asset.................................... $11,444 $5,765
======= ======
</TABLE>
Net operating loss carryforwards relate primarily to eLoyalty's UK
operations and have an indefinite carryforward period.
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
FOR THE SEVEN MONTH
PERIOD FROM FOR THE YEARS
FOR THE YEAR ENDED JUNE 1 TO ENDED MAY 31,
DECEMBER 31, DECEMBER 31, -----------------
1999 1998 1998 1997
------------------ ------------------- ------ ------
<S> <C> <C> <C> <C>
United States......................... $7,447 $(164) $3,781 $4,527
Foreign............................... 650 19 454 296
------ ----- ------ ------
Total....................... $8,097 $(145) $4,235 $4,823
====== ===== ====== ======
</TABLE>
NOTE 8 -- STOCK OPTIONS
As of the Distribution, each outstanding option to purchase TSC common
stock held by a person who was an employee or director of eLoyalty immediately
after the Distribution (and who was not also a director of TSC) was converted
into a substitute option to purchase eLoyalty common stock. The conversion of
the options was done in such a manner that (1) the aggregate intrinsic value of
the options immediately before and after the exchange was the same, (2) the
ratio of the exercise price per option to the market value per option was not
reduced, and (3) the vesting provisions and option period of the replacement
options was the same as the original vesting terms and option period. The
substitute option takes 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 is the same as the current
TSC option.
Each outstanding nonqualified TSC option granted before June 22, 1999 to a
person who continued as an employee or director of TSC after the Distribution,
or who was not an employee or director of either TSC or eLoyalty after the
Distribution, was converted into both an adjusted TSC option and a substitute
eLoyalty option. The conversion of the options was done in such a manner that
(1) the aggregate intrinsic value of the options immediately before and after
the exchange were the same, (2) the ratio of the exercise price per option to
the market value per option was not reduced, and (3) the vesting provisions and
option period of the replacement options were the same as the original vesting
terms and option period. Employment with TSC
41
<PAGE> 44
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
was taken into account in determining when each substitute eLoyalty option
becomes exercisable and when it terminates, and in all other respects was
substantially the same as the existing TSC option.
Each outstanding nonqualified TSC option granted after June 21, 1999 to a
person who continued as an employee or director of TSC after the Distribution,
or who was not an employee or director of either TSC or eLoyalty after the
Distribution, continued solely as an option to purchase shares of TSC common
stock.
Each TSC option that was an incentive stock option, within the meaning of
Section 422 of the Code, was converted into an incentive stock option to
purchase the stock of the corporation with which the optionee was employed
immediately after the Distribution. These options were converted based on the
relative trading prices of the stock purchasable under the option immediately
after the Distribution. Immediately after the Distribution, the Company's stock
traded at 83.4722 percent of the combined value of one share of the Company's
stock and one share of TSC's stock. This conversion preserved both the intrinsic
value of the option and the ratio of the exercise price to the fair market value
of the stock. In connection with the Distribution, 6.8 million eLoyalty options
were issued to replace certain TSC options as described above.
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 at an exercise price of
$3.50 per share, the deemed fair value of the underlying eLoyalty common stock
to eLoyalty employees and certain employees of TSC who were instrumental to
eLoyalty's operations up to and including the Distribution. The Company also
issued additional options to purchase shares of eLoyalty's stock between the
initial grant in June 1999 and December 31, 1999, some of which were below the
deemed fair value on the date of grant, and accordingly resulted in the Company
recording unearned compensation. 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.
The following table summarizes eLoyalty stock option activity during 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding as of December 31, 1998......................... -- --
Granted................................................... 5,447,250 $3.88
Forfeited................................................. (107,250) $3.50
--------- -----
Outstanding as of December 31, 1999......................... 5,340,000 $3.89
=========
Stock options exercisable as of December 31, 1999........... --
=========
</TABLE>
42
<PAGE> 45
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table summarizes information about eLoyalty stock options
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------
AVERAGE WEIGHTED-
REMAINING AVERAGE
CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICES
- ------------------------ --------- ----------- ---------
<S> <C> <C> <C>
$ 0.01 - $ 3.50............................................. 4,901,500 10 years $ 3.50
$ 3.51 - $ 8.00............................................. 274,250 10 years $ 6.08
$ 8.01 - $12.00............................................. 118,500 10 years $10.61
$12.01 - $16.00............................................. 45,750 10 years $14.72
---------
5,340,000 10 years $ 3.89
=========
</TABLE>
The company elected to disclose the pro forma effects of SFAS No. 123,
"Accounting for Stock Based Compensation. The fair value of eLoyalty and TSC
options granted to eLoyalty employees was estimated at the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
FOR THE
FOR THE SEVEN MONTH
YEAR ENDED PERIOD ENDED FOR THE YEARS ENDED MAY 31,
DECEMBER 31, DECEMBER 31, ---------------------------------------
TSC OPTIONS 1999 1998 1998 1997 1996
- ----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Expected volatility...... 49.7%-54.2% 43.6%-49.8% 41.9%-44.1% 40.9%-51.4% 50.6%-52.0%
Risk-free interest
rates.................. 4.6%-6.3% 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 4.5 years
Dividends................ 0% 0% 0% 0% 0%
</TABLE>
<TABLE>
<CAPTION>
ELOYALTY OPTIONS
- ----------------
<S> <C> <C> <C> <C> <C>
Expected volatility...... 50%
Risk Free interest
rates.................. 5.7%-6.3%
Expected Lives........... 4.5 years
Dividends................ 0%
</TABLE>
The weighted average grant date fair value of options granted during the
year were as follows:
<TABLE>
<CAPTION>
FOR THE FOR THE YEARS ENDED
YEAR ENDED MAY 31,
DECEMBER 31, -----------------------
1999 1999 1998 1997
------------ ----- ----- -----
<S> <C> <C> <C> <C>
TSC Options............................................ $5.08 $8.15 $7.90 $5.24
eLoyalty Options issued at market prices............... $1.79
eLoyalty Options issued below market prices............ $8.62
</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. Had
compensation expense related to both eLoyalty and TSC options
43
<PAGE> 46
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
granted to eLoyalty employees been determined consistent with SFAS No. 123,
eLoyalty's net income (loss) and net income (loss) per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
FOR THE
FOR THE SEVEN MONTH FOR THE YEARS
YEAR ENDED PERIOD ENDED ENDED MAY 31,
DECEMBER 31, DECEMBER 31, ---------------
1999 1998 1998 1997
------------ ------------ ------ ------
<S> <C> <C> <C> <C>
Net income(loss):
As reported............................... $4,058 $ (543) $2,213 $2,926
Pro forma................................. $1,219 $(2,574) $ (500) $1,651
Basic net income(loss) per share:
As reported............................... $ 0.10 $ (0.01) $ 0.05 $ 0.07
Pro forma................................. $ 0.03 $ (0.06) $(0.01) $ 0.04
Diluted net income (loss) per share:
As reported............................... $ 0.09 $ (0.01) $ 0.05 $ 0.06
Pro forma................................. $ 0.03 $ (0.06) $(0.01) $ 0.04
</TABLE>
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 year ended
December 31, 1999, the seven month transition period ended December 31, 1998 and
the fiscal years ended May 31, 1998 and 1997.
<TABLE>
<CAPTION>
UNITED EUROPE AND COMBINED
FOR THE YEAR ENDED DECEMBER 31, 1999 STATES CANADA AUSTRALIA TOTAL
- ------------------------------------ -------- ------ ---------- --------
<S> <C> <C> <C> <C>
Revenues......................................... $113,504 $7,577 $24,922 $146,003
Identifiable Assets.............................. $ 63,770 $3,874 $28,959 $ 96,603
</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>
44
<PAGE> 47
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10 -- LEASES
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 $1,436, $469, $738 and $133
for the year ended December 31, 1999, the transition period ended December 31,
1998 and for the fiscal years ended May 31, 1998 and 1997, 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>
2000........................................................ $1,018
2001........................................................ 791
2002........................................................ 614
2003........................................................ 441
2004........................................................ 415
Thereafter.................................................. 70
------
$3,349
======
</TABLE>
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
The Company is involved in various pending or threatened claims in the
normal course of business. Management believes that losses, if any, arising from
such claims will not have a material adverse affect on the Company's financial
position, results of operations or cash flows.
NOTE 12 -- CAPITAL STOCK
In 1999, eLoyalty was established as a wholly-owned subsidiary of TSC. In
connection with establishing eLoyalty as a separate legal entity, 100,000,000
shares of common stock, $.01 par value, were authorized, of which a total of
41,400,000 common stock shares were issued to TSC. The Company also has
authorized 10,000,000 shares of preferred stocks, $.01 par value, of which none
has been issued.
45
<PAGE> 48
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 13 -- QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH YEAR
IN THOUSANDS, EXCEPT PER SHARE DATA --- --- --- --- ----
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999
Revenues....................................... $31,491 $36,145 $40,016 $38,351 $146,003
Gross Profit................................... $18,215 $18,296 $20,555 $18,525 $ 73,591
Net income (loss).............................. $ 727 $ 1,480 $ 1,879 $ (28) $ 4,058
Basic net income (loss) per share.............. $ 0.02 $ 0.04 $ 0.05 $ (0.01) $ 0.10
Diluted net income (loss) per share............ $ 0.02 $ 0.03 $ 0.04 $ (0.01) $ 0.09
Shares used to calculate basic net income
(loss) per share (in millions)............... 41.4 41.4 41.4 41.4 41.4
Shares used to calculate diluted net income
(loss) per share (in millions)............... 42.4 42.4 44.6 41.4 44.2
FOR THE YEAR ENDED DECEMBER 31, 1998
Revenues....................................... $23,643 $25,998 $28,044 $27,550 $105,235
Gross Profit................................... $11,933 $13,855 $14,433 $14,327 $ 54,548
Net income (loss).............................. $ 828 $ 894 $ 292 $ (947) $ 1,067
Basic net income (loss) per share.............. $ 0.02 $ 0.02 $ 0.01 $ (0.02) $ 0.03
Diluted net income (loss) per share............ $ 0.02 $ 0.02 $ 0.01 $ (0.02) $ 0.02
Shares used to calculate basic net income
(loss) per share (in millions)............... 41.4 41.4 41.4 41.4 41.4
Shares used to calculate diluted net income
(loss) per share (in millions)............... 43.1 43.2 43.1 41.4 43.1
</TABLE>
NOTE 14 -- SUBSEQUENT EVENTS
Effective February 15, 2000 TSC completed its spin-off its eLoyalty
division into a separate publicly traded company. In connection with the
spin-off, TSC contributed to eLoyalty an additional $20 million of cash. In
addition, in connection with the spin-off, eLoyalty entered into a $10 million
revolving line of credit facility with Bank of America to provide cash for short
term operating obligations. Pursuant to the Reorganization Agreement and certain
other agreements relating to the spin off, Technology Solutions Company has
agreed to guarantee obligations under this facility through December 31, 2000.
The borrowing under this revolving credit facility bear interest at a rate of
LIBOR plus .75%. The credit facility contains customary representations,
warranties, covenants and default provisions, including working capital
commitments and debt to equity ratios.
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,
subject to adjustment pursuant to certain anti-dilution provisions. Stock
purchase was subject to the receipt of a private letter ruling from the Internal
Revenue Service to the effect that the Distribution would be tax free to TSC and
its stockholders for United States Federal Income tax purposes and certain other
customary connections. On January 27, 2000, TSC received a favorable ruling from
the Internal Revenue Service that the spin-off of its eLoyalty division would be
a tax free distribution of all of the Company's eLoyalty shares to TSC's
shareholders. In connection with the Distribution, on February 15, 2000, the
venture capital investors purchased 2.5 million eLoyalty Common Stock shares for
$8.4 million, reflecting adjustments pursuant to certain anti-dilution
provisions.
On January 26, 2000, the Board of Directors adopted a Stockholder Rights
Plan (the "Rights Plan"). The Rights Plan is intended to assure fair and equal
treatment for all of the Company's stockholders in the event of a hostile
takeover attempt. Under the terms of the Rights Plan, each share of the
Company's
46
<PAGE> 49
eLOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Common Stock has associated with it one Right. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $.01 per share, at an
exercise price of $160.00 (subject to adjustment). The Rights become exercisable
under certain circumstances following the announcement that any person has
acquired 15 percent or more of the Company's Common Stock or the announcement
that any person has commenced a tender offer for 15 percent or more of the
Company's Common Stock. The Company may redeem the Rights in whole, but not in
part, at a price of $.01 per Right at any time until ten days after any person
has acquired 15 percent or more of the Company's Common Stock.
47
<PAGE> 50
ELOYALTY CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1999, THE
SEVEN MONTH PERIOD ENDED DECEMBER 31, 1998
AND FOR THE YEARS ENDED MAY 31, 1999 AND 1997
(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, 1997
Valuation allowances and receivable reserves for
potential losses................................... $ 184 $ 453 $ (439) $ 198
May 31, 1997
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
December 31, 1999
Valuation allowances and receivable reserves for
potential losses................................... $2,638 $2,059 $(2,613) $2,084
</TABLE>
48
<PAGE> 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
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 December 31, 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............................. 53 Director
Michael J. Murray.......................... 55 Director
John R. Purcell............................ 68 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............................. 43 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., 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
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<PAGE> 52
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 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. Muffayare
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 the Company since October 1997.
Until his retirement in December 1999, he had served as Vice Chairman of Fleet
Boston Financial, a financial services company, since 1993 and as its Chief
Technology Officer since April 1997. Mr. Zucchini joined Fleet Boston Financial
in 1987 from General Re Corp., where he had been a senior executive since 1974.
From 1997 until 1999, he served as Chairman of the Financial Services Roundtable
Subcommittee on Legislation and Registration charged with interactivity with
Congress on issues related technology. He is also currently serving as a
Director of Technology Solutions Company, served from 1993 to 1999 as a Director
of Visa, U.S.A. Inc., and served from 1995 to 1996 as a Director of American Re
Corporation.
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.
50
<PAGE> 53
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 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 Ernst &
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 resigned from the Technology Solutions
Company board of directors at the time of the spin-off.
BOARD COMMITTEES
The Company intends to create an audit committee and a compensation
committee in the near future. The audit committee will review the internal
accounting procedures of eLoyalty and consult with and review
51
<PAGE> 54
the services provided by eLoyalty's independent accountants. The audit committee
is expected to include 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. The compensation
committee is expected to consist of Messrs. Purcell and Coxe.
52
<PAGE> 55
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation information paid by the Company
for our Chief Executive Officer and the four other executive officers. All
information set forth in this table reflects compensation earned by these
individuals for services with eLoyalty 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 $266,573 625,000(3) $387,303(6)
President and 1998(1) 266,667 120,000 65,000 2,800(6)
Chief Executive Officer 1998(2) 440,000 100,000 135,000 2,000(6)
Craig B. Lashmet....................... 1999 $400,000 $211,448 350,000(3) 4,167(7)
Senior Vice President, 1998(1) 226,667 90,000 97,750(4) 2,431(7)
North America 1998(2) 340,000 95,000 33,750(5) 1,737(7)
Arthur J. Bird......................... 1999 $314,300 $ 61,620 100,000(3) $ 23,569(8)
Senior Vice President 1998(1) 176,400 57,038 19,189 17,070(8)
European Operations 1998(2) 156,683 29,066 0 17,540(8)
Kevin Kraft............................ 1999 $260,000 $127,005 100,000(3) $ 18,586(9)
Senior Vice President 1998(1) 151,667 57,000 17,100 7,374(9)
Solutions Marketing 1998(2) 231,667 62,773 0 19,100(9)
Chris Danson........................... 1999 $260,000 $129,438 100,000(3) $ 16,133(10)
Senior Vice President 1998(1) 145,000 57,000 36,838 2,800(10)
Development & Support 1998(2) 200,000 50,000 0 2,000(10)
</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) Subject to option provisions regarding termination of employment, one third
of these options become exercisable on July 1, 2001 and 1/36 of these
options become exercisable on the last day of each calendar month for 24
months.
(4) 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.
(5) 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 4.
(6) The other compensation consisted of principal and interest forgiven under a
Promissory Note dated November 12, 1998. It also includes employer 401K
contributions of $4,800, $2,000, and $2,800 in 1999, year ended 1998, and
fiscal year ended 1998, respectively.
(7) The other compensation consists of 401K employer contributions.
(8) The other compensation consisted of principal and interest forgiven under a
Promissory Note dated November 4, 1997.
(9) The other compensation consisted of principal and interest forgiven under a
Promissory Note dated September 4, 1998. It also includes employer 401K
contributions of $4,800, $2,000, and $2,800 in 1999, year ended 1998, and
fiscal year ended 1998, respectively.
(10) The other compensation consisted of principal and interest forgiven under a
Promissory Note dated September 13, 1999. It also includes employer 401K
contributions of $4,800, $2,000, and $2,800 in 1999, year ended 1998, and
fiscal year ended 1998, respectively.
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<PAGE> 56
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
Arthur J. Bird.................. 100,000(2) 2% 3.50 7/1/09 220,113 557,810
Kevin Kraft..................... 100,000(2) 2% 3.50 7/1/09 220,113 557,810
Chris Danson.................... 100,000(2) 2% 3.50 7/1/09 220,113 557,810
</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, 2001 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.
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.
54
<PAGE> 57
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
Arthur J. Bird
Technology Solution
Options................. -- -- 8,783 23,689 $ 195,520 $ 298,522
eLoyalty Options........ -- -- -- 100,000 -- $ 2,868,750
Kevin Kraft
Technology Solution
Options................. -- -- 1,602 15,498 $ 35,183 $ 4,445,598
eLoyalty Options........ -- -- -- 100,000 -- $ 2,868,750
Chris Danson
Technology Solution
Options................. -- -- 34,355 51,000 $ 865,748 $ 477,503
eLoyalty Options........ -- -- -- 100,000 -- $ 2,868,750
</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. 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.
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<PAGE> 58
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the close of business on March 24,
2000, certain information with respect to the beneficial ownership of Common
Stock beneficially owned by (i) each director of the Company, (ii) the most
highly compensated executive officers of the Company (collectively, the "named
officers"), (iii) all executive officers and directors as a group and (iv) each
stockholder who is known to the Company to be the beneficial owner, as defined
in Rule 13d-3 under the Securities Exchange Act of 1934, as amended
<TABLE>
<CAPTION>
SHARES OF COMMON PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER STOCK OWNED OUTSTANDING SHARES
------------------------------------ ---------------- ---------------------
<S> <C> <C>
Massachusetts Financial Services Company(1)............... 3,337,960 7.1%
FMR Corp.(2).............................................. 2,272,950 4.8%
GeoCapital LLC(3)......................................... 2,864,139 6.1%
Brookside Capital Partners Fund, L.P.(4).................. 3,355,300 7.1%
</TABLE>
<TABLE>
<S> <C> <C>
Kelly D. Conway........................................... 562,462(5) 1.2%
Tench Coxe................................................ 1,548,740(6) 3.2%
Jay C. Hoag............................................... 1,698,740(7) 3.5%
John T. Kohler............................................ 455,212(8) 1.0%
Michael J. Murray......................................... 292,089(9) *
John R. Purcell........................................... 732,403(10) 1.5%
Michael R. Zucchini....................................... 42,427(11) *
Timothy J. Cunningham..................................... 0 *
Craig B. Lashmet.......................................... 163,105(12) *
Arthur J. Bird............................................ 12,437(13) *
Chris J. Danson........................................... 54,350(14) *
Kevin J. Kraft............................................ 7,329(15) *
--------- -----
All Directors and Executive Officers as a group (12 5,569,294(16) 11.5%
persons)................................................
</TABLE>
- ---------------
* Less than one percent
(1) Based on the most recent report on Schedule 13G/A filed with the SEC on
February 11, 2000, Massachusetts Financial Services Company is expected to
have sole voting power with respect to 3,337,960 shares of Technology
Solutions Company common stock and sole dispositive power with respect to
3,337,960 shares of Technology Solutions Company common stock.
Massachusetts Financial Services Company is located at 500 Boylston
Street, Boston, MA 02116.
(2) Based on the most recent joint report on Schedule 13G, filed with the SEC
on February 16, 1999, FMR is expected to have sole voting power with
respect to 2,272,950 shares of Technology Solutions Company common stock
to be converted to eLoyalty Common Stock. FMR Corp.'s address is 82
Devonshire Street, Boston, MA 02109.
(3) Based on the most recent report on Schedule 13G, filed with the SEC on
February 8, 2000, GeoCapital LLC is expected to have sole dispositive
power with respect to 2,864,139 shares of Technology Solutions Company
common stock. GeoCapital's address is 767 Fifth Ave. 45th Fl., New York,
NY 10153-4590.
(4) Based on the most recent report on Schedule 13G, filed with the SEC on
February 11, 2000, Brookside Capital Partners Fund, L.P. is expected to
have sole voting power with respect to 3,355,300 shares of Technology
Solutions Company common stock and sole dispositive power with respect to
3,355,300 shares of Technology Solutions Company common stock. Brookside's
address is Two Copely Place, Boston, Massachusetts 02116.
(5) Includes 543,953 shares Mr. Conway has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(6) Includes 1,548,740 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.
(7) 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.
56
<PAGE> 59
(8) Includes 355,157 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.
(9) Includes 117,253 shares Mr. Murray has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(10) Includes 20,216 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.
(11) Includes 34,875 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.
(12) Includes 160,435 shares Mr. Lashmet has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(13) Includes 12,437 shares Mr. Bird has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(14) Includes 44,226 Mr. Danson has the right to acquire under options which
are currently exercisable or which will be exercisable within 60 days.
(15) Includes 4,797 Mr. Kraft has the right to acquire under options which are
currently exercisable or which will be exercisable within 60 days.
(16) Includes 1,293,350 shares of common stock issuable under options which are
currently exercisable or which will be exercisable within 60 days. All
directors and officers are located at 205 N. Michigan Ave., Suite 1500,
Chicago, IL 60601.
57
<PAGE> 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into a common stock purchase and sale agreement with Sutter
Hill Ventures and Technology Crossover Ventures. On June 22, 1999, these
investors agreed to purchase an aggregate of 2,400,000 shares of our common
stock at $3.50 per share. The 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 purchase and sale of common stock to the investors was
exempt from registration under Section 4(2) of the Securities Act because the
transactions did not involve a public offering.
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. The notes representing these loans have been assigned to
eLoyalty in connection with the separation of our business operations from
Technology Solutions Company.
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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 us
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 our registration
statement on Form S-1 (No. 333-94293).
REORGANIZATION AGREEMENT
The Reorganization Agreement provides for, among other things, the
principal corporate transactions required to effect the separation of our
business from the remaining Technology Solutions Company business, the spin-off
and other agreements governing the relationship between us and Technology
Solutions Company after the spin-off.
Pursuant to the Reorganization Agreement, Technology Solutions Company has
transferred to us substantially all of the assets, and we have assumed
substantially all of the corresponding liabilities, of our business. The assets
of eLoyalty's business were transferred to us on an "as is, where is" basis and
no representations or warranties will be made by Technology Solutions Company
regarding those assets.
