<PAGE> 1
REGISTRATION STATEMENT NO. 333-
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 10, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ELOYALTY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 36-4304577
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
205 NORTH MICHIGAN AVENUE
SUITE 1500
CHICAGO, ILLINOIS 60601
(312) 228-4500
(Address, including zip code and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
KELLY D. CONWAY
ELOYALTY CORPORATION
205 NORTH MICHIGAN AVENUE
SUITE 1500
CHICAGO, ILLINOIS 60601
(312) 228-4500
(Name, address, including zip code and telephone number, including area code, of
agent for service)
---------------------
Please Send Copies of All Communications To:
<TABLE>
<S> <C>
PAUL R. PETERSON JOHN M. O'HARE
TECHNOLOGY SOLUTIONS COMPANY STEVEN SUTHERLAND
205 NORTH MICHIGAN AVENUE SIDLEY & AUSTIN
SUITE 1500 ONE FIRST NATIONAL PLAZA
CHICAGO, ILLINOIS 60601 CHICAGO, ILLINOIS 60603
(312) 228-4500 (312) 853-7000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
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Common Stock, $.01 par value.......... 44,000,000 shares $1.73(1) $76,120,000(1) $20,096
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Preferred Stock Purchase Rights....... 44,000,000 rights (2) (2) (2)
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee and,
pursuant to Rule 457(f)(2) under the Securities Act and is based upon the
book value of the Common Stock computed as of December 31, 1999.
(2) The Preferred Stock Purchase Rights initially are attached to and trade with
the shares of Common Stock being registered hereby. Value attributable to
such Rights, if any, is reflected in the value of the Common Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
[TSC LETTERHEAD]
January , 2000
Dear Stockholders:
The Board of Directors of Technology Solutions Company (TSC) has decided to
separate the two divisions of TSC through a spin-off of the eLoyalty division.
TSC will accomplish this spin-off by transferring the eLoyalty business to a
newly created company called eLoyalty Corporation and then distributing the
common stock of eLoyalty owned by TSC to TSC stockholders. Following the
spin-off, eLoyalty will be a new, independent public company that is expected to
be traded on The Nasdaq Stock Market under the symbol "ELOY." We expect the
spin-off to occur on or about January , 2000.
TSC will continue to be a public company and TSC common stock will continue
to trade on The Nasdaq Stock Market under the symbol "TSCC." TSC will focus on
its remaining business, the E-Solutions division. The E-Solutions division
provides consulting and systems integration services that help companies apply
technology to improve the way they do business, specifically in the areas of
eCommerce, supply chain management, computer based training and resource
planning.
If you own TSC common stock as of the close of business on January ,
2000, you will receive one share of eLoyalty for every one share of TSC common
stock you own at that time. You should receive your eLoyalty shares shortly
after January , 2000.
You do not need to take any action for the spin-off to occur. You do not
have to pay for the shares of eLoyalty common stock that you will receive in the
spin-off, nor do you have to surrender or exchange shares of TSC common stock in
order to receive your shares of eLoyalty common stock. The number of shares of
TSC common stock that you own will not change as a result of the spin-off. TSC
has requested a ruling from the IRS that the spin-off will be tax-free to TSC
and its stockholders.
This information statement/prospectus gives you information about TSC,
eLoyalty and the spin-off. We are enthusiastic about the spin-off and the
opportunities that await these two separate companies. We encourage you to read
this document carefully to learn more about the two companies and this spin-off.
Sincerely,
William H. Waltrip
Chairman of the Board
[TSC LETTERHEAD]
<PAGE> 3
[eLOYALTY LOGO]
January , 2000
Dear Future Stockholders,
Welcome to eLoyalty.
It is with great pleasure that we are sharing with you the exciting news
about eLoyalty. In March of 1999, the TSC Board of Directors announced its
decision to spin-off eLoyalty into a separate, publicly traded company. If you
own TSC common stock on the record date of January , 2000 you will become a
stockholder in eLoyalty as well as retain your ownership of TSC.
We believe that the spin-off will have significant impact on advances in
the arena of customer loyalty. Consider the following:
- After the spin-off, we will be the largest pure-play customer
relationship solutions provider in the industry;
- We design solutions to help companies build loyalty across multiple
customer access channels;
- We offer a broad knowledge of electronic customer relationship management
(commonly referred to as eCRM) technologies to deploy loyalty solutions
across the Internet, e-mail, web-chat, telephone and fax;
- We have highly experienced professionals specializing in customer
loyalty; and
- Our investment in research and development differentiates our solutions
and will enable us to remain a driving force in the evolution of customer
loyalty.
We encourage you to read this information statement/prospectus to learn
more about eLoyalty. We look forward to the focus and expansion that will be
possible for eLoyalty as a stand-alone public company. We believe that eLoyalty,
as an independent company, will be better able to provide complete solutions for
our clients and adapt to rapid technology change. We are committed to building
an exciting and rewarding company that is worthy of your investment.
Sincerely,
Kelly D. Conway
President and
Chief Executive Officer
[ELOYALTY LETTERHEAD]
<PAGE> 4
THE INFORMATION IN THIS INFORMATION STATEMENT/PROSPECTUS IS NOT COMPLETE
AND MAY BE CHANGED. WE MAY NOT DISTRIBUTE THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS INFORMATION STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES.
SUBJECT TO COMPLETION,
DATED JANUARY 10, 2000
INFORMATION STATEMENT/PROSPECTUS
[ELOYALTY LOGO]
eLOYALTY CORPORATION
COMMON STOCK
We are furnishing you with this information statement/prospectus in
connection with the spin-off by Technology Solutions Company, known as TSC, of
all of the outstanding shares of common stock of eLoyalty Corporation owned by
TSC to stockholders of TSC.
TSC will accomplish the spin-off by distributing all issued and outstanding
shares of our common stock owned by TSC to holders of record of TSC common
stock. TSC expects that the distribution of eLoyalty common stock will be made
on or about January , 2000 to holders of record of TSC common stock at the
close of business on January , 2000. This spin-off will be accomplished
through a distribution of one share of common stock of eLoyalty for every one
share of TSC common stock. NO CONSIDERATION WILL BE PAYABLE BY TSC STOCKHOLDERS
FOR THE ELOYALTY SHARES, NOR WILL THEY BE REQUIRED TO SURRENDER OR EXCHANGE
SHARES OF TSC COMMON STOCK OR TAKE ANY OTHER ACTION IN ORDER TO RECEIVE THE
ELOYALTY SHARES.
There is currently no public market for the common stock of eLoyalty,
although it is expected that a "when-issued" trading market may develop prior to
the time of the spin-off. We have applied to have our common stock listed on The
Nasdaq Stock Market under the symbol "ELOY."
IN REVIEWING THIS INFORMATION STATEMENT/PROSPECTUS, YOU SHOULD CAREFULLY
CONSIDER THE MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" COMMENCING ON
PAGE 8.
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WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
The material in this information statement/prospectus may be revised or
completed. We have filed a registration statement relating to the common stock
of eLoyalty with the Securities and Exchange Commission. We will not issue these
securities before the registration statement becomes effective.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this information statement/prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
---------------------
THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS IS JANUARY , 2000
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary..................................................... 1
Risk Factors................................................ 8
The Spin-Off................................................ 21
eLoyalty's Business......................................... 26
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 42
eLoyalty Capitalization..................................... 58
eLoyalty Financing.......................................... 59
eLoyalty Selected Financial Data............................ 60
eLoyalty's Relationship with Technology Solutions Company
After the Spin-Off........................................ 62
eLoyalty's Management....................................... 67
Ownership of eLoyalty Common Stock by Certain Beneficial
Owners.................................................... 77
Description of eLoyalty Capital Stock....................... 78
Certain Transactions........................................ 87
eLoyalty's 2001 Annual Meeting of Stockholders.............. 88
Legal Matters............................................... 88
Experts..................................................... 88
Additional Information...................................... 89
Index to Financial Statements and Schedule.................. F-1
</TABLE>
Until , 2000, all dealers that effect transactions in these
securities may be required to deliver this information statement/prospectus.
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eLoyalty, GetLoyal.com, Guaranteed Business Benefits, Loyalty Architecture,
Loyalty Cockpit, Loyalty Decision Engine, Loyalty Hosting, Loyalty Lab, Loyalty
Observer, Loyalty Process Design, Loyalty Repository, Loyalty Rules
Configurator, Loyalty Strategy, Loyalty Support, Loyalty Warehouse, Loyalty
Channel, Business Case, Channel Hosting and Loyalty Channel Influencer are all
trademarks or the subject of trademark applications of eLoyalty Corporation. All
other brand names or trademarks appearing in this information statement are the
property of their respective holders.
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i
<PAGE> 6
SUMMARY
This summary highlights selected information from this information
statement/prospectus, but does not contain all details concerning the spin-off
and eLoyalty, including information that may be important to you. To better
understand the spin-off and the business and financial position of eLoyalty you
should carefully review this entire document.
In this information statement/prospectus, "eLoyalty," "the company," "we,"
"our" and "us" each refers to eLoyalty Corporation and the business we conducted
as a division of Technology Solutions Company and "TSC" refers to Technology
Solutions Company.
QUESTIONS AND ANSWERS ABOUT ELOYALTY AND THE SPIN-OFF
What is the spin-off?........ The spin-off is designed to separate TSC's
E-Solutions and eLoyalty businesses into separate
publicly traded companies. TSC will accomplish
the spin-off by distributing to TSC stockholders
as a dividend all of the outstanding common stock
of eLoyalty owned by TSC. For every share of TSC
common stock that you own of record on January
, 2000 you will receive one share of eLoyalty
common stock. For example, if you own 200 shares
of TSC common stock on the record date, you will
receive 200 shares of eLoyalty common stock in
the spin-off.
Why is TSC effecting the
spin-off?.................... TSC's board of directors and management believe
that separating eLoyalty from the rest of TSC's
business will allow both TSC and eLoyalty to:
- focus their attention and financial
resources on their respective businesses;
- pursue different strategies;
- react quickly to changing market
environments;
- focus on each company's own strategic
plan;
- develop incentive programs tailored to
their own business; and
- have greater capital planning flexibility
and simplify their organizational and
internal reporting structures.
What is the business of
eLoyalty?.................... eLoyalty is a management consulting and
information technology services company that
provides solutions designed to improve customer
relationships for our clients. We define our
category of solutions as loyalty solutions.
eLoyalty is currently a subsidiary of TSC and
will become an independent publicly traded
company upon completion of the spin-off.
What are customer
relationships?............... Companies build relationships with their
customers through a chain of events including
marketing, sales and post sale customer service.
This is known as a customer lifecycle. During
this customer lifecycle, companies communicate
and interact with their customers in a variety of
different ways including:
- person to person;
- over the Internet;
- by telephone;
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<PAGE> 7
- by e-mail; and
- by fax.
We refer to these means of communication as
access channels. During each customer lifecycle a
number of interactions occur as a customer
communicates through their preferred access
channel.
The complexity increases as the customer
purchases more than one product or service. Large
companies are often organized into separate
product divisions that communicate with customers
independently of other divisions. In addition,
each division commonly separates the management
of a stage in the customer lifecycle by creating
separate marketing, sales and customer service
groups. Furthermore, each of these groups may
then focus separate teams of employees (for
instance field sales force, eCommerce group, call
center, etc.) to respond to different access
channels. In many cases these teams may have
overlapping or conflicting goals.
Companies will often establish different
policies, personnel and management of customer
relationships in each distinct area. This often
means that these companies purchase different
software products to support each separate
business aim. Frequently, these software products
are not compatible with each other without
customization and technology integration. The
internal business and technology infrastructure
may serve to manage each function of the company
and the result can be a fragmented picture of
each customer.
The effect for the customer is the appearance of
a disjointed organization that does not fully
recognize the customer's specific needs. This
lack of understanding can lead to companies
losing their customers.
Why is it important to
improve customer
relationships?............. Improved customer relationships can lead to
higher revenues and improved profitability for
companies. Companies today are increasingly aware
of the significant financial impact associated
with losing high value customers, particularly in
the early stages of the relationship. According
to research presented by Frederick R. Reichheld
and W. Earl Sasser, Jr. in a Harvard Business
Review article, "companies can boost their
profits by almost 100% by retaining just 5% more
of their customers."
What are loyalty
solutions?................... A loyalty solution is a combination of business
strategy and technology integration that seeks to
improve customer relationships. A loyalty
solution focuses on:
- improving the efficiency and effectiveness
of the communications throughout the
customer lifecycle; and
- taking advantage of customer interactions
to sell more products and services to
customers.
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<PAGE> 8
We believe that several different and specialized
skills are required to create a loyalty solution.
These skills include:
- strategic business consulting to define a
company's policies for managing customers
in each division and group within the
organization;
- technical knowledge of the different products
that a company needs to communicate with their
customers using the Internet, telephone, e-mail
and fax;
- integration techniques to enable each of these
software products to be tied together; and
- ongoing support of their loyalty solution to
meet changing business requirements and
emerging technology.
What is new about loyalty
solutions?................. eLoyalty believes that loyalty solutions are the
next step in the customer relationship management
(CRM) market. The CRM market refers to consulting
services and software products that focus on
helping a company manage the stages of the
customer lifecycle.
With the emergence of the Internet, managing
customer relationships has become more complex.
The Internet is available at all times of the day
and night and almost anywhere in the world. This
freedom of access can create an expectation with
customers that they should be able to communicate
with any part of a company about any matter
relating to their products or services at any
time. To meet these new expectations, a company
needs to link their existing CRM solution with
this new electronic environment.
We define this market opportunity as electronic
customer relationship management (commonly
referred to as eCRM). eCRM is an expansion of CRM
to further include the Internet, e-mail and web-
chat across each division of a company. We view a
loyalty solution as an eCRM business and
technology solution that is designed to:
- help companies build lasting relationships with
their customers;
- maximize the efficiency and effectiveness of
customer interactions; and
- capitalize on selling opportunities based on
customer information gathered during these
interactions.
What are eLoyalty's key
objectives?.................. eLoyalty's objective is to be the leading global
provider of loyalty solutions. We intend to
substantially increase our revenues and
profitability and to create a global brand name.
Our strategy to attain these goals is:
- to focus on providing business benefits to our
clients;
- to enhance our loyalty solutions to include
hosting capabilities;
- to build strategic vendor relationships
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<PAGE> 9
- to invest in brand equity;
- to invest in operational and management
systems;
- and processes and to expand our global
presence.
What will be the relationship
between eLoyalty and TSC
after the spin-off?........ After the spin-off, TSC will not own any of our
common stock. TSC and eLoyalty will enter into
certain agreements in connection with the
spin-off to allocate responsibility for
obligations arising prior to the spin-off and for
certain obligations that might arise in the
future. TSC will retain responsibility for
liabilities and obligations relating to its
business and we will assume responsibility for
liabilities and obligations relating to our
business. See "eLoyalty's Relationship with
Technology Solutions Company After the Spin-Off."
What do I have to do to
participate in the
spin-off?.................. Nothing. You are not required to take any action
to receive eLoyalty common stock in the spin-off.
No proxy or vote is necessary for the spin-off.
You should not mail in TSC stock certificates to
receive eLoyalty shares. Our transfer agent will
send to you your eLoyalty share certificates
shortly after January , 2000. The number of
shares of TSC common stock you own will not
change as a result of the spin-off.
When will I receive my
eLoyalty shares?............. If you hold your TSC shares in your own name,
your share certificates will be mailed to you on
or about January , 2000. You should allow
several days for the mail to reach you. If you
hold your TSC shares through your stockbroker,
bank or other nominee, you are probably not a
stockholder of record. Your receipt of eLoyalty
shares depends on your arrangements with the
nominee that holds your TSC shares for you. See
"The Spin-Off -- Manner of Effecting the
Spin-Off."
Is the spin-off taxable for
United States federal income
tax purposes?.............. The spin-off is conditioned on, among other
things, TSC receiving a ruling from the United
States Internal Revenue Service that the spin-
off will be tax-free to TSC and its United States
stockholders. See "The Spin-Off -- Material
Federal Tax Consequences" for a more complete
discussion of the United States federal income
tax consequences of the spin-off to holders of
TSC common stock.
Where will my shares of our
common stock trade?........ Currently, there is no public market for eLoyalty
common stock. We have applied to have eLoyalty
common stock listed on The Nasdaq Stock Market's
National Market under the symbol "ELOY." If the
shares are accepted for listing, we expect that a
"when-issued" trading market for eLoyalty common
stock will develop prior to January , 2000, and
that "regular-way" trading will begin on that
date. See "The Spin-Off -- Market for eLoyalty
Common Stock."
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<PAGE> 10
What will happen to the
listing of TSC's shares on
The Nasdaq Stock Market?... TSC common stock will continue to be listed on
The Nasdaq Stock Market under the symbol "TSCC."
TSC expects that its common stock will continue
to trade on a regular basis through and after the
spin-off date.