Subject to some exceptions, the Reorganization Agreement provides for
cross-indemnities principally designed to place financial responsibility for the
liabilities of our business with us and financial responsibility for the
obligations and liabilities of Technology Solutions Company's retained business
with Technology Solutions Company. Specifically, we have agreed to assume
liability for, and to indemnify Technology Solutions Company against, any and
all liabilities associated with our 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 our
business by Technology Solutions Company to us. Technology Solutions Company has
agreed to indemnify us against any and all liabilities associated with
Technology Solutions Company's retained business.
The Reorganization Agreement provides for the allocation of benefits
between Technology Solutions Company and us 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
are 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 also provides that Technology Solutions
Company and eLoyalty are granted access to some records and information in the
possession of the other. This requires the retention by Technology Solutions
Company and us, 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 also provides 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,
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<PAGE> 62
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 we will establish retirement savings
and welfare plans. The Reorganization Agreement provides that the account
balances (including outstanding loans) of all eLoyalty employees participating
in Technology Solutions Company's deferred compensation and 401(k) plans are
transferred to eLoyalty's new deferred compensation and 401(k) plans and assets
held in trust related to such account balances are transferred to new trusts
established by us. The Reorganization Agreement will also generally provide
that, after the spin-off, we will assume all liabilities for benefits under any
welfare plans related to our employees, other than specified claims incurred on
or before the spin-off. Moreover, the Reorganization Agreement provides that,
effective as of the spin-off, we are responsible for all other liabilities to
our employees. The Reorganization Agreement also provides that eLoyalty maintain
an employee stock purchase plan substantially similar to Technology Solutions
Company's 1995 employee stock purchase plan.
TAX SHARING AND DISAFFILIATION AGREEMENT
The Technology Solutions Company and eLoyalty Tax Sharing and
Disaffiliation Agreement sets 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."
General Taxes. Under the Tax Sharing and Disaffiliation Agreement, we 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 us. We 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 us 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).
Under the Tax Sharing and Disaffiliation 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 the Tax Sharing and Disaffiliation 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
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<PAGE> 63
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 eLoyalty 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 have entered into a Shared
Services Agreement, pursuant to which Technology Solutions Company provides 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. The Shared Services 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 services Technology Solutions 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 entered 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 entered 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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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following combined financial statements and supplemental schedule of
eLoyalty and Report of Independent Accountants thereon are included herein:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
Report of Independent Accountants........................... 29
Combined Balance Sheets as of December 31, 1999 and 1998.... 30
Combined Statements of Operations for the years ended
December 31, 1999 and 1998 (unaudited), the seven month
period from June 1, 1998 to December 31, 1998, and for
each of the two years in the period ended May 31, 1998.... 31
Combined Statements of Cash Flows for the years ended
December 31, 1999 and 1998 (unaudited), the seven month
period from June 1, 1998 to December 31, 1998, and for
each of the two years in the period ended May 31, 1998.... 32
Combined Statements of Changes in Stockholder's Equity and
Comprehensive Income (Loss) for the year ended December
31, 1999, the seven month period ended December 31, 1998,
and for each of the two years in the period ended May 31,
1998...................................................... 33
Notes to Combined Financial Statements...................... 34
</TABLE>
FINANCIAL STATEMENT SCHEDULE
<TABLE>
<S> <C> <C>
Schedule II
-- Valuation and Qualifying Accounts........................... 48
</TABLE>
(a)(2) Financial Statement Schedules
Included in Item 14(a)(1) above
All other schedules to the financial statements required by Article 7 of
Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.
(a)(3) Listing of Exhibits
The Exhibits required to be part of this Annual Report are listed in the
Index to Exhibits on Page 63.
(b) Reports on Form 8-K
None
(c) Exhibits
Included in Item 14(a)(3) above.
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<PAGE> 65
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Chicago,
State of Illinois, on March 30, 2000.
eLOYALTY CORPORATION
By: /s/ KELLY D. CONWAY
----------------------------------
Kelly D. Conway
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons on behalf of
eLoyalty Corporation and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ KELLY D. CONWAY Director, President and March 30, 2000
- ----------------------------------------------------- Chief Executive Officer
Kelly D. Conway (principal executive officer)
/s/ TIMOTHY J. CUNNINGHAM Chief Financial Officer March 30, 2000
- ----------------------------------------------------- (principal financial officer
Timothy J. Cunningham and
principal accounting officer)
/s/ JOHN T. KOHLER Director March 30, 2000
- -----------------------------------------------------
John T. Kohler
/s/ MICHAEL J. MURRAY Director March 30, 2000
- -----------------------------------------------------
Michael J. Murray
/s/ JOHN R. PURCELL Director March 30, 2000
- -----------------------------------------------------
John R. Purcell
/s/ TENCH COXE Director March 30, 2000
- -----------------------------------------------------
Tench Coxe
/s/ MICHAEL R. ZUCCHINI Director March 30, 2000
- -----------------------------------------------------
Michael R. Zucchini
/s/ JAY C. HOAG Director March 30, 2000
- -----------------------------------------------------
Jay C. Hoag
</TABLE>
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<PAGE> 66
INDEX TO 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
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
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 Office Lease -- River Place Point II made as of March 17 by
and between Investors Life Insurance and eLoyalty as Tenant
10.16 Line of Credit -- Bank of America
21.1 Subsidiaries of eLoyalty
23.1 Consent of PricewaterhouseCoopers LLP, Chicago, Illinois,
Independent Accountants
27 Financial Data Schedule
</TABLE>
- ---------------
+ Incorporated by reference to the Company's Registration Statement on Form S-1
(No 333-94293) which was made effective by the Securities and Exchange
Commission on February 8, 2000.
64
<PAGE> 1
EXHIBIT 10.15
RIVER PLACE POINTE II LEASE AGREEMENT
By and Between
INVESTORS LIFE INSURANCE COMPANY OF NORTH AMERICA
("Landlord")
and
ELOYALTY CORPORATION
("Tenant")
DATED: MARCH ____, 2000
<PAGE> 2
RIVER PLACE POINTE II LEASE AGREEMENT
THIS LEASE is entered into as of March ____, 2000, between INVESTORS
LIFE INSURANCE COMPANY OF NORTH AMERICA, a Washington corporation ("Landlord"),
whose address for purposes of notice hereunder is 701 Brazos, Suite 1400,
Austin, Texas, 78701 and eLOYALTY CORPORATION, a Delaware corporation
("Tenant"), whose local address prior to the Commencement Date (defined in
Section 2.01 hereof) is 701 Brazos, Suite 680, Austin, Texas 78701, and whose
local address after the Commencement Date shall be 6500 River Place Boulevard,
Building II, Suite 400, Austin, Texas, 78730.
W I T N E S S E T H:
ARTICLE 1
1.01 PREMISES. Landlord hereby leases to Tenant, and Tenant hereby
leases from Landlord, for the rent and subject to the provisions of this Lease,
the space (the "Premises") reflected on the floor plan(s) attached as Exhibit
"A" hereto, consisting of the entire fourth (4th) floor and approximately the
east one-half (2) of the third (3rd) floor of the building (the "Building")
known as River Place Pointe II located at 6500 River Place Boulevard, Austin,
Travis County, Texas, in River Place Pointe (the "Project"). The Project is a
multi-building office project under construction by Landlord containing multiple
office buildings, ground-level open areas and walkways, parking areas and
garages and other structures or improvement located on the real property
described on Exhibit "B" attached hereto and made a part hereof for all purposes
(the "Land"). The Building, as well as River Place Pointe I and the River Place
Pointe Parking Garage I ("Parking Garage I") are currently under construction by
Landlord. It is anticipated that the Premises will contain approximately 40,691
square feet of rentable area and the Building will contain approximately 112,782
net rentable square feet as measured by the most recent BOMA Standard Method of
Floor Measurement (the "BOMA Standard(s)"). The usable and rentable square
footage of the Premises shall be measured by Landlord's architect, and such
measurement shall be approved by Tenant's architect, in accordance with BOMA
Standards, taking into account that the fourth floor will be a single tenant
floor and the third floor will be a multi-tenant floor. In the event the
measurement of the Premises according to BOMA Standards results in a change in
the rentable area of the Premises, all appropriate terms herein shall be
adjusted accordingly. Within ten (10) days after the Commencement Date Tenant
and Landlord shall execute a declaration (in the form of Exhibit "D" hereto)
specifying, among other things, the measurements of the Premises and the
Building as determined by Landlord's architect and approved by Tenant's
architect.
ARTICLE 2
<PAGE> 3
2.01 TERM. Subject to the other provisions hereof, and any exhibits
hereto, this Lease shall be for a term of approximately five (5) years
commencing on the Commencement Date (defined in Section 2.02 hereof) and
expiring on May 31, 2005 (the "Expiration Date"). Such term, as it may be
modified or extended, is herein called the "Term." A "Lease Year" shall be the
twelve month period beginning on June 1 of each calendar year and ending on May
31 of the following calendar year.
2.02 COMMENCEMENT. As used herein, "Commencement Date" means the
earlier to occur of: (a) June 7, 2000, or if later, the date the Premises
(including the Tenant Improvements described on Exhibit "C") are Substantially
Completed (as hereinafter defined), or would have been Substantially Completed
but for Tenant Delays (as defined in Exhibit "C"), and Landlord has notified
Tenant of such completion, or (b) the date Tenant begins the occupancy of all or
any part of the Premises in a reasonably normal manner for the conduct of
Tenant's business. The parties anticipate the Premises will be Substantially
Complete on or about June 7, 2000. "Substantial Completion" (or "Substantially
Complete" or "Substantially Completed") shall mean that Landlord has received a
temporary or permanent certificate of occupancy from the City of Austin
permitting Tenant's occupancy of the Premises, that Tenant's architect has
approved the measurement of the Premises as taken my Landlord's architect, and
that the Premises (and parking and other improvements in the Project reasonably
necessary to Tenant's use and enjoyment of the Premises) are sufficiently
complete to allow Tenant's use and occupancy of the Premises, except for any
work upon which Landlord and Tenant shall have agreed to in writing ("Punch List
Items"), the performance of which shall not, after Tenant commences occupancy of
the Premises, significantly interrupt or interfere with Tenant's use thereof.
Landlord agrees to complete any Punch List Items within thirty (30) days after
the Commencement Date. Within ten (10) days after the Commencement Date Tenant
and Landlord shall execute a declaration (in the form of Exhibit "D" hereto)
specifying, among other things, the actual date on which the Commencement Date
occurred.
Landlord hereby consents to Tenant having limited access to the
Premises three (3) weeks prior to the Commencement Date (the "Early Access
Period") to install its equipment and furnishings preparatory to its occupancy
of the Premises, subject however to City of Austin temporary certificate of
occupancy requirements and City of Austin Fire Department and Building
Inspection Department life safety issues ("COA Issues"), and provided Tenant has
delivered to Landlord evidence of all insurance required to be carried by Tenant
under this Lease. Tenant's early access to the Premises is governed by Paragraph
10 of the Exhibit "C" hereto. Landlord and Tenant agree to mutually and
reasonably cooperate with each other during the Early Access Period. Tenant
acknowledges and agrees that during the Early Access Period, Landlord may still
be in process of completing the Tenant Improvements, including, without
limitation, laying carpet. During the Early Access Period, Tenant will use
reasonable efforts to accommodate Landlord's completion of the Tenant
Improvements. Likewise, Landlord
2
<PAGE> 4
acknowledges and agrees that during the Early Access Period, Tenant will be
installing, subject to COA Issues, wiring, equipment and furniture (including
wall and furniture systems) and Landlord will use reasonable efforts to
accommodate Tenant's pre-occupancy installations during the Early Access Period.
Landlord acknowledges that Tenant is not required to pay rent during the Early
Access Period.
2.03 RENEWAL OPTION. Landlord hereby gives and grants to Tenant two (2)
options to renew this Lease for respective periods of five (5) years each, on
the terms and conditions set forth in Exhibit "E". The first renewal term shall
commence on the expiration of the initial Term, and the second renewal term
shall commence on the expiration of the Term as extended by the first renewal
option.
2.04 RIGHT OF FIRST REFUSAL. Landlord hereby grants Tenant a right of
first refusal with respect to all remaining space on the third floor of the
Building as set forth in "Exhibit "F".
2.05 EXPANSION OPTION. Landlord hereby gives and grants to Tenant an
expansion option ("Expansion Option") on the terms and conditions set forth in
Exhibit "G".
ARTICLE 3
3.01 BASE RENT. Tenant, in consideration for this Lease, agrees to pay
to Landlord a base rental ("Base Rent") for each square foot of rentable area
agreed to in writing by Landlord and Tenant to be within the Premises, for each
calendar year during this Lease as follows:
Lease Year 1 - $18.50 per rentable square foot
Lease Year 2 - $19.00 per rentable square foot
Lease Year 3 - $19.50 per rentable square foot
Lease Year 4 - $20.00 per rentable square foot
Lease Year 5 - $20.50 per rentable square foot
The Base Rent shall be payable in equal monthly installments, the amount of
which shall be determined by dividing the total rent for each respective Lease
Year by twelve (12), and payable at Landlord's address herein provided in legal
tender of the United States of America, without notice, demand, counterclaim,
set-off or abatement (except as expressly provided in this Lease), in advance on
the first day of each calendar month throughout the Term, except that the first
such monthly installment is due upon the date of execution of this Lease by
Tenant. Notwithstanding the foregoing, if the Commencement Date is a date other
than the first day of a calendar month, then the rent for the Base Rent for the
first month of this Lease shall be a sum equal to the Base Rent specified for
the first full calendar month as herein provided, times a fraction, the
numerator of which equals the number of days from the Commencement Date to the
end of the
3
<PAGE> 5
calendar month during which the Commencement Date falls and the denominator of
which equals the number of days in the same calendar month.
3.02 TENANT'S PERCENTAGE SHARE OF OPERATING EXPENSES. In addition to
the Base Rent, Tenant, as additional consideration for this Lease, agrees to pay
to Landlord Tenant's Percentage Share of Operating Expenses (defined in Section
3.04 hereof) annualized for each calendar year during the Term. On or before the
Commencement Date and thereafter on or before the first day of each calendar
year of the Term, Landlord shall provide to Tenant the Estimated Operating
Expense (defined in Section 3.03 hereof) for the upcoming calendar year. Tenant
shall pay in advance on the first day of each calendar month during the Term,
installments equal to one-twelfth (1/12) of Tenant's Percentage Share of
Estimated Operating Expenses annualized for each calendar year. Within one
hundred twenty (120) days after the end of each calendar year during the Term,
Landlord shall furnish to Tenant a statement certified by Landlord of the Actual
Operating Expenses for the immediately preceding calendar year. If Tenant's
Percentage Share of Estimated Operating Expenses paid to Landlord during the
previous calendar year exceeds Tenant's Percentage Share of Actual Operating
Expenses for such year, then Landlord shall refund the difference to Tenant at
the time Landlord furnishes the statement of the Actual Operating Expense.
Otherwise, within fifteen (15) days after Landlord furnishes such statement to
Tenant, Tenant shall make a lump sum payment to Landlord equal to the positive
difference between Tenant's Percentage Share of the Actual Operating Expense for
the preceding calendar year over Tenant's Percentage Share of the Estimated
Operating Expense paid by Tenant for the preceding calendar year. As used in
this Lease the term "Rent" shall refer collectively to the Base Rent and
Tenant's Percentage Share of Estimated Operating Expenses. If the Commencement
Date is on a day other than the first day of the month, then Tenant shall be
required to pay only a pro-rata portion of the installment of Rent due for such
month.
Landlord will cause adequate books and records to be maintained to
permit Tenant to verify computations of Operating Expenses and other amounts
relevant to Tenants obligations under this Lease; provided, Landlord shall not
be required to maintain any books and records concerning any payment due
hereunder for more than 2 years after such payment is due. Further, Landlord
shall permit Tenant or Tenant's representative to audit such books and records
during normal business hours and shall assist in any way reasonably required for
such audits. Landlord shall also furnish explanations in reasonable detail if
requested by Tenant of any computation made under this Lease. All determinations
required or permitted of Landlord concerning payments for Operating Expenses and
other charges due hereunder shall be subject to verification by Tenant. If any
such determinations are found to be incorrect, an adjustment will be promptly
made between Landlord and Tenant to correct any underpayments or overpayments
resulting from such incorrect determinations. If an audit of Operating Expenses
for any calendar year reveals that Tenant was overcharged under this Section
3.02 by more than ten percent (10%) for that year, Landlord will reimburse
Tenant for the cost of such audit. However, notwithstanding that a disagreement
may arise between Tenant and Landlord about any
4
<PAGE> 6
determination required or permitted of Landlord concerning Rent and other
charges due hereunder, Tenant shall continue to pay Rent and other charges as
herein provided pending resolution of such determination.
3.03 TENANT'S PERCENTAGE SHARE. For purposes of this Lease, the term
"Tenant's Percentage Share" shall mean a percentage which is equal to the number
of rentable square feet contained in the Premises divided by the total number of
rentable square feet contained in the Building, as both such measurements have
been agreed to in writing by Landlord and Tenant.
3.04 OPERATING EXPENSES. "Operating Expenses" shall mean and include
all reasonable amounts, expenses, and costs of whatever nature paid by or on
behalf of Landlord for the management (excluding wages and benefits for
employees above the level of building manager), operation, repair, maintenance
and security of the Building and Landlord's personal property which may be
reasonably utilized in connection therewith. Without limiting the foregoing,
Operating Expenses will include a share (equal to the rentable square footage of
the Building divided by the total rentable square footage of all buildings in
the Project from time to time) of any costs and expenses incurred by Landlord
which are for the benefit of the Project generally, rather than any particular
Building. If, however, greater security is required for an occupant of a
particular building in the Project, or if an occupant requires repairs or
maintenance to such occupant's specific tenant improvements (excluding however,
repairs or maintenance to the Base Building which are included in Operating
Expenses), the cost of such greater security or repairs or maintenance to such
occupant's specific tenant improvements will not be treated as a cost for the
benefit of the Project generally under this provision, but will be allocated
specifically to such occupant. Notwithstanding the foregoing, controllable
Operating Expenses (which include landscaping, janitorial, pest control and
waste removal) shall not increase more than five percent (5%) per annum.
Notwithstanding anything to the contrary herein, Operating Expenses
shall not include, and Tenant shall not be required to pay or reimburse Landlord
for any part of the following: property management fees in excess of five
percent (5%) of Base Rent; the cost of capital improvements or depreciation
(except as expressly permitted by the next sentence); interest and principal
payments on mortgages, ground lease rentals and other non-operating debts of
Landlord; specific costs for special items or services billed to specific
tenants (or that would be billed to another tenant if its lease required
payments in addition to base rent on substantially the same terms and conditions
as this Lease requires of Tenant); costs of correcting construction or design
defects or violations of law existing as of the Commencement Date; legal fees or
other costs incurred because of any lease negotiation or dispute between
Landlord and other tenants or prospective tenants; income, excess profits,
franchise, transfer, estate or inheritance taxes; costs paid by insurance,
recovery upon construction warranties or other sources (excluding reimbursement
by tenants for Operating Expenses); leasing commissions, attorneys' fees,
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advertising expenses, and other expenses incurred in connection with leasing,
selling or conveying any interest in the Project or the land associated
therewith; costs of repairs or other work occasioned by fire, wind storm or
other casualty or necessitated by condemnation. Operating Expenses shall,
however, include:
(A) The annual cost of all capital improvements made subsequent to
the final completion of the Building (including the Premises)
which, although capital in nature, can reduce the normal
operating costs of the Building, as amortized in accordance
with generally accepted accounting principles, consistently
applied; provided that such amortization shall not be more in
any calendar year than Landlord's reasonable estimate of the
resulting savings in other Operating Expenses.
(B) The annual cost of all capital improvements made in order to
comply with any statutes, rules, regulations, or directives
enacted or promulgated by any governmental authority after the
effective date of this Lease, as amortized in accordance with
generally accepted accounting principles, consistently
applied.
If at any time during the Term the present method of ad valorem
taxation or assessment against the Land, Building or Project shall be so changed
that the whole or any part of the real estate taxes or assessments now levied,
assessed or imposed on the Land, Building or Project shall be changed and as a
substitute therefor, or in lieu of an addition thereto, taxes, assessments or
charges shall be levied, assessed or imposed wholly or partially as a capital
levy or otherwise on the rents received from the Project or the Rent due under
this Lease or any part thereof, then such substitute or additional taxes,
assessments or charges, to the extent so levied, assessed or imposed, shall be
deemed to be included within the real estate taxes to the extent that such
substitute or additional tax actually substitutes for and replaces prior real
estate taxes or is imposed in lieu of or in addition to existing real estate
taxes.
Operating Expenses shall be determined on an accrual basis in
accordance with generally accepted accounting principles, consistently applied.
The "Estimated Operating Expense" shall equal the Landlord's reasonable estimate
of Operating Expenses for the applicable calendar year. Landlord's statement of
the Estimated Operating Expense shall control for the year specified in such
statement and for each succeeding year during the Term until Landlord provides a
new statement of the Estimated Operating Expense. Landlord's Estimated Operating
Expense for the calendar year 2000 is $8.00 per rentable square foot, prorated
for the number of months in 2000 the Building is completed. The "Actual
Operating Expense" shall equal the operating expenses actually incurred for the
applicable calendar year. Notwithstanding the foregoing, in no event shall
Tenant be required to pay an amount in excess of the total of Actual Operating
Expenses less amounts payable by other tenants in the Building.
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Operating Expenses shall be reduced by any insurance proceeds or
eminent domain awards to the extent the same may be received by Landlord.
Landlord may deduct from such proceeds or awards, the reasonable expenses
incurred in obtaining such proceeds or awards (including without limitation
legal and other professional fees) provided that such expenses were not
previously billed as Estimated Operating Expenses or Actual Operating Expenses.
3.05 TENANT IMPROVEMENTS. Prior to the applicable Commencement Date,
Landlord shall, on the terms and conditions set forth in Exhibit "C" construct
the improvements desired by Tenant to complete the Premises for Tenant's
occupancy (the "Tenant Improvements").
ARTICLE 4
4.01 USE. Tenant shall use and occupy the Premises only for office
purposes, for software development and training, and for no other purposes.
Tenant shall not do or permit anything to be done in the Premises or authorize
anything to be done in other parts of the Project, nor shall Tenant bring or
keep anything in the Project, that will in any way increase the existing rate of
or affect any fire or other insurance upon the Project or any of its contents,
or cause cancellation of any insurance policy covering the Project or any part
thereof or any of its contents. Tenant shall not do or permit anything to be
done in the Premises or authorize anything to be done in other parts of the
Project that will unreasonably or improperly obstruct or interfere with the
rights of other tenants or occupants of the Project or injure or annoy them or
tend to lower the first class character of the building or create unreasonable
elevator loads or otherwise interfere with standard Building operations. Tenant
shall not do or permit anything to be done in the Premises or authorize anything
to be done in other parts of the Project that would constitute a nuisance.
Tenant shall not commit or suffer to be committed any waste in or upon the
Premises. Tenant shall not use the Premises nor authorize or permit anything to
be done in other parts of the Project that will in any way conflict with any
private restrictive covenant, law, statute, ordinance or any rule or regulation
of Landlord or any governmental or quasi-governmental authority now in force or
that may hereafter be enacted or promulgated.
ARTICLE 5
5.01 LANDLORD'S SERVICES. Provided Tenant is not in default hereunder,
Landlord shall, at Landlord's expense, except as provided to the contrary in
this Lease, furnish to Tenant the following services:
(a) Subject to curtailment as required by governmental laws, rules
or regulations, air conditioning and central heat, in season,
at temperatures between 67 and 78 degrees F., during all
Normal Building Hours. ("Normal Building Hours" will be 7:00
a.m. through 6:00 p.m. on weekdays and 8:00 a.m. through 12:00
p.m. on
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Saturdays, exclusive of Normal Business Holidays. "Normal
Business Holidays" for purposes of this Lease shall be the
days reasonably designated as such by Landlord from time to
time (but not more than nine days in any calendar year), which
days may include, without limitation, New Year's Day, Martin
Luther King Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, the Friday following Thanksgiving
Day and Christmas Day. If in the case of any holiday described
herein a different day shall be observed than the respective
day described, then the day which constitutes the day observed
by national banks in Austin, Texas, on account of such holiday
shall constitute the holiday under this Lease.)
(b) Janitorial services in the Premises and public portions of the
Building for all days except Saturdays, Sundays, and Normal
Business Holidays.
(c) Water at those points of supply provided for drinking, toilet,
and lavatory purposes.
(d) Normal and customary routine maintenance, and any repairs
required from time to time, for all public, structural, and
exterior portions of the Project and for the HVAC and other
Building systems.
(e) Electric lighting service for all public portions of the
Building, Parking Garage I, the surface parking areas serving
the Building, and the Project.
(f) Reasonably adequate, non-exclusive automatic passenger
elevator service at all times for access to and egress from
the Premises. There are no separate freight elevators in the
Building. Tenant shall have the right to use the passenger
elevators, in common with other tenants, for freight uses
during reasonable business hours as prescribed by Landlord,
exclusive of Saturdays, Sundays, and Normal Business Holidays
unless otherwise approved by Landlord, as long as Tenant
appropriately pads the elevator walls to insure that no damage
is caused to elevators by virtue of Tenant's use for freight
purposes. If Tenant desires to use any elevator for freight
purposes for any extended period (more than one hour), Tenant
must get the prior approval of Landlord.
(g) Electric energy that Tenant shall require for normal office
equipment such as typewriters, dictation machines,
calculators, personal computers, telephones, facsimile
machines, copying machines and other machines of a similar
electrical consumption, and Building Standard (defined in
Exhibit "C" attached hereto) lighting in the Premises. Without
Landlord's prior written consent, Tenant shall not be entitled
to employ lighting on the Premises that consumes electrical
current
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in excess of Building Standard lighting nor utilize space
heaters nor utilize any office equipment that consumes more
than 0.5 kilowatts per hour at rated capacity or requires a
voltage of other than 120 volts single phase or an electric
capacity greater than any limitations on capacity contemplated
in the Drawings approved by Landlord and Tenant as described
in Exhibit "C". The Building will have normal and customary
electrical service typical to supply a first class office
building in Austin, Texas, for use by all of the tenants of
the Building.
(h) Building security to encourage compliance with the Rules and
Regulations (defined in Section 15.09 hereof) and to limit
after-hour access to the Building; provided, however, Landlord
shall have no responsibility to prevent, and shall not be
liable to Tenant for, and shall be indemnified by Tenant
against, liability or loss to Tenant, its agents, employees
and visitors arising out of losses due to theft, burglary, or
damage or injury to persons or property caused by persons
having or gaining access to the Building or the Premises,
whether or not caused by Landlord's negligence, and Tenant
hereby releases Landlord from all liability relating thereto.
Tenant shall have 24-hour access to the Building and the
Premises by a card access system
(i) Window washing services for the outside portions of the
Building up to two (2) times per calendar year, as needed.
5.02 ADDITIONAL SERVICE COST. Tenant shall pay Landlord, upon
demand, such additional amounts as are necessary to recover additional costs
incurred by Landlord in performing or providing janitorial, maintenance,
security, or other services or requirements of Tenant (and in paying additional
taxes) as to any non-Building Standard installations in the Premises.
Tenant shall pay Landlord, upon monthly demand by invoice, an amount
equal to one hundred ten percent (110%) of Landlord's actual or reasonably
estimated cost for providing off-hour and nonstandard air conditioning, heating
and electricity service to the Premises. Such after hours service will be
available by card access or key pad.
5.03 SERVICE INTERRUPTION. To the extent any of the services described
above require electricity, gas, water or other services supplied by public
utilities, Landlord's covenants hereunder shall impose on Landlord only the
obligation to use its good faith efforts to cause the applicable public
utilities to furnish the same. Any failure or defect in the services described
above shall not be construed as an eviction of Tenant nor entitle Tenant to any
reduction, abatement, offset, or refund of Rent or to any damages from Landlord.
Landlord shall not be in breach or default under this Lease, provided Landlord
uses reasonable diligence during normal business hours to restore any such
failure or defect after Landlord receives written notice thereof.
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ARTICLE 6
6.01 ALTERATIONS. Tenant shall not make or allow to be made any
alterations, installations, additions or improvements in or to the Premises, or
place safes, vaults or other heavy furniture or equipment within the Premises,
without Landlord's prior written consent. Such consent by Landlord will not be
unreasonably withheld or delayed for interior, nonstructural alterations to the
Premises that do not require modifications to the Building HVAC or other
systems. All alterations, installations, additions or improvements, other than
movable furniture, wall systems, equipment, and trade fixtures, made by Tenant
to the Premises shall remain upon and be surrendered with the Premises and
become the property of Landlord at the expiration or termination of this Lease
or the termination of Tenant's right to possession of the Premises; provided,
however, that Landlord may require Tenant, at Tenant's cost, to remove any or
all of such items made by Tenant that are not Building Standard upon the
expiration or termination of this Lease or the termination of Tenant's right to
possession of the Premises. Tenant, at its sole cost and prior to the expiration
or termination of this Lease, shall remove all of Tenant's property from the
Premises and make, or reimburse Landlord for the cost of all repairs to the
Premises and/or Project for damage resulting from such removal. Tenant is not
required, however, to remove any Initial Tenant Improvements or any subsequent
alterations approved by Landlord. All work shall be completed promptly and in a
good and workmanlike manner and shall be performed in such a manner that no
mechanic's, materialman's or other similar liens shall attach to Tenant's
leasehold estate, and in no event shall Tenant permit, or be authorized to
permit, any such liens or other claims to be asserted against Landlord or
Landlord's rights, estate and interests with respect to the Project or this
Lease. If the cost of any alterations, installations, additions or improvements
to the Premises exceeds $5,000.00, Landlord may require, at Tenant's sole cost
and expense, a lien and completion bond in an amount equal to the estimated cost
of such improvements, additions or alterations Tenant proposes to make in the
Premises.
6.02 TENANT REPAIRS. By taking possession of the Premises, Tenant shall
be deemed to have accepted the Premises as being in good, sanitary order,
condition and repair, subject to Punch List Items and latent defects. Tenant
shall, at Tenant's sole cost and expense, keep the Premises in good condition
and repair, excepting damage thereto by fire or other casualty or resulting from
causes beyond the reasonable control of Tenant and further excepting ordinary
wear and tear. Other than as herein provided to the contrary with respect to
damages resulting from fire or other insurable casualties, any injury or damage
to the Premises or Project, or the appurtenances or fixtures thereof, caused by
or resulting from the negligent acts or omissions of or the intentional
misconduct of Tenant or Tenant's employees, servants, agents, invitees,
assignees, or subtenants shall be repaired or replaced by Tenant, or at
Landlord's option by Landlord, at the expense of Tenant. If Tenant fails to
maintain the Premises or fails to repair or replace any damage to the Premises
or Project resulting from the negligence or intentional act of Tenant, its
employees, servants, agents or invitees, or for which Tenant is otherwise
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responsible by the terms of this Lease, Landlord may, but shall not be obligated
to, cause such maintenance, repair or replacement to be done, as Landlord deems
necessary, and Tenant shall immediately pay to Landlord all costs related
thereto plus a charge for overhead of ten percent (10%) of such costs.
6.03 LANDLORD REPAIRS. Except as stipulated herein, Landlord shall not
be required to make any improvements to or repairs of any kind or character to
the Premises during the Term. However, notwithstanding any provisions of this
Lease to the contrary, all repairs, alterations or additions to the Base
Building or its systems (as opposed to those involving only Tenant's leasehold
improvements), and all repairs, alterations or additions to Tenant's
non-Building Standard leasehold improvements which affect the Building's
structural components or major mechanical, electrical or plumbing systems in the
Building, shall be made only by Landlord (or its contractor) and at commercially
competitive rates. Further, to the extent that other provisions of this Lease
would make any such repairs, alterations or additions the responsibility of
Tenant, Tenant shall pay the cost thereof (including an additional charge of ten
percent (10%) of actual direct costs for Landlord's overhead).
ARTICLE 7
7.01 LANDLORD INSURANCE. Landlord shall insure the Project and Building
against fire and other casualty and shall maintain comprehensive general
liability and other insurance in such amounts as may be required by Landlord's
mortgagee, or in such other greater commercially reasonable amounts as Landlord,
in its sole discretion, may deem appropriate. The cost of such insurance,
including any reasonable deductible paid thereunder by Landlord, shall be an
"Operating Expense" as defined in Section 3.03 hereof. Such insurance shall be
for the sole benefit of Landlord and, if required, Landlord's mortgagee. If the
annual premiums to be paid by Landlord exceed the standard rates because of
Tenant's operations within or contents of the Premises or because improvements
to the Premises are above Building Standard, Tenant shall promptly pay the
excess amount of the premium upon request by Landlord (and if necessary,
Landlord may allocate the insurance costs of the Building to give effect to this
sentence).
7.02 TENANT INSURANCE. Tenant shall, at Tenant's expense, fully insure
its property located in the Premises against fire and other casualty and shall
maintain comprehensive general liability insurance insuring Landlord and Tenant
against any liability arising out of ownership, use, occupancy or maintenance of
the Premises and all areas appurtenant thereto, including contractual liability
insurance (with respect to Section 7.04 hereof), with insurance companies
approved by Landlord and with limits of liability of at least $2,000,000 in each
occurrence for Bodily Injury and Property Damage combined and $2,000,000 general
aggregate for Bodily Injury and Property Damage combined with the endorsement of
comprehensive general liability CG-2504. Tenant shall cause Landlord to be named
as an additional insured under such general liability policies and shall, not
less than twenty (20) days prior to (a) the
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Commencement Date, and (b) the expiration of old policies, furnish Landlord with
certificates of insurance reasonably satisfactory to Landlord. The limit of such
insurance shall not, however, limit the liability of Tenant hereunder. Tenant
may carry such insurance under a blanket policy, provided such insurance has a
Landlord's protective liability endorsement attached thereto. If Tenant fails to
procure and maintain said insurance, Landlord may, but shall not be required to,
procure and maintain same, but at the expense of Tenant. No policy shall be
cancelable or subject to reduction of coverage except after thirty (30) days
prior written notice to Landlord.
7.03 WAIVER OF SUBROGATION. WHENEVER (A) ANY LOSS, COST, DAMAGE OR
EXPENSE RESULTING FROM FIRE, EXPLOSION OR ANY OTHER CASUALTY OR OCCURRENCE IS
INCURRED BY EITHER OF THE PARTIES TO THIS LEASE IN CONNECTION WITH THE PREMISES
OR THE PROJECT, AND (B) SUCH PARTY IS THEN COVERED (OR IS REQUIRED UNDER THIS
LEASE TO BE COVERED) IN WHOLE OR IN PART BY INSURANCE WITH RESPECT TO SUCH LOSS,
COST, DAMAGE OR EXPENSE, THEN NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN
CONTAINED, THE PARTY SO INSURED (OR REQUIRED TO BE INSURED), FOR ITSELF AND ANY
INSURER OR ANYONE ELSE THAT MIGHT OTHERWISE CLAIM THROUGH IT BY WAY OF
SUBROGATION, HEREBY RELEASES THE OTHER PARTY (EVEN IF THE OTHER PARTY IS
NEGLIGENT) FROM ANY LIABILITY THE OTHER PARTY WOULD OTHERWISE HAVE ON ACCOUNT OF
SUCH LOSS, COST, DAMAGE, AND WAIVES ANY RIGHT OF SUBROGATION WHICH MIGHT
OTHERWISE EXIST ON ACCOUNT THEREOF.
7.04 TENANT'S INDEMNITY. Tenant hereby indemnifies, defends and holds
harmless Landlord and its respective officers, directors, employees and agents,
and Landlord's successors and assigns, and their officers, directors, employees
and agents (collectively, the "Landlord Indemnified Parties") against any and
all claims, demands, losses, liabilities, costs and expenses (including
attorneys' fees at trial and on any appeal or petition for review) incurred by
the Landlord Indemnified Parties arising from Tenant's use or occupancy of the
Premises for the conduct of its business or from any activity, work or other
thing done, permitted or suffered by Tenant on or about the Building or the
Project, and shall further indemnify defend and hold harmless the Landlord
Indemnified Parties from and against any and all claims arising from any breach
or default in the performance of any obligation on Tenant's part to be performed
under the terms of this Lease, or arising from any act or omission of, or due to
the negligence or intentional misconduct of Tenant, or any officer, agent,
employee, guest or invitee of Tenant, and from and against all costs, attorneys'
fees, expenses and liabilities incurred in or related to any such claim or any
action or proceeding brought thereon. Tenant, as a material part of the
consideration to Landlord, hereby assumes all risk of damage to property or
injury to persons including death in, upon or about the Premises, from any
cause, including without limitation, Landlord's negligence, but except for such
damage or injury caused solely by Landlord's gross negligence or willful
misconduct, and Tenant hereby waives all claims in respect thereof against
Landlord.
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7.05 LANDLORD'S INDEMNITY. Landlord hereby indemnifies, defends and
holds harmless Tenant and its respective officers, directors, employees and
agents, and Tenant's successors and assigns, and their officers, directors,
employees and agents (collectively, the "Tenant Indemnified Parties") against
any and all claims, demands, losses, liabilities, costs and expenses (including
attorneys' fees at trial and on any appeal or petition for review) incurred by
the Tenant Indemnified Parties arising from any accident, injury or damages
whatsoever caused to any person or the property of any person in or about the
common areas or public areas of the Building or the Project (specifically
excluding the Premises) to the extent attributable to the gross negligence or
willful misconduct of Landlord or its agents and employees.
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ARTICLE 8
8.01 CASUALTY. Tenant shall promptly give Landlord written notice of
any fire or other casualty occurring within the Premises. If the Premises or
other parts of the Building or Project reasonably required for Tenant's use and
quiet enjoyment of the Premises are damaged by fire or other casualty then,
subject to the following provisions of this Article, Landlord shall promptly
repair the damage. If, however, the damage (a) is not covered by insurance
carried by Landlord hereunder, (b) is covered by insurance carried by Landlord
hereunder, but Landlord's mortgagee requires that proceeds of such insurance be
used to retire the mortgage debt, (c) is to such an extent that the cost of
repairs will be greater than 10% of the then full replacement cost of the
Building, or (d) occurs during the last 12 months of the then effective Term of
this Lease, then Landlord shall have the option (i) to repair the damaged
Premises and any other damaged parts of the Building or Project reasonably
necessary to Tenant's use and quiet enjoyment of the Premises to substantially
the same condition as immediately prior to such fire or other casualty, or (ii)
to terminate this Lease by so notifying Tenant within sixty (60) days after the
date of such damage, such termination to be effective as of the date of the fire
or other casualty causing the damage. Notwithstanding the foregoing, if the
Premises are so destroyed that they cannot or will not be repaired or rebuilt
within one hundred eighty (180) days of the casualty date, Tenant shall have the
option to terminate this Lease by so notifying Landlord within thirty (30) days
after Tenant's discovery of such untentability, such termination to be effective
as of the date of fire or other casualty causing the damage. The Rent required
to be paid hereunder shall be abated in proportion to the portion of the
Premises, if any, which is rendered untenantable by fire or other casualty
hereunder from the date of the occurrence of such damage or casualty until the
repairs specified in clause (i) of the preceding sentence are completed. Other
than such rental abatement, no damages, compensation or claims shall be payable
by Landlord for loss of the use of the whole or any part of the Premises,
Tenant's personal property, or any inconvenience, loss of business, or annoyance
arising from any such repair and reconstruction. Landlord shall not be required
to repair or replace any furniture, furnishings, or other personal property that
Tenant may be entitled to remove from the Premises or any alterations to the
Premises constructed and installed by or for Tenant pursuant to Section 6.01
hereof or any installations in excess of Building Standard.
ARTICLE 9
9.01 CONDEMNATION. If a "substantial portion of the Premises" (as
hereinafter defined) should be taken for any public or quasi-public use, by
right of eminent domain or otherwise, or should be sold in lieu of condemnation,
then either party hereof shall have the right, at its option, to terminate this
Lease as of the date when physical possession of the Premises is taken by the
condemning authority. If less than a substantial portion of the Premises is so
taken or sold , the Rent payable hereunder shall be abated in proportion to the
portion of the Premises which is rendered untenantable by such condemnation, and
Landlord shall, to the
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extent Landlord deems feasible, subject to the following provisions of this
Article, promptly restore the Premises and the appurtenances thereto to
substantially its former condition. As used herein, a "substantial portion of
the Premises" will mean (1) more than 20% of the rentable are of the Premises
itself, (2) any parking areas or other appurtenances to the Premises in the
Project, without which Tenant cannot continue to operate its business in a
reasonably normal manner, (3) any part of the Project, after the taking of which
(or sale in lieu thereof), Landlord is unable or unwilling to promptly restore
the remainder of the Project for any reason (including any shortage of
condemnation or sales proceeds available to Landlord or any refusal of
Landlord's mortgagee, ground lessor or other secured party, to give consents
necessary for such restoration). If any substantial part of the Project other
than the Premises may be so taken or sold, Landlord shall have the right at its
option to terminate this Lease as of the date when physical possession of such
part of the Project is taken by the condemning authority. All amounts awarded
upon taking of any part or all of the Project or the Premises shall belong to
Landlord and Tenant shall not be entitled to, and expressly assigns all claims,
rights and interests to, any such compensation to Landlord. If available, Tenant
shall have the right to pursue separately against the condemning authority any
award available separately to Tenant for Tenant's moving and relocation
expenses, rent differentials, brokerage and attorneys' fees, unamortized
improvements (including furnishings) made and paid solely by Tenant, if any, the
value, if any, of Tenant's options of renewal, first refusal, and expansion as
granted pursuant to Sections 2.03, 2.04, and 2.05, respectively, and other
expenses or costs of Tenant reasonably related to such taking or condemnation;
provided, however, in no event shall any such award to Tenant reduce or limit
the condemnation award payable to Landlord by the condemning authority, and to
the extent any award to Tenant would in any manner reduce or limit the award
otherwise payable to Landlord, such award shall be payable to Landlord.
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ARTICLE 10
10.01 ENTRY. Landlord, its agents, employees and representatives, shall
have the right to enter the Premises at any time during Normal Business Hours
after reasonable notice to Tenant under the circumstances (which notice may be
oral and not in compliance with Section 15.08 hereof, but no notice shall be
required in the case of emergency) to show the Premises to prospective lenders
or prospective purchasers or, within the last six (6) months of the Term, to
prospective tenants unless Tenant has renewed or extended the Term. Provided any
such entry is done in a manner that does not unnecessarily interfere with
Tenant's use or enjoyment of the Premises, Tenant hereby waives any claim for
damages or for any injury or inconvenience to or interference with Tenant's
business, any loss of occupancy or quiet enjoyment of the Premises, and any
other loss occasioned thereby, except where such damages or injury are caused by
Landlord's gross negligence or willful misconduct. For each of the aforesaid
purposes, Landlord shall at all times have and retain a key with which to unlock
all of the doors in, upon and about the Premises, excluding Tenant's vaults,
safes and files. Landlord shall have the right to use any and all means which
Landlord may deem proper to open the doors in, upon and about the Premises in an
emergency in order to obtain entry to the Premises without liability to Tenant,
except for any failure to exercise due care for Tenant's property. Tenant shall
have 24-hour access to the Building and the Premises by card access system
ARTICLE 11
11.01 SUBORDINATION. Subject to the nondisturbance provisions in the
next Section, this Lease is and shall be subject and subordinate to any and all
ground or similar leases affecting the Project, and to all mortgages, deeds of
trust, and security agreements that may now or hereafter encumber or affect the
Project or any interest of Landlord therein and/or the contents of the Building,
and to any advances made on the security thereof and to any and all increases,
renewals, modifications, consolidations, replacements and extensions of any such
leases, mortgages, deeds of trust and/or security agreements. This clause shall
be self-operative and no further instrument of subordination need be required by
any owner or holder of such ground lease, mortgage, deed of trust or security
agreement. Tenant agrees to execute and return any estoppel certificate, consent
or agreement reasonably requested by any such lessor, mortgagee, trustee or
secured party in connection with this Section within ten (10) days after
Tenant's receipt of same, Tenant's receipt being governed by Section 15.08 of
this Lease. Any breach of the preceding sentence by Tenant shall constitute a
"Default" hereunder. If any mortgagee of Landlord secured by a lien on the
Project, any lessor to Landlord under a ground lease of the Project, or any
secured party under a security agreement encumbering the interest of Landlord
shall request it and provide Tenant with an address for notices, Tenant shall
provide to such mortgagee, lessor or secured party written notice of any default
or breach by Landlord at least thirty (30) days prior to the exercise by Tenant
of any rights and/or remedies of Tenant hereunder
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arising out of such default or breach. Provided Tenant is not in default
hereunder, within ten (10) days following receipt of a written request therefor,
Landlord agrees to execute and return any estoppel certificate, consent or
agreement reasonably requested by Tenant or any mortgagee, trustee, or secured
party reasonably interested in the Premises.