Who do I contact for
information regarding the
spin-off, TSC and
eLoyalty?.................. Before the spin-off, you should direct inquiries
relating to the spin-off to:
ChaseMellon Shareholder Services, L.L.C.
111 Founders Plaza, 11th Floor
East Hartford, Connecticut 06108
(860) 282-3512
Technology Solutions Company
205 North Michigan Avenue
Chicago, Illinois 60601
Attention: TSC Investor Relations
(312) 228-4500
After the spin-off, you should direct inquiries
relating to your investment in eLoyalty common
stock to:
eLoyalty
205 North Michigan Avenue
Chicago, Illinois 60601
Attention: Timothy J. Cunningham
(312) 228-4540
Voice Mailbox 4540
[email protected]
After the spin-off, the transfer agent and
registrar for the eLoyalty common stock will be
ChaseMellon Shareholder Services, L.L.C.
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<PAGE> 11
SUMMARY FINANCIAL DATA
The following tables present summary selected historical financial data of
eLoyalty. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes thereto included
in this information statement/prospectus. The statement of operations data for
the seven month period ended December 31, 1998 and for each of the three years
ended May 31, 1998, 1997 and 1996 and the balance sheet data as of December 31,
1998 set forth below are derived from the audited combined financial statements
included in this information statement/prospectus. They should be read in
conjunction with those financial statements and the notes. The statement of
operations data for the nine month periods ended September 30, 1999 and 1998 and
for the seven month period ended December 31, 1997 and for years ended May 31,
1995 and 1994 and the balance sheet data as of September 30, 1999 are derived
from unaudited combined financial statements.
The historical financial information may not be indicative of our future
performance and does not necessarily reflect what our financial position and
results of operations would have been had we operated as a separate, stand-alone
entity during the periods covered.
eLOYALTY
STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE SEVEN
MONTH MONTH PERIODS
PERIODS ENDED ENDED
SEPTEMBER 30, DECEMBER 31, FOR THE YEARS ENDED MAY 31,
------------------ --------------------- ---------------------------------------------
1999 1998 1998 1997 1998 1997 1996 1995 1994
-------- ------- ------- ----------- ------- ------- ------- ------ ------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues(1).......................... $107,652 $77,685 $64,415 $43,668 $84,488 $43,181 $26,516 $6,132 $1,333
Revenues less project personnel(1)... $ 55,066 $40,221 $33,113 $21,339 $43,159 $25,103 $14,842 $2,995 $ 618
Operating income (loss)(1, 2)........ $ 7,748 $ 3,952 $ (230) $ 911 $ 4,259 $ 4,808 $ 4,907 $ (179) $ (101)
Net income (loss)(1, 2).............. $ 4,086 $ 2,014 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050 $ (128) $ 2
Basic net income (loss) per common
share(3)........................... $ 0.10 $ 0.05 $ (0.01) $ 0.01 $ 0.05 $ 0.07 $ 0.07 $(0.00) $ 0.00
Diluted net income (loss) per common
share(3)........................... $ 0.08 $ 0.04 $ (0.01) $ 0.01 $ 0.05 $ 0.06 $ 0.07 $(0.00) $ 0.00
Shares used to calculate basic net
income (loss) per share (in
millions)(3)....................... 41.4 41.4 41.4 41.4 41.4 41.4 41.4 41.4 41.4
Shares used to calculate diluted net
income (loss) per share (in
millions)(3)....................... 48.5 46.5 41.4 45.8 46.8 46.6 45.5 41.4 46.0
</TABLE>
eLOYALTY
BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $10,654 $ 4,411
Working capital............................................. $51,932 $26,231
Total assets................................................ $92,792 $63,904
Stockholders' Equity........................................ $71,289 $47,888
</TABLE>
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(1) Includes the results of acquired businesses since their acquisition dates.
See Note 3 to the Notes to Combined Financial Statements.
(2) Includes goodwill amortization of $3,748, $2,704, $2,450, $1,856, $3,201 and
$376 for the nine month periods ended September 30, 1999 and 1998, the seven
month periods ended December 31, 1998 and 1997, and the years ended May 31,
1998
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<PAGE> 12
and 1997, respectively, and amortization of capitalized software to be sold
of $320, $447, $206, $354 and $110 for the nine months ended September 30,
1998, the seven month periods ended December 31, 1998 and 1997, and the
fiscal years ended May 31, 1998 and 1997, respectively. There was no
goodwill amortization for the years ended May 31, 1996, 1995 and 1994. There
was no amortization of capitalized software to be sold during the nine month
period ended September 30, 1999 and the years ended May 31, 1996, 1995 and
1994.
(3) In December 1999, eLoyalty issued 41.4 million shares to TSC. Basic earnings
per share have been computed by dividing the net income/(loss) for each
period presented by the 41.4 million shares. Diluted net earnings per share
was computed by dividing the net income/(loss) for each period presented by
the 41.4 million shares plus the estimated effect of dilutive stock options
using the "treasury stock" method. See Note 8 to the Notes to Combined
Financial Statements for a discussion of stock options.
All other share numbers in this information statement/prospectus, unless we
specifically state otherwise, assume that we have issued:
- 41.4 million shares of our common stock to TSC; and
- 2.4 million shares of our common stock to Sutter Hill Ventures and four
entities controlled by Technology Crossover Management III, L.L.C.
("Technology Crossover Ventures") under an agreement that we have with
them. See "Certain Transactions."
The number of shares issued to Sutter Hill Ventures and Technology
Crossover Ventures, and the purchase price per share, will be adjusted
proportionately to the extent that the number of our shares owned by TSC when we
issue shares to these investors does not equal 41.4 million shares. The number
of shares reserved for issuance under our 1999 Stock Incentive Plan, as well as
the number of shares and the exercise price for options we have already granted
under that plan, may also need to be adjusted proportionately if TSC distributes
in the spin-off a different number of our shares than the 41.4 million shares we
assumed at the time we adopted the 1999 Stock Incentive Plan and issued options
under that plan.
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RISK FACTORS
You should carefully consider each of the following risks and all of the
other information in this information statement/prospectus. Some of the
following risks relate principally to the spin-off while other risks relate
principally to our business in general and the industry in which we operate.
Finally, other risks relate principally to the securities markets and ownership
of our stock.
If any of the following risks and uncertainties develop into actual events,
our business, financial condition or results of operations could be materially
adversely affected. If that happens, the trading price of our common stock could
decline.
This information statement/prospectus contains forward-looking statements
that involve risks and uncertainties. You should not rely on these
forward-looking statements. We use words such as "anticipate," "believe,"
"plan," "expect," "future," "intend" and similar expressions to identify such
forward-looking statements. This information statement/prospectus also contains
forward-looking statements attributed to certain third parties relating to their
estimates regarding, among other things, the growth of the CRM industry and the
number of Internet users. You should not place undue reliance on those
forward-looking statements. Our actual results could differ materially from
those anticipated in the forward-looking statements for many reasons, including
the risks faced by us described below and elsewhere in this information
statement/prospectus.
RISKS RELATING TO THE SPIN-OFF
We are subject to the following risks relating to the spin-off.
WE COULD INCUR SIGNIFICANT TAX LIABILITY IF THE CONTRIBUTION OR THE SPIN-OFF
DOES NOT QUALIFY FOR TAX FREE TREATMENT.
TSC and the TSC stockholders could incur significant tax liability if the
contribution of the eLoyalty business or the spin-off does not qualify for
tax-free treatment. Should this occur, we could be jointly and severally liable
for, and could be required to indemnify and pay TSC for, taxes and resulting
liabilities imposed upon TSC with respect to the contribution or the spin-off.
TSC has requested a private letter ruling from the IRS indicating that the
contribution of the eLoyalty business assets by TSC to eLoyalty will be tax-free
to TSC and the spin-off by TSC of all of the shares of eLoyalty common stock
owned by TSC to the stockholders of TSC will not be taxable to TSC or its
stockholders. See "The Spin-Off -- Material Federal Tax Consequences." The
ruling, assuming it is received, will be based upon various factual
representations and assumptions, as well as upon certain undertakings. We are
not aware of any facts or circumstances that would cause the representations and
assumptions to be untrue or incomplete in any material respect. However, the
ruling received from the IRS might be invalid if:
- any of those factual representations or assumptions were untrue or
incomplete in a material respect;
- any undertaking was not complied with; or
- the facts upon which that ruling is based were materially different from
the facts at the time of the spin-off.
In addition, the spin-off may become taxable to TSC if:
- acquisitions involving 50% or more of eLoyalty stock (by vote or value)
are found to be part of a plan (or a series of related transactions) of
which the spin-off is a part; or
- acquisitions involving 50% or more of TSC stock (by vote or value) are
found to be part of a plan (or a series of related transactions) of which
the spin-off is a part.
If the contribution or the spin-off were not to qualify for tax-free
treatment for United States federal income tax purposes then, in general, a very
substantial tax would be payable by TSC (in the case of the contribution or the
spin-off) and TSC stockholders (in the case of the spin-off only). In general,
TSC would
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be subject to tax as if it had sold the eLoyalty business in a taxable sale and
the TSC shareholders would generally be subject to tax as if they had received a
taxable distribution equal to the fair market value of the eLoyalty stock
distributed to them. See "The Spin-Off -- Material Federal Tax Consequences."
Although the taxes described above generally would be imposed on TSC and
its stockholders, we would in certain circumstances be liable for all or a
portion of such taxes. As part of the spin-off, TSC and we will enter into a Tax
Sharing and Disaffiliation Agreement. This agreement will generally allocate,
between TSC and us, the taxes and liabilities relating to the failure of the
contribution or the spin-off to be tax-free. We would be liable for such taxes
or liabilities imposed as a result of:
- any inaccuracy or breach of any representation, warranty or covenant that
is made by eLoyalty pursuant to a specified section of that agreement
(which section, in general, includes representations and warranties by
eLoyalty relating to the truthfulness, correctness and completeness of
the facts and representations set out in the IRS ruling and the materials
submitted to the IRS in connection with that ruling, in each case to the
extent descriptive of the eLoyalty Group (generally, our affiliates and
us) or the eLoyalty business (including the plans, proposals, intentions,
and policies of the eLoyalty Group and 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 capital stock of eLoyalty in the
spin-off).
TSC would be liable for such taxes or liabilities under corresponding provisions
relating to TSC and the business retained by TSC.
The Tax Sharing and Disaffiliation Agreement also contains provisions where
we and TSC share taxes and other liabilities resulting from the failure of the
contribution or spin-off to be tax free where neither we nor TSC otherwise has
liability under the agreement or where both otherwise have liability under the
agreement. See "eLoyalty's Relationship with Technology Solutions Company After
the Spin-Off -- Tax Sharing and Disaffiliation Agreement."
Aside from the Tax Sharing and Disaffiliation Agreement, under United
States federal income tax laws, we and TSC would be jointly and severally liable
for TSC's federal income taxes resulting from the spin-off being taxable. This
means that even if we do not have to indemnify TSC for any liabilities and
expenses if the contribution or the spin-off fails to be tax-free, we may still
be liable for any part of, including the whole amount of, these liabilities and
expenses. In certain circumstances, however, TSC may be required to indemnify us
for such liabilities and expenses. See "eLoyalty's Relationship with Technology
Solutions Company After the Spin-Off -- Tax Sharing and Disaffiliation
Agreement."
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY
The historical financial information we have included in this information
statement/prospectus may not reflect what our results of operations, financial
position and cash flows would have been had we been a separate, stand-alone
entity during the periods presented or what our results of operations, financial
position and cash flows will be in the future. This is because:
- we have made adjustments and allocations, primarily with respect to
corporate-level adjustments and administrative functions, because TSC did
not account for us as, and we were not operated as, a single stand-alone
business for all periods presented; and
- the information does not reflect changes that we expect to occur in the
future as a result of our separation from TSC, including tax, employee,
transitional service matters and establishing new offices.
For additional information, see "eLoyalty Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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THE TRANSITIONAL SERVICES PROVIDED TO US BY TECHNOLOGY SOLUTIONS COMPANY MAY NOT
BE SUFFICIENT TO MEET OUR NEEDS
We have never operated as a stand-alone company. While TSC is contractually
obligated to provide us with transitional services including, among others,
accounting, tax, benefits, human resources and information systems, we cannot
assure you that these services will be sustained at the same level as when we
were part of TSC or that we will obtain the same benefits. We will also lease
and sub-lease certain office facilities from TSC. We cannot assure you that,
after the expiration of these various arrangements, we will be able to replace
the transitional services or enter into appropriate leases in a timely manner or
on terms and conditions, including cost, as favorable as those we will receive
from TSC. In addition, as we build our own infrastructure during the term of
those agreements, we will incur additional costs for duplicated administrative
services.
These agreements were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of our separation from
TSC. For more information about these arrangements, see "eLoyalty's Relationship
with Technology Solutions Company After the Spin-Off."
WE WILL NOT BE ABLE TO RELY ON TSC TO FUND FUTURE CAPITAL REQUIREMENTS
In the past, our capital needs have been satisfied by TSC. However,
following the spin-off, TSC will no longer provide funds to finance our working
capital or other cash requirements. We cannot guarantee that financing, if
needed, will be available on favorable terms.
We believe that our capital requirements will vary greatly from quarter to
quarter, depending on, among other things, capital expenditures, fluctuations in
our operating results and financing activities. We believe that the following
sources will provide sufficient capital to satisfy our cash requirements for the
foreseeable future:
- the net proceeds from the investment by the venture capital investors
described under "Certain Transactions;"
- current cash, cash equivalents and additional cash to be contributed by
TSC to eLoyalty prior to the spin-off;
- the revolving credit facility described under "eLoyalty Financing;" and
- cash flow from operations after the spin-off.
However, to increase our financial resources, we intend to obtain
additional equity financing in the next twelve months through a public offering.
In addition, we may obtain additional capital through a private placement of
equity with strategic or other investors or through additional debt financing in
the future. Future equity financings would dilute the relative percentage
ownership of the then existing holders of our common stock. Future debt
financings could involve restrictive covenants that limit our ability to take
certain actions. We may not be able to obtain financing with interest rates as
favorable as those historically enjoyed by TSC. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
IF WE ARE UNABLE TO OBTAIN CERTAIN THIRD-PARTY CONSENTS TO THE SPIN-OFF, OUR
ABILITY TO CONDUCT OUR BUSINESS AS CURRENTLY CONDUCTED COULD BE MATERIALLY
ADVERSELY AFFECTED
The spin-off and related transactions could result in a violation of
certain of TSC's existing contractual arrangements or require the consent of a
third party to transfer these arrangements to us. In a substantial number of
situations, an amendment, consent or waiver from third parties (such as from
clients or suppliers) will be required. Although we believe that no single
agreement for which an amendment, consent or waiver is being sought is material,
the failure to receive a significant number of such amendments, waivers or
consents with respect to contractual arrangements could have a material adverse
effect on our ability to continue to conduct our business.
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CREDITORS OF TSC AT THE TIME OF THE SPIN-OFF MAY ATTEMPT TO CHALLENGE THE
SPIN-OFF AS A FRAUDULENT CONVEYANCE
If a court in a lawsuit by an unpaid creditor or representative of
creditors of TSC, such as a trustee in bankruptcy, were to find that, among
other reasons, at the time of the spin-off, TSC or eLoyalty,
- was insolvent,
- was rendered insolvent by reason of the spin-off,
- was engaged in a business or transaction for which TSC's or eLoyalty's
remaining assets constituted unreasonably small capital or
- intended to incur, or believed it would incur, debts beyond its ability
to pay such debts as they matured,
the court may be asked to void the spin-off (in whole or in part) as a
fraudulent conveyance. The court could then require that the stockholders return
some or all of the shares of eLoyalty common stock, or require TSC or eLoyalty,
as the case may be, to fund certain liabilities of the other company for the
benefit of creditors. The measure of insolvency for purposes of the foregoing
will vary depending upon the jurisdiction whose law is being applied. Generally,
however, each of TSC and eLoyalty, as the case may be, would be considered
insolvent if the fair value of its assets were less than the amount of its
liabilities or if it incurred debt beyond its ability to repay such debt as it
matures. TSC and eLoyalty believe that each company will be solvent after the
spin-off.
IF THE SPIN-OFF IS NOT A LEGAL DIVIDEND, IT COULD BE HELD INVALID BY A COURT
The dividend which effects the spin-off is subject to the Delaware
corporate law. We cannot assure you that a court will not later determine that
the spin-off was invalid under Delaware law and reverse the spin-off. The
resulting complications and cost could have a material adverse effect on our
financial condition and results of operations. We do not intend to obtain a
legal opinion that the dividend is valid under Delaware law but intend to rely
on financial calculations by our officers, as permitted by Delaware law.