11.02 NONDISTURBANCE AND ATTORNMENT. If any ground or similar such
lease, mortgage, deed of trust or security agreement is enforced by the ground
lessor, the mortgagee, the trustee, or the secured party, Tenant shall, upon
request, attorn to the lessor under such lease or the mortgagee or purchaser at
such foreclosure sale, or any person or party succeeding to the interest of
Landlord as a result of such enforcement, as the case may be, and execute
instrument(s) confirming such attornment; provided, however, that regardless of
whether this Lease was approved and accepted in writing by such lessor,
mortgagee, trustee or secured party, Tenant's attornment and the rights of the
lessor, mortgagee, trustee or secured party (or anyone else claiming through
them) shall be conditioned upon the agreement by such successor to Landlord's
interest not to disturb Tenant's possession or other rights hereunder during the
Term so long as Tenant performs its obligations under this Lease. In the event
of such enforcement and upon Tenant's attornment as aforesaid, Tenant will
automatically become the tenant of the successor to Landlord's interest without
change in the terms or provisions of this Lease; provided, however, that such
successor to Landlord's interest shall not be (a) bound by any payment of Rent
for more than one month in advance (except prepayments for security deposits, if
any), or (b) bound by any amendments or modifications of this Lease made without
the prior written consent of the applicable mortgagee or secured party after
Tenant has been notified of its name and address, or (c) subject to liability or
offset for any damages Tenant may claim because of a default by Landlord
hereunder prior to the date Landlord's interest in the Building is conveyed to
such successor of Landlord.
11.03 QUIET ENJOYMENT. Tenant, on paying the Rent and keeping and
performing the conditions and covenants herein contained, shall and may
peaceably and quietly enjoy the Premises for the Term, subject to Sections 11.01
and 11.02, all applicable laws and other governmental and legal requirements and
the provisions of this Lease. It is understood and agreed that this covenant and
any and all other covenants of Landlord contained in this Lease shall be subject
to the penultimate sentence of Section 15.07.
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ARTICLE 12
12.01 ASSIGNMENT AND SUBLETTING. Tenant shall have the right, without
Landlord's consent, to assign this Lease in its entirety, or to sublet all or
any part of the Premises to (a) a subsidiary or affiliate of Tenant; (b) any
partnership succeeding to the business and assets of Tenant; or (c) a successor
entity created by merger, reorganization, recapitalization, or acquisition. For
purposes of this Section, the word "affiliate" shall mean an entity, directly or
indirectly, through one or more intermediaries, controlled by Tenant or under
common control with Tenant, or by Tenant's parent company. Except as set forth
above, Tenant shall not, voluntarily, by operation of law, or otherwise, assign,
transfer, mortgage, pledge, or encumber this Lease or sublease the Leased
Premises or any part thereof, or suffer any person other than Tenant, its
employees, agents, servants and invitees to occupy or use the Leased Premises or
any portion thereof without the express prior written consent of Landlord which
consent shall not be unreasonably withheld; provided, however, any such assignee
or sublessee must be creditworthy, must use the Leased Premises for the specific
uses set forth in Article 4, must not be a type a type or class of tenant that
would reduce the value of the Project as a first class office building project,
and Landlord shall not be required to give its consent to a sublease or
assignment that would result in a breach by Landlord of any of its lease
obligations to other tenants. Any attempt to do any of the foregoing without
such written consent shall be null and void and of no effect, and shall further
constitute a default under this Lease. If Tenant so requests Landlord's consent,
said request shall be in writing specifying the identity of the proposed
transferee, the duration of said desired sublease or assignment, the date same
is to occur, the exact location of the space affected thereby and the proposed
rentals on a square foot basis chargeable thereunder, and shall be submitted to
Landlord at least fifteen (15) days in advance of the date on which Tenant
desires to make such assignment or sublease or allow such occupancy or use. Upon
such request Landlord may, in its reasonable discretion, (a) grant such consent
subject to Landlord's approval of the assignee, transferee, subtenant, or
mortgagee, or (b) deny such consent, which denial shall not be effective unless
Landlord provides Tenant with a written explanation of the reason(s). If
Landlord does not give such consent in writing within ten (10) days of the date
such consent is requested, then Landlord's consent shall be deemed to have been
granted. In no event may Tenant assign this Lease or sublease the Leased
Premises or any portion thereof to any party whose operations in the Project
would not be in keeping with, or would detract from, the operations of other
tenants in the Project.
In any situation in which Landlord consents to an assignment or
sublease hereunder, Tenant shall promptly deliver to Landlord a fully executed
copy of the final sublease agreement or assignment instrument and all ancillary
agreements relating thereto. No assignment shall be effective unless the
assignee has agreed within the assignment instrument to assume the obligations
of Tenant hereunder and to be personally bound by all of the covenants, terms
and conditions hereof on the part of Tenant to be performed or observed
hereunder.
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12.02 CONTINUED LIABILITY. Tenant shall, despite any permitted
assignment or sublease, remain directly and primarily liable for the performance
of all of the covenants, duties, and obligations of Tenant hereunder, and
Landlord shall be permitted to enforce the provisions of this Lease against
Tenant or any assignee or sublessee without demand upon or proceeding in any way
against any other person.
12.03 CONSENT. Consent by Landlord to a particular assignment or
sublease shall not be deemed a consent to any other or subsequent transaction.
If this Lease is assigned or if the Premises are subleased without the
permission of Landlord, then Landlord may nevertheless collect Rent from the
assignee or sublessee and apply the net amount collected to the Rent payable
hereunder, but no such transaction or collection of Rent or application thereof
by Landlord shall be deemed a waiver of any provision hereof or a release of
Tenant from the performance of the obligations of the Tenant hereunder.
12.04 PROCEEDS. All cash or other proceeds of any assignment or
sublease of Tenant's interest in this Lease and/or the Premises, whether
consented to by Landlord or not, in excess of the rentals called for hereunder,
shall be paid first to pay all reasonable out-of-pocket costs and expenses paid
by Tenant related to such sublease or assignment of the Premises, including
leasing commission and tenant improvements costs, and thereafter, fifty percent
(50%) of such excess rentals shall be paid to Landlord and fifty percent (50%)
shall be paid to Tenant, unless Tenant is in default hereunder, in which event
all excess rentals shall be paid to Landlord during the continuance of such
default. After the payment of all reasonable out-of-pocket costs and expenses
related to such sublease or assignment, Tenant hereby covenants and agrees to
pay to Landlord fifty percent (50%) of all rent and other consideration which it
receives which is in excess of the rent payable hereunder within ten (10) days
following receipt thereof by Tenant; provided that during the occurrence of an
event of default hereunder by Tenant, Tenant covenants to pay to Landlord one
hundred percent (100%) of such excess rentals within ten (10) days following
receipt thereof by Tenant. This covenant and assignment shall benefit Landlord
and its successors in ownership of the Building and shall bind Tenant and
Tenant's heirs, executors, administrators, personal representatives, successors
and assigns. In addition to any other rights and remedies which Landlord may
have hereunder, at law or in equity, in the event Tenant has failed to pay any
rent due hereunder on or before five (5) days following the date on which it is
due, Landlord shall have the right to contact any assignee and require that from
that time forward all payments made pursuant to the assignment shall be made
directly to the Landlord. Any assignee or sublessee of Tenant's interest in this
Lease (all such assignees or sublessees being hereinafter referred to as
"Successors"), by occupying the Premises and/or assuming Tenant's obligations
hereunder, shall be deemed to have assumed liability to Landlord for all amounts
paid to persons other than Landlord by such Successors in consideration of any
such assignment in violation of the provisions hereof.
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ARTICLE 13
13.01 DEFAULT. Each of the following shall constitute a "Default" by
Tenant:
(a) The failure of Tenant to pay the Rent or any part thereof when
due and the continuation of such failure for five days after
Tenant is notified in writing thereof; provided, however, that
if Tenant fails to make any payment required by this Lease
when due two (2) or more times in any Lease Year, then
notwithstanding that such defaults have been cured by Tenant,
any further similar failure shall be deemed a Default without
notice or opportunity to cure;
(b) Tenant shall become insolvent or unable to pay its debts as
they become due, or Tenant notifies Landlord that it
anticipates either condition;
(c) Tenant takes any action to, or notifies Landlord that Tenant
intends to, file a petition under any section or chapter of
the United States Bankruptcy Code, as amended from time to
time, or under any similar law or statute of the United States
or any state thereof; or a petition shall be filed against
Tenant under any such statute or Tenant notifies Landlord that
it knows such a petition will be filed; or the appointment of
a receiver or trustee to take possession of substantially all
of Tenant's assets located at the Premises or of Tenant's
interest in this Lease; or the attachment, execution or other
judicial seizure of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease;
unless the application of this subsection 13.01(c) shall
contravene any applicable law;
(d) Tenant shall fail to fulfill or perform, in whole or in part,
any of its obligations under this Lease (other than the
payment of Rent) and such failure or nonperformance shall
continue for a period of fifteen (15) days after written
notice thereof has been given by Landlord to Tenant; but if
the failure is of a nature that it cannot be cured within such
15-day period, Tenant shall not have committed a Default if
Tenant commences the curing of the failure within such 15-day
period and thereafter diligently pursues the curing of same
and completes the cure within thirty (30) days;
(e) Tenant shall fail to take possession of the Premises within
ninety (90) days after the Commencement Date;
(f) Tenant shall vacate or abandon the Premises or any significant
portion thereof for a period in excess of ninety (90) days,
except in connection with an assignment or sublease of the
Premises or a significant portion thereof approved by Landlord
or
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an abandonment or vacation otherwise approved by Landlord, in
its sole discretion; and
(g) The occurrence of any event or condition having a material and
adverse effect on the assets, liabilities, financial
condition, business or operations of Tenant as they exist on
the date of this Lease, or the ability of the Tenant to meet
its obligations under this Lease on timely basis;
(h) Any representation or warranty by Tenant in this Lease, or any
certificate or other document furnished by Tenant to induce
Landlord to enter into this Lease, including without
limitation, financial information, proves to be incorrect in
any material respect.
13.02 RIGHTS UPON DEFAULT. If a Default by Tenant occurs, then at any
time thereafter, with or without notice or demand, Landlord may exercise any and
all rights and remedies available to Landlord under this Lease, at law or in
equity, statutory or at common law, including without limitation, termination of
this Lease and termination of Tenant's right to possession without terminating
the Lease. In the event of a Default, Landlord may, without additional notice
and without court proceedings, re-enter and repossess the Premises and remove
all persons and property therefrom, and Tenant hereby agrees to surrender
possession of the Premises, waives any claim arising by reason thereof or by
reason of issuance of any distress warrant or writ of sequestration, and agrees
to hold Landlord harmless from any such claims. If Landlord elects to terminate
this Lease, it may treat the Default as an entire breach of this Lease and
Tenant shall immediately become liable to Landlord for damages equal to the
total of (a) the cost of recovering, reletting, including, without limitation,
the cost of leasing commissions attributable to the unexpired portion of the
Term of this Lease, and remodeling of the Premises for a normal and customary
office tenant, (b) all unpaid Rent and other amounts earned or due through such
termination, including interest thereon at the rate specified in Section 13.04
hereof, plus (c) the present value (discounted at the rate of eight percent (8%)
per annum) of the balance of the Rent for the remainder of the Term less the
present value (discounted at the same rate) of the fair market rental value of
the Premises for said period and (d) any other sum of money and damages owed by
Tenant to Landlord. If Landlord elects to terminate Tenant's right to possession
of the Premises without terminating this Lease, Landlord may (but shall not be
obligated to) rent the Premises or any part thereof for the account of Tenant to
any person or persons for such rent and for such terms and conditions as
Landlord reasonably deems appropriate, and Tenant shall be liable to Landlord
for the amount, if any, by which the Rent for the unexpired balance of the Term
exceeds the net amount, if any, received by Landlord from such reletting, being
the gross amount so received by Landlord less the costs of repossession,
reletting, remodeling, and other expenses incurred by Landlord. Such sum or sums
shall be paid by Tenant in monthly installments on the first day of each month
of the Term. In no case shall Landlord be liable for failure to relet the
Premises or to collect the rent due under such reletting,
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and in no event shall Tenant be entitled to more than 50% of any excess rents
received by Landlord. All rights and remedies of Landlord shall be cumulative
and not exclusive. Landlord shall use commercially reasonable efforts to
mitigate Tenant's damages in the event of Tenant's default.
13.03 COSTS. If a Default by Tenant occurs, then Tenant shall reimburse
Landlord on demand for all costs reasonably incurred by Landlord in connection
therewith including, but not limited to, reasonable attorney's fees, court
costs, and related costs, plus interest thereon from the date such costs are
paid by Landlord until Tenant reimburses Landlord, at the rate specified in
Section 13.04 hereof.
13.04 INTEREST. All late payments of Rent, costs or other amounts due
from Tenant under this Lease shall bear interest from the date due until paid at
the rate of eighteen percent (18%) per annum; provided, however, in no event
shall the rate of interest hereunder exceed the maximum non-usurious rate of
interest (the "Maximum Rate") permitted by the applicable laws of the State of
Texas or the United States of America, whichever shall permit the higher
non-usurious rate, and as to which Tenant could not successfully assert a claim
or defense of usury.
13.05 INTENTIONALLY OMITTED
13.06 SECURITY DEPOSIT. Upon the execution of this Lease, Tenant shall
deposit with Landlord $88,333.00 as a security deposit (the "Security Deposit").
The Security Deposit shall be held by Landlord without liability for interest
and as security for the performance by Tenant of Tenant's covenants and
obligations under this Lease, it being expressly understood that the Security
Deposit shall not be considered an advance payment of rent or a measure of
Tenant's liability for damages in case of Default by Tenant. Landlord shall have
no fiduciary responsibilities or trust obligations whatsoever with regard to the
Security Deposit and shall not assume the duties of a trustee for the Security
Deposit. Landlord may, from time-to-time, without obligation and without
prejudice to any other remedy and without waiving such Default, use the Security
Deposit to the extent necessary to cure any Default of Tenant hereunder;
provided, however, Landlord has no obligation to use the Security Deposit to
cure any Default of Tenant. Following any such application of the Security
Deposit, Tenant shall pay to Landlord on demand in cash the amount so applied in
order to restore the Security Deposit to its original amount. If Tenant is not
in Default at the termination of this Lease, the balance of the Security Deposit
remaining after any such application shall be returned by Landlord to Tenant. If
Landlord transfers its interest in the Premises during the term of this Lease,
and the transferee accepts all legal obligations of Landlord under the Lease,
Landlord may assign the Security Deposit to the transferee and thereafter shall
have no further liability for the return of such Security Deposit. Tenant agrees
to look solely to such transferee or assignee or successor thereof for the
return of the Security Deposit. Landlord and its successors and assigns shall
not be bound by any actual or attempted assignment or encumbrance of the
Security Deposit by Tenant.
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Tenant, at its option, may substitute a letter of credit for the cash Security
Deposit; provided, however, such letter of credit must be in a form and content
acceptable to Landlord, in its sole and absolute discretion.
13.07 NON-WAIVER. The failure of Landlord or Tenant to seek redress for
violation of, or to insist upon the strict performance of, any covenant or
condition of this Lease shall not prevent a subsequent act or omission that
would have originally constituted a violation of this Lease from having all the
force and effect of an original violation. The receipt by Landlord of Rent with
or without knowledge of the breach of any provision of this Lease shall not be
deemed a waiver of such breach, shall not reinstate this Lease or Tenant's right
of possession if either or both have been terminated, and shall not otherwise
affect any notice, election, action, or suit by Landlord. No provision of this
Lease shall be deemed to have been waived unless such waiver is in writing
signed by the waiving party. No act or thing done by Landlord during the Term
shall be deemed an acceptance of a surrender of the Premises and no agreement to
accept such surrender shall be valid, unless express and in writing signed by
Landlord.
ARTICLE 14
14.01 FINANCIAL STATEMENTS. Within sixty (60) days after the end of
each fiscal year of Tenant, or as may be requested from time to time by
Landlord, Tenant shall deliver to Landlord current financial statements,
including, without limitation, balance sheets, profit and loss statements,
reconciliations of capital and surplus, changes in financial condition,
schedules of sources and applications of funds, and operating statements with
respect to the business of Tenant, all of which shall, at the request of
Landlord, be certified by an independent certified public accountant.
14.02 EVIDENCE OF AUTHORITY. Simultaneously with the execution and
delivery of this Lease, Tenant shall deliver a fully executed Certificate of the
Secretary, with attached Resolutions of its corporate board, indicating the
authority of the person executing this Lease on behalf of Tenant, substantially
in the form attached hereto as Exhibit "H".
ARTICLE 15
15.01 AMENDMENT. Any agreement hereafter made between Landlord and
Tenant shall be ineffective to modify, release, or otherwise affect this Lease,
in whole or in part, unless such agreement is in writing and signed by the party
to be bound thereby.
15.02 SEVERABILITY. If any term or provision of this Lease shall, to
any extent, be held invalid or unenforceable by a final judgment of a court of
competent jurisdiction, the remainder of this Lease shall not be affected
thereby.
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15.03 ESTOPPEL LETTERS. Tenant shall promptly upon request from
Landlord execute and acknowledge a certificate containing such information as
may be reasonably requested for the benefit of Landlord, any prospective
purchaser or any current or prospective mortgagee of all or any portion of the
Project. Landlord shall promptly upon request from Tenant execute and
acknowledge a certificate containing such information as may be reasonably
requested for the benefit of Tenant, any prospective transferee or any current
or prospective mortgagee of all or any portion of the Premises.
15.04 LANDLORD'S LIABILITY AND AUTHORITY. The liability of Landlord to
Tenant for any default by Landlord under the terms of this Lease shall be
limited to the interest of Landlord in the Building, it being intended that
Landlord, its officers, directors and employees shall not be personally liable
for any judgment or deficiency. Whenever in this Lease there is imposed upon
Landlord or Tenant the obligation to use its best efforts, reasonable efforts,
diligence or act in good faith, Landlord or Tenant, as the case may be, shall be
required to do so only to the extent the same is economically feasible and
otherwise will not impose upon Landlord extreme burdens, financial or otherwise.
15.05 HOLDOVER. If Tenant shall remain in possession of the Premises
after the Expiration Date or earlier termination of this Lease, then Tenant
shall be deemed a tenant-at-will whose tenancy is terminable at any time. In
such event, Tenant shall pay Rent at 150% the daily Rent prevailing on the date
of such termination or expiration for the first ninety (90) days of such
holdover, and 200% the daily Rent prevailing on the date of such termination or
expiration thereafter, but otherwise shall be subject to all of the obligations
of Tenant under this Lease. Additionally, Tenant shall pay to Landlord all
damages sustained by Landlord on account of such holding over by Tenant.
15.06 SURRENDER. Upon the expiration or earlier termination of the
Term, Tenant shall peaceably quit and surrender the Premises in the condition
required by Sections 6.01 and 6.02 hereof. All obligations of Tenant for the
period of time prior to the expiration or earlier termination of the Term shall
survive such expiration or termination.
15.07 PARTIES AND SUCCESSORS. Subject to the limitations and conditions
set forth elsewhere herein, this Lease shall bind and inure to the benefit of
the respective heirs, legal representatives, successors, and permitted assigns
and/or sublessees of the parties hereto. The term "Landlord", as used in this
Lease, so far as the performance of any covenants or obligations on the part of
Landlord under this Lease are concerned, shall mean only the owner of the
Project at the time in question, so that in the event of any transfer of title
to the Project, the party by whom any such transfer is made shall have no
liability for a breach of any obligations of the Landlord under this Lease after
the date of such transfer, and the party to whom any such transfer is made shall
have no liability for any breach of the obligations of the Landlord under this
Lease before the date of the transfer. Landlord shall have the right to
transfer, sell, assign,
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mortgage or encumber, in whole or in part, all of its rights and obligations
hereunder and in the Building, the Land, the Project and other property of
Landlord referred to herein.
15.08 NOTICE. Except as otherwise provided herein, any statement,
notice, demand or other communication provided for or required to be given
pursuant to this Lease shall be in writing and served on the parties at the
addresses listed below. Any notice shall be either (a) personally delivered to
the address set forth below, in which case it shall be deemed delivered on the
date of delivery to the addressee; or (b) sent by registered or certified
mail/return receipt requested, in which case it shall be deemed delivered three
(3) business days after deposited in the U.S. Mail; (c) sent by a nationally
recognized overnight courier, in which case it shall be deemed delivered one (1)
business day after deposit with such courier; or (d) sent by telecommunications
("Fax") in which case it shall be deemed delivered on the day sent, provided an
original is received by the addressee by hand delivery or by a nationally
recognized overnight courier within one (1) business day of the Fax. The
addresses and Fax number listed herein may be changed by written notice to the
other parties, provided, however, that no notice of a change of address or Fax
number shall be effective until date of delivery of such notice. Copies of
notice are for informational purposes only and a failure to give or receive
copies of any notice shall not be deemed a failure to give notice. For purposes
of notice, the addresses of the parties shall be as follows:
If to Landlord: Investors Life Insurance Company of North America
Attn: James M. Grace
701 Brazos, Suite 1400
Austin, Texas 78701
Facsimile No. (512) 404-5051
If to Tenant: eLoyalty Corporation
Attn: Tony Lapetina
Suite 1000
1050 Winter Street
Waltham, Massachusetts 02451
Facsimile No. (781) 530-3638
and
eLoyalty Corporation
Attn: Susan Seah, Esq.
150 North Field Drive
Lake Forest, Illinois 60045
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15.09 RULES AND REGULATIONS. Tenant, its servants, employees, agents,
visitors, invitees, and licensees, shall observe faithfully and comply strictly
with the Rules and Regulations set forth in Exhibit "I" hereto, and shall abide
by and conform to such further reasonable non-discriminatory Rules and
Regulations as Landlord may from time to time make, amend or adopt, after Tenant
receives a copy thereof.
15.10 CAPTIONS. The captions in this Lease are inserted only as a
matter of convenience and for reference and they in no way define, limit, or
describe the scope of this Lease or the intent of any provision hereof.
15.11 NUMBER AND GENDER. All genders used in this Lease shall include
the other genders, the singular shall include the plural, and the plural shall
include the singular, whenever and as often as may be appropriate.
15.12 GOVERNING LAW. This Lease shall be governed by and construed in
accordance with the laws of the State of Texas.
15.13 INABILITY TO PERFORM. Notwithstanding Section 15.18 hereof,
whenever a period of time is herein prescribed for the taking of any action by
Landlord or Tenant, such party shall not be liable or responsible for, and there
shall be excluded from the computation of such period of time, any delays due to
strikes, riots, acts of God, shortages of labor or materials, war, governmental
laws, regulations or restrictions, or any other cause whatsoever beyond the
control of such party (financial inability or hardship excepted), and such
nonperformance or delay in performance shall not constitute a breach or default
by such party under this Lease nor give rise to any claim against such party for
damages or constitute a total or partial eviction, constructive or otherwise:
provided, however, this provision shall not excuse any delay in, or extend the
time periods set forth herein for Landlord's or Tenant's making of payments
required by this Lease.
15.14 USE OF NAME. Tenant shall not, except to designate Tenant's
business address (and then only in a conventional manner and without emphasis or
display), use the name or mark "River Place Pointe" or "River Place Pointe II"
for any purpose whatsoever.
15.15 BROKERS. Tenant represents and warrants that only brokers Tenant
has dealt with in connection with this lease are Greg Johnston of Colliers
Oxford Commercial, Inc. and Michael J. Burns of Burns & Company, which represent
Tenant, and S. Tim Casey of FIC Realty Services, Inc., which represents
Landlord. Tenant also represents that, insofar as Tenant knows, no other brokers
negotiated this Lease or are entitled to any commission in connection herewith.