THE COMBINED POST-SPIN-OFF VALUE OF TSC AND ELOYALTY SHARES MAY NOT EQUAL OR
EXCEED THE PRE-SPIN-OFF VALUE OF TSC SHARES
After the spin-off, TSC common stock will continue to be listed and traded
on The Nasdaq Stock Market and we expect that eLoyalty common stock will be
listed and traded on The Nasdaq Stock Market. We cannot assure you that the
combined trading prices of TSC common stock and eLoyalty common stock after the
spin-off will be equal to or greater than the trading price of TSC common stock
prior to the spin-off. Until the market has fully evaluated the business of TSC
without the business of eLoyalty, the price at which TSC common stock trades may
fluctuate significantly. Similarly, until the market has fully evaluated the
eLoyalty business, the price at which our common stock trades may fluctuate
significantly.
RISK FACTORS RELATING TO OUR BUSINESS
Our business is subject to the following risks, which include risks
relating to the industry in which we operate.
WE HAVE A LIMITED OPERATING HISTORY AND CONSEQUENTLY FACE SIGNIFICANT RISKS AND
UNCERTAINTIES
We commenced our business as a separate business unit within TSC in 1994
and therefore have a limited operating history. An owner of our common stock
must consider the risks and difficulties frequently
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encountered by early stage companies. We have a limited history of addressing
material risks in our business. These risks include our potential inability to:
- attract, retain and motivate qualified personnel;
- increase the scale of our operations;
- maintain sufficiently high employee utilization;
- respond effectively to competitive pressures;
- continue to develop and upgrade our solutions;
- replace the transitional services necessary for the conduct of our
business that TSC has agreed to provide to us for a limited period after
the completion of the spin-off; and
- satisfy legal and regulatory requirements.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND, IF
WE ARE UNABLE TO MANAGE THIS GROWTH, OUR BUSINESS WILL BE ADVERSELY AFFECTED
Our ability to successfully implement our business plan in a rapidly
evolving market requires an effective planning and management process. Our
growth has placed significant demands on our management and other resources and
will continue to do so in the future. Our revenues increased approximately 38.6%
for the nine month period ended September 30, 1999 compared to the first nine
months of 1998. Our employees increased from 518 full-time employees at December
31, 1998 to 653 at September 30, 1999. Our future success will depend on our
ability to manage our growth effectively, including:
- continuing to retain and motivate our existing employees and attract and
integrate new employees;
- improving our business development capabilities;
- maintaining project quality;
- maintaining high rates of employee utilization;
- accurately estimating time and resources for engagements; and
- developing and improving our operational, financial, accounting and other
internal systems and controls.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS BECAUSE
OF MANY FACTORS, ANY OF WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE
Our quarterly financial results will vary from quarter to quarter. It is
possible that in some future periods our operating results may be below the
expectations of public market analysts and investors. In this event, the price
of our common stock may fall. Our revenues and operating results may vary
significantly from quarter to quarter due to a number of factors, many of which
are not in our control. These factors include:
- unanticipated cancellations or reductions in the scope of major projects;
- variability in market demand for the solutions we provide;
- our ability to upgrade and develop our systems and infrastructure and
attract new personnel in a timely and effective manner;
- our ability to deliver complex projects and the number, size and scope of
our projects;
- our client retention and acquisition rate and the length of the sales
cycle associated with our solutions;
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- the introduction of new services and solutions;
- the efficiency with which we utilize our employees, plan and manage our
existing and new projects and manage future growth;
- our ability to anticipate accurately our revenues and operating expenses;
- changes in pricing policies by us or our competitors;
- number of billing days;
- general economic conditions; and
- seasonal availability of employees.
Our quarterly revenues for the year ended December 31, 1997 were $11
million, $15 million, $19 million and $19 million; for the year ended December
31, 1998 were $24 million, $26 million, $28 million and $28 million; and for the
three quarters ended September 30, 1999 were $31 million, $36 million and $40
million, respectively.
OUR INDUSTRY IS VERY COMPETITIVE AND, IF WE FAIL TO SUCCESSFULLY COMPETE, OUR
MARKET SHARE AND BUSINESS WILL BE ADVERSELY AFFECTED
The CRM market has been in existence for some time. We define the CRM
market as the consulting services and software products that focus on helping a
company manage the stages of a customer lifecycle. The eCRM market in which we
compete is an expansion of CRM to further include the Internet, e-mail and
web-chat across each division of a company. The eCRM market is relatively new
and very competitive. We expect competition to intensify even further as this
market evolves. Many of our competitors have longer operating histories, more
clients, longer relationships with their clients, greater brand or name
recognition and significantly greater financial, technical, marketing and public
relations resources than we do. As a result, our competitors may be in a
stronger position to respond quickly to new or emerging technologies and changes
in client requirements. They may also develop and promote their products and
services more effectively than we do. These risks are especially pronounced in
our industry where we will face major challenges from other companies including:
- systems integrators such as Andersen Consulting, Deloitte & Touche LLP,
Ernst & Young LLP, KPMG LLP, PricewaterhouseCoopers LLP, Arthur Andersen
LLP, IBM Global Services, Cambridge Technology Partners, Sapient
Corporation, Diamond Technology Partners and Whittman-Hart, Inc.;
- Internet and eCommerce services companies such as Scient Corporation,
Viant Corporation, Proxicom, Inc., AppNet Inc., Tanning Technology
Corporation and Razorfish, Inc.;
- large information technology service companies such as Computer Sciences
Corporation (CSC) and Perot Systems Corporation;
- management consulting firms such as Bain & Company, Booz, Allen &
Hamilton, Boston Consulting Group, Inc. and McKinsey & Company; and
- internal information technology departments of current and potential
clients.
New market entrants pose a threat to our business. We do not own any
patented technology that precludes or inhibits competitors from entering this
market or from providing solutions similar to ours. Existing or future
competitors may develop or offer solutions that are comparable or superior to
ours at a lower price.
To compete successfully, we must respond promptly and effectively to the
challenges of technological change, evolving standards and our competitors'
innovations by continuing to enhance and expand our
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solutions, as well as our sales and marketing channels. Increased competition
could result in price reductions, reduced margins or loss of market share.
THE LOSS OF OUR PROFESSIONALS, OR THE INABILITY TO RECRUIT ADDITIONAL
PROFESSIONALS, WOULD MAKE IT DIFFICULT TO COMPLETE EXISTING PROJECTS AND BID FOR
NEW PROJECTS
The people-intensive information technology professional services industry
currently faces a shortage of qualified personnel, which is expected to
continue. We compete intensely with other companies to recruit and hire from
this limited pool. In addition, our industry suffers from a high rate of
employee turnover. If we cannot hire and retain qualified personnel, or if a
significant number of our current employees leave, we may be unable to complete
or retain existing projects or bid for new projects of similar scope and
revenue.
WE DEPEND ON OUR KEY PERSONNEL AND THE LOSS OF ANY KEY PERSONNEL MAY HARM OUR
ABILITY TO OBTAIN AND RETAIN CLIENT ENGAGEMENTS AND COMPETE EFFECTIVELY
We believe that our success will depend on the continued employment of our
key personnel. This dependence is particularly important to our business because
personal relationships are critical to obtaining and maintaining client
engagements. If one or more of our key personnel were unable or unwilling to
continue in their present positions, they would be very difficult to replace and
our business could be seriously harmed. In addition, if any of these key
employees joins a competitor or forms a competing company, some of our clients
might choose to use the services of that competitor or new company instead of
our own. Furthermore, clients or other companies seeking to develop in-house
information technology services capabilities may hire away some of our key
employees. This would not only result in the loss of key employees but could
also result in the loss of a client relationship or a new business opportunity.
WE MAY INCUR SIGNIFICANT UNANTICIPATED COSTS ASSOCIATED WITH OUR NEW BUSINESS
OFFERINGS
We are currently exploring several new solution offerings that represent
fundamentally different business models from our core business. One such model
is our Architecture Hosting solution. Using the Architecture Hosting solution,
we plan to provide our clients with dial-up access to an integrated collection
of third-party and proprietary software applications to support their customer
interactions across multiple channels including the Internet, e-mail, web-chat,
telephone and fax. With this solution, we expect that our clients will reduce
their risk, time and investment in supporting loyalty-building interactions with
their customers. To provide this service, we need to form alliances and to
invest in infrastructure including, computers, software and application
integration in amounts that may exceed our current expectations. We have no
prior experience delivering such a comprehensive operational system from a
remote site, and our failure to successfully deliver this and other new business
offerings could cause us to lose business opportunities with both existing and
potential clients. In addition, we may fail to accurately price new business
offerings, which could reduce the profitability of, or result in a loss on,
projects involving these new offerings.
WE MUST MAINTAIN OUR REPUTATION AND EXPAND OUR NAME RECOGNITION TO REMAIN
COMPETITIVE
We believe that establishing and maintaining a good reputation and name
recognition is critical for attracting and expanding our targeted client base.
If our reputation is damaged or if potential clients do not know what solutions
we provide, we may become less competitive or lose our market share. Promotion
and enhancement of our name will depend largely on our success in providing high
quality services and solutions, which cannot be assured. If clients do not
perceive our solutions to be effective or of high quality, our brand name and
reputation could be materially and adversely affected.
Our clients use our solutions for critical applications. Any errors,
defects or other performance problems, including those in our proprietary
software or products supplied by third-party vendors, could result in financial
or other damages. In addition to any liability we might have, performance
problems could also adversely affect our brand name and reputation.
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WE MAY FAIL TO ACCURATELY ESTIMATE THE TIME AND RESOURCES NECESSARY FOR THE
PERFORMANCE OF OUR SERVICES
To date, we have generally provided solutions to our clients on a time and
materials basis, although we sometimes work on a fixed-fee or capped-fee basis.
In the future, it is possible that an increasing percentage of our client
engagements will be subject to fixed-fee or other arrangements that are not
solely based on time and materials. For example, we may price certain
engagements on a value-based model under which we may reduce our billing rates
or limit our fees in exchange for a share of the expected economic benefits to
our clients from implementing our solutions. Because we have limited experience
in pricing engagements on these terms, it can be difficult to judge the time and
resources necessary to complete a project or to gauge any business benefits that
our clients may realize from our solutions. Our failure to accurately estimate
these variables could reduce the profitability of, or result in a loss on, our
projects and could damage our client relationships and our reputation.
OUR BUSINESS WILL SUFFER IF WE ARE UNABLE TO ADAPT TO RAPID TECHNOLOGICAL CHANGE
AND EVOLVING INDUSTRY STANDARDS
Our industry is characterized by rapidly changing technologies, the
introduction of many new products and services and evolving industry standards.
The recent growth of the eCRM market and the intense competition in our industry
magnify these characteristics. In addition, enhancements of our solutions must
meet the requirements of our current and prospective clients and must achieve
significant acceptance. Our future success will depend on our ability to:
- - adapt to rapidly changing technologies by continually improving our solutions;
- - continue to develop our strategic business consulting and technical knowledge;
- - enhance our current solutions;
- - remain knowledgeable on emerging eCRM technology including the Internet,
e-mail, telephony and other software applications;
- - remain knowledgeable with respect to leading-edge research on customer
behavior and actions required to increase customer loyalty;
- - develop new solutions that meet changing client needs;
- - advertise and market our solutions; and
- - influence and respond to emerging industry standards and other technological
changes.
We cannot give any assurance that we will be successful in addressing these
developments and challenges on a timely basis or at all.
WE DEPEND ON OUR ABILITY TO RAPIDLY LEARN, USE AND INTEGRATE SOFTWARE PACKAGES
DEVELOPED BY THIRD PARTIES TO SUCCESSFULLY COMPETE IN THE ECRM MARKET
To conduct our business we use software packages from a variety of
third-party vendors. In particular, we rely on third-party software products and
services. If we are unable to integrate this software in a fully functional
manner, we may experience difficulties that could delay or prevent the
successful development, introduction or marketing of new solutions. We could
also incur substantial costs if we need to modify our services or infrastructure
to adapt to these changes. These modifications and complex solutions that
include software often contain errors or defects, particularly when first
introduced or when new versions or enhancements are released. Despite internal
testing and testing by current and potential clients, our current and future
solutions may contain serious defects due to our software or that of third-party
vendors. Serious defects or errors could result in liability for damages, lost
revenues or a delay in market acceptance.
We rely on relationships with the executive level management of third-party
vendors of technology that we integrate or incorporate into our solutions. These
relationships are necessary to allow us to rapidly learn about their software
packages, to develop appropriate methods to integrate their software into our
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solutions and to gain executive level sponsorship of the integration process. If
we are unable to initiate and maintain such relationships, we may significantly
reduce our ability to successfully integrate third-party technology in our
solutions.
In addition, our competitors could also learn, use and integrate software
packages developed by third parties and develop relationships with these third
party vendors. By offering similar solutions, these competitors could adversely
affect our business.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM THIRD-PARTY CHALLENGES
Proprietary rights are important to our success and our competitive
position. Although we seek to protect our proprietary rights through a variety
of means, we cannot assure you that the actions we have taken are adequate to
protect these rights.
We typically enter into confidentiality or license agreements with our
clients, employees, professionals and corporate partners and generally control
access to and distribution of our technologies, documentation and other
proprietary information. Despite our efforts to protect our proprietary rights
from unauthorized use or disclosure, parties may attempt to disclose, obtain or
use our rights. The steps we have taken may not prevent misappropriation of our
proprietary rights, particularly in foreign countries where laws or law
enforcement practices may not protect our proprietary rights as fully as in the
United States.
We may be required to obtain licenses from others to refine, develop,
market and deliver current and new services and solutions. There can be no
assurance that we will be able to obtain any of these licenses on commercially
reasonable terms or at all, or that rights granted by these licenses will be
valid and enforceable.
OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS WHICH
MAY RESULT IN SUBSTANTIAL COSTS, DIVERSION OF RESOURCES AND MANAGEMENT
ATTENTION, AND HARM TO OUR REPUTATION
Although we believe that our solutions do not infringe on the intellectual
property rights of others, we cannot give any assurances that an infringement
claim will be successfully defended. We may also license content from third
parties in the future and it is possible that we could become subject to
infringement actions based upon the content licensed from these third parties.
In addition, a portion of our business involves the development of software
applications for specific client engagements. Ownership of client-specific
software is generally retained by the client, although we retain rights to some
of the applications, processes and other intellectual property developed in
connection with client engagements. We may have disputes with our clients
related to our development of software for specific client engagements and our
ability to resell or reuse that software. A successful infringement claim
against us could materially and adversely affect us in the following ways:
- we may experience a diversion of our financial resources and the
attention of technical and management personnel;
- we may be liable for damages and litigation costs, including attorneys'
fees;
- we may be enjoined from further use of the intellectual property;
- we may have to obtain a license to use the intellectual property,
incurring licensing fees;
- we may have to develop a non-infringing alternative, which could be
costly and delay projects; and
- we may have to indemnify clients with respect to losses incurred as a
result of our infringement of the intellectual property.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS
For the nine month period ended September 30, 1999, 22.5% of our revenues
were derived from our international operations. We expect international revenue
to account for a growing percentage of total
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revenue in the future and we believe that we will need to continue to expand our
international operations in order to be successful. Our international sales
growth will be limited if we are unable to establish additional foreign
operations, expand international sales management and support organizations,
hire additional personnel, customize our solutions for use in local markets,
develop relationships with international service providers and establish
relationships with additional distributors and third-party vendors. Even if we
are able to successfully expand international operations, we cannot be certain
that international market demand for our solutions will increase. International
operations are generally subject to a number of risks, including:
- difficulties in staffing and managing international operations, including
the logistics of transferring information and training employees;
- expenses associated with customizing our solutions for use in foreign
countries;
- protectionist laws and business practices that favor local competition;
- dependence on local vendors;
- multiple, conflicting and changing governmental laws and regulations and
difficulties in enforcing contractual obligations related to intellectual
property in foreign countries;
- potentially adverse tax consequences;
- international currency issues, including foreign currency exchange rate
fluctuations;
- longer sales cycles;
- seasonal reductions in business activity; and
- political and economic instability.
To date, a majority of our international revenue and costs have been
denominated in foreign currencies. We believe that an increasing portion of our
international revenue and costs will be denominated in foreign currencies in the
future. To date, we have not engaged in any foreign exchange hedging
transactions and we are therefore subject to foreign currency risk.
INCREASING GOVERNMENT REGULATION COULD AFFECT OUR BUSINESS
We are subject not only to regulations applicable to businesses generally,
but also to laws and regulations directly applicable to electronic commerce.
Although there are currently few such laws and regulations, state, federal and
foreign governments may adopt laws and regulations applicable to our business.
Any such legislation or regulation could dampen the growth of the Internet and
decrease its acceptance. If such a decline occurs, companies may decide in the
future not to use our solutions. Any new laws and regulations in the following
areas could affect our business:
- user privacy;
- the pricing and taxation of goods and services offered over the Internet;
- the content of websites;
- copyrights;
- consumer protection;
- the online distribution of specific material or content over the
Internet; and
- the characteristics and quality of products and services offered over the
Internet.
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THE YEAR 2000 ISSUE MAY ADVERSELY AFFECT OUR BUSINESS
The Year 2000 issue is a general term used to address a class of problems
caused by the inability of computer programs to recognize various date values
around January 1, 2000. This class of problems could result in a system failure
or miscalculations causing disruptions of operations such as, among others, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
Pursuant to a Shared Services Agreement with TSC, we will be relying on TSC
to provide a number of transitional services to us, including among others
accounting, tax, benefits administration, human resources and information
systems. As a result, Year 2000 problems experienced by TSC could have a
material adverse effect on our business, financial condition or results of
operations. TSC has advised us that, based on presently available information,
it believes that any necessary compliance efforts concerning its internal
systems will not have a material adverse effect on its business, operating
results and financial condition. However, if compliance efforts of which TSC is
not currently aware are required and are not completed on time, or if the cost
of any required updating, modification or replacement of TSC's information
systems exceeds its estimates, the Year 2000 issue could have a material adverse
impact on TSC's business, operating results and financial condition, which in
turn could have a material adverse impact on our business, operating results and
financial condition.
In addition, Year 2000 problems of our clients could affect our systems or
operations. Widespread Year 2000 difficulties could also decrease demand for our
services as companies expend resources upgrading their computer systems. As part
of our analysis of the Year 2000 problem, we have analyzed the impact of the
"worst case scenario" on our business. The "worst case scenario" would occur if
the statements and warranties of vendors concerning their Year 2000 compliance
and upgrade programs were entirely false, its current upgrades were unsuccessful
and either our contingency plan or TSC's failed, resulting in a critical systems
failure.
Although, as a general matter, we do not specifically warrant to clients
that our work will be Year 2000 compliant, certain clients have requested and
received such warranties. In such cases, we do not warrant the compliance of
third-party software; rather, we warrant only that software created by us will
be Year 2000 compliant. However, even absent a specific Year 2000 warranty,
there is a risk that clients for whom we have created or implemented software
will attempt to hold us liable for any damages that result in connection with
Year 2000 problems.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000" for a more complete description of the Year
2000 risks that we face and the steps we have taken to reduce those risks.
OUR BUSINESS MAY SUFFER IF GROWTH IN THE USE OF THE INTERNET AND ECRM
TECHNOLOGIES DECLINES
Internet and eCRM technologies are central to many of our solutions. Our
business depends upon continued growth in the use of these technologies by our
clients, prospective clients and their customers and suppliers. If the number of
users of this technology does not increase and commerce using this technology
does not become more accepted and widespread, demand for our services may
decrease. Factors that may affect the usage of this technology include:
- actual or perceived lack of security of information;
- lack of access and ease of use;
- congestion of Internet traffic or other usage delays;
- inconsistent quality of service;
- increases in costs of using the Internet and eCRM technology;
- increased government regulation;
- uncertainty regarding intellectual property ownership;
- reluctance to adopt new business methods; and
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- costs associated with the obsolescence of existing infrastructure.
POTENTIAL FUTURE ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS AND DILUTE STOCKHOLDER VALUE
Although we currently have no specific plans to do so, we may acquire other
businesses in the future that may complicate our management tasks. We may need
to integrate widely dispersed operations with distinct corporate cultures. Such
integration efforts may not succeed or may distract our management from
servicing existing clients. Our failure to manage future acquisitions
successfully could seriously harm our operating results. Also, acquisition costs
could cause our quarterly operating results to vary significantly. Furthermore,
our stockholders would be diluted if we finance the acquisitions by issuing
equity or equity-linked securities.
RISK FACTORS RELATING TO SECURITIES MARKETS
There are risks relating to securities markets that you should consider in
connection with your ownership of our stock.
THE MARKET PRICE FOR OUR COMMON STOCK COULD BE ADVERSELY AFFECTED BY SALES OF
COMMON STOCK IN THE PUBLIC MARKET
Sales of substantial amounts of our common stock in the public market or
the perception that such sales might occur could have a material adverse effect
on the price of our common stock. The shares of our common stock distributed in
the spin-off will be freely tradable except for shares received by persons who
may be deemed to be our "affiliates." An aggregate of 5,340,000 shares of our
common stock are reserved initially for issuance under our stock incentive plan,
plus, as of the first day of each fiscal year, an additional number of shares
equal to 5% of the number of shares of our common stock then outstanding. As of
September 30, 1999 we have issued options to purchase an aggregate of 5,046,000
shares of our common stock, and will issue additional options as of the date of
the spin-off in substitution of all of the TSC options then held by our
employees and directors and some of the TSC options then held by TSC employees
and directors. See "eLoyalty Relationship with Technology Solutions Company
After the Spin-Off -- Stock Options" and Note 8 of the Notes to Consolidated
Financial Statements. These substitute options are not subject to the limit on
the shares reserved for issuance set forth above. An additional 1,687,500 shares
are reserved for issuance under the our employee stock purchase plan. We intend
to file registration statements on Form S-8 covering the issuance of shares of
our common stock pursuant to those plans. Accordingly, the shares issued
pursuant to either of those plans will be freely tradable, subject to the
restrictions on resale by persons who may be deemed to be our affiliates.
We have entered into a common stock purchase and sale agreement with Sutter
Hill Ventures and Technology Crossover Ventures. On June 22, 1999 the investors
agreed to purchase an aggregate of 2,400,000 shares of our common stock at $3.50
per share. The agreement with the investors provides that the proposed purchase
of our common stock is subject to the receipt of a private letter ruling from
the IRS to the effect that the spin-off will be tax-free to TSC and its
stockholders for United States federal income tax purposes and certain other
customary conditions. Following the completion of the sale of our common stock
to the investors, each of Sutter Hill Ventures and Technology Crossover Ventures
will have the right to designate a nominee to our board of directors. We expect
Sutter Hill Ventures to nominate Tench Coxe as its designee on our board and
that Tench Coxe will be our chairman of the board. We expect that Technology
Crossover Ventures to nominate Jay Hoag as its designee on our board.
PROVISIONS IN OUR CORPORATE DOCUMENTS, AND CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS, COULD DELAY OR PREVENT A CHANGE IN CONTROL OF OUR COMPANY, WHICH
COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK
The existence of some provisions in our corporate documents and Delaware
law could delay or prevent a change in control of our company, which could
adversely affect the price of our common stock. Our certificate of incorporation
and bylaws contain some provisions that may make the acquisition of control of
our company more difficult, including provisions relating to the nomination,
election and removal
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of directors and limitations on actions by our stockholders. For example, our
certificate of incorporation provides that the board of directors will be
divided into three classes as nearly equal in size as possible with staggered
three-year terms. This classification of the board of directors has the effect
of making it more difficult for stockholders to change the composition of the
board of directors. In addition, our preferred share purchase rights would cause
substantial dilution to any person or group who attempts to acquire a
significant interest in our company without advance approval from our board of
directors. For a more complete description of our capital stock, our certificate
of incorporation, bylaws, our preferred share purchase rights and the effects of
Delaware law that could hinder a third party's attempt to acquire control over
us, see "Description of eLoyalty Capital Stock."
Certain acquisitions of the stock of eLoyalty prior to, or following, the
spin-off might cause the spin-off to be taxable, for federal income tax
purposes, to TSC if the acquisitions involve, in the aggregate, 50% or more (by
vote or value) of eLoyalty's stock and are found to be part of a plan (or series
of related transactions) of which the spin-off is a part. Acquisitions of
eLoyalty stock occurring during the four-year period beginning two years before,
and ending two years after, the spin-off are presumed to be part of a plan (or
series of related transactions) of which the spin-off is a part. Under the Tax
Sharing and Disaffiliation Agreement, eLoyalty has agreed to indemnify TSC if
the spin-off is taxable as a result of any acquisition or other transaction
involving the capital stock of eLoyalty. Such liability, if it were to arise,
would be significant. As a consequence of the foregoing, persons otherwise
interested in acquiring eLoyalty stock might postpone or cancel any acquisitions
out of concern that their acquisitions would cause the spin-off to be taxable,
with the resulting tax liability effectively borne by eLoyalty under the terms
of the Tax Sharing and Disaffiliation Agreement. See "The Spin-Off -- Material
Federal Tax Consequences" and "eLoyalty's Relationship with Technology Solutions
Company After the Spin-Off -- Tax Sharing and Disaffiliation Agreement."
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY FOLLOWING THE SPIN-OFF
The market price of our common stock could be subject to significant
fluctuations in response to our operating results, changes in earnings estimated
by securities analysts or our ability to meet those estimates, publicity
regarding the CRM industry in general or any of our significant clients and
other factors. Some or all of these factors may be beyond our control. In
particular, the realization of any of the risks described in these "Risk
Factors," including the possibility of substantial sales of our common stock and
the timing, structure and terms of the spin-off, could have a significant and
adverse impact on the market price of our common stock. In addition, the stock
market in general has experienced extreme volatility that has often been
seemingly unrelated to the operating performance of particular companies,
particularly those that are technology related. These broad market fluctuations
may adversely affect the trading price of our common stock. In the past,
securities class action litigation has often been instituted against companies
following periods of volatility in the market price of their securities. Such
litigation could result in substantial costs and a diversion of management's
attention and resources. There is currently no public market for our common
stock and we cannot assure you that an active trading market will develop or be
sustained after the spin-off.
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THE SPIN-OFF
BACKGROUND AND PURPOSES OF THE SPIN-OFF
TSC was organized in 1988 and became a public company in 1991. TSC's
businesses originally consisted of the design, development and implementation of
custom client/server computer systems for large corporate clients. TSC's first
engagements in the CRM area consisted of custom call center projects at two
Fortune 500 companies, the first of which began in 1991.
Over time, the business conducted by TSC has evolved in related but
distinct directions, which led to the establishment of two divisions within TSC:
- the eLoyalty division, which represents the business formerly conducted
as the Enterprise Customer Management business unit within TSC; and
- the E-Solutions division, which comprises the remaining business
currently conducted by TSC.
TSC's E-Solutions division provides consulting and systems integration
services that help companies apply technology to improve the way they do
business. The E-Solutions division specializes in the areas of eCommerce, supply
chain management, computer based training and resource planning. Historically,
the E-Solutions division has focused on the integration of packaged software
applications. Currently, E-Solutions is applying this expertise in the high
growth areas of eBusiness.
The principal market in which the E-Solutions division operates is the more
established information technology services market, which is distinct from the
market targeted by eLoyalty. As a result, eLoyalty and E-Solutions have
developed different growth characteristics and strategic priorities.
Over the past year, TSC's board of directors has considered alternatives to
separate the businesses of the eLoyalty division from the E-Solutions division,
including by way of a spin-off or a spin-off preceded by an initial public
offering of eLoyalty common stock. On September 23, 1999, TSC announced its
intention to spin-off eLoyalty through the tax-free distribution of eLoyalty
shares to TSC stockholders.
The spin-off is designed to separate the E-Solutions and eLoyalty
businesses. We expect that important benefits will accrue to TSC and eLoyalty,
including the following:
- Capital Financing Flexibility. After the spin-off, each company should
have greater capital planning flexibility. For example, each company
would be able to use its own stock to pursue acquisitions if and when it
chooses to do so, subject to certain federal income tax considerations.
See "-- Material Federal Tax Consequences." The eLoyalty business will no
longer have to compete with other business units in TSC to secure funding
for the investments it believes are appropriate to effect its growth
plan.
- Business Focus. As a result of the spin-off, each of TSC and eLoyalty
will be better able to focus its attention and financial resources on its
own business and on exploring and implementing the most appropriate
growth opportunities and executing its own strategic plans.
- Employee Incentives. The spin-off will allow each company to develop
incentive programs for management and other professionals that are
tailored to their own business and are tied to the market performance of
their own common stock. These programs will more directly reward
employees based on each company's individual success.
- Simplified Internal Structures. Management of each company should be able
to implement simplified organizational and internal reporting structures.
MANNER OF EFFECTING THE SPIN-OFF
TSC will accomplish the spin-off by distributing all of the outstanding
common stock of eLoyalty owned by TSC to TSC stockholders as a dividend. TSC
expects that its board of directors will declare the dividend necessary to
effect the spin-off. Each TSC stockholder of record as of the close of business
on
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January , 2000, which is the "record date" for the spin-off, will be entitled
to participate in the spin-off. On the spin-off date, those same TSC
stockholders will each receive one share of our common stock for every one share
of TSC common stock that they hold as of the record date. Although the spin-off
will not occur unless certain conditions are satisfied, we expect that the
spin-off will take place on or about January , 2000. See "-- Conditions to the
Spin-Off."
As soon as possible on or after the spin-off date, TSC will deliver to the
spin-off agent, as agent for TSC stockholders as of the close of business on the
record date for the spin-off, certificates representing shares of eLoyalty
common stock. The spin-off agent will then mail, on or about the spin-off date,
certificates representing shares of our common stock to those stockholders.
No TSC stockholder will be required to pay cash or other consideration for
the shares of eLoyalty common stock to be received in the spin-off or to
surrender or exchange shares of TSC common stock in order to receive eLoyalty
common stock.
RESULTS OF THE SPIN-OFF
After the spin-off, TSC and eLoyalty will be separate, independent public
companies. Our management, fundamentals, growth characteristics and strategic
priorities will be different from those of TSC.
The number and identity of our stockholders immediately after the spin-off
will be the number and identity of TSC's stockholders at the close of business
on the record date for the spin-off together with the venture capital investors
described under "Certain Transactions." Immediately after the spin-off we expect
to have approximately holders of record of our common stock and
approximately shares of our common stock issued and outstanding, based on
the number of holders of record and issued and outstanding shares of TSC common
stock on December 31, 1999 for the spin-off and the holders of eLoyalty common
stock prior to the spin-off.
Our board of directors expects to consider adopting a rights plan before
the spin-off, which will entitle each eLoyalty stockholder, as of the close of
business on January , 2000, to one preferred share purchase right for every
share of eLoyalty common stock he or she receives in the spin-off. Shares of
eLoyalty common stock also will represent the same number of rights issued under
the rights plan. See "Description of eLoyalty Capital Stock -- Rights Plan."
Unless the context otherwise requires, references in this information
statement/prospectus to our common stock include the related rights issued under
our rights plan.
The spin-off will not affect the rights of the holders of outstanding
shares of TSC or the rights associated with those shares.
MATERIAL FEDERAL TAX CONSEQUENCES
The following summarizes the material United States federal income tax
consequences of the spin-off. The discussion that follows is based on and
subject to the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations under the Code, existing administrative interpretations and court
decisions as of the date of this information statement/prospectus, all of which
are subject to change (possibly with retroactive effect) and all of which are
subject to differing interpretation. The following discussion does not address
the effects of the spin-off under any state, local or foreign tax laws.
The tax treatment of a TSC stockholder may vary depending upon the
stockholder's particular situation, and certain TSC stockholders (including
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, persons who do not hold TSC stock as capital assets, employees
of TSC, and individuals who hold TSC stock as part of a straddle or conversion
transaction) may be subject to special rules not discussed below. YOU ARE URGED
TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE
SPIN-OFF INCLUDING THE EFFECTS OF UNITED STATES FEDERAL, STATE AND LOCAL, AND
FOREIGN AND OTHER TAX RULES, AND THE EFFECT OF POSSIBLE CHANGES IN TAX LAWS.
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TSC has requested a private letter ruling from the IRS regarding the United
States federal income tax consequences of the spin-off, substantially to the
effect that, among other things:
- No gain or loss will be recognized by TSC or eLoyalty upon the transfer
of the eLoyalty business assets by TSC to eLoyalty (and the assumption by
eLoyalty of certain liabilities);
- The spin-off will qualify as a tax-free spin-off under Section 355 of the
Code;
- No gain or loss will be recognized by TSC upon the distribution of all of
its shares of eLoyalty common stock to the stockholders of TSC;
- No gain or loss will be recognized by (and no amount will be included in
the income of) the TSC stockholders as a result of their receipt of
eLoyalty common stock in the spin-off;
- In connection with the spin-off, a stockholder's basis in TSC stock will
be apportioned between the TSC stock and the eLoyalty common stock
received in the spin-off in accordance with their relative fair market
values on the date of the spin-off; and
- The holding period of the eLoyalty common stock received in the spin-off
will include the holding period of the TSC stock with respect to which
the eLoyalty common stock will be distributed, provided the TSC stock is
held as a capital asset on the date of the spin-off.
The private letter ruling, if received, will generally be binding on the
IRS. However, the ruling, assuming it is received, will be based upon various
factual representations and assumptions, as well as upon certain undertakings.
We are not aware of any facts or circumstances that would cause the
representations and assumptions to be untrue or incomplete in a material
respect. If, however, any of those factual representations or assumptions were
untrue or incomplete in a material respect, any undertaking were not complied
with, or the facts upon which the ruling is based were materially different from
the facts at the time of the spin-off, the ruling received from the IRS might be
invalid.
Certain acquisitions of the stock of eLoyalty or TSC prior to, or
following, the spin-off might cause the spin-off to be taxable, for federal
income tax purposes, to TSC (but not its stockholders) if the acquisitions
involve, in the aggregate, 50% or more (by vote or value) of the stock of
eLoyalty or TSC and are found to be part of a plan (or series of related
transactions) of which the spin-off is a part. Acquisitions of eLoyalty or TSC
stock occurring during the four-year period beginning two years before, and
ending two years after, the spin-off are presumed to be part of a plan (or
series of related transactions) of which the spin-off is a part.