Tenant shall indemnify and hold harmless Landlord from and against all claims
(and costs of defending against and investigating such claims) of any other
brokers or similar parties claiming under Tenant in connection with this Lease.
The brokers acknowledge and agree that they have entered into Leasing Commission
Agreements with Landlord, and such Leasing Commission
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Agreements govern the payment of commissions to the brokers in this transaction.
The brokers further acknowledge and agree that the commissions provided for
under the Leasing Commission Agreement are not earned until this Lease has been
fully executed by all parties hereto, and one-half (1/2) of the commission is
payable upon the full execution of the Lease by all parties hereto, and the
remaining one-half (1/2) of the commission is payable upon Tenant's occupancy of
the Premises and the payment of the first months rent by Tenant.
15.16 PARKING. Tenant shall have the right to use the parking
facilities of the Building, including the visitor parking spaces, subject to the
rules and regulations for such parking facilities as set forth in Exhibit "I"
hereto. Tenant shall be entitled to one (1) parking space per 250 rentable
square feet contained in the Premises, such parking spaces to be surface parking
spaces and spaces in the Project as determined by Landlord. In addition, for a
period of sixty (60) days from the Commencement Date, Tenant shall be entitled
to lease a proportionate number of executive parking spaces located beneath the
Building (based on the ratio of the rentable square feet in the Premises bears
to the total rentable square feet in the Building applied to the total number of
executive parking spaces located under the Building) at an additional cost of
$100.00 per space per month, and such amounts shall be in addition to the Rent.
After the expiration of sixty (60) days from the Commencement Date, executive
parking spaces may only be leased by Tenant on a space available basis, and the
leasing of such executive parking spaces shall be subject to the sole and
absolute discretion of the Landlord. Any executive parking spaces leased by
Tenant shall be counted against the 1 space to 250 rentable square feet
allocation set forth above. Tenant shall comply with all traffic, security,
safety and other rules and regulations concerning parking as are reasonably
promulgated from time to time by Landlord. Tenant shall indemnify and hold
harmless Landlord from and against all claims, losses, liabilities, damages,
costs and expenses (including, but not limited to, attorneys' fees and court
costs) arising out of Tenant's use of any such parking spaces, whether or not
caused or alleged to be caused by Landlord's negligence.
15.17 SIGNAGE. Interior signage, suite identity and lobby directories
will be provided by Landlord, and Tenant will have access to the Building
directory for its signage, consistent with the Building directory signage
adopted by Landlord. In addition, if Landlord installs a monument sign for the
Building, Tenant shall have non-exclusive access to such Building monument sign,
such signage to be approved by Landlord, which approval shall not be
unreasonably withheld, as long as any such monument signage is consistent with
the monument signage in the Project. Landlord is under no obligation to install
a monument sign at the Building.
15.18 TIME OF ESSENCE. Time is of the essence of this Lease and
each and all of its provisions in which performance is a factor.
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15.19 TENANT TAXES. Tenant shall pay, or cause to be paid, before
delinquency, any and all taxes levied or assessed and which become payable
during the Term upon all of Tenant's non-Building Standard leasehold
improvements and all of Tenant's equipment, furniture, fixtures and personal
property located in the Premises.
15.20 ATTORNEY'S FEES. In the event either party defaults or is alleged
to have defaulted in the performance of any of the terms, agreements or
conditions contained in this Lease and the other party places the enforcement of
this Lease, or any part thereof, or the collection of any amount due or to
become due hereunder, or recovery of the possession of the Premises, in the
hands of any attorney who files suit upon the same, the prevailing party in the
suit shall be entitled to recover its reasonable attorney's fees from the other
party.
15.21 LANDLORD ALTERATIONS OR MODIFICATIONS. Subject to the other
provisions hereof, Landlord expressly reserves the right in its sole discretion
to temporarily or permanently change the location of, close, block or otherwise
alter any entrances, corridors, skywalks, tunnels, doorways, or walkways leading
to or providing access to the Building or any part thereof or otherwise restrict
the use of same, provided such acts do not materially and adversely impair
Tenant's access to the Premises, do not detract from the appearance of the
Premises, and do not otherwise interfere with Tenant's use and enjoyment of the
Premises. Landlord shall not incur any liability whatsoever to Tenant as a
consequence of acts authorized by this provision, and such acts shall not be
deemed to be a breach of any of Landlord's obligations hereunder. Landlord
agrees to exercise good faith in notifying Tenant within a reasonable time in
advance of any alterations, modification or other acts of Landlord under this
Section.
15.22 NAME CHANGE. Landlord and Tenant covenant and agree that Landlord
hereby reserves and shall have the right at any time and from time to time to
change the name of the Building as Landlord may deem advisable, and Landlord
shall not incur any liability whatsoever to Tenant as a consequence thereof,
except that Landlord shall reimburse Tenant for the reasonable costs of
replacement of Tenants stationary, signage, and the like due to such changes.
Landlord may not change the name of the Building at the request or direction of
or with the intent to place emphasis upon any tenant in the Building with less
rentable space than Tenant in the Project, unless such tenant (or a parent,
subsidiary or affiliate of such tenant) is the owner of the Building or the
Project.
15.23 ENTIRE AGREEMENT. This Lease, including all Exhibits attached
hereto (which Exhibits are hereby incorporated herein and shall constitute a
portion hereof), contains the entire agreement between Landlord and Tenant with
respect to the subject matter hereof. Tenant hereby acknowledges and agrees that
neither Landlord nor Landlord's agents or representatives have made any
representations, warranties, or promises with respect to the Project, the
Premises, Landlord's services, or any other matter or thing except as herein
expressly
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set forth, and no rights, easements, or licenses are acquired by Tenant by
implication or otherwise except as expressly set forth in this Lease. The taking
of possession of the Premises by Tenant shall be conclusive evidence, as against
Tenant, that Tenant accepts the Premises and the Project, and that same were in
good and satisfactory condition at the time such possession was so taken,
subject to punch list items and latent defects. Further, the terms and
provisions of this Lease shall not be construed against or in favor of a party
hereto merely because such party is the "Landlord" or the "Tenant" hereunder or
such party or its counsel is the draftsman of this Lease.
15.24 RIGHT OF TERMINATION. Subject to the terms and conditions of
Exhibit "G" attached hereto, if Tenant timely exercises the Expansion Option and
Landlord is unable to accommodate Tenant's expansion needs (up to 16,414
rentable square feet) either (i) in the Expansion Space, or (ii) in the event
Tenant has not exercised its Right of First Refusal as to a portion of the
Expansion Space, in other space in the Building or the Project with respect to
said portion reasonably acceptable to Tenant (as more clearly illustrated at
Exhibit "G"), then Tenant shall have the right to cancel and terminate this
Lease as of May 31, 2003, by giving Landlord written notice of such election no
later than December 1, 2002; provided, however, in order for Tenant to cancel
and terminate this Lease, Tenant must pay, prior to May 31, 2003, liquidated
damages to Landlord equal to the unamortized costs incurred by Landlord in
connection with this Lease, including, but not limited to, Tenant Improvements
constructed by Landlord, Additional Tenant Improvements constructed by Landlord,
and leasing commissions.
(REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS)
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EXECUTED as of the date first written above.
LANDLORD:
INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA
By: ____
Name:
Title:
TENANT:
eLOYALTY CORPORATION
By:
Name:
Title:
EXHIBITS:
EXHIBIT "A": FLOOR-PLANS
EXHIBIT "B": LEGAL DESCRIPTION
EXHIBIT "C": BASE BUILDING, TENANT IMPROVEMENTS AND TENANT IMPROVEMENT
ALLOWANCE
EXHIBIT "D": COMMENCEMENT DATE DECLARATION
EXHIBIT "E": RENEWAL OPTION
EXHIBIT "F": RIGHT OF FIRST REFUSAL
EXHIBIT "G": EXPANSION OPTION
EXHIBIT "H": CERTIFICATE OF THE SECRETARY
EXHIBIT "I": RULES AND REGULATIONS
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EXHIBIT "A"
TO LEASE BETWEEN INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA AS LANDLORD,
AND eLOYALTY CORPORATION, AS TENANT
RIVER PLACE POINTE II FLOOR-PLANS
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INITIALED FOR IDENTIFICATION BY LANDLORD AND TENANT
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EXHIBIT "B"
TO LEASE BETWEEN INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA AS LANDLORD
AND eLOYALTY CORPORATION, AS TENANT
LEGAL DESCRIPTION OF THE LAND
TRACT I
Lots 1-8, Block A, River Place Section 20, a subdivision in Travis County,
Texas, according to the map or plat thereof recorded in Volume 95, Pages 99-102
of the Plat Records of Travis County, Texas.
AND
TRACT II
METES AND BOUNDS DESCRIPTION OF A 0.345 ACRE TRACT AS RECORDED IN VOLUME 8210,
PAGE 723 OF THE TRAVIS COUNTY DEED RECORDS, TRAVIS COUNTY, TEXAS AND BEING
LOCATED IN THE ALEXANDER DUNLAP SURVEY NO. 805, ABSTRACT 224, SAID 0.345 ACRE
TRACT BEING DESCRIBED AS FOLLOWS:
BEGINNING at 1/4-INCH iron rod found marking the northwest corner of the Charles
Webb 0.50 acre tract as recorded in Volume 7641, Page 112 of the Travis County
Deed Records. same being a re-entrant comer in the northerly one of the First
River Place Reserve Ltd. 1441.33 acre tract as recorded in Volume 11379, Page
379 of the Travis County Deed Records, and being in the northerly line of the
Banyan Payne Survey No. 288, Abstract No. 640 and the southerly line of the
Alexander Dunlap Survey No. 805, Abstract No. 224;
THENCE N 59- 34' 01" W, with the said survey line 270.92 feet to a 1/2-inch iron
rod set in the southerly line of the Bryan H. Montandon called 3.629 acre tract
as recorded in Volume 9450, Page 944 of the Travis County Deed Records, same
being the southerly line of a 100-foot wide L.C.R.A. easement as recorded in
Volume 611, Page 616 of the Travis County Deed Records, from which a 1/2-inch
iron rod found bears S 83- 01'26" W, 0.95 feet;
THENCE N 83- 01'26" E, with said southerly line of the Bryan H. Montandon tract
and the L.C.R.A. easement passing at 166.56 feet a 1-1/4 inch hex bolt found, in
all 167.29 feet to a 1/2
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inch iron rod set in the westerly right-of-way line of Ranch to Market Road
2222, 80 foot wide at this point; THENCE with the said westerly right-of-way of
Ranch to Market Road 2222, S 27- 35' 26" E, 156.79 feet to a 1/2 inch iron rod
set at the point of curvature of a curve to the left;
THENCE southeasterly with said curve to the left and the west right-of-way line,
passing through a central angle of 04- 22' 15" to a 1/2 inch iron rod set, said
curve having a radius of 490.67 feet, an arc length of 37.43 feet and a chord
bearing S 29- 46' 47" E 37.42 feet;
THENCE departing said west right-of-way line, N 59- 34' 01" W, with the
aforementioned survey line 27.44 feet to the POINT OF BEGINNING and containing
0.345 acres of land.
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INITIALED FOR IDENTIFICATION BY LANDLORD AND TENANT
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EXHIBIT "C"
TO LEASE BETWEEN INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA, AS LANDLORD,
AND eLOYALTY CORPORATION, AS TENANT
BASE BUILDING, TENANT IMPROVEMENTS AND
TENANT IMPROVEMENT ALLOWANCE
1. Base Building. Landlord shall, at its sole cost and expense,
construct the Base Building in a good and workmanlike manner and in accordance
with all applicable laws and restrictive covenants affecting the Project. The
Base Building is specifically described in the Base Building Plans prepared by
the architectural firm Graeber, Simmons & Cowan, dated 4/12/99 and 5/28/99,
under Job No. 9816900. The Base Building Plans are incorporated herein by
reference for all purposes. The Base Building includes the foundation,
structural walls, exterior facade, exterior glass, roof, mechanical equipment
and systems, electrical systems, plumbing systems, atrium, elevator shafts, cabs
and lobbies, rest rooms, corridors required by code for building access,
Building Standard window treatments, and certain Base Building finishes as set
forth below. For purposes of this Lease, the Base Building will also be deemed
to include the allocated surface parking, allocated space within the Parking
Garage I, building loading zones, and common areas located on the Land. The Base
Building and Base Building finishes shall include the following:
Floor: Exposed structural concrete slab.
Walls: The interior of exterior walls and
partitions separating tenant spaces from
public spaces shall be taped and floated,
but not finished on the Tenant side.
Columns: Exterior columns shall have gypsum board
furring enclosures, with taped and floated
finish. All other columns shall be left
exposed.
Ceiling: A suspended ceiling grid system and ceiling
tiles shall be provided and stacked on each
floor of the Building; provided, however, if
Tenant elects not to utilize the suspended
ceiling grid system and ceiling tiles
provided by Landlord, then Tenant shall
receive a credit in the Tenant Improvement
Allowance for all or such portion of the
ceiling grid system and ceiling tiles, but
only to the extent Landlord can reasonably
use same in other portions of the Project.
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Lighting: Lighting only in public areas, no lighting
in Tenant spaces; provided, however, Tenant
shall receive a full credit in the Tenant
Improvement Allowance of $65.00 per fixture
for Building Standard 2' X 4' parabolic
lay-in fluorescent light fixtures for each
one hundred sixteen (116) square feet of
rentable area in the Premises.
Exit Corridors: Code required exit corridors.
Riser Sleeves: Sleeves will be provided at the back of the
stairwells for use by Tenant for
electrical/plumbing risers, or other uses as
necessary (refer to Base Building Plans and
Specifications for locations).
Mechanical: A VAV heating, ventilating, and air
conditioning system for an open floor plan
is provided to each floor, with main duct
runs, VAV boxes, duct connections from the
main duct run to each VAV box and window
slot diffusers. VAV boxes are sized to
handle loads serving one person per 200
square feet of rentable area and a lighting
electrical load of 2.0 watts per square foot
of rentable area (subject to Building
standard lighting).
Plumbing: There will be water and wastewater risers
installed for tenant use throughout the Base
Building (refer to Base Building Plans for
locations). Drinking fountains will be
provided in a common area adjacent to
restrooms.
Doors: Doors and door hardware for doors that are
visible from public spaces shall be provided
in accordance with the specifications
contained in the Base Building Plans.
Electrical: Panels will be provided throughout the Base
Building sized to handle normal occupant
loads. Convenience outlet electrical
capacity shall be 4.5 watts per square foot
of rentable area demand load and 7.0 watts
per square foot of rentable area connected
load. One electrical room will be provided
on each floor.
Communications: One communications closet will be installed
on each floor for telephone service.
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Emergency System: The Base Building emergency lighting
and fire alarm system will be provided.
Tenant will be responsible for code
compliant life safety system in Tenant
Improvements.
Sprinklers: A code compliant sprinkler system will be
installed in the Base Building.
Modifications to the base system shall be
charged at the marginal increased cost of
installation as part of Tenant Improvements
and shall be required to meet all codes.
Structural: The Base Building is designed for a nominal
live load of 50 psf along the Base Building
perimeter and a nominal live load of 80 psf
in the Base Building interior.
Elevators: Two passenger elevators will be provided and
finished.
Signage: Signage will be provided to comply with life
safety code requirements.
Window Wall: Window blinds in Landlord selected color at
each exterior window.
Public Restroom: Complete men's and women's restroom
facilities are provided on each floor. All
restrooms meet current ADA requirements.
The Base Building Plans shall be determinative of all issues related to the Base
Building.
2. Tenant Improvements. Prior to the Commencement Date, Landlord shall,
at its sole cost and expense (except as limited below), construct the
improvements desired by Tenant to complete the Building for Tenant's occupancy
(the "Tenant Improvements") in accordance with the Drawings (as defined below).
The cost of the Tenant Improvements shall be advanced by Landlord for the
benefit of Tenant, to be repaid by Tenant in the form of Base Rent, but only to
the extent that the aggregate cost of furnishing the Tenant Improvements does
not exceed $18.00 per rentable square foot contained in the Premises (the
"Tenant Improvement Allowance"). The Tenant Improvement Allowance shall be in
addition to the Base Building (as defined below). The following items will be
charged against the Tenant Improvement Allowance: (i) architectural,
engineering, design and space planning work in preparation of the Drawings
necessary to construct the Tenant Improvements, including all mechanical,
structural, electrical, plumbing and fire sprinkler engineering required to
develop Tenant Improvements or any modifications to the Base Building or
Building Standard requested by Tenant and approved by Landlord to accommodate
the Tenant Improvements; (ii) the total cost of the Tenant Improvements, (iii) a
charge of five percent (5%) of the total costs and expenses otherwise chargeable
for the Tenant Improvements for Landlord's construction management of the Tenant
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Improvements (which construction management fee is payable to Landlord in lieu
of overhead or other administrative fees of Landlord itself and is exclusive of
and in addition to the general contractor's overhead and profit); (iv) Tenant's
moving costs; and (v) all other costs and expenses related to the design or
construction of the Tenant Improvements (collectively, the "Tenant Improvements
Cost"). Landlord shall keep accurate books and records related to the Tenant
Improvements Cost. Except as provided in Paragraph 6 of this Exhibit "C" below,
the Tenant Improvements Cost in excess of the Tenant Improvement Allowance shall
be paid by Tenant prior to Tenant's occupancy of the Premises.
3. Building Standard. For purposes of this Lease, "Building Standard"
shall mean those improvements and other items as reasonably approved by Landlord
or Landlord's architect as standard for build out purposes of the Tenant
Improvements. The improvements set forth as Building Standard are part of the
Tenant Improvements and shall be charged against the Tenant Improvement
Allowance. The following shall apply unless otherwise specified in this Lease:
a. Ceiling System: 2' X 4' suspended lay-in acoustical
ceiling.
b. Flooring: Building standard flooring will be 32 ounce
carpet glued directly to the concrete slab.
c. Hardware: Polished finish Yale locksets.
d. Interior Doors: Solid core nine foot (9') wood veneer doors
with hollow metal frame and latch set.
e. Lighting: 2' X 4' parabolic lay-in fluorescent light
fixtures
4. Drawings. Tenant's architect, Whitney, Inc., in consultation with
Landlord's architect, Graeber, Simmons and Cowan, as design professionals, will
prepare the plans, specifications and architectural working drawing for the
Tenant Improvements (the "Drawings"). Landlord shall have the right to
reasonably approve the Drawings. The cost of the Drawings, including costs and
expenses of both Tenant's architect and Landlord's architect, are included in
the Tenant Improvements Cost and will be applied against the Tenant Improvement
Allowance. The Drawings shall include partition and door location drawings,
telephone and electric drawings, and ceiling drawings, and include any
specifications required by Tenant, including, but not limited to, paint colors,
finish details, and non-standard construction work to be performed within the
Premises by the general contractor. Tenant shall cause Tenant's architect to
complete the Drawings within the time schedule set forth below. Landlord agrees
to promptly respond to Tenant's requests for information and approvals from time
to time as necessary to allow the Drawings to be completed by Tenant's architect
in a timely manner.
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5. Schedule. In order for the Leased Premises to be substantially
completed by the estimated target date of June 7, 2000, Landlord and Tenant
acknowledge and agree that it is imperative that the parties adhere to the
following schedule:
March 20, 2000 - Drawings, including mechanical, electrical and plumbing plans
and specifications, all in a form and content suitable for
construction bidding, must be completed, approved by Landlord
and Tenant, and delivered to Landlord for distribution to
general contractors approved by Landlord and Tenant to obtain
bids for the cost of the Tenant Improvements
March 23, 2000 - Approved general contractors provide to Landlord and Tenant
bids for the construction of the Tenant Improvements based on
the Drawings.
March 27, 2000 - Tenant approves the final construction budget for the Tenant
Improvements and selects a general contractor, reasonably
acceptable to Landlord (the "General Contractor")
March 30, 2000 - Landlord and General Contractor execute the Construction
Contract which contains the final approved construction budget
approved by Tenant.
April 3, 2000 - Building Permit obtained and construction of Tenant
Improvements commences
If Tenant does not finally approve the construction budget and select the
General Contractor by March 27, 2000, the target date of June 7, 2000 shall be
automatically extended for the number of days between June 7, 2000, and the day
the Tenant approves the final construction budget and selects the General
Contractor.
6. Additional Tenant Improvement Allowance. As set forth in Paragraph 1
of this Exhibit "C" above, the Tenant Improvement Allowance is $18.00 per
rentable square foot contained in the Premises. All Tenant Improvements Costs in
excess of the Tenant Improvement Allowance shall be paid by Tenant prior to
occupancy of the Premises. Notwithstanding the foregoing, if the Tenant
Improvements Cost is in excess of the Tenant Improvement Allowance, Landlord
agrees to provide an additional allowance not to exceed fifty percent (50%) of
the Tenant Improvements Cost in excess of the Tenant Improvement Allowance (the
"Additional Tenant Improvement Allowance"); provided, however, the Additional
Tenant Improvement Allowance, plus interest thereon at the rate of ten percent
(10%) per annum, shall be amortized over the initial Term of the Lease and added
to the Base Rent. If Tenant requests the Additional Tenant Improvement
Allowance, Tenant shall give Landlord written notice thereof prior to Tenant's
occupancy of the Premises. Prior to substantial completion of the Premises,
Landlord shall prepare and deliver to Tenant an estimate of the Tenant
Improvements Cost in excess of the
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Tenant Improvement Allowance and the Additional Tenant Improvement Allowance
(the "Estimated Excess Costs"), and Tenant shall pay the Estimated Excess Costs
to Landlord prior to Tenant's occupancy of the Premises. Upon substantial
completion of the Tenant Improvements and the issuance of a certificate of
occupancy for the Premises by the City of Austin, Landlord shall provide Tenant
an accounting of the actual Tenant Improvements Cost, which shall include all
costs, expenses and fees related to the design and construction of the Tenant
Improvements. If the total Tenant Improvements Cost exceeds the Tenant
Improvement Allowance, the Additional Tenant Improvement Allowance, and the
Estimated Excess Costs paid by Tenant prior to occupancy, Tenant shall pay to
Landlord the excess within thirty (30) days from the date such accounting is
delivered to Tenant. If the total Tenant Improvements Cost is less than the
Tenant Improvement Allowance, the Additional Tenant Improvement Allowance, and
the Estimated Excess Costs paid by Tenant prior to occupancy, Landlord shall
refund to Tenant any surplus within thirty (30) days from the date such
accounting is delivered to Tenant. Tenant, at its expense, shall have the right
to examine all of the books and records of Landlord, the General Contractor, or
the architects in order to verify and approve the total Tenant Improvements
Cost. Once the Additional Tenant Improvement Allowance is finally determined,
Landlord shall calculate the revised Base Rent and give Tenant written notice
thereof.
7. General Contractor. Tenant acknowledges that the general contractor
constructing the Base Building is Constructors & Associates, Inc.