If the contribution or the spin-off were not to qualify for tax-free
treatment for United States federal income tax purposes then, in general, a very
substantial tax would be payable by TSC. Such a tax would generally be based on
the excess of the gross fair market value of the eLoyalty business over the tax
basis of the assets included in that business (which tax basis is expected to be
insignificant relative to the fair market value). If the spin-off were not to
qualify for tax-free treatment for United Stated federal income tax purposes
(other than by reason of acquisitions described in the preceding paragraph)
then, in general, a very substantial tax would also be payable by the TSC
stockholders. In general, a TSC stockholder would be treated as having received
a distribution equal to the fair market value of the eLoyalty stock on the date
of distribution. Such distribution would be taxed as ordinary dividend income to
the extent not in excess of TSC's current and accumulated earnings and profits.
Thereafter, such distribution would decrease (but not below zero) a TSC
stockholder's tax basis in his or her TSC stock. Thereafter, such distribution
would be taxed as gain from the sale or exchange of TSC stock.
Under United States federal income tax laws, TSC and eLoyalty would be
jointly and severally liable for TSC's federal income taxes resulting from the
contribution or spin-off being taxable. As summarized below under "eLoyalty's
Relationship with Technology Solutions Company After the Spin-Off -- Tax Sharing
and Disaffiliation Agreement," arrangements will exist between TSC and eLoyalty
relating to tax sharing and other tax matters, including indemnification by TSC
and eLoyalty to each other with respect to the failure of the contribution of
the eLoyalty business or the spin-off to be tax free.
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United States Treasury Regulations require each TSC stockholder to attach
to its United States federal income tax return for the year of the spin-off a
detailed statement setting forth such data as may be appropriate in order to
show the applicability of Section 355 of the Code to the spin-off. Within a
reasonable time after the spin-off, TSC will provide TSC stockholders with the
information necessary to comply with such requirements, and will provide
information regarding the allocation of the tax basis as described in the fifth
bullet point above in this section. The private letter ruling, if received by
TSC, will not specifically address the tax basis allocation rules applicable to
TSC stockholders who hold blocks of TSC stock with different per share tax bases
and such stockholders must consult their own tax advisors in that regard. ALL
TSC STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR
TAX CONSEQUENCES OF THE SPIN-OFF TO THEM, INCLUDING THE APPLICATION OF STATE,
LOCAL AND FOREIGN TAX LAWS AND ANY CHANGES IN UNITED STATES FEDERAL INCOME TAX
LAW THAT MAY OCCUR AFTER THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS.
MARKET FOR ELOYALTY COMMON STOCK
See "Risk Factors" for a discussion of certain considerations relating to
the market for and trading prices of our common stock following the spin-off.
Currently there is no regular public market for our common stock. We have
applied to have our common stock listed on The Nasdaq Stock Market's National
Market under the symbol "ELOY," and "regular-way" trading of our common stock is
expected to begin on the first business day after the spin-off date. In
addition, we expect that "when-issued" trading for our common stock will develop
prior to the spin-off date. "When-issued" trading refers to that period when
shares are traded prior to the time shares are actually available or issued.
None of these trades, however, will settle until after the spin-off date, when
regular trading in our common stock has begun. If the spin-off does not occur,
all when-issued trading will be null and void. TSC expects that its common stock
will continue to trade on a regular basis through and after the spin-off date.
Shares of our common stock distributed in the spin-off will be freely
transferable, except for shares received by persons who may be deemed to be our
"affiliates" under the Securities Act of 1933, as amended (the "Securities
Act"). Persons who may be deemed to be our affiliates after the spin-off
generally include individuals or entities that control, are controlled by, or
are under common control with, us and may include certain of our officers,
directors or principal stockholders. Persons or entities who or which are our
affiliates will be permitted to sell shares of our common stock only pursuant to
an effective registration statement under the Securities Act or any exemption
from the registration requirements of the Securities Act that may be available.
CONDITIONS TO THE SPIN-OFF
The spin-off is conditioned on, among other things, declaration of the
spin-off by the TSC board of directors. Other conditions to the spin-off
include:
- TSC's receipt of the private letter ruling from the IRS as described
under "-- Material Federal Tax Consequences;"
- the receipt by TSC's board of directors of opinions of TSC's financial
advisor regarding the fairness to stockholders of TSC of the spin-off and
the viability of TSC and eLoyalty after the spin-off;
- receipt of all material approvals and consents necessary to consummate
the spin-off;
- the absence of any prohibition of the spin-off by any law or governmental
authority;
- registration of our common stock under the Securities Act and the
Securities Exchange Act of 1934 (the "Exchange Act"); and
- approval for listing on The Nasdaq Stock Market's National Market of our
common stock.
Even if all the conditions to the spin-off are satisfied, TSC has reserved
the right to amend or terminate the reorganization agreement providing for the
spin-off and the related transactions. The TSC board of directors has not
attempted to identify or establish objective criteria for evaluating the
particular
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types of events or conditions that would cause the TSC board of directors to
consider amending or terminating the spin-off. Although the conditions described
above may be waived by TSC to the extent permitted by law, the TSC board of
directors presently has no intention to proceed with the spin-off unless each of
these conditions is satisfied.
OPINIONS OF FINANCIAL ADVISOR
TSC has engaged Credit Suisse First Boston Corporation as a financial
advisor in connection with the spin-off. As provided for in an engagement letter
dated November 1, 1999, Credit Suisse First Boston has been requested to deliver
to the TSC board of directors its written opinion with respect to:
- the fairness of the spin-off from a financial point of view to the
stockholders of TSC; and
- whether the spin-off should materially and adversely affect the ability
of TSC (after the completion of the spin-off) and eLoyalty to meet their
respective projected operating and capital expenditures immediately
following the spin-off through December 31, 2000 as set forth in the
financial forecasts provided to Credit Suisse First Boston by the
management of TSC.
The TSC board of directors expects that it will consider this opinion in
deciding to formally declare the spin-off dividend.
The full text of the Credit Suisse First Boston opinion, when issued, will
set forth, among other things, assumptions made, procedures followed, matters
considered and limitations set on the scope of the review undertaken by Credit
Suisse First Boston in rendering its opinion. The full text of the opinion, when
issued, will be attached as an annex to this information statement/prospectus
and is incorporated by reference in its entirety. The Credit Suisse First Boston
opinion will address only the fairness of the spin-off from a financial point of
view to the stockholders of TSC and as to whether the spin-off should materially
and adversely affect the ability of TSC (after the completion of the spin-off)
and eLoyalty to meet their respective projected operating and capital
expenditures immediately following the spin-off through December 31, 2000, as
set forth in the financial forecasts provided to Credit Suisse First Boston by
the management of TSC. The opinion will be addressed to the TSC board of
directors and will not constitute a recommendation to any stockholder of TSC as
to whether such stockholder should buy, sell or continue to hold shares of TSC
common stock or, following the spin-off, eLoyalty common stock.
As provided for in the engagement letter, TSC has agreed to pay Credit
Suisse First Boston a customary fee, which will be paid upon the completion of
the spin-off. TSC has agreed to reimburse Credit Suisse First Boston for its
out-of-pocket expenses, including attorney's fees, incurred in connection with
its engagement. TSC has also agreed to indemnify Credit Suisse First Boston and
certain related persons against certain liabilities and expenses arising out of
or in conjunction with its rendering of services under its engagement, including
liabilities arising under the federal securities laws.
Credit Suisse First Boston was selected by the TSC board of directors based
on Credit Suisse First Boston's qualifications, expertise and reputation, as
well as its familiarity with TSC. Credit Suisse First Boston is an
internationally recognized investment banking and advisory firm. Credit Suisse
First Boston, as part of its investment banking business, is continuously
engaged in the valuation of businesses and securities in connection with mergers
and acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In the ordinary course of its
business, Credit Suisse First Boston and its affiliates may actively trade the
debt and equity securities of TSC and eLoyalty for their own accounts and for
the accounts of their customers and, accordingly, may at any time hold a long or
short position in such securities.
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eLOYALTY'S BUSINESS
OUR HISTORY
eLoyalty was founded in 1994 as a business unit within TSC and was
incorporated in Delaware in May 1999.
TSC's core business originally consisted of the design, development and
implementation of custom client/server computer systems for large corporate
clients. TSC's first engagements in the CRM area consisted of projects at two
Fortune 500 companies which involved the identification, integration and
implementation of various software products so that these clients could better
communicate with their customers by telephone from a centralized location. These
centralized locations are commonly referred to as call centers. The first of
these projects began in 1991. Kelly Conway, eLoyalty's President and Chief
Executive Officer, was hired by TSC in November 1993. Drawing upon TSC's
experience and his own background and knowledge, Mr. Conway led the development
of TSC's expertise in call center and other CRM technologies.
Mr. Conway established the call center business unit within TSC in May
1994. To reflect the broader scope and strategic, enterprise-wide focus of the
solutions developed and offered by the group headed by Mr. Conway, it was
renamed the Enterprise Customer Management (ECM) business unit in 1997. In June
1999, the ECM business unit was named the eLoyalty division of TSC. Since 1994,
this group within TSC has consistently dedicated time and resources to
developing eLoyalty's strategic consulting and technology capabilities in an
effort to lead the development of, and stay at the forefront of, the eCRM
market.
OVERVIEW
We are a 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 customer
relationship management (CRM) market. The CRM market refers to consulting
services and software products that focus on managing the stages of the customer
lifecycle from marketing to sales to customer service. These services are
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 the existing CRM solution into this new electronic environment.
We define the market opportunity created by this business need as eCRM.
eCRM is an expansion of CRM to further include the Internet, e-mail and web-chat
across each division of a company. Our key services to build a loyalty solution
include:
- strategic and business consulting to define a company's policy for
managing customer relationships;
- technical knowledge of the software products available from third party
vendors in this area;
- proprietary software and methodologies to tie together the different
software products; and
- ongoing support to meet the changing business requirements of our clients
as well as to update their solutions as technology advances.
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The following scenarios illustrate how loyalty solutions can increase
profitability and build loyalty:
CUSTOMER SCENARIO #1: BANKING
A highly valued customer is late making his credit card payment. He has
exceeded his credit limit and is about to have his credit line suspended.
The bank's standard policy on late payments is to charge a $20 delinquency
fee and to apply a high interest charge to the outstanding balance.
A customer information database identifies the situation and notes that
although he is a low value customer to the credit card division, he is of
high overall value to the bank because he maintains several profitable
accounts. In recognition of his value, the business rules put into place
by executive management and embedded in the loyalty solution direct the
customer service representative to initiate a call to the customer and
notify him that he has been granted a two-week payment extension and that
no fees or interest will be charged to his account. To increase the
profitability of this relationship, the loyalty solution also prompts the
customer service representative to up-sell the customer a new platinum
credit card. The customer accepts the offer because his credit limit will
be increased. The bank expects to generate higher annual fees from this
upgrade as well as greater transaction revenue from the customer's
increased spending.
CUSTOMER SCENARIO #2: TECHNOLOGY
A highly valued customer has purchased many top-of-the-line computers from
the direct sales division over the past two years. The customer has
recently experienced a problem with a new printer only four months after
buying it. Unfortunately, the customer did not purchase an extended
warranty. The company's standard policy is to charge a fee to repair the
machine after the standard, ninety-day coverage expires.
The customer goes on-line, but cannot find the solution to the printer's
problem using the self-service problem resolution application on the
company's web site. The loyalty solution recognizes the customer's value
and automatically presents the customer with a "call me" option. Within
minutes, the customer receives a call at home from a technical engineer.
The engineer quickly determines that the printer does not have sufficient
memory to meet the customer's needs. Information pulled from the customer
database by the loyalty solution also notifies the engineer that during
the customer's previous on-line activity he has been browsing the scanner
section of the company's web site. The engineer then informs the customer
that he will not be charged for the service request and successfully sells
the customer an upgrade package for the printer along with a new order for
a scanner at a special discounted rate.
CUSTOMER SCENARIO #3: TRAVEL
A top-tier business traveler is making an on-line reservation to fly with
her husband and daughter on vacation. The executive travels over 100,000
miles a year with the airline, putting her in the top group of frequent
fliers. She has collected sufficient points to upgrade her family on this
trip, however, the airline's standard travel policy allows only one
additional upgrade per reservation. This would mean that one of the three
passengers has to travel alone in coach class seating. This same
businesswoman is also the decision maker for her company's travel policy.
The Internet ticketing system automatically searches the customer
information database and determines that the customer is in the airline's
highest value segment. Based on business rules put into place by executive
management, the Internet ticketing system allows the high-value customer
to upgrade up to three additional reservations. These rules, embedded in
the loyalty solution, direct the system to offer the businesswoman a
"companion travels free" coupon as an incentive for her to use the airline
for subsequent personal travel.
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INDUSTRY BACKGROUND
Increasing competitiveness is forcing companies to become more focused on
their current customers. The importance of customer relationships is a familiar
business concept. New technologies are helping companies attract and maximize
the value of their existing customers more effectively. In addition, the rapid
growth of the Internet is fundamentally changing the way businesses communicate
(interact) with their customers. Customers can use the Internet to more quickly
evaluate products and prices from a wide range of companies without regard to
geographical constraints. Consumers are increasingly using the Internet, e-mail
and web-chat as their preferred methods of communication. International Data
Corporation (IDC) expects the number of worldwide Internet users to grow from
142 million in 1998 to 502 million in 2003. In addition, IDC expects consumer
e-mail users in the United States to grow from 48 million in 1998 to 112 million
in 2005.
To remain competitive in this dynamic business environment, more companies
are seeking to create and enhance customer loyalty by making their interactions
with customers more personal and relevant to the customer. By personalizing
these contacts with their customers, companies hope to build a stronger
relationship with each customer -- a relationship that will increase that
customer's loyalty to the company's products or services. This greater loyalty
is expected to increase revenue and profitability per customer. By knowing their
customers better, companies can market complementary products, known as
"cross-selling," or market higher-end products, known as "up-selling," during
regular customer interactions.
Furthermore, companies today are increasingly aware of the significant
financial impact associated with losing high value customers, particularly in
the early stages of the relationship. In most industries, initial customer
acquisition costs far exceed a typical customer's spending in the first year.
According to research presented by Frederick R. Reichheld and W. Earl Sasser,
Jr. in a Harvard Business Review article, "companies can boost their profits by
almost 100% by retaining just 5% more of their customers."
The early stage of CRM was focused on the call center, where customer
interaction took place through telemarketing, telesales and follow-up customer
service. Although call centers were a first step in the CRM initiative, they
were limited to only one customer access channel -- 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 customer access channels
including the Internet, e-mail, web-chat, telephone and fax, and provides a
seamless integration of these channels to support core business operations.
Increasingly, companies are looking for outside providers to implement these
initiatives directed at improving customer loyalty. The Gartner Group, an
information technology research firm, predicts that the market for CRM services
will grow from $2.9 billion in 1998 to $20.8 billion in 2003. The following
diagram illustrates those six components grouped by their functionality, as well
as examples of third party vendors who provide software in each category.
Significant Components of the eCRM Market
[COMPONENTS OF THE eCRM MARKET GRAPHIC]
CHANNEL MANAGEMENT CUSTOMER SEGMENTATION CRM APPLICATIONS
eCOMMERCE CRITICAL VOID BACK OFFICE
CALL CENTER TECHNOLOGY
eLOYALTY APPROACH
While a well-defined technology architecture is needed to successfully
integrate these software products, the value of an eCRM solution is derived from
combining this architecture 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 across each access channel. 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 across access channels and
capitalize on selling opportunities based on customer information gathered
during these interactions.
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THE ELOYALTY DIFFERENCE
eLoyalty is "the largest pure-play customer relationship solutions service
supplier in the industry," according to a July 2, 1999 report by the Aberdeen
Group commissioned by eLoyalty. We believe that we can be considered a leading
provider of loyalty solutions for the following reasons:
- ACTION-ORIENTED APPROACH TO CREATING LOYALTY
We help our clients by identifying appropriate customer loyalty goals,
improving customer retention, increasing up-selling and cross-selling
opportunities, reducing sales costs and increasing customer referrals. We
identify these goals by analyzing and segmenting a client's customer base
using key indicators including value, preference and potential sales
opportunities. We work with the senior executives of our clients to help
organize the company's approach to its customers based on the results of
our analysis. Our approach is designed to translate the customer loyalty
goals of our clients into operational business rules. The business rules
prescribe a set of specific actions to be used by our client to help
increase customer loyalty. In essence, we work with our clients to help
them create practical steps to optimize everyday customer interactions.
- ABILITY TO ARCHITECT 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 each customer access channel, including
the Internet, e-mail, web-chat, telephone and fax. We are able to
architect solutions that integrate various point applications, our
proprietary software and the back office transaction processing systems of
our clients.
Our familiarity with emerging technology and software applications used in
the eCRM market coupled with our understanding of key business processes
allow us to implement successful loyalty solutions.
- PROPRIETARY TECHNOLOGY THAT ENHANCES OUR SOLUTIONS
We have developed software that is designed to complement existing
technology and point applications. The availability of this software
reduces the time needed to deploy our solutions. In addition, our software
increases the functionality of third-party applications that are used in
our solutions. Our proprietary software, the Loyalty Suite, enables us to
architect a comprehensive solution that takes advantage of emerging
technology.
We develop software in our Loyalty Lab, which is a showcase for our
business and technology capabilities. The Loyalty Lab is also used as a
demonstration center for current and prospective clients and as a training
center for employees. In addition, we use the Loyalty Lab to create
prototypes and test solutions before they are implemented at a client's
site.
- ONGOING SUPPORT FOR OUR SOLUTIONS
Loyalty solutions are complex multi-channel implementations that include
many different software applications in an integrated architecture. To
maintain optimal operating performance, a wide breadth of knowledge is
required to understand each individual component and also how the pieces
of the solution fit together. Each time one of these application vendors
releases a new version of their software, our clients need to understand
and verify the compatibility with the other components of their solution.
These upgrades normally take place at least twice a year for each
application and our clients are often unable to attract or retain
resources with the broad range of skills in each of the existing and
emerging technologies. Our Loyalty Support group provides around-the-clock
support of the entire loyalty solution to ensure that all of our clients'
customer-facing systems are operational. We also offer a broad range of
maintenance, upgrade and performance monitoring services to establish a
benchmark for our client's operations and to identify opportunities for
continual improvement. In 1999, we received the Solution Integrator of the
Year Award for New Business.
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- EXPERIENCED PROJECT TEAMS
Our differentiated delivery model uses a team of between ten and fifteen
principals and senior consultants, providing a solid core of experience.
This group is led by two to three Vice Presidents and complemented by a
similar number of supporting consultants. We believe this model provides
us with an advantage over some of our competitors, who prefer a pyramid
model of pairing one partner with many less experienced professionals.
Many of our consultants have held senior management positions including
Chief Executive Officer, Chief Financial Officer and Chief Information
Officer. Our 100 Vice Presidents average 20 years of relevant industry
experience and are distinguished in their ability to manage and deploy
complex and multi-channel solutions. The average years of experience for
our other professionals is 12 years. This level of experience has helped
us to realize an average billing rate of $211 per hour and $215 per hour
for the nine months and three months ended September 30, 1999,
respectively.
- ABILITY TO SERVE CLIENTS ON A GLOBAL BASIS
We are a global firm with a large domestic presence and international
offices in London, Cologne, Paris, Sydney and Toronto. We have an
established presence in Europe and are now expanding in Asia Pacific. For
the nine month period ended September 30, 1999, 22.5% of our revenues were
derived from our international operations.
Through our Loyalty Lab and knowledge base of shared projects,
methodologies and best practices, we have demonstrated to our
multi-national clients our ability to provide loyalty solutions tailored
to their local needs and requirements.
STRATEGY
Our objective is to be the leading global provider of loyalty solutions. We
intend to substantially increase our revenues and profitability and to create a
global brand name. Our strategy to achieve these goals includes the following:
- FOCUS ON THE BUSINESS BENEFITS WE DELIVER TO OUR CLIENTS
We focus on highly strategic projects that are designed to improve the
profitability of our clients. We identify customer loyalty goals and
design business rules that prescribe a specific set of actions used by the
client to increase customer loyalty. We perform detailed financial
analysis to calculate the expected return on investment from implementing
our loyalty solutions. Based upon our experience to date, we believe that
the expected business benefits derived from using our loyalty solutions
will measurably improve our clients' profitability.
We may from time to time offer certain clients a value-based pricing model
for our solutions based upon these expected business benefits. We believe
that this pricing model (which we call Guaranteed Business Benefits) will
be of significant interest to our clients and differentiate us from our
competitors.
Under this model, we may reduce our billing rates or limit our fees in
exchange for a share of the expected economic benefits to our clients from
implementing our solutions. By sharing in the cost savings, profitability
and increased revenues that result from our solutions, we anticipate that
we will experience greater client satisfaction, higher revenues and
increased profitability.
- EXTEND OUR TECHNOLOGY INNOVATION AND THOUGHT LEADERSHIP
We will continue to invest the necessary resources to develop leading-edge
loyalty solutions. The investment is directed in two main areas: emerging
eCRM technology and business thought leadership that we define as
leading-edge research on customer behavior.
To be at the forefront of emerging technology, specifically the Internet,
we will continue to maintain and develop relationships with leading
software vendors. We have strategically invested in
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a talented group of technology experts that focus exclusively on creating
innovative loyalty solutions. Our Loyalty Lab is the focal point for these
activities in addition to providing a demonstration center for our
competencies.
We plan to advance our business thought leadership and education on the
concepts of customer loyalty. We intend to explore areas including brand
impact, customer perception and satisfaction, the interdependency of
multiple interactions to ensure that our loyalty solutions reflect and
extend the most forward-thinking business ideas. We believe that our
technology and business capabilities will significantly enhance our
competitive position by enabling us to deliver more complete solutions.
- CONTINUE TO ENHANCE OUR LOYALTY SOLUTIONS
We currently have two separate initiatives to enhance our loyalty
solutions: extend our current Loyalty Support services and introduce our
Loyalty Hosting offering. We have been providing our clients with our
Loyalty Support service to ensure that our implementations result in
continued business value to our clients. We provide around-the-clock
maintenance, support and upgrade services. We intend to additionally
provide business performance monitoring to identify opportunities for
continual improvement of their loyalty solutions.
We intend to offer additional flexibility to our clients with our Loyalty
Hosting offering. This offering will provide remote subscription to our
loyalty solutions for those clients who desire to reduce risk, time and
initial investment in their effort to use a sophisticated architecture to
realize the on-going value of our loyalty solutions.
- BUILD STRATEGIC VENDOR RELATIONSHIPS
We will continue our investment in two kinds of strategic vendor
relationships. First, we plan to collaborate with the leading-edge
technology and application vendors to gain access to new products at an
early stage of release. This early access allows us to rapidly develop the
necessary implementation and integration skills required in our loyalty
solutions. Second, we intend to establish vendor relationships as part of
our overall sales efforts including joint lead development and sales
calls. The purpose of these relationships is to give us alternate channels
for developing new business. We have been collaborating with Lucent
Technologies and DST Systems and are in the process of establishing more
formal arrangements with them.
- CONTINUE TO BUILD BRAND EQUITY
A successful brand results in a greater ability to attract new clients and
employees as well as to improve competitive positioning. We will continue
to invest in marketing programs to build brand awareness through regular
publications, award sponsorship, communications with analysts, trade
shows, industry events and marketing material. In 1999, eLoyalty received
Solutions Integrator magazine's SI Impact Award for Solution Integrator of
the Year. In addition, our Loyalty Support services received the SI Impact
Award for New Business. We are the founder and a sponsor of the
prestigious Computerworld Smithsonian 21st Century Pioneer Awards Program
and the sponsor of Britain's Most Admired Company award.
- CONTINUE TO INVEST IN INFRASTRUCTURE
We plan to continue our strategic investments in operational and
management information systems. We have developed a sophisticated
web-based management information system, GetLoyal.com, that provides us
with a real-time global view of our staffing, pipeline, scheduling,
forecasting, accounting and client information. We will continue to refine
and upgrade our management systems so that we can optimize our resource
allocation and achieve our target operational measures.
- CONTINUE TO ATTRACT AND RETAIN EMPLOYEES
Our key assets are our employees. We will continue to invest in the
necessary resources to attract and retain highly qualified and motivated
personnel. We have concentrated on fostering an energetic
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working environment that facilitates and rewards initiative and
achievement. In keeping with this goal, we are developing our Employee
Loyalty program, an enterprise-wide human resources management program.
The Employee Loyalty program is designed to create a culture that
engenders communication, recognize significant employee achievements and
provide training on new technology. In addition, we intend to make
available to all of our employees stock options and other
performance-based incentives.
In our five years of operation, the success of our human resources
management is reflected in the average tenure of our employees. As of
September 30, 1999 the average tenure of our senior management was about
52 months, Vice Presidents about 44 months and other professionals about
27 months.
- EXPAND OUR GLOBAL PRESENCE
We expect our plans for global expansion will allow us to capitalize on
high-growth geographic regions and further diversify our revenue base. We
also believe this will enable us to develop closer relationships with our
multi-national clients who are increasingly seeking service providers with
experience in addressing their needs and requirements on a global basis.
We are committed to ensuring the consistency and quality of our loyalty
solutions worldwide through our Loyalty Lab and knowledge base of shared
projects, methodologies and best practices.
THE ELOYALTY SOLUTION
We believe 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, architecture and integration of various technologies
and software applications and post-implementation support. Our software enables
us to complement the functional gaps of existing technology and eCRM
applications and helps reduce time to implementation, reduce deployment risks
and increase the functionality of our loyalty solutions.
Approach
eLoyalty has developed a 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 customer
access channel each time a contact with the customer occurs; and
- MEASURE: Report and diagnose the effectiveness of these actions on
customer loyalty.
By executing this approach across multiple access channels, organizations can
influence behavior resulting in 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 architecture. Our
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competencies include repeatable methodologies and proprietary tools that should
increase the success and effectiveness of our projects. The following list
highlights our core competencies:
- ASSESSMENT -- Working with our clients, we evaluate their efficiency and
effectiveness in handling customer interactions. We use our Loyalty
Observer, a proprietary software tool, to help with this process. The
Loyalty Observer enables our professionals to capture and analyze the
metrics of each customer interaction, including the number of legacy
systems used to handle the situation, interaction time, reason for
interaction and actions taken to resolve any customer issues. We use
these results to influence the Business Process Design.
- STRATEGIC CONSULTING -- Through our strategic consulting competency,
which we call Loyalty Strategy, we assist our clients in identifying
their most valuable customers through detailed segmentation of their
customer base. We use this segmentation to target high-value customers to
receive special offers or service levels designed to increase their
loyalty to our client. Enhanced loyalty results in increased purchases,
reduced cost of sales and additional customer referrals.
- BUSINESS CASE -- Based on the results of our strategic consulting and
operational assessment, we perform a detailed financial analysis to
calculate the expected return on investment for the implementation of our
loyalty solutions. Our Business Case also establishes goals, alternatives
and priorities and assigns client accountability throughout resulting
projects.
- BUSINESS PROCESS DESIGN -- Following our Business Case analysis, we
select the appropriate loyalty solution for our client. The
implementation of our loyalty solutions can lead to significant
organizational, structural, operational and staffing changes. Our Loyalty
Process Design is the method we employ to determine the changes in
business processes and organizational structure required to implement our
loyalty solutions. Our clients implement these changes because of the
tangible business benefits identified by our Business Case analysis.
- ARCHITECTURE AND SYSTEMS INTEGRATION -- This competency allows us to
implement the technical aspects of our loyalty solutions. We design a
loyalty architecture to integrate a variety of software applications from
third-party vendors and our own Loyalty Suite. The applications we
integrate include channel management, customer segmentation, CRM
applications, eCommerce, back office and call center technology.
- SUPPORT AND HOSTING -- Through our Loyalty Support capabilities, we
provide ongoing maintenance, technical upgrades, benchmarking and we
monitor our solutions to ensure high quality service and efficiency. We
intend to offer hosting services of our loyalty solutions on behalf of
our clients. Loyalty Hosting will provide our clients with remote access
to our loyalty solutions. By using this solution, our clients will
experience less risk, time and initial investment in their effort to
enhance customer loyalty.
Software
The Loyalty Suite is a set of software applications that we license to our
clients. Our software ties together the critical components of the loyalty
architecture. The Loyalty Suite provides sophisticated real-time information,
allowing the client to handle each customer interaction in a consistent manner
throughout the enterprise. As of September 30, 1999, we had implemented
components of our Loyalty Suite to over 30 of our clients as part of our
solution. The Loyalty Suite currently consists of the following:
- LOYALTY COCKPIT -- The Loyalty Cockpit is a desktop portal providing
real-time customer information collected throughout the enterprise. The
application is designed for employees that interact with customers. The
user benefits from an enterprise view of the customer. A sophisticated
scripting feature assists the user to navigate quickly to the multiple
point solutions required to effectively manage the interaction. This is
accomplished by automating the sequence and the access to various CRM
applications and back office systems.
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- LOYALTY REPOSITORY -- The customer information contained in the Loyalty
Repository enhances and extends existing data stored in CRM applications,
legacy systems and marketing databases. The information is used to
determine customer loyalty indicators such as customer value, preference
and potential sales opportunities. Unlike traditional application
databases, the Loyalty Repository is specifically designed for optimum
use in real-time for quickly accessing multiple pieces of customer
information. The data model is highly flexible allowing companies to
define specific parameters for their loyalty indicators in real-time. For
example, the levels at which customer value is segmented are assigned
using the Loyalty Rules Configurator, and can be changed dynamically to
reflect a company's loyalty goals.
- LOYALTY RULES CONFIGURATOR -- The Loyalty Rules Configurator is the user
interface for the Loyalty Decision Engine. It is designed for the
business user, allowing non-technical managers to define key
characteristics of their customers, employees, events and actions.
Business managers can then decide which resources and actions to select
for specific customer profiles and in specific situations. These
decisions are stored as "rules" by the application and reflect the
multi-dimensional aspects of the customer relationship strategy.
- LOYALTY DECISION ENGINE -- The Loyalty Decision Engine is the brain of
the Loyalty Suite. It is a powerful, efficient, server-based application
that applies loyalty business rules across multiple channels and
enterprise applications.
- LOYALTY OUTCOME MANAGER -- The Loyalty Outcome Manager is a web-based
application that enables companies to streamline their data collection
and measurement processes. It enables companies to test and report on
their performance through measurement and analysis of key customer, event
and resource information that is collected over time. The Loyalty Outcome
Manager reduces the time and cost to provide companies with a customer
loyalty scorecard.
- LOYALTY CHANNEL INFLUENCER -- The Loyalty Channel Influencer pulls
information from customer interactions across all customer access
channels, including the Internet, e-mail, web-chat, fax and interactive
voice response systems. This information is then stored in the Loyalty
Repository for use with future customer interactions.
- LOYALTY WAREHOUSE -- The Loyalty Warehouse is a database that stores
information about customers, human resources, events, actions and
customer interactions. It is a chronological history of information that
reflects patterns and trends of customer loyalty data over time. The
Loyalty Warehouse is a flexible model that is able to continually respond
to the dynamic nature of a company's customer relationship and loyalty
information. This data model is specifically designed for optimum
processing of large data requests such as batch reporting.
CLIENTS
For the nine months and three months ended September 30, 1999, eLoyalty's
five largest clients accounted for 21.8% and 23.6% of our revenue, respectively;
our twenty largest clients accounted for 54.8% and 62.4%, respectively, of our
revenue. No single client accounted for more than 10% of our total revenue in
any quarter during that period. For the nine months ended September 30, 1999, 34
clients each accounted for over $1 million of revenues.
For the three months ended September 30, 1999, 89.9% and 51.1% of our
revenues came from clients who were also clients during the three months ended
June 30, 1999 and the three months ended September 30, 1998, respectively.
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The following is a representative list of companies for which we were
providing solutions on November 30, 1999:
- ADAC Laboratories, Inc.
- A&E Signature Services, a Division of Montgomery Wards
- Agilent Technologies, Inc.
- Allina Health System
- Allstate Insurance Company
- Axel Springer Verlag AG
- Bank of America Corporation
- British Broadcasting Corporation (BBC)
- Club Mediterranee (Club Med)
- Deutsche Telekom AG
- Federal Kemper Life Assurance Company
- General Motors Corporation
- Intuit Inc.
- Lucent Technologies, Inc.
- News Limited
- Penn Treaty American
Corporation
- Sprint Communications Company, L.P.
- Union Bank of California, N.A.
- USA Group, Inc.
- U S WEST Communications, Inc.
- Virgin Atlantic Airways Limited
- Xerox Canada Ltd.
CASE STUDIES
The following are examples of actual client services we have provided. In
each case the client has given us permission to describe the solution that we
provided for them. These case studies therefore illustrate some of the solutions
that we have created for our clients.
PENN TREATY AMERICAN CORPORATION
CHALLENGE
To help our client improve its competitive position and to make their sales
agents more effective in building long-term relationships with their customers
by providing alternative channels to improve the sales and accuracy of
processing sales orders and increase their on-line marketing capabilities.
SOLUTION
- Developed an on-line system for our client's national independent agency
network for access to real-time information on insurance quotes and
status of pending customer policies and applications.
- Created a solution that simplified and streamlined the sales process.
This new solution enabled agents to complete their customer policy
applications in real-time, thereby creating a competitive advantage.
- Defined and implemented an overall architecture to support these new
systems and their customer relationship strategy.