("Constructors"). In order to maintain and monitor the quality of the building
construction, the design intent of the systems, including warranties,
guarantees, etc., Landlord has recommended to Tenant that all Tenant
Improvements be performed by Constructors. Tenant agrees to use Constructors for
the Tenant Improvements if Constructors is competitive in their fees, profit and
general conditions; provided, however, Tenant shall have the right to have the
Tenant Improvements competitively bid by Constructors and other general
contractors.
8. Punch List. "Punch List Items" as used herein shall mean any details
of construction, decoration, mechanical and electrical adjustments or other
matters, which, in the aggregate, are minor in character, the non-completion of
which does not materially interfere with Tenant's use or enjoyment of the
Premises. Prior to Tenant's occupancy of the Premises, Landlord and Tenant shall
conduct a walk-though of the Premises to agree on cosmetic Punch List Items.
Within fifteen (15) days after the date Tenant takes occupancy of the Premises,
Tenant shall deliver to Landlord a current list of non-cosmetic Punch List Items
for the Premises that Landlord is obligated by the provisions of this Lease to
complete. The list of cosmetic Punch List Items and the list of non-cosmetic
Punch List Items is herein called the "Punch List". Landlord shall use
reasonable efforts to complete all Punch List Items within thirty (30) days
after the date the applicable approved Punch List is delivered by Tenant to
Landlord.
9. Extra Work. Except as set forth herein, Landlord has no other
agreement with Tenant and has no other obligation to do any other work with
respect to the Premises. Any other
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work in the Premises that may be permitted by Landlord pursuant to the terms and
conditions of this Lease shall be done at Tenant's sole cost and expense and
subject to Landlord's reasonable approval. If, after the commencement of
construction of the Tenant Improvements, Tenant desires to make changes in the
Drawings or desires extra work to be performed not contemplated by the Drawings
(the "Extra Work"), Tenant, at Tenant's sole cost and expense, shall submit to
Landlord all necessary drawings, plans and specifications (the "Extra Work
Drawings") to construct the Extra Work. Landlord shall have the right to
reasonably approve the Extra Work Drawings. Landlord shall submit to Tenant
written estimates of the cost of Extra Work and any delays to Substantial
Completion of the Premises resulting from Extra Work (any delays resulting from
Extra Work shall constitute a Tenant Delay as defined in Paragraph 10 below).
Landlord's estimate of the cost of the Extra Work shall include a charge of five
percent (5%) of the total expenses and costs otherwise chargeable for the Extra
Work as Landlord's construction management fee (which fee shall be exclusive of
and in addition to the General Contractor's overhead and profit). If Tenant
fails to approve Landlord's estimate within three (3) business days from the
receipt thereof, then Landlord's estimate shall be deemed disapproved in all
respects by Tenant and Landlord shall not be authorized to proceed with such
Extra Work. If Tenant timely accepts Landlord's estimate, Tenant agrees to pay
50% of the cost of the Extra Work to Landlord upon acceptance of Landlord's
estimate, and the balance of the cost of the Extra Work within ten (10) days of
being billed therefor by Landlord. All Extra Work shall be done at Tenant's sole
cost and expense and shall not be included in the Additional Tenant Improvement
Allowance. Landlord shall not be liable for any damages, nor shall the
Commencement Date be delayed, nor any Rent abated, as a result of the
construction or performance of any Extra Work or any delay in such construction
or performance.
10. Tenant's Right of Entry Prior to Occupancy. Landlord hereby
consents to Tenant having access to all or any part of the Premises
approximately three (3) weeks prior to the anticipated Commencement Date (the
"Early Access Period") for the limited purpose of preparing the Premises for
occupancy. Such preparations shall include without limitation the installation
of computers (and peripherals), voice and data communication systems, wall and
furniture systems, and other office equipment and furnishings, subject however
to City of Austin, Texas, temporary certificate of occupancy requirements and
provided Tenant has delivered to Landlord evidence of all insurance required to
be carried by Tenant under this Lease. Landlord and Tenant agree to mutually and
reasonably cooperate with each other during the Early Access Period. Tenant
acknowledges and agrees that during the Early Access Period, Landlord may still
be in process of completing the Tenant Improvements, including, without
limitation, laying carpet. During the Early Access Period, Tenant will use
reasonable efforts to accommodate Landlord's completion of the Tenant
Improvements. Likewise, Landlord acknowledges and agrees that during the Early
Access Period, Tenant will be installing wiring, equipment and furniture and
Landlord will use reasonable efforts to accommodate Tenant's pre-occupancy
installations during the Early Access Period. Landlord acknowledges that Tenant
is not required to pay rent during the Early Access Period. During the Early
Access Period, Tenant and Tenant's
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agents may enter the Premises, in mutual cooperation with Landlord, in order
that Tenant may do such work as may be required by Tenant to make the Premises
ready for Tenant's use and occupancy thereof. Tenant's early entry into the
Premises is conditioned upon Tenant and Tenant's agents, contractors, workmen,
mechanics, suppliers and invitees, working in harmony and not interfering with
Landlord, Landlord's agents and the General Contractor in completing the Tenant
Improvements or other tenants and occupants of the Building. If at any time such
entry shall cause or threaten to cause such disharmony or interference with the
timely completion of the Tenant Improvements, Landlord shall have the right to
withdraw Landlord's consent to Tenant's early entry of the Premises upon
twenty-four (24) hours written notice to Tenant. Tenant agrees that any such
early entry into and occupation of the Premises shall be deemed to be under all
of the terms, covenants, conditions and provisions of this Lease except as to
the covenant to pay Rent, and further agrees Landlord shall not be liable in any
way for any injury, loss or damage that may occur to any of the Tenants
Improvements or Tenant's installations made in the Premises or to properties
placed therein prior to the Commencement Date, the same being at Tenant's sole
risk. Tenant hereby indemnifies, defends and hold harmless Landlord and
Landlord's Indemnified Parties against any and all claims, demands, losses,
liabilities, costs and expenses (including reasonable attorneys' fees) arising
out of or related to Tenant's or Tenant's agents entry of the Premises prior to
substantial completion of the Premises to install its equipment and furnishings
preparatory to its occupancy of the Premises, or on account of injury to any
person whatsoever or damage to any property arising out of, in connection with
or in any way relating to Tenant's entry of the Premises prior to substantial
completion of the Premises.
11. Tenant Delays. Tenant agrees that for purposes of this Lease, the
following shall constitute "Tenant Delays":
(a) Tenant fails to timely comply with the dates
established in the schedule of dates described in
Paragraph 5 hereof, including without limitation,
having Tenant's architect timely complete the
Drawings; or
(b) Tenant's failure to furnish information in accordance
herewith or to respond to any written request by
Landlord for any approval or information within any
time period prescribed, or if no time period is
prescribed, then within three (3) days of such
written request; or
(c) Tenant's insistence on materials, finishes or
installations other than Landlord's Building Standard
after having first been informed by Landlord in
writing at or before the time of delivery to Tenant
of final construction pricing for Tenant's approval
that such materials, finishes or installations will
cause a Tenant Delay; or
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(d) Tenant's causes changes to be made in the Drawings
(notwithstanding Landlord's approval of such changes)
that reasonably would cause a delay in the completion
of the Premises or Tenant causes changes in the
Tenant Improvements after commencement of
construction of the Tenant Improvements resulting in
Extra Work; or
(e) Tenant, or any person, firm or corporation employed
by Tenant, fails to timely perform or complete any
work by Tenant or said person, firm or corporation
employed by Tenant (all such work and such persons,
firms or corporations being subject to the reasonable
approval of Landlord); or
(f) Tenant shall have directly, or indirectly through any
person, firm or corporation employed by Tenant,
interfered with or delayed the work of the General
Contractor; or
(g) Any request by Tenant that Landlord delay the
completion of any of Landlord's work; or
(h) Any breach or default by Tenant in the performance of
Tenant's obligations under this Lease; or
(i) Any delay resulting from Tenant's entry of the
Premises prior to its being substantially completed,
as described in Paragraph 10 of this Exhibit "C"
above.
12. Acceptance of Tenant Improvements. Except for the completion of any
Punch List Items, the taking of possession of the Premises by Tenant means that
(i) Tenant has conducted its own independent investigation of the Premises and
that the Premises are suitable for the purpose for which the same are leased,
subject to any latent defect which is not discoverable upon reasonable
inspection, and (ii) the Building and each and every part and appurtenance
thereof are in good and satisfactory condition, except for any latent defect
which is not discoverable upon a reasonable inspection.
13. American's with Disabilities Act. Landlord, at Landlord's expense,
shall be responsible to construct the common areas, the building systems,
exterior walls and the exterior of the Building in compliance with the Americans
with Disabilities Act and the Texas Architectural Barriers Act (collectively,
the "Act"). Tenant, as part of the Tenant Improvements and included in the
Tenant Improvement Allowance, shall be responsible for construction of the
Tenant Improvements in compliance with the Act. Tenant shall be responsible, at
Tenant's sole cost and expense, for compliance of the Premises with the Act.
Tenant covenants and agrees that all alterations and improvements to the
Premises constructed by Tenant, whether prior to or after
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<PAGE> 46
the Commencement Date, shall be constructed in accordance with the Act. Except
to the extent Landlord is responsible for compliance with the Act as set forth
above, Tenant shall be responsible for any accommodations or alterations which
need to be made to the Premises to accommodate its disabled employees or
customers. If, subsequent to the Commencement Date, Tenant requests Landlord to
perform any alterations, additions or improvements to the Premises, whether by
virtue of expansion, extension or otherwise, Tenant agrees to and shall be
responsible for all costs and expense incurred in connection with any
improvements and alterations necessary to ensure compliance with the Act.
INITIALED FOR IDENTIFICATION BY LANDLORD AND TENANT
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<PAGE> 47
EXHIBIT "D"
TO LEASE BETWEEN INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA, AS LANDLORD,
AND eLOYALTY CORPORATION, AS TENANT
RENTABLE AREA AND COMMENCEMENT DATE DECLARATION
This declaration is executed with respect to that certain Lease
Agreement (the "Lease") dated March __, 2000 by and between Investors Life
Insurance Company of North America, a Washington corporation ("Landlord"), and
eLoyalty Corporation, a Delaware corporation ("Tenant"), covering approximately
square feet of rentable area on floors four and five of the Building.
Capitalized terms used but not defined herein shall have the meanings given to
them in the Lease.
By their respective execution below, Landlord and Tenant each hereby
stipulates and agrees that:
(1) The Commencement Date (as defined in Section 2.02 of the
Lease) occurred on _________________, 2000, and the Expiration
Date is May 31, 2005.
(2) The Premises contain rentable square feet.
(3) The Building contains __________ net rentable square feet.
(4) Tenant's Percentage Share for purposes of calculating Tenants
Percentage Share of Operating Expenses is %.
(5) Base Rent is payable in equal monthly installments starting on
the Commencement Date as follows:
<TABLE>
<S> <C> <C>
Lease Year 1 - $ ($18.50 per rentable square foot)
-----------------------------
Lease Year 2 - $ ($19.00 per rentable square foot)
-----------------------------
Lease Year 3 - $ ($19.50 per rentable square foot)
-----------------------------
Lease Year 4 - $ ($20.00 per rentable square foot)
-----------------------------
Lease Year 5 - $ ($20.50 per rentable square foot)
-----------------------------
</TABLE>
Additional Rent for the calendar year 2000 (based on $8.00 per
rentable square foot) is $ per month.
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<PAGE> 48
(6) Other than latent defects of which Tenant is not aware, all
construction work per the Drawings is complete with the
exceptions outlined in the attached "punch list". Landlord
agrees to remedy the items on the punch list within thirty
(30) days of the date hereof.
This declaration may be relied upon by any person having or acquiring
an interest in the Lease or the Building, without notice to or consent of
Landlord or Tenant.
EXECUTED on this day of , 2000.
LANDLORD:
INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA
By:
Name:
Title:
TENANT:
eLOYALTY CORPORATION
By:
Name:
Title:
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<PAGE> 49
INITIALED FOR IDENTIFICATION BY LANDLORD AND TENANT
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<PAGE> 50
EXHIBIT "E"
TO LEASE BETWEEN INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA, AS LANDLORD,
AND eLOYALTY CORPORATION, AS TENANT
RENEWAL OPTION
Provided that a Default by Tenant has not occurred and is continuing,
Tenant shall have the right and option (the "Renewal Option") to renew and
extend this Lease with respect to all of the Premises for two (2) consecutive
renewal terms for respective periods of five (5) years each. In order to
exercise each Renewal Option, Tenant must give Landlord written notice of the
exercise of the Renewal Option no later than one (1) year prior to the
expiration of the initial Term, or the expiration of the first renewal term, as
the case may be. Failure by Tenant to notify Landlord in writing of Tenant's
election to exercise a Renewal Option herein granted within the time limits set
forth for such exercise shall constitute a waiver of such Renewal Option. Each
renewal term shall be upon the same provisions as for the initial Term except as
follows:
1. In the event Tenant elects to exercise the Renewal Options as set
forth above, Landlord shall, within thirty (30) days thereafter, notify Tenant
in writing of the proposed rental for the applicable Renewal Term, including any
annual adjustments to the Base Rent (the "Proposed Renewal Rental"). Within
fifteen (15) days following Landlord's delivery of the Proposed Renewal Rental,
Tenant shall notify Landlord in writing of the acceptance or rejection of the
Proposed Renewal Rental. If Tenant accepts Landlord's proposal, then the
Proposed Renewal Rental shall be the rental rate in effect during the applicable
renewal term. If Tenant fails to respond within such fifteen (15) day period,
Tenant shall be deemed to have rejected Landlord's Proposed Renewal Rental. If
Tenant rejects Landlord's Proposed Renewal Rental during such fifteen (15) day
period, Tenant's rejection notice must either (i) withdraw its exercise of the
Renewal Option, or (ii) exercise its right to a thirty (30) day negotiation
period with Landlord which right is hereby granted. If Tenant exercises such
right, Tenant and Landlord shall, in good faith, endeavor to negotiate a
reasonable renewal rental rate (the "Negotiated Renewal Rate"), providing
supporting cost and market data for its respective renewal rate preferences. If
Tenant and Landlord fail to agree upon a Negotiated Renewal Rental during such
thirty (30) day period, Tenant's may elect to either (i) withdraw its exercise
of the Renewal Option, or (ii) exercise its right to enter into arbitration with
Landlord concerning the Market Rate (as hereinafter defined), which right is
hereby granted, in accordance with the following procedure.
a. Within ten (10) days after Tenant delivers to Landlord its
rejection notice requesting arbitration of the Market Rate (the "Designation
Date"), Landlord and Tenant shall
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<PAGE> 51
each appoint an independent arbitrator who shall be an appraiser or licensed
real estate broker with at least five (5) years experience in building leasing,
management and marketing in the Austin, Texas, geographic real estate market or
in appraising leasehold interests under commercial leases, and shall be familiar
with the valuation of comparable property in such area and otherwise qualified
to act as an expert witness over objection to give opinion testimony addressed
to the issue in a court of competent jurisdiction. Each independent appraiser
shall not have been employed, regularly or as a broker or consultant, during the
past six (6) month period by the respective party selecting such person. By the
Designation Date, each party shall notify the other party in writing of the
name, address, telephone number and qualifications of its appraiser so
appointed. If either party shall fail to notify the other party of its named
appraiser by the Designation Date, the determination of the Market Rate by the
single appraiser appointed shall be conclusive and binding upon both Landlord
and Tenant. If both parties timely designate their respective appraisers, then
the two appointed appraisers shall select a third qualified appraiser within ten
(10) days after the Designation Date. Landlord and Tenant shall each bear the
cost of its appraiser and one-half (1/2) of the cost of the third appraiser.
b. The three appraisers shall determine the Market Rate in
accordance with the parameters set forth herein by mutual agreement within
thirty (30) business days after the Designation Date. If all of the appraisers
fail to agree on the Market Rate within thirty (30) business days after the
Designation Date, but two of the appraisers can so agree, then the Market Rate
as determined by such two appraisers shall be controlling. If none of the
appraisers can agree on the Market Rate within such time period, then an average
shall be taken of the two closest determinations thereof and such average shall
be controlling (except that if the median of the three rates provided by the
appraisers is also the average of the three, it shall be controlling). Tenant
shall have fifteen (15) days to accept or reject in writing the Market Rate as
determined by the arbitration procedure. If Tenant does not accept the Market
Rate as determined by the arbitration procedure on or before the end of said
fifteen (15) day period, then Tenant shall pay all of Landlord's costs
associated with obtaining the aforementioned appraisals and Tenant shall be
deemed to withdraw its exercise of the Renewal Option, and all rights of
Landlord and Tenant under this option to renew shall immediately terminate and
all terms and conditions of this option to renew shall be of no further force
and effect. Except as noted above in case of a failure to agree on Market Rate,
Tenant may not revoke its election to renew after such election has been made.
c. For purposes of this Lease and the arbitration process set
forth above, "Market Rate" shall be the then prevailing annual rental rates then
being charged for comparable space in first class buildings similarly situated
to the Building located in Austin, Travis County, Texas, taking into
consideration without limitation use, location and/or floor level within the
applicable building, definition of net rentable area, leasehold improvements
provided, quality, age and location of the applicable building, area of
premises, percentage of building included in
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<PAGE> 52
area of premises, rental concessions, the time the particular rate under
consideration became effective and all other then prevailing market inducements.
2. During each such renewal term, Tenant shall pay all other Rent and
other amounts due under this Lease, including without limitation all rental
adjustments pursuant to Article 3 of this Lease, provided that any expense caps
or similar limitations shall not be renewed or carried forward (i.e., they shall
be adjusted to market) unless the Market Rate contemplates that such limitations
be continued during each renewal term.
3. Tenant shall have no further right to renew this Lease.
4. Upon exercise of the Renewal Option by Tenant and subject to the
conditions set forth herein, the Lease shall be extended for the period of such
Renewal Term without the necessity of the execution of any further instrument or
document, although if requested by either party, Landlord and Tenant shall enter
into a written agreement modifying and supplementing the Lease in accordance
with the provisions hereof. Any termination of the Lease during the initial Term
or the first renewal term shall terminate all subsequent renewal rights
hereunder. The renewal rights of Tenant hereunder shall not be severable from
the Lease, nor may such rights be assigned or otherwise conveyed in connection
with any permitted assignment of the Lease, unless such assignment is to
Tenant's subsidiary, affiliate, or successor in accordance with the provisions
of Article 12. Landlord's consent to any assignment of the Lease to a party
other than a subsidiary, affiliate, or successor of Tenant shall not be
construed as allowing an assignment of such rights to any assignee.
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<PAGE> 53
INITIALED FOR IDENTIFICATION BY LANDLORD AND TENANT
4
<PAGE> 54
EXHIBIT "F"
TO LEASE BETWEEN INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA, AS LANDLORD,
AND eLOYALTY CORPORATION, AS TENANT
RIGHT OF FIRST REFUSAL
Landlord hereby grants to Tenant a right of first refusal (the "Right
of First Refusal") exercisable as hereinafter set forth, covering the remainder
of the third floor of the Building, containing approximately 16,414 rentable
square feet, more particularly described on the floor plan of the third floor of
the Building attached as Exhibit "A" to this Lease (the "Refusal Space"). All
rights of Tenant to lease the Refusal Space pursuant to the Right of First
Refusal shall be applicable to the entire Refusal Space or to any portion
thereof which may become available. The Right of First Refusal shall be as
follows:
(a) Upon the issuance by Landlord of a formal proposal to a third
party tenant to lease all or any portion of the Refusal Space,
Landlord shall notify the Tenant in writing (the "Offer
Notice") of the issuance of such formal proposal for all or
such portion of the Refusal Space (the "Offered Refusal
Space"). Tenant may exercise the Right of First Refusal and
include the Offered Refusal Space, or any other unleased
portion of the Refusal Space under this Lease, upon the terms
and conditions of this Lease by delivering to Landlord written
notice of Tenant's election (the "Acceptance Notice") on or
before the seventh (7th) business day after the date of
Tenant's receipt of the Offer Notice.
(b) In the event Landlord does not receive Tenant's Acceptance
Notice as to the Offered Refusal Space as described in the
Offer Notice within said seven (7) business day period, then
Landlord shall be free to lease the Offered Refusal Space to
one or more third parties, provided such third parties have
been the subject of an Offer Notice. Until May 31, 2003 (the
"Evergreen Period"), Tenant's failure to give Landlord a
Tenant's Acceptance Notice as to any Offered Refusal Space
described in an Offer Notice shall not constitute a waiver of
Tenant's right to receive a subsequent Offer Notice for all or
any portion of such Offered Refusal Space (assuming Landlord
does not consummate a lease with such third party tenant the
subject of the original Offer Notice). However, on May 31,
2003 the Evergreen Period expires, and thereafter, if Tenant
fails to timely give Landlord a Tenant's Acceptance Notice as
to any Offered Refusal Space covered by an Offer Notice, then
such failure shall be deemed a waiver and
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<PAGE> 55
release of Tenant's Right of First Refusal as to the Offered
Refusal Space designated in the Offer Notice.
(c) All Refusal Space leased by Tenant pursuant to the Right of
First Refusal shall be for a term which is coterminous with
the initial Term and any renewal or extension thereof.
(d) The term Premises, as used in this Lease, shall include all
expansions thereof that may occur from time to time pursuant
to this Right of First Refusal.
(e) In the event Tenant exercises the Right of First Refusal
pursuant to the terms hereof, Landlord shall do the work
necessary to furnish and install within the Refusal Space
leased by Tenant, in accordance with drawings to be prepared
by Tenant and approved in writing by Landlord, the tenant
improvements provided for in the drawings. The cost of the
work shall be advanced by Landlord for the benefit of Tenant,
to be repaid by Tenant in the form of Base Rent, but only to
the extent that the aggregate cost of the tenant improvements
for the Refusal Space provided for in the drawings does not
exceed an amount per square foot leased, rounded up or down to
the nearest cent (but not to exceed $18.00), equal to (X)
$18.00, times (Y) the number of months remaining in the Term
(excluding all renewals, unless such renewals have been
irrevocably exercised by Tenant), divided by (Z) sixty (60).
(f) The Base Rent for the Refusal Space shall be the same as the
Base Rent for the Premises and shall be due and payable
commencing on the earlier of (i) the date the tenant
improvements constructed by Landlord in the Refusal Space
leased by Tenant are substantially completed, or would have
been substantially completed but for Tenant Delays, and
Landlord has notified Tenant of such completion, or (ii) the
date Tenant begins the occupancy of all or any part of the
Refusal Space leased by Tenant in a reasonably normal manner
for the conduct of Tenant's business.
(g) Upon the exercise of the Refusal Option pursuant to the terms
hereof, Landlord and Tenant shall execute, at the request of
either party, an instrument delineating and describing the any
Refusal Space leased by Tenant and thereby added to the
Premises.
(h) In the event Tenant exercises the Right of First Refusal
pursuant to the terms hereof, as a condition precedent to
Tenant exercising the Right of First Refusal, Tenant must
cause the Security Deposit to be increased to an amount equal
to one
2
<PAGE> 56
month's Base Rent on the entire Premises, including any
Refusal Space leased by Tenant.