- Currently creating individual web sites for all the agents that will
allow them to have a direct relationship with their customers and engage
in eCommerce. We intend to link these web sites to the on-line system,
enabling agents to obtain real-time insurance quotes and status on
pending customer policies and applications directly from their individual
web sites. This will significantly improve the marketing capability of
these agents.
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FEDERAL KEMPER LIFE ASSURANCE COMPANY
CHALLENGE
Help our client achieve the following objectives: (1) streamline the
management of their customer interactions; (2) develop a consistent mechanism
for handling their customers; and (3) support the roll-out of new channels for
their customer interactions.
SOLUTION
- Developed a methodology and set of business rules that supported target
marketing and proactive selling to their customers based upon the
knowledge of each customer and distribution channel. A pilot campaign
increased outbound sales call productivity between 30% and 50%.
- Deployed the overall solution including software developed in our Loyalty
Lab that enabled a multi-channel management of customer interactions.
- Automated numerous manual functions and integrated the solution with back
office processing systems resulting in a more efficient sales and
fulfillment process.
- Provided support services to maintain and support the customized
technology environment.
- By implementing a consistent architecture throughout our client's
enterprise, we were able to help our client share valuable information
about their customers across multiple divisions. This improved our
client's ability to up-sell and cross-sell their products and services to
their customers.
- Our solution is credited with helping our client to realize multi-million
dollar cost savings and increased sales as well as a significant
reduction in employee attrition partially due to the introduction of
easy-to-use customer service desktops powered by the Loyalty Cockpit.
AXEL SPRINGER VERLAG AG
CHALLENGE
Help our client achieve the following objectives: (1) reduce operational
costs; (2) increase sales; and (3) strengthen their competitive position.
SOLUTION
- Developed an effective strategy to facilitate and improve our client's
customer relationships by deploying multimedia customer interaction
centers that handled e-mail, fax, telephone calls and written
correspondence. By defining the overall strategy and architecture that
integrated a number of customer contact channels, our client could more
cost-effectively influence their customer's experience and focus on
additional selling opportunities.
- Created a set of best practices for each customer access channel to
ensure high quality service and consistent management of their customers.
- Integrated the solution with the SAP enterprise backbone and legacy
systems resulting in a seamless and consistent architecture throughout
our client's company. This provided the ability for our client to handle
multiple customer requests across different divisions.
- Developed a web-based transaction processing application that captured
real-time information about customer inquiries. Our client used this
information to increase up-selling and cross-selling opportunities for
its products across all customer channels.
- Implemented our software to allow our client to collect detailed
information about their customer's needs and preferences. This
information was used to tailor their products and services to increase
sales and to increase up-selling and cross-selling opportunities.
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- Centralized customer contacts relating to more than 20 different product
lines into two multimedia centers offering around-the-clock access for
their customers.
SALES AND MARKETING
Our sales and marketing efforts are performed by our senior level
professionals, the majority of whom are also responsible for managing the
implementation of our solutions. We have recently created two new sales and
marketing groups, the business development team and the solutions marketing
group. Our business development team consists of experienced industry
professionals who focus on new client opportunities. Our solutions marketing
group establishes relationships with select vendors and leverages their
distribution networks to accelerate the acquisition of new clients. Our goal is
to maintain long-term relationships with our clients in order to generate
recurring revenues.
BUSINESS DEVELOPMENT TEAM -- Our business development team targets Global
2000 companies. This team is a set of senior professionals with an average
industry experience of 12 years. These professionals develop executive level
relationships with our clients. As of September 30, 1999, eLoyalty had 17
business developers, each dedicated to a specific region.
SOLUTIONS MARKETING -- We are in the process of establishing more formal
arrangements with companies such as Lucent Technologies and DST Systems. We
expect that these relationships will provide us with alternative channels for
identifying prospective clients. We intend to develop more of these
relationships to increase our market share.
In addition, our solutions marketing group seeks to communicate a
consistent message to our professionals on the availability, use, pricing and
integration of our solutions and leverage the benefits of our Loyalty Lab. This
communication results in the reduction of technical risk, time and cost
associated with the delivery of our solutions.
AGGRESSIVE BRAND DEVELOPMENT -- Following the launch of the eLoyalty brand,
we continue to expand our strategic initiatives to create greater awareness of
our solutions. We have conducted aggressive marketing and branding programs that
include the development and launch of our new web site, frequent press releases
and new marketing material. Our Journal of Customer Loyalty, a quarterly
publication featuring articles by industry professionals, has a distribution
list of over 19,000 and is supplemented by a monthly e-mail campaign entitled
"All Roads Lead to Loyalty." We also have direct mail campaigns, joint
marketing, industry and investment analyst relations and trade show
participation and sponsorship.
We are also a sponsor of two awards that recognize individuals and
companies on their quality of operations. We established the Computerworld
Smithsonian 21st Century Pioneer Awards Program to honor prestigious companies
and individuals that leverage technology to benefit society. Management Today's
"Britain's Most Admired Companies" researches companies from several sectors to
find the one that has the best reputation among its competitors based on
categories such as quality of marketing, use of corporate assets, quality of
products/services and many others. These award programs give eLoyalty the
opportunity to promote its name recognition globally and continue its
positioning as an industry thought leader.
RESEARCH AND DEVELOPMENT
The market we operate in is constantly evolving due to changing business
needs and the increasing number of software products that are available. We
believe that it is necessary to invest in research and development to remain
competitive. In 1998, we formally established our Loyalty Lab as a center for
our research and development group. The lab is an important part of our strategy
and we have made significant investments to build our research and development
over the last four years and we plan to continue these investments. As of
September 30, 1999, 37 employees were working in our Loyalty Lab.
This 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
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development. Our software helps to tie the components of the loyalty solution
together and capture important customer loyalty information. The Loyalty Suite
has been designed using the experience we have gained from developing loyalty
solutions for our clients over the past five years.
The objectives of our Loyalty Lab are as follows:
- to enhance the Loyalty Architecture through research and evaluation of
emerging technologies;
- to work closely with technology partners to decrease the time and
difficulty of integration;
- to develop and enhance the Loyalty Suite;
- to be a center for demonstrating loyalty solutions to our current and
prospective clients; and
- to train our employees on our solutions.
eLoyalty's research and development expenditures for fiscal 1997 and 1998
were approximately $1.7 million and $2.4 million, respectively. We spent $2.9
million on research and development for the seven month period ended December
31, 1998, and $3.6 million for the nine months ended September 30, 1999.
TECHNOLOGY EXPERIENCE -- We have collaborated with vendors to allow us to
more effectively integrate their software into our solutions. This experience
enhances our ability to provide a more complete solution. The relationships that
we have with these vendors are non-exclusive. The following list is an example
of some of these vendors:
- BroadVision, Inc.
- Cisco Systems, Inc.
- Clarify, Inc.
- DST Systems, Inc.
- eFusion, Inc.
- E.piphany Incorporated
- Genesys Corporation
- Kana Communications, Inc.
- Lucent Technologies, Inc.
- Nuance Communications, Inc.
- Oracle Corporation
- RightPoint Software, Inc.
- SAP AG
- Servicesoft Technologies, Inc.
- Silknet Corporation
- Speechworks International, Inc.
- Siebel Systems, Inc.
- TriVida Corporation
- Vantive Corporation
- Vignette Corporation
- Webline Communications Corporation
COMPETITION
Although the CRM market has been in existence for some time, the eCRM
market in which we compete is relatively new and very competitive. We expect
competition to intensify even further as this market evolves. Many of our
competitors have longer operating histories, more clients, longer relationships
with their clients, greater brand or name recognition and significantly greater
financial, technical, marketing and public relations resources than we do. As a
result, our competitors may be in a better position to respond quickly to new or
emerging technologies and changes in client requirements. They may also develop
and promote their products and services more effectively than we do. These risks
are especially pronounced in our industry where we will face major challenges
from other companies including:
- systems integrators such as Andersen Consulting, Deloitte & Touche LLP,
Ernst & Young LLP, KPMG LLP, PricewaterhouseCoopers LLP, Arthur Andersen
LLP, IBM Global Services, Cambridge Technology Partners, Sapient
Corporation, Diamond Technology Partners and Whittman-Hart Inc.;
- Internet and eCommerce services companies such as Scient Corporation,
Viant Corporation, Proxicom, Inc., AppNet Inc., Tanning Technology
Corporation and Razorfish, Inc.;
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- large information technology services companies such as Computer Sciences
Corporation (CSC) and Perot Systems Corporation;
- management consulting firms such as Bain & Company, Booz, Allen &
Hamilton, Boston Consulting Group, Inc. and McKinsey & Company; and
- internal information technology departments of current and potential
clients.
New market entrants pose a threat to our business. We do not own any
patented technology that precludes or inhibits competitors from entering this
market or from providing solutions similar to ours. Existing or future
competitors may develop or offer solutions that are comparable or superior to
ours at a lower price. In addition, several competitors have announced their
intention to offer a broader range of services than they currently provide. Many
of our competitors focus on the implementation of CRM applications.
We believe that we are differentiated from our competition by our ability
to provide a complete loyalty solution. We believe that this involves a
combination of several different and specialized skills including:
- strategic business consulting to define a company's policies for managing
customers in each division and group within the organization;
- technical knowledge in each of the different products that a company
needs to communicate with their customers using the Internet, telephone,
e-mail and fax;
- integration techniques to enable each of these software products to be
tied together; and
- ongoing support of their loyalty solution to meet changing business
requirements and emerging technology.
INTELLECTUAL PROPERTY RIGHTS
A majority of our clients has required that we grant to them all
proprietary and intellectual property rights with respect to the work product
resulting from our performance of solutions, including the intellectual property
rights to any custom software developed by us for them. Each grant of
proprietary and intellectual property rights limits our ability to reuse work
product components and work product solutions with other clients. In a limited
number of such situations, we have obtained, and in the future may attempt to
obtain, an ownership interest or a license from our clients to permit us to
market custom software to other clients. These arrangements may be nonexclusive
or exclusive, and licensors to us may retain the right to sell products and
services that compete with those of eLoyalty.
We also develop core software and methodologies, such as the Loyalty Suite,
that are owned by us and licensed to our clients. We regard these software and
methodologies as proprietary and intend to protect our rights, where
appropriate, with registered copyrights, patents, registered trademarks, trade
secret laws and contractual restrictions on disclosure and transferring title.
In addition, to protect our proprietary information, we rely upon a
combination of trade secret and common law, employee nondisclosure policies and
third-party confidentiality agreements.
EMPLOYEES
As of September 30, 1999, eLoyalty had 653 employees of which 515 were
billable employees. Of the 653 employees, 534 were located in North America, 102
in Europe and 17 in Australia. Our business is mainly of professional services
and is inherently people intensive. We believe we have a satisfactory
relationship with our employees. Our average annualized turnover of billable
employees was 17.9% and 16.6% for the nine months and three months ended
September 30, 1999, respectively. None of our 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
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foreign countries in which we operate may increase the cost of terminating
employees in those countries. We maintain various programs and strategies to
retain and recruit employees.
FACILITIES
eLoyalty's principal executive office is located at 205 North Michigan
Avenue, Suite 1500, Chicago, Illinois. It consists of approximately 15,000
square feet of leased office space. We also lease office space throughout the
United States and abroad, in some cases pursuant to subleases with TSC. Our
domestic offices are located in Austin, Texas, San Francisco, California and
Waltham, Massachusetts. Our international offices are located in London,
Cologne, Paris, Sydney and Toronto. Pursuant to the reorganization agreement
between us and TSC, we will also have the ability to use, subject to certain
restrictions, TSC offices in Atlanta, Georgia, Dallas, Texas, Los Angeles,
California, Minneapolis, Minnesota and New York City through June 30, 2000 for
no charge. TSC also has comparable rights to use our domestic branch offices for
the same period and subject to the same terms, conditions and restrictions.
LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with eLoyalty's
Financial Statements and Notes and the other financial information appearing in
this information statement/prospectus. In addition to historical information,
the following discussion and other parts of this information
statement/prospectus contain forward-looking information that involves risks and
uncertainties. eLoyalty's actual results could differ materially from those
anticipated by such forward-looking information for many reasons, including
competitive factors, risks associated with eLoyalty's expansion plans,
transitional service agreements with TSC and other factors discussed under "Risk
Factors" and elsewhere in this information statement/prospectus. Effective
beginning December 31, 1998, we changed our fiscal year end from May 31 to
December 31. The seven month transition period of June 1, 1998 through December
31, 1998 precedes the start of the new fiscal year. References in this section
to a fiscal year mean the fiscal year ended May 31.
OVERVIEW
Our revenue consists of fees generated for professional services and
support services, as well as license revenue generated from sales of in-house
developed software, all of which we collectively sell as solutions to our
customers. To date, revenues from software have not exceeded 3.0% of our total
revenues in any quarter and were 1.4% and 1.5% of our total revenues for the
first nine months of 1999 and the twelve months ended December 31, 1998,
respectively. We expect this split of revenues between professional services and
software to remain relatively constant in the foreseeable future.
Revenues from our support services were less than 1.5% of our total
revenues for the first nine months of 1999 and the twelve months ended December
31, 1998. Our revenues from support services may increase in the future. In
addition, we intend to offer hosting services for our loyalty solutions, which
would generate a recurring revenue stream. For selected clients, and after the
completion of a detailed financial analysis, we may from time to time price
engagements on a value-based model under which we reduce our billing rates or
limit our fees in exchange for a share of the expected economic benefit to our
clients of implementing our solutions. Our failure to accurately estimate
variables in pricing engagements on these terms could reduce the profitability
of, or result in a loss on, those projects and could damage our client
relationships and our reputation.
To date, we have provided professional services to our clients principally
on a time and materials basis. We have, on limited occasions, contracted certain
phases of our projects on a fixed fee basis. We expect that we will continue to
provide most of our professional services on a time and materials basis. Under
time and materials contracts, we recognize revenue as services are provided. We
are generally reimbursed for reasonable expenses under our contracts.
Our revenue from international operations represents revenue from
engagements with our clients outside of the United States. Currently, we have
international operations in Europe and Australia. We intend to expand our
Australian operations and establish a presence in Asia. Revenue from
international operations has made an increasing contribution to our total
revenues and we anticipate that in the future our revenues from international
operations will account for a greater percentage of our total revenues.
International operations are subject to a number of additional risks and our
international sales growth will be limited if we are unable to manage those
risks. International operations represented 22.5% and 22.0% of total revenues in
the first nine months of 1999 and in the twelve months ended December 31, 1998,
respectively. International operations represented 10.3% and 12.5% of income
before income taxes in the first nine months of 1999 and in the twelve months
ended December 31, 1998, respectively.
We typically experience seasonal fluctuations in our revenues and earnings
on a global basis in the fourth quarter because of the reduced number of billing
days due to holidays. In addition, we have experienced a slight decrease in
revenues from our European operations in the third quarter because of extended
vacation periods. Although those decreases in revenue have not been significant
in the past, they may increase as we expand internationally.
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Revenues from our operations in the United Kingdom, Germany, Switzerland,
France, Australia and Canada are currently denominated in U.S. dollars and
various other local currencies such as Pound Sterling, Deutsche Marks, French
Francs, Swiss Francs, Euros, Australian dollars and Canadian dollars. We believe
that an increasing portion of our international revenue and costs will be
denominated in foreign currencies in the future. Non-U.S. currency denominated
revenue represented 15.2% and 17.5% of revenues for the first nine months of
1999 and the twelve months ended December 31, 1998, respectively. Historically,
we have not experienced material fluctuations in our results of operations due
to foreign currency exchange rate changes.
We have a diversified client base and revenues from our top five and top 20
clients represented 21.8% and 54.8%, respectively, of revenues in the first nine
months of 1999 and 22.6% and 54.9%, respectively, of revenues in the twelve
months ended September 30, 1999. No single client accounted for more than 10% of
our total revenue in any quarter during those periods. We do not expect that our
revenues from our top clients as a percentage of our total revenues will
increase.
Project personnel costs represent our most significant expense. These costs
consist primarily of salaries, incentive compensation and employee benefits for
company personnel available for client assignments as well as fees paid to
subcontractors for work performed on our projects. Our revenues from using
subcontractors were 4.6% of total revenues in the first nine months of 1999 and
2.7% of total revenues in the twelve months ended December 31, 1998. We
anticipate that we will continue to use subcontractors from time to time,
although we expect that the extent to which we use subcontractors will remain
constant or decrease as a percentage of revenues.
Gross profits represent our revenues less project personnel costs ("Gross
Profit"). We anticipate that to the extent we have additional software and
hosting services revenues, the margin on our Gross Profits will increase. Gross
Profit margins are negatively impacted by several factors, including the use of
subcontractors and non-billable time incurred by project personnel.
Sales and marketing expenses consist primarily of salaries, incentive
compensation and employee benefits for dedicated sales and marketing personnel
in our marketing, business development and solutions marketing groups (prior to
May 1999 this also included an allocation from TSC for their corporate sales and
marketing). Sales and marketing expenses do not include sales and marketing
expenses associated with other employees who are not part of the sales and
marketing group. In addition, sales and marketing expenses include promotional
and brand development costs, business development staff recruiting costs, travel
expenses and depreciation expenses. We expect that our sales and marketing
expenses will increase as a percentage of revenues in the future as we invest in
brand development.