INITIALED FOR IDENTIFICATION BY LANDLORD AND TENANT
3
<PAGE> 57
EXHIBIT "G"
TO LEASE BETWEEN INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA, AS LANDLORD,
AND eLOYALTY CORPORATION, AS TENANT
EXPANSION OPTION
Subject to the terms and conditions of this Lease, Landlord hereby
grants to Tenant an expansion option (the "Expansion Option") exercisable as
hereinafter set forth, covering the remainder of the third floor of the
Building, containing approximately 16,414 rentable square feet (the "Expansion
Space").
(a) Until November 1, 2002, so long as Tenant is not in default in
the performance of its covenants under this Lease, Tenant may
exercise the Expansion Option to include under this Lease,
beginning on June 1, 2003, all or any part of Expansion Space.
In the event Tenant desires to exercise the Expansion Option,
Tenant must deliver to Landlord written notice (the "Expansion
Notice") of Tenant's election on or before November 1, 2002.
If Tenant fails to deliver the Expansion Notice to Landlord by
November 1, 2002, Tenant's option to expand the Premises as
set forth herein shall terminate and be of no further force or
effect. The Rent for the Remaining Expansion Space shall the
same as for the Rent for the original Premises.
(b) If prior to November 1, 2002, Tenant fails to exercise its
Right of First Refusal with respect to an Offer Notice for all
or any portion of the Offered Refusal Space in accordance with
Exhibit "F" and Landlord subsequently leases such Offered
Refusal Space to another tenant which has been the subject of
the Offered Notice, then Tenant's Expansion Option with
respect to such Offered Refusal Space as such space also
constitutes Expansion Space, shall terminate; but in such
event, Landlord agrees to make available to Tenant up to
16,414 rentable square feet, either in the Building or in
other buildings located in the Project as designated by
Landlord, as replacement Expansion Space. (For example, and by
way of example only, if, prior to November 1, 2002, Landlord
gives Tenant an Offer Notice for 5,000 rentable square feet on
the third floor of the Building in accordance with Exhibit
"F", and Tenant fails to exercise its Right of First Refusal
for such 5,000 rentable square feet, and Landlord leases such
5,000 rentable square feet to a third party tenant, then such
5,000 rentable square feet shall also be excluded from the
Expansion Space, but only if Landlord makes available to
Tenant as replacement Expansion Space 5,000 rentable square
feet on
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<PAGE> 58
either the first or second floor of the Building or in another
building in the Project reasonably acceptable to Tenant.
Tenant's right to expand into the remaining portion of the
Expansion Space on the third floor shall not be affected by
Tenant's waiver of its Right of First Refusal as to the 5,000
rentable square feet in this example.)
(c) If Tenant does not exercise its Expansion Option as to all of
the Expansion Space by November 1, 2002, then as to the
portion of the Expansion Space which Tenant does not elect to
expand, Landlord shall have the right to lease such space to
third parties, but subject to the Right of First Refusal set
forth in Exhibit "F".
(d) The term "Premises," as used in this Lease, shall include all
expansions thereof that may occur from time to time.
(e) In the event Tenant exercises the Expansion Option pursuant to
the terms hereof, Landlord shall do the work necessary to
furnish and install within the Expansion Space tenant
improvements in accordance with drawings to be prepared by
Tenant and approved in writing by Landlord. The cost of the
work shall be advanced by Landlord for the benefit of Tenant,
to be repaid by Tenant in the form of Base Rent, but only to
the extent that the aggregate cost of furnishing the Building
Standard improvements and such additional improvements
provided for in the drawings does not exceed an amount per
square foot leased, rounded up or down to the nearest cent
(but not to exceed $18.00), equal to (X) $18.00, times (Y) the
number of months remaining in the Term (excluding all
renewals, unless such renewals have been irrevocably exercised
by Tenant), divided by (Z) sixty (60).
(f) The failure by Tenant to timely give the written Expansion
Option Notice above shall constitute the Tenant's decision not
to exercise the Expansion Option, and the Tenant shall be
considered to have permanently waived any rights to the
Expansion Space, except for Tenant's Right of First Refusal
set forth in Exhibit "F".
(f) Upon the exercise of the Expansion Option pursuant to the
terms hereof, Landlord and Tenant shall execute, at the
request of either party, an instrument delineating and
describing the space added to the Premises.
(g) All Expansion Space leased pursuant to this Exhibit "G" shall
be for a term which is coterminous with the initial Term of
this Lease, and any renewal or extension thereof.
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<PAGE> 59
(h) If Tenant timely exercises the Expansion Option and Landlord
is unable to accommodate Tenant's expansion needs because of
(i) the unavailability of 16,414 rentable square feet of
Expansion Space or (ii) in the event Tenant exercised its
Right of First Refusal to less than the entire Expansion
Space, the unavailability of such amount of space in the
Building or the Project as designated by Landlord, in
Landlord's discretion, that equals the excess of 16,414
rentable square feet of space less any amount of space
obtained by Tenant through its Right of First Refusal and that
is reasonably acceptable to Tenant, then Tenant shall have the
right to cancel and terminate this Lease as of May 31, 2003,
by giving Landlord written notice of such election no later
than December 1, 2002; provided, however, as a condition
precedent to Tenant being entitled to cancel and terminate
this Lease, Tenant must pay, prior to May 31, 2003, liquidated
damages to Landlord equal to the unamortized costs incurred by
Landlord in connection with this Lease, including, but not
limited to, Tenant Improvements constructed by Landlord,
Additional Tenant Improvements constructed by Landlord, and
leasing commissions. Landlord and Tenant hereby acknowledge
and agree they have included the provision for payment of
liquidated damages in this Exhibit "G" because, in the event
of a termination by Tenant in accordance with this provision,
the actual damages incurred by Landlord can reasonably be
expected to approximate the amount of liquidated damages
called for in this Section (h) of this Exhibit "G", and
because the actual amount of such damages would be difficult
if not impossible to accurately measure.
(i) In the event Tenant exercises the Expansion Option pursuant to
the terms hereof, as a condition precedent to Tenant
exercising the Expansion Option, Tenant must cause the
Security Deposit to be increased to an amount equal to one
month's Base Rent on the entire Premises, including any
Expansion Space leased by Tenant.
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<PAGE> 60
INITIALED FOR IDENTIFICATION BY LANDLORD AND TENANT
4
<PAGE> 61
EXHIBIT "H"
TO LEASE BETWEEN INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA AS LANDLORD
AND eLOYALTY CORPORATION, AS TENANT
CERTIFICATE OF THE SECRETARY
The undersigned, Secretary of eLoyalty Corporation, a Delaware
corporation (the"Corporation"), hereby certifies that attached is a true and
correct copy of the resolutions duly adopted by unanimous consent dated ,
2000, of all directors of the Board of Directors of the Corporation
and that the same have not been amended, altered or rescinded and are now in
full force and effect; that the Corporation is duly organized and existing under
the laws of the State of Delaware; that all franchise and other taxes, if any,
required to maintain the corporate existence of the Corporation have been paid
when due and that no such taxes are delinquent; that no proceedings are pending
for the forfeiture of the Certificate of Incorporation of the Corporation or for
its dissolution, voluntary or involuntary; that the Corporation is duly
qualified to do business in the State of Texas and is in good standing in such
state; that there is no provision of the Articles of Incorporation or Bylaws of
the Corporation limiting the powers of the Board of Directors to pass or consent
to the resolutions set out in the instrument attached hereto and that said
resolutions are in conformity with the provisions of said Articles of
Incorporation and Bylaws; and that the Secretary is the keeper of the records
and minutes of the proceedings of the Board of Directors of the Corporation.
This is to further certify that the persons named below are the duly
elected and qualified officers of the Corporation, holding the respective
offices set forth opposite their names, that they continue to hold these offices
at the present time, and that the respective signatures set opposite their names
are the genuine, original signatures of each respectively:
Name Title Signature
President
---------------------------- ------------
Secretary
----------------------------
This is to further certify that the Corporation is duly organized and
existing under the laws of the State of Delaware; that all franchise and other
taxes, if any, required to maintain the existence of the Corporation have been
paid when due and that no such taxes are delinquent; that no proceedings are
pending for the dissolution or liquidation of the Corporation, voluntary
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<PAGE> 62
or involuntary; that the Partnership is duly qualified to do business in the
State of Texas; and that there is no provision of the partnership agreement
establishing the Corporation which would limit the powers of the Corporation to
execute a lease pursuant to the provisions which are attached hereto.
IN WITNESS WHEREOF I have hereunto affixed my name as Secretary and
have caused the corporate seal of the Corporation to be hereto affixed this day
of , 2000.
Secretary
The undersigned, , President of the Corporation, hereby
certifies that , is the duly elected and qualified Secretary of the
Corporation, that the signature above is his (her) genuine signature, that
attached is a true and correct copy of the resolutions duly adopted by the Board
of Directors of the Corporation, which are now in full force and effect; and
that the foregoing certificate is true and correct.
President
[ATTACHED TO THIS CERTIFICATE MUST BE CORPORATE RESOLUTIONS EVIDENCING
THAT THE OFFICER EXECUTING THE LEASE HAS AUTHORITY TO EXECUTE THIS LEASE FOR
TENANT]
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<PAGE> 63
INITIALED FOR IDENTIFICATION BY LANDLORD AND TENANT
EXHIBIT "I"
TO LEASE BETWEEN INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA AS LANDLORD
AND eLOYALTY CORPORATION, AS TENANT
RULES AND REGULATIONS
The following standards shall be observed by Tenant for the mutual
safety, cleanliness and convenience of all occupants of the Building. These
rules are subject to change from time to time, as specified in the Lease.
1. Tenant shall not use the Premises or the Building to sell any items
or services at retail price or cost without the prior written consent of
Landlord. Stenography, typewriting, blueprinting, duplicating services of any
kind, food and beverage services, and similar businesses, shall not be conducted
from or within the Premises or Building for the service or accommodation of
other occupants of the Building without the prior written consent of Landlord.
2. Sidewalks, halls, passageways, fire exits, roof access, and
stairwells shall not be obstructed or used by Tenant for a purpose other than
ingress and egress to and from the Premises and Building.
3. Flammable, explosive or other hazardous liquids and materials shall
not be brought on the Premises or into the Building without the prior written
consent of Landlord. All holiday decorations shall be made of flame retardant
materials and are limited to the interior of the Building.
4. All contractors and technicians performing work for Tenant within
the Building shall be referred to Landlord for approval before performing such
work. All work, including, but not limited to, installation of telephone and
telegraph equipment, electrical and electronic
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<PAGE> 64
devices and attachments, and all installations affecting floors, walls, windows,
doors, ceilings or any other physical feature of the Building, shall not
commence prior to written approval by Landlord.
5. Tenant shall not conduct any auction on the Premises nor store
goods, wares or merchandise on the Premises, except for Tenant's own personal
use.
6. Movement into or out of the Building of freight, furniture, office
equipment or other material for dispatch or receipt by Tenant which requires
movement through public corridors or lobbies or entrances to the Building shall
be limited to the use of elevators only and shall be done at hours and in a
manner approved by Landlord for such purposes from time to time. Only licensed,
commercial movers shall be used for the purpose of moving freight, furniture or
office equipment to and from the Premises and Building. All hand trucks shall be
equipped with rubber tires and rubber side guards.
7. Requests by Tenant for building services, maintenance or repair
shall be made in writing to the office of the Landlord or its management agent,
if any.
8. Tenant shall not change locks or install additional locks on doors
without prior written consent of Landlord. Tenant shall not make or cause to be
made duplicates of keys procured from Landlord without the prior approval of
Landlord. All keys to the Premises shall be surrendered to Landlord upon
termination of tenancy.
9. Tenant shall give prompt notice to the office of the Landlord or
its management agent, if any, of any damage to or defects in plumbing,
electrical fixtures or heating and cooling equipment. Liquids, or other
materials or substances which will cause injury to the plumbing, shall not be
put into the lavatories, water closets or other plumbing fixtures, by Tenant,
its agents, employees or invitees.
10. Tenant shall not place, install or operate on the Premises, or in
any part of the Building or Project, any stoves or cooking equipment outside any
kitchen areas without the prior written approval of Landlord.
11. Large files, safes, electronic data processing equipment and other
heavy equipment shall not be moved into the Building or installed in the
Premises without the prior written approval of Landlord.
12. Tenant shall not lay floor covering within the Premises without
the prior written approval of Landlord. The use of cement or other similar
adhesive materials not easily removed with water is expressly prohibited.
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<PAGE> 65
13. Tenant agrees to cooperate and assist Landlord in the prevention
of canvassing, soliciting and peddling within the Building.
14. Nails, screws or picture hangers shall not be driven into the wood
finish of any room without the prior written consent of Landlord. Animals or
birds shall not be kept in or about the Premises or the Building.
15. All plants within the Tenant Suite should be maintained by
professional plant management companies. Any infestation as a result of the
plants is the responsibility of the Tenant.
16. No sign, advertisement, notice or handbill shall be exhibited,
distributed, painted or affixed by Tenant which is visible from any part of the
Project beyond the boundaries of the Premises without prior written consent of
the Landlord.
17. Landlord reserves the right to exclude from the Building, between
the hours of 6:00 p.m. and 7:00 a.m. on weekdays and at all hours on Saturday,
Sunday and legal holidays, all persons who are not known to the Building
watchman, if any, and who do not present a pass to the Building signed by
Tenant. Each Tenant shall be responsible for all persons for whom he supplies a
pass or key to the Building or Premises.
18. No smoking is allowed inside the Building. Smoking is restricted
to the exterior West end of the Building. Tenant shall be responsible for each
employee.
19. Tenant will use all caution when driving and parking in the
garage. Landlord is NOT responsible for any lost, stolen, or damage done to
persons or property of Tenant and/or its employees as result of parking on the
Project. Parking around the Building is limited to handicapped and 30-minute
visitor parking only. There is no parking on the streets. Violating vehicles
will be towed at owner's expense.
20. Tenant shall not use the Building or the Premises to store
vehicles, including without limitation boats, trailers, campers, golf carts,
motorcycles or automobiles. All vehicles other than automobiles and motorcycles
will be towed and stored at the owner's expense and Landlord shall assume no
liability therefore, and Tenant waives any claim arising by reason thereof and
agrees to hold Landlord harmless from any such claims arising from such towing,
storage or removal. Any automobile or motorcycle left on the Premises for more
than twenty (20) consecutive days may be towed and stored at the owner's expense
and Landlord shall assume no liability therefore and Tenant waives any claim
arising by reason thereof and agrees to hold Landlord harmless from any such
claims arising from such towing, storage or removal.
<PAGE> 66
INITIALED FOR IDENTIFICATION BY LANDLORD AND TENANT
<PAGE> 1
EXHIBIT 10.16
[BANK OF AMERICA LOGO] BUSINESS LOAN AGREEMENT
Bank of America, N.A.
This Agreement dated as of March , 2000, is between BANK OF AMERICA,
N.A. (the "Bank") and eLOYALTY CORPORATION (the "Borrower").
1. LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will
provide a line of credit to the Borrower. The amount of the line of credit (the
"Commitment") is Ten Million Dollars ($10,000,000).
(b) This is a revolving line of credit providing for cash advances and
letters of credit. During the availability period, the Borrower may repay
principal amounts and reborrow them.
(c) Each advance will be for at least One Hundred Thousand Dollars
($100,000), or for the amount of the remaining available line of credit, if
less.
(d) The Borrower agrees not to permit the outstanding principal balance
of advances under the line of credit plus the outstanding amounts of any letters
of credit, including amounts drawn on letters of credit and not yet reimbursed,
to exceed the Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between the date of
this Agreement and December 30, 2000 (the "Expiration Date") unless the Borrower
is in default.
1.3 INTEREST RATE.
(a) Unless the Borrower elects the optional interest rate described
below, the interest rate is a per annum rate equal to the Reference Rate defined
below.
(b) The Reference Rate is the rate of interest publicly announced from
time to time by the Bank in San Francisco, California, as its Reference Rate.
The Reference Rate is set by the Bank based on various factors, including the
Bank's costs and desired return, general economic conditions and other factors,
and is used as a reference point for pricing some loans. The Bank may price
loans to its customers at, above, or below the Reference Rate. Any change in the
Reference Rate will take effect at the opening of business on the day specified
in the public announcement of a change in the Bank's Reference Rate.
1.4 OPTIONAL INTEREST RATE. Instead of the interest rate based on the Bank's
Reference Rate, the Borrower may elect the optional interest rate listed below
during interest periods agreed to by the Bank and the Borrower. The optional
interest rate shall be subject to the terms and conditions described later in
this Agreement. Any principal amount bearing interest at an optional rate under
this Agreement is referred to as a "Portion." The following optional interest
rate is available: the IBOR Rate plus 0.75 percentage points.
1.5 REPAYMENT TERMS.
(a) The Borrower will pay interest on April 30, 2000, and then monthly
thereafter until payment in full of any principal outstanding under this line of
credit.
(b) The Borrower will repay in full all principal and any unpaid
interest or other charges outstanding under this line of credit no later than
the Expiration Date.
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1.6 LETTERS OF CREDIT. This line of credit may be used for financing:
(i) standby letters of credit with a maximum maturity not to extend
more than one year beyond the Expiration Date.
(ii) The amount of the letters of credit outstanding at any one time
(including amounts drawn on the letters of credit and not yet reimbursed) may
not exceed Three Million Dollars ($3,000,000) (the "L/C Sublimit").
The Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the
Bank, be added to the principal amount outstanding under this Agreement. The
amount will bear interest and be due as described elsewhere in this Agreement.
(b) if there is a default under this Agreement, to immediately prepay
and make the Bank whole for any outstanding letters of credit.
(c) the issuance of any letter of credit and any amendment to a letter
of credit is subject to the Bank's written approval and must be in form and
content satisfactory to the Bank and in favor of a beneficiary acceptable to the
Bank.
(d) to sign the Bank's form Application and Agreement for Standby
Letter of Credit.
(e) to pay any issuance and/or other fees that the Bank notifies the
Borrower will be charged for issuing and processing letters of credit for the
Borrower.
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
2. OPTIONAL INTEREST RATE
2.1 OPTIONAL RATE. The optional interest rate is a rate per year. interest will
be paid on the last day of each interest period, and, if the interest period is
longer than 90 days, then on the last day of each quarter during the interest
period. At the end of any interest period, the interest rate will revert to the
rate based on the Reference Rate, unless the Borrower has designated another
optional interest rate for the Portion. No Portion will be converted to a
different interest rate during the applicable interest period. Upon the
occurrence of an event of default under this Agreement, the Bank may terminate
the availability of optional interest rates for interest periods commencing
after the default occurs.
2.2 IBOR RATE. The election of IBOR Rates shall be subject to the following
terms and requirements:
(a) The interest period during which the IBOR Rate will be in effect
will be no shorter than 30 days and no longer than 180 days. The first day of
the interest period must be a Banking Day on which the Bank is also open for
business in California and dealing in offshore dollars. The last day of the
interest period will be determined by the Bank using the practices of the
offshore dollar inter-bank market.
(b) Each IBOR Rate Portion will be for an amount not less than the
following:
(i) for interest periods of 91 days or longer, Five Hundred
Thousand Dollars ($500,000).
(ii) for interest periods of between 31 and 90 days, One Million
Dollars ($1,000,000).
(c) The Borrower may not elect an IBOR Rate with respect to any
principal amount which is scheduled to be repaid before the last day of the
applicable interest period.
(d) The "IBOR Rate" means the interest rate determined by the following
formula, rounded upward to the nearest 1/100 of one percent. (All amounts in
the calculation will be determined by the Bank as of the first day of the
interest period.)
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IBOR Rate = IBOR Base Rate
---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "IBOR Base Rate" means the interest rate at which the Bank's
Grand Cayman Branch, Grand Cayman, British West Indies, would offer
U.S. dollar deposits for the applicable interest period to other major
banks in the offshore dollar inter-bank market.
(ii) "Reserve Percentage" means the total of the maximum reserve
percentages for determining the reserves to be maintained by member
banks of the Federal Reserve System for Eurocurrency Liabilities, as
defined in Federal Reserve Board Regulation D, rounded upward to the
nearest 1/100 of one percent. The percentage will be expressed as a
decimal, and will include, but not be limited to, marginal, emergency,
supplemental, special, and other reserve percentages.
(e) Each prepayment of an IBOR Rate Portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee as described below.
A "prepayment" is a payment of an amount on a date earlier than the scheduled
payment date for such amount as required by this Agreement. The prepayment fee
shall be equal to the amount (if any) by which:
(i) the additional interest which would have been payable during
the interest period on the amount prepaid had it not been prepaid,
exceeds
(ii) the interest which would have been recoverable by the Bank by
placing the amount prepaid on deposit in the domestic certificate of
deposit market, the eurodollar deposit market, or other appropriate
money market selected by the Bank for a period starting on the date on
which it was prepaid and ending on the last day of the interest period
for such Portion (or the scheduled payment date for the amount prepaid,
if earlier).
(f) The Bank will have no obligation to accept an election for an IBOR
Rate Portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal
to the interest period, of an IBOR Rate Portion are not available in
the offshore Dollar inter-bank market; or
(ii) the IBOR Rate does not accurately reflect the cost of an IBOR
Rate Portion.
3. FEES AND EXPENSES
3.1 FEES.
(a) LOAN FEE. The Borrower agrees to pay a loan fee in the amount of
Twenty Five Thousand Dollars ($25,000). This fee is due on or before the date of
this Agreement.
(b) UNUSED COMMITMENT FEE. The Borrower agrees to pay a fee on any
difference between the Commitment and the amount of credit it actually uses,
determined by the weighted average credit outstanding during the specified
period. The fee will be calculated at 0.125% per year. The calculation of credit
outstanding will include the undrawn amount of letters of credit. This fee is
due on March 31, 2000 and on the last day of each quarter thereafter until the
expiration of the availability period.
3.2 EXPENSES. The Borrower agrees to reimburse the Bank upon demand, whether or
not any loan is made under this Agreement, for:
(a) filing, recording and search fees, appraisal fees, title report
fees, documentation fees, and other similar fees, costs and expenses incurred by
the Bank.
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<PAGE> 4
(b) any expenses the Bank incurs in the preparation, negotiation and
execution of this Agreement and any agreement or instrument required by this
Agreement. Expenses include, but are not limited to, reasonable attorneys' fees,
including any allocated costs of the Bank's in-house counsel.
(c) any stamp or other taxes which may be payable with respect to the
execution or delivery of this Agreement and any agreement or instrument required
by this Agreement.
4. DISBURSEMENTS, PAYMENTS AND COSTS
4.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made in
writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank.
4.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank will be made in
immediately available funds and will be evidenced by records kept by the Bank.
In addition, the Bank may, at its discretion, require the Borrower to sign one
or more promissory notes. Each payment made by the Borrower will be made without
set-off or counterclaim in immediately available funds not later than 2:00 p.m.,
Chicago time, on the date called for under this Agreement at the Bank's office
at 231 South LaSalle Street, Chicago, Illinois 60697. Funds received on any day
after such time will be deemed to have been received on the next Banking Day.
Whenever any payment to be made under this Agreement is stated to be due on a
day which is not a Banking Day, such payment will be made on the next succeeding
Banking Day and such extension of time will be included in the computation of
any interest.
4.3 TELEPHONE AND FACSIMILE AUTHORIZATION.
(a) The Bank may honor telephone or facsimile instructions for advances
or repayments or for the designation of optional interest rates and facsimile
requests for the issuance of letters of credit given by any one of the
individuals authorized to sign loan agreements on behalf of the Borrower, or any
other individual designated by any one of such authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from
the Borrowers account or such other of the Borrower's accounts with the Bank
as designated in writing by the Borrower.
(c) Upon the Bank's request, the Borrower will provide written
confirmation to the Bank of any telephone or facsimile instructions within 2
days. if there is a discrepancy and the Bank has already acted on the
instructions, the telephone or facsimile instructions will prevail over the
written confirmation.
(d) The Borrower indemnifies and excuses the Bank (including its
officers, employees, and agents) from all liability, loss, and costs in
connection with any act resulting from telephone or facsimile instructions the
Bank reasonably believes are made by any individual authorized by the Borrower
to give such instructions. This indemnity and excuse will survive this
Agreement.
4.4 DIRECT DEBIT.
(a) The Borrower agrees that interest and any fees will be deducted
automatically on the due date from the Borrower's checking account number
, or such other of the Borrower's accounts with the Bank as designated
in writing by the Borrower.
(b) The Bank will debit the account on the dates the payments become
due. If a due date does not fall on a Banking Day, the Bank will debit the
account on the first Banking Day following the due date.
(c) The Borrower will maintain sufficient funds in the account on the
dates the Bank enters debits authorized by this Agreement. If there are
insufficient funds in the account on the date the Bank enters any debit
authorized by this Agreement, the debit will be reversed.
4.5 BANKING DAYS. Unless otherwise provided in this Agreement, a "Banking Day"
is a day other than a Saturday or a Sunday on which the Bank is open for
business in Chicago, Illinois. All payments and disbursements which would be due
on a day which is not a Banking Day will be due on the next Banking Day.
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<PAGE> 5
All payments received on a day which is not a Banking Day will be applied to the
credit on the next Banking Day.
4.6 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the Bank's
costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and
commitments for credit.
4.7 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360 day year and
the actual number of days elapsed. Installments of principal which are not paid
when due under this Agreement shall continue to bear interest until paid.
4.8 DEFAULT RATE. Upon the occurrence and during the continuation of any default
under this Agreement, principal amounts outstanding under this Agreement will at
the option of the Bank bear interest at a rate which is 2 percentage point(s)
higher than the rate of interest otherwise provided under this Agreement. This
will not constitute a waiver of any default.
5. CONDITIONS
The Bank must receive the following items, in form and content acceptable to the
Bank, before it is required to extend any credit to the Borrower under this
Agreement:
5.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance by the
Borrower (and any guarantor) of this Agreement and any instrument or agreement
required under this Agreement have been duly authorized.
5.2 GOVERNING DOCUMENTS. A copy of the Borrower's articles of incorporation.
5.3 INSURANCE. Evidence of insurance coverage, as required in the "Covenants"
section of this Agreement.
5.4 GUARANTY. A continuing guaranty signed by Technology Solutions Company (the
"Guarantor").
5.5 PAYMENT OF FEES. Payment of all accrued and unpaid expenses incurred by the
Bank as required by the paragraph entitled "Expenses".
5.6 GOOD STANDING. Certificates of good standing for the Borrower and the
Guarantor from their state of formation and from any other state in which they
are required to qualify to conduct their business.
5.7 OTHER ITEMS. Any other items that the Bank reasonably requires.
6. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation.
6.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
6.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
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<PAGE> 6
6.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
6.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
6.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement, or
obligation by which the Borrower is bound.
6.6 FINANCIAL INFORMATION. All financial and other information that has been or
will be supplied to the Bank, including the Borrower's financial statement dated
as of September 30, 1999, and the guarantor's financial statement dated as of
September 30, 1999, is:
(a) sufficiently complete to give the Bank accurate knowledge of the
Borrower's (and any guarantor's) financial condition, including all material
contingent liabilities.
(b) in compliance with all government regulations that apply.
Since the date of the financial statement specified above, there has been no
material adverse change in the assets or the financial condition of the
Borrower.
6.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
6.8 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
6.9 OTHER OBLIGATIONS. The Borrower is not in default an any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
6.10 INCOME TAXES. The Borrower has filed all tax returns required to be filed
and has paid, or made adequate provisions for the payment of, all taxes due and
payable pursuant to such returns and pursuant to any assessments made against it
or any of its property. No tax liens have been filed and no material claims are
being asserted with respect to any such taxes. The reserves on the books of the
Borrower in respect of taxes are adequate. The Borrower is not aware of any
proposed assessment or adjustment for additional taxes (or any basis for any
such assessment) which might be material to the Borrower.
6.11 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse of
time or both would be, a default under this Agreement.
6.12 INSURANCE. The Borrower has obtained, and maintained in effect, the
insurance coverage required in the "Covenants" section of this Agreement.
6.13 ERISA PLANS.
(a) Each Plan (other than a multiemployer plan) is in compliance in all
material respects with the applicable provisions of ERISA, the Code and other
federal or state law. Each Plan has received a favorable determination letter
from the IRS and to the best knowledge of the Borrower, nothing has occurred
which would cause the loss of such qualification. The Borrower has fulfilled its
obligations, if any, under the minimum funding standards of ERISA and the Code
with respect to each Plan, and has not incurred any liability with respect to
any Plan under Title IV of ERISA.
(b) There are no claims, lawsuits or actions (including by any
governmental authority), and there has been no prohibited transaction or
violation of the fiduciary responsibility rules, with respect to any Plan which
has resulted or could reasonably be expected to result in a material adverse
effect.
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<PAGE> 7
(c) With respect to any Plan subject to Title IV of ERISA:
(i) No reportable event has occurred under Section 4043(c) of
ERISA for which the PBGC requires 30 day notice.
(ii) No action by the Borrower or any ERISA Affiliate to terminate
or withdraw from any Plan has been taken and no notice of intent to
terminate a Plan has been filed under Section 4041 of ERISA.
(iii) No termination proceeding has been commenced with respect to
a Plan under Section 4042 of ERISA, and no event has occurred or
condition exists which might constitute grounds for the commencement of
such a proceeding.
(d) The following terms have the meanings indicated for purposes of
this Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(ii) "ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
(iii) "ERISA Affiliate" means any trade or business (whether or
not incorporated) under common control with the Borrower within the
meaning of Section 414(b) or (c) of the Code.
(iv) "PBGC" means the Pension Benefit Guaranty Corporation.
(v) "Plan" means a pension, profit-sharing, or stock bonus plan
intended to qualify under Section 401(a) of the Code, maintained or
contributed to by the Borrower or any ERISA Affiliate, including any
multiemployer plan within the meaning of Section 4001(a)(3) of ERISA.
6.14 YEAR 2000 COMPLIANCE. The Borrower has conducted a comprehensive review and
assessment of the Borrower's computer applications and made inquiry of the
Borrower's key suppliers, vendors and customers with respect to the "year 2000
problem" (that is, the inability of computers, as well as embedded microchips in
non-computing devices, to be able to properly perform date-sensitive functions
after December 31, 1999) and, based on that review and inquiry, the Borrower
does not believe the year 2000 problem will result in a material adverse change
in the Borrower's business condition (financial or otherwise), operations,
properties or prospects, or ability to repay the credit.
7. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
7.1 USE OF PROCEEDS. To use the proceeds of the credit only for general
corporate purposes and issuing letters of credit (up to the L/C Sublimit).
7.2 FINANCIAL INFORMATION. To provide the following financial information and
statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time:
(a) Within 90 days of the Borrower's fiscal year end, the Borrower's
annual financial statements. These financial statements must be audited by a
Certified Public Accountant acceptable to the Bank. The statements shall be
prepared on a consolidated basis.
(b) Within 45 days of the period's end, the Borrower's quarterly
financial statements. These financial statements may be Borrower prepared. The
statements shall be prepared on a consolidated basis.
(c) Within the period(s) provided in (a) and (b) above, a compliance
certificate of the Borrower signed by an authorized financial officer of the
Borrower setting forth (1) the information and computations (in sufficient
detail) to establish that the Borrower is in compliance with all financial
covenants at the end of the period
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covered by the financial statements then being furnished and (ii) whether there
existed as of the date of such financial statements and whether there exists as
of the date of the certificate, any default under this Agreement and, if any
such default exists, specifying the nature thereof and the action the Borrower
is taking and proposes to take with respect thereto.
7.3 TANGIBLE NET WORTH. To maintain on a consolidated basis tangible net worth
equal to at least the greater of the following:
(a) Seventy Million Dollars ($70,000,000); or
(b) 75% of closing Tangible Net Worth measured quarterly.
"Tangible Net Worth" means the gross book value of the Borrower's
assets (excluding goodwill, patents, trademarks, trade names, organization
expense, treasury stock, unamortized debt discount and expense, capitalized or
deferred research and development costs, deferred marketing expenses, deferred
receivables, and other like intangibles, and monies due from affiliates,
officers, directors, employees, or shareholders, of the Borrower) plus
liabilities subordinated to the Bank in a manner acceptable to the Bank (using
the Bank's standard form) less total liabilities, including but not limited to
accrued and deferred income taxes, and any reserves against assets.
7.4 OTHER DEBTS. Not to have outstanding or incur any direct or contingent
liabilities or lease obligations (other than those to the Bank), or become
liable for the liabilities of others without the Bank's written consent.
This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
7.5 OTHER LIENS. Not to create, assume, or allow any security interest or lien
(including judicial liens) on property the Borrower now or later owns, except:
(a) Mortgages, deeds of trust and security agreements in favor of the
Bank.
(b) Liens for taxes not yet due.
7.6 LEASES. Not to permit the aggregate payments due in any fiscal year under
all leases (including capital and operating leases for real or personal
property) to exceed Ten Million Dollars ($10,000,000).
7.7 LOANS AND INVESTMENTS. Not to make any extensions of credit, or make any
investments in, or make any capital contributions or other transfers of assets
to, any individual or entity, except the following:
(a) extensions of credit in the nature of accounts receivable or notes
receivable arising from the sale or lease of goods or services in the ordinary
course of business.
(b) investments in any of the following:
(i) U.S. treasury bills and other obligations of the federal
government;
(ii) stock of its subsidiaries.
(c) investments in venture capital funds, with others, created to
invest in companies in loyalty technology, provided, however, such investment
capital must come from the proceeds of a secondary public offering.
7.8 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over Ten Million Dollars ($10,000,000) against the
Borrower.
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<PAGE> 9
(b) any substantial dispute between the Borrower and any government
authority.
(c) any event of default under this Agreement, or any event which, with
notice or lapse of time or both, would constitute an event of default.
(d) any material adverse change in the Borrower's business condition
(financial or otherwise), operations, properties or prospects, or ability to
repay the credit.
(e) any change in the Borrower's name, legal structure, place of
business, or chief executive office if the Borrower has more than one place of
business.
(f) any actual contingent liabilities of the Borrower, and any such
contingent liabilities which are reasonably foreseeable, where such liabilities
are in excess of Five Million Dollars ($5,000,000) in the aggregate.
7.9 BOOKS AND RECORDS. To maintain adequate books and records,
7.10 AUDITS. To allow the Bank and its agents to inspect the Borrower's
properties and examine, audit and make copies of books and records at any
reasonable time. If any of the Borrower's properties, books or records are in
the possession of a third party, the Borrower authorizes that third party to
permit the Bank or its agents to have access to perform inspections or audits
and to respond to the Bank's requests for information concerning such
properties, books and records.
7.11 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
7.12 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.
7.13 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements
to keep the Borrower's properties in good working condition.
7.14 PERFECTION OF LIENS. To help the Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to protect its
security interests and liens.
7.15 COOPERATION. To take any action reasonably requested by the Bank to carry
out the intent of this Agreement.
7.16 INSURANCE.
(a) GENERAL BUSINESS INSURANCE. To maintain insurance as is usual for
the business it is in.
(b) EVIDENCE OF INSURANCE. Upon the request of the Bank, to deliver to
the Bank a copy of each insurance policy, or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.
7.17 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture,
syndicate, or other combination, or become a partner in a partnership, a member
of a joint venture, or a member of a limited liability company.
(d) sell, assign, lease, transfer or otherwise dispose of any assets
for less than fair market value, or enter into any agreement to do so.
(e) enter into any sale and leaseback agreement covering any of its
fixed or capital assets.
-9-
<PAGE> 10
(f) acquire or purchase a business or its assets.
(g) voluntarily suspend its business for more than 7 days in any 30 day
period.
7.18 BANK AS PRINCIPAL DEPOSITORY. To maintain the Bank as its principal
depository bank, including for the maintenance of business, cash management,
operating and administrative deposit accounts.
7.19 ERISA PLANS. With respect to a Plan subject to Title IV of ERISA, to give
prompt written notice to the Bank of:
(a) The occurrence of any reportable event under Section 4043(c) of
ERISA for which the PBGC requires 30 day notice.
(b) Any action by the Borrower or any ERISA Affiliate to terminate or
withdraw from a Plan or the filing of any notice of intent to terminate under
Section 4041 of ERISA.
(c) The commencement of any proceeding with respect to a Plan under
Section 4042 of ERISA.
8. DEFAULT
If any of the following events occurs, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy" below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
8.1 FAILURE TO PAY. The Borrower fails to make a payment under this Agreement
when due.
8.2 FALSE INFORMATION. The Borrower has given the Bank false or misleading
information or representations.
8.3 BANKRUPTCY. The Borrower files a bankruptcy petition, a bankruptcy petition
is filed against the Borrower, or the Borrower makes a general assignment for
the benefit of creditors.
8.4 RECEIVERS; TERMINATION. A receiver or similar official is appointed for the
Borrower's business, or the business is terminated, or any guarantor is
liquidated or dissolved.
8.5 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more trade
creditors against the Borrower in an aggregate amount of Ten Million Dollars
($10,000,000) or more in excess of any insurance coverage.
8.8 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower, or the Borrower enters into any settlement agreements with respect to
any litigation or arbitration, in an aggregate amount of Ten Million Dollars
($10,000,000) or more in excess of any insurance coverage.
8.7 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's financial condition or
ability to repay.
8.8 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the Borrower's
business condition (financial or otherwise), operations, properties or
prospects, or ability to repay the credit.
8.9 CROSS-DEFAULT. Any default occurs under any agreement in connection with any
credit the Borrower or any of the Borrower's related entities or affiliates has
obtained from anyone else or which the Borrower or any of the Borrower's related
entities or affiliates has guaranteed if the default consists of failing to make
a payment when due or gives the other lender the right to accelerate the
obligation.
8.10 DEFAULT UNDER RELATED DOCUMENTS. Any guaranty, subordination agreement,
security agreement, mortgage, deed of trust, or other document required by this
Agreement is violated or no longer in effect.
-10-
<PAGE> 11
8.11 OTHER BANK AGREEMENTS. The Borrower fails to meet the conditions of, or
fails to perform any obligation under any other agreement the Borrower has with
the Bank or any affiliate of the Bank, or demand is made by the Bank or any
affiliate of the Bank on any obligation owing to the Bank or such affiliate
under any other agreement the Borrower has with the Bank or any affiliate of the
Bank.
8.12 ERISA PLANS. The occurrence of any one or more of the following events with
respect to a Plan subject to Title IV of ERISA, provided such event or events
could reasonably be expected, in the judgment of the Bank, to subject the
Borrower to any tax, penalty or liability (or any combination of the foregoing)
which, in the aggregate, could have a material adverse effect on the financial
condition of the Borrower:
(a) A reportable event shall occur under Section 4043(c) of ERISA with
respect to a Plan.
(b) Any Plan termination (or commencement of proceedings to terminate a
Plan) or the full or partial withdrawal from a Plan by the Borrower or any ERISA
Affiliate.
8.13 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions of,
or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article. This includes any failure or
anticipated failure by the Borrower to comply with any financial covenants set
forth in this Agreement, whether such failure is evidenced by financial
statements delivered to the Bank or is otherwise known to the Borrower or the
Bank.
9. ENFORCING THIS AGREEMENT; MISCELLANEOUS
9.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
9.2 ILLINOIS LAW. THIS AGREEMENT IS GOVERNED BY THE INTERNAL LAWS OF THE STATE
OF ILLINOIS.
9.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and the
Bank's successors and assignees. The Borrower agrees that it may not assign this
Agreement without the Bank's prior consent. The Bank may sell participations in
or assign this loan, and may exchange financial information about the Borrower
with actual or potential participants or assignees; provided that such actual or
potential participants or assignees agree to treat all financial information
exchanged as confidential.
9.4 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable, the
rest of the Agreement may be enforced. The Bank retains all rights, even if it
makes a loan after default. If the Bank waives a default, it may enforce a later
default. Any consent or waiver under this Agreement must be in writing.
9.5 ADMINISTRATION COSTS. The Borrower will pay the Bank for all reasonable
costs incurred by the Bank in connection with administering this Agreement.
9.6 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any reasonable
costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and in
connection with any amendment, waiver, "workout" or restructuring under this
Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing
party is entitled to recover costs and reasonable attorneys' fees incurred in
connection with the lawsuit or arbitration proceeding, as determined by the
court or arbitrator. In the event that any case is commenced by or against the
Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar
or successor statute, the Bank is entitled to recover costs and reasonable
attorneys' fees incurred by the Bank related to the preservation, protection, or
enforcement of any rights of the Bank in such a case. As used in this paragraph,
"attorneys' fees" includes the allocated costs of the Bank's in-house counsel.
9.7 ONE AGREEMENT. This Agreement and any related security or other agreements
required by this Agreement, collectively;
-11-
<PAGE> 12
(a) represent the sum of the understandings and agreements between the
Bank and the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and
the Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete
and exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
9.8 INDEMNIFICATION. The Borrower will indemnify and hold the Bank harmless from
any loss, liability, damages, judgments, and costs of any kind relating to or
arising directly or indirectly out of (a) this Agreement or any document
required hereunder, (b) any credit extended or committed by the Bank to the
Borrower hereunder, and (c) any litigation or proceeding related to or arising
out of this Agreement, any such document, or any such credit. This indemnity
includes but is not limited to attorneys' fees (including the allocated cost of
in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries
and all of their directors, officers, employees, agents, successors, attorneys,
and assigns. This indemnity will survive repayment of the Borrower's obligations
to the Bank. All sums due to the Bank hereunder shall be obligations of the
Borrower, due and payable immediately without demand.
9.9 NOTICES. All notices required under this Agreement will be in writing and
will be transmitted by personal delivery, first class mail, overnight courier,
or facsimile to the addresses or facsimile numbers on the signature page of this
Agreement, or to such other addresses or facsimile numbers as the Bank and the
Borrower may specify from time to time in writing.
9.10 HEADINGS. Article and paragraph headings are for reference only and do not
affect the interpretation or meaning of any provisions of this Agreement.
9.11 COUNTERPARTS. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, will be deemed an original but all such
counterparts will constitute but one and the same agreement.
9.12 CONSENT TO JURISDICTION. To induce the Bank to accept this Agreement, the
Borrower irrevocably agrees that, subject to the Bank's sole and absolute
election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY ARISING OUT OF OR RELATED TO
THIS AGREEMENT WILL BE LITIGATED IN COURTS HAVING SITUS IN CHICAGO, ILLINOIS.
THE BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY COURT
LOCATED WITHIN CHICAGO, ILLINOIS, WAIVES PERSONAL SERVICE OF PROCESS UPON THE
BORROWER, AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED
MAIL DIRECTED TO THE BORROWER AT THE ADDRESS STATED ON THE SIGNATURE PAGE HEREOF
AND SERVICE SO MADE WILL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT.
9.13 WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK EACH WAIVES ANY RIGHT TO A
TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (a)
UNDER THIS AGREEMENT OR ANY RELATED AGREEMENT OR UNDER ANY AMENDMENT,
INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE
DELIVERED IN CONNECTION WITH THIS AGREEMENT OR (b) ARISING FROM ANY BANKING
RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY
SUCH ACTION OR PROCEEDING WILL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
THE BORROWER AGREES THAT IT WILL NOT ASSERT ANY CLAIM AGAINST THE BANK OR ANY
OTHER PERSON INDEMNIFIED UNDER THIS AGREEMENT ON ANY THEORY OF LIABILITY FOR
SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES.
-12-
<PAGE> 13
This Agreement is executed as of the date stated at the top of the first page.
BANK OF AMERICA, N.A. eLOYALTY CORPORATION
By: By: Timothy J. Cunningham
---------------------------- ----------------------------
Title: Title:
------------------------- -------------------------
Address and facsimile number Address and facsimile number
where notices to the Bank are where notices to the Borrower
to be sent: are to be sent:
231 South LaSalle Street 205 North Michigan Avenue
Chicago, Illinois 60697 Chicago, Illinois 60601
Attention: Upper MW Strategies II Attention: Timothy Cunningham
FAX: (312) 974-2109 FAX: (312) 228-4501
-13-
<PAGE> 1
EXHIBIT 21.1
ELOYALTY CORPORATION
SUBSIDIARIES OF THE COMPANY
The following are all the subsidiaries of eLoyalty and were established in
connection with eLoyalty being spun-off from Technology Solutions Company
effective February 15, 2000.
eLoyalty Europe Delaware
eLoyalty Limited UK
eLoyalty GMBH Germany
eLoyalty France SARL France
eLoyalty Ltd. Switzerland
eLoyalty Pty. Ptd Australia
eLoyalty Corporation Canada
(Canada)
Geising International Ltd. New York
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-96473) and (No. 33-30374) of eLoyalty
Corporation's of our report dated February 15, 2000 appearing in this eLoyalty
Corporation Report on Form 10-K for the year ended December 31, 1999.
/s/ PricewaterhouseCoopers LLP
March 30, 2000
Chicago, Illinois
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,462
<SECURITIES> 7,175
<RECEIVABLES> 46,140
<ALLOWANCES> 2,084
<INVENTORY> 0
<CURRENT-ASSETS> 77,915
<PP&E> 5,371
<DEPRECIATION> 3,087
<TOTAL-ASSETS> 96,603
<CURRENT-LIABILITIES> 22,988
<BONDS> 0
0
0
<COMMON> 414
<OTHER-SE> 73,201
<TOTAL-LIABILITY-AND-EQUITY> 96,603
<SALES> 0
<TOTAL-REVENUES> 146,003
<CGS> 0
<TOTAL-COSTS> 137,961
<OTHER-EXPENSES> (127)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> 8,097
<INCOME-TAX> 4,039
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