Research and development expenses consist primarily of salaries, incentive
compensation and employee benefits for dedicated personnel, staff recruiting
costs, administrative costs, travel expenses and depreciation expenses. Expenses
of establishing our Loyalty Lab in fiscal year 1998 are included in research and
development expenses beginning in the second quarter of 1998. Our Loyalty Lab is
the center for our research and development activities. It is an important part
of our strategy which we believe differentiates us from other companies in our
industry. The objectives of our Loyalty Lab are to enhance our loyalty
solutions, to allow us to work closely with emerging technology and to be a
demonstration center for our clients' senior executives. Our research and
development expenses as a percentage of revenues have decreased slightly to 3.3%
for the first nine months of 1999 from 3.5% for the twelve months ended December
31, 1998. We anticipate that research and development expenses will continue at
approximately the same percentage of revenues for the foreseeable future.
General and administrative support expenses consist of salaries, incentive
compensation and benefits for our managerial and administrative staff (including
senior and regional management) as well as provisions for doubtful receivables.
The provisions for doubtful receivables have historically been approximately 1%
of total revenues with the exception of the 1998 transition period. Because we
established a provision for doubtful receivables related to revenues generated
during the 1998 transition period (largely from clients of The Bentley Group),
the total provisions for doubtful receivables rose to approximately 4.1% of
total revenues. Other overhead expenses consist of employee costs for training,
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certain travel expenses, laptop computer leases and other non-billable expenses
not directly related to projects, sales or research and development.
TSC corporate services allocation expenses relate to all shared services
provided to us by TSC, including legal, information systems, finance and
accounting, insurance, human resources, benefits administration, stockholder
services and corporate managerial services. TSC corporate services allocation
expenses also include the Chicago headquarters for all periods and all other
directly allocated offices prior to April 30, 1999. In addition, labor costs
associated with recruiting were also included in this expense item prior to
April 30, 1999. From January 1 through June 30, 2000, these services will be
allocated as part of the Shared Services Agreement described under "eLoyalty's
Relationship with Technology Solutions Company After the Spin-Off -- Shared
Services Agreement." Although we have never operated as a stand-alone company
and have limited historical basis for our cost estimates, we anticipate our
combined general and administrative and corporate services allocation expenses
will decrease as a percentage of total revenues; however, we expect short term
increases as we build our infrastructure to manage these functions as a separate
company. We expect that by the third quarter of 2000 we will be able to provide
for ourselves the services currently provided by TSC. After that time we expect
that the costs for these services will be reflected in general and
administrative expenses.
Since May 1, 1999, our recruiting and certain office expenses have been
transferred from TSC corporate services allocation expenses to general and
administrative expenses as the management of those functions was transferred to
us from TSC. The expenses for facilities are attributable to facilities
specifically allocated to us.
Goodwill amortization expenses relate to our acquisitions of The Bentley
Group in June 1997, Geising International in February 1997 and Aspen Consultancy
Ltd. in May 1996. The goodwill amortization for The Bentley Group acquisition is
approximately $1.0 million per quarter and is being amortized over a five year
period (1997 to 2002). The goodwill amortization associated with The Bentley
Group acquisition currently represents approximately 80% of our total goodwill
amortization costs.
Historically, our effective tax rate has fluctuated significantly and for
certain periods our effective tax rate was unusually high. The high effective
tax rates were due primarily to pre-tax losses being generated in low tax-rate
jurisdictions and pre-tax earnings being generated in high tax-rate
jurisdictions. Our effective tax rate of 47.5% and 61.0% for the nine months
ended September 30, 1999 and the twelve months ended December 31, 1998,
respectively, was adversely impacted by nondeductible goodwill and expenses as
well as foreign tax rate differences. As we implement tax planning strategies
for our business as a stand-alone entity, we expect our effective tax rates to
be less than these historical levels.
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The following tables present the relative composition of revenue and
expenses.
eLOYALTY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTH FOR THE SEVEN MONTH
PERIODS ENDED FOR THE PERIODS FROM JUNE 1 TO
SEPTEMBER 30, YEAR ENDED DECEMBER 31, FOR THE YEARS ENDED MAY 31,
------------------- DECEMBER 31, ---------------------- ------------------------------
1999 1998 1998 1998 1997 1998 1997 1996
-------- -------- ------------ -------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................... $107,652 $ 77,685 $105,235 $ 64,415 $ 43,668 $ 84,488 $ 43,181 $ 26,516
Project personnel.......... (52,586) (37,464) (50,687) (31,302) (22,329) (41,329) (18,078) (11,674)
-------- -------- -------- -------- -------- -------- -------- --------
REVENUES LESS PROJECT
PERSONNEL................ 55,066 40,221 54,548 33,113 21,339 43,159 25,103 14,842
-------- -------- -------- -------- -------- -------- -------- --------
OTHER COSTS AND EXPENSES
Sales and marketing........ 6,185 3,197 4,894 3,456 994 2,429 1,663 1,032
Research and development... 3,599 2,231 3,635 2,889 1,393 2,383 1,689 46
General and administrative
support.................. 22,554 18,912 26,326 16,438 10,641 20,216 11,539 5,559
TSC corporate services
allocation............... 10,769 9,225 12,769 7,698 5,544 10,671 5,028 3,298
Equity in net loss of
unconsolidated
investee................. 463 -- 412 412 -- -- -- --
Goodwill amortization...... 3,748 2,704 3,794 2,450 1,856 3,201 376 --
-------- -------- -------- -------- -------- -------- -------- --------
47,318 36,269 51,830 33,343 20,428 38,900 20,295 9,935
-------- -------- -------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS).... 7,748 3,952 2,718 (230) 911 4,259 4,808 4,907
-------- -------- -------- -------- -------- -------- -------- --------
OTHER INCOME (EXPENSE)
Net investment income...... 83 56 95 116 39 68 15 --
Interest expense........... (55) (65) (74) (31) (53) (92) -- --
-------- -------- -------- -------- -------- -------- -------- --------
28 (9) 21 85 (14) (24) 15 --
-------- -------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.................... 7,776 3,943 2,739 (145) 897 4,235 4,823 4,907
INCOME TAX PROVISION....... 3,690 1,929 1,672 398 562 2,022 1,897 1,857
-------- -------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS).......... $ 4,086 $ 2,014 $ 1,067 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
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eLOYALTY
STATEMENTS OF OPERATIONS
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
FOR THE FOR THE
NINE MONTH FOR THE SEVEN MONTH PERIOD
PERIODS ENDED YEAR ENDED FROM JUNE 1 TO FOR THE YEARS ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, MAY 31,
---------------- ------------ ------------------- -----------------------
1999 1998 1998 1998 1997 1998 1997 1996
----- ----- ------------ ----- ----------- ----- ----- -----
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Project personnel.................... (48.8)% (48.2)% (48.2)% (48.6)% (51.1)% (48.9)% (41.9)% (44.0)%
----- ----- ----- ----- ----- ----- ----- -----
REVENUES LESS PROJECT PERSONNEL...... 51.2% 51.8% 51.8% 51.4% 48.9% 51.1% 58.1% 56.0%
----- ----- ----- ----- ----- ----- ----- -----
OTHER COSTS AND EXPENSES
Sales and marketing.................. 5.7% 4.1% 4.6% 5.4% 2.3% 2.9% 3.9% 3.9%
Research and development............. 3.3% 2.9% 3.5% 4.5% 3.2% 2.8% 3.9% 0.2%
General and administrative support... 21.0% 24.3% 25.0% 25.5% 24.3% 24.0% 26.6% 21.0%
TSC corporate services allocation.... 10.0% 11.9% 12.1% 12.0% 12.7% 12.6% 11.6% 12.4%
Equity in net loss of unconsolidated
investee........................... 0.4% 0.0% 0.4% 0.5% 0.0% 0.0% 0.0% 0.0%
Goodwill amortization................ 3.5% 3.5% 3.6% 3.8% 4.3% 3.8% 0.9% 0.0%
----- ----- ----- ----- ----- ----- ----- -----
44.0% 46.7% 49.2% 51.7% 46.8% 46.1% 46.9% 37.5%
----- ----- ----- ----- ----- ----- ----- -----
OPERATING INCOME (LOSS).............. 7.2% 5.1% 2.6% (0.3)% 2.1% 5.0% 11.2% 18.5%
----- ----- ----- ----- ----- ----- ----- -----
OTHER INCOME (EXPENSE)
Net investment income................ 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0%
Interest expense..................... (0.1)% (0.1)% (0.1)% 0.0% (0.1)% (0.1)% 0.0% 0.0%
----- ----- ----- ----- ----- ----- ----- -----
0.0% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0%
----- ----- ----- ----- ----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES.... 7.2% 5.1% 2.6% (0.2)% 2.1% 5.0% 11.2% 18.5%
INCOME TAX PROVISION................. 3.4% 2.5% 1.6% 0.6% 1.3% 2.4% 4.4% 7.0%
----- ----- ----- ----- ----- ----- ----- -----
NET INCOME (LOSS).................... 3.8% 2.6% 1.0% (0.8)% 0.8% 2.6% 6.8% 11.5%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998
This section discusses the first nine months of 1999 compared with the same
period in 1998. The first nine months of 1999 were significant as we launched
the eLoyalty brand and continued to focus on improving our operational
management systems. We also increased our investment in research and development
to increase our focus on the use of emerging technology.
REVENUES
Our revenues increased $30.0 million, or 38.6%, to $107.7 million in the
first nine months of 1999 from $77.7 million in the first nine months of 1998.
Revenues from professional services increased $28.6 million, or 36.9%, to $106.2
million in the first nine months of 1999 from $77.6 million in the first nine
months of 1998. Revenues generated using subcontractors was 4.6% of revenues for
the first nine months of 1999 compared to 2.7% in the first nine months of 1998.
Revenues from software were $1.5 million in the first nine months of 1999,
representing 1.4% of revenues in that period. We had revenues of $0.1 million
from sales of software in the first nine months of 1998.
The increase in our revenues of $30.0 million reflected increases in both
the size and number of client projects as well as higher average billing rates.
During the first nine months of 1999 our average billable employees increased to
515, or 28.1%, from 402 for the first nine months of 1998. Our average billing
rate for the first nine months of 1999 increased by 5.7% from the first nine
months of 1998. Revenues from
46
<PAGE> 52
Europe and Australia increased to approximately 17.1% of our total revenues in
the first nine months of 1999, compared to 14.2% of total revenues in the first
nine months of 1998.
PROJECT PERSONNEL COSTS
Our project personnel costs increased $15.1 million, or 40.4%, to $52.6
million in the first nine months of 1999 from $37.5 million in the first nine
months of 1998. The increase in project personnel costs in the first nine months
of 1999 was primarily due to an increase in the use of subcontractors that were
required to meet demand. We expect that our use of subcontractors will decline
as we operate as a separate business. Our Gross Profit margin decreased slightly
to 51.2% in the first nine months of 1999 from 51.8% in the comparable period in
1998.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased $3.0 million, or 93.8%, to $6.2
million in the first nine months of 1999 from $3.2 million in the first nine
months of 1998. The increase in sales and marketing expenses was primarily the
result of our decision to invest in brand building with respect to the launch of
our new identity as eLoyalty and to formalize our business development group. We
increased our sales and marketing staff with the launch of our solutions
marketing group at the beginning of calendar year 1999. As a result of the
foregoing, sales and marketing expenses increased as a percentage of total
revenues to 5.7% in the first nine months of 1999 from 4.1% in the comparable
period in 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses increased $1.4 million, or 63.6%, to
$3.6 million in the first nine months of 1999 from $2.2 million in the first
nine months of 1998. Research and development expenses increased as a percentage
of total revenues to 3.3% in the first nine months of 1999 from 2.9% for the
comparable period in 1998. In the first nine months of 1999, we substantially
increased our investment in our Loyalty Lab by hiring additional developers and
purchasing additional software and hardware.
GENERAL AND ADMINISTRATIVE SUPPORT EXPENSES
Our general and administrative support expenses increased $3.7 million, or
19.6%, to $22.6 million in the first nine months of 1999 from $18.9 million in
the first nine months of 1998. General and administrative expenses decreased as
a percentage of total revenues to 21.0% in the first nine months of 1999 from
24.3% for the comparable period in 1998. This decrease resulted from greater
leverage of our regional management, particularly in Europe, who are responsible
for general and administrative functions. This more than offset an increase in
general and administrative support expenses resulting from the reallocation of
recruiting and certain office expenses from TSC corporate services allocation
expenses as the management of those functions was transferred to us from TSC. In
addition, we were able to eliminate the duplication of expenses associated with
The Bentley Group.
TSC CORPORATE SERVICES ALLOCATION EXPENSES
TSC corporate services allocation expenses increased $1.6 million, or
17.4%, to $10.8 million in the first nine months of 1999 from $9.2 million in
the first nine months of 1998. TSC corporate services allocation expenses
decreased as a percentage of total revenues to 10.0% in the first nine months of
1999 from 11.9% for the comparable period in 1998. This decrease was a result of
the reallocation of recruiting and certain office expenses into general and
administrative support expenses as described above.
GOODWILL AMORTIZATION
Our goodwill amortization expenses increased $1.0 million or 37.0%, to $3.7
million in the first nine months of 1999 from $2.7 million in the first nine
months of 1998. This increase was due to the contingent purchase price payments
related to the acquisition of The Bentley Group and Aspen Consultancy Ltd.
47
<PAGE> 53
PROVISION FOR INCOME TAXES
Income tax expense represents combined federal, state and foreign taxes.
Our income tax provision increased to $3.7 million on pre-tax profits of $7.8
million at the end of the first nine months of 1999 compared to $1.9 million on
pre-tax profits of $3.9 million at the end of the comparable period in 1998. Our
effective tax rate was 47.5% in the first nine months of 1999 and 48.9% in the
comparable period in 1998. This decrease in the effective tax rate was primarily
the result of a lower proportion of pre-tax earnings being generated in foreign,
high tax-rate jurisdictions.
SEVEN MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1998 COMPARED WITH THE SEVEN
MONTH PERIOD ENDED DECEMBER 31, 1997
This section discusses the seven-month transition period ended December 31,
1998, resulting from our change from a May 31 fiscal year end to a December 31
fiscal year end beginning December 31, 1998. The 1998 transition period was
significant for the company due to a number of events including the integration
of the Bentley Group, which was previously acquired by TSC, the integration of
the telecom business unit of TSC and investments in Europe and Australia. During
this period we established a direct sales force and began a dedicated sales
effort in Europe and Australia. We also undertook a significant restructuring to
support our focus on large multi-channel engagements.
REVENUES
Our revenues increased $20.7 million, or 47.4%, to $64.4 million in the
transition period ended December 31, 1998, from $43.7 million in the seven month
period ended December 31, 1997. Revenues generated from using subcontractors was
2.2% of revenues in the transition period ended December 31, 1998 compared with
1.7% of revenues in the comparable period in the prior year. Revenues from sales
of software were $1.0 million in the transition period ended December 31, 1998
representing 1.6% of revenues in that period. We had revenues of $0.2 million
from sales of software in the transition period ended December 31, 1997.
The increase in our revenues of $20.7 million reflected increases in both
the size and number of client projects as well as higher average billing rates.
The increase in revenues from our international operations also significantly
contributed to this increase in revenue. In addition, The Bentley Group
acquisition contributed approximately $7.8 million of revenues in the transition
period ended December 31, 1997.
PROJECT PERSONNEL COSTS
Our project personnel costs increased $9.0 million, or 40.4%, to $31.3
million in the transition period ended December 31, 1998 from $22.3 million in
the prior year period. The increase in project personnel costs was primarily due
to an increase in average billable employees, as well as higher salaries. Our
Gross Profit margin increased to 51.4% for the transition period ended December
31, 1998 from 48.9% for the comparable period in 1997, principally due to higher
utilization of project personnel.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased $2.5 million, or 250.0%, to $3.5
million in the transition period ended December 31, 1998 from $1.0 million in
the comparable period in the prior year. The increase in sales and marketing
expenses was primarily the result of establishing our business development group
in North America and beginning our sales activities in Europe and Australia. By
the end of 1998 we had hired more than 10 people as dedicated business
developers in North America. Sales and marketing expenses increased as a
percentage of total revenues to 5.4% in the transition period ended December 31,
1998 from 2.3% in the comparable period in the prior year because of the
significant growth in our new business regions.
48
<PAGE> 54
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses increased $1.5 million, or 107.1%, to
$2.9 million in the transition period ended December 31, 1998 from $1.4 million
in the comparable period in the prior year. Research and development expenses
increased as a percentage of total revenues to 4.5% in the transition period
ended December 31, 1998 from 3.2% in the comparable period in the prior year.
This increase resulted from the significant expansion of the scope and
operations of our Loyalty Lab. We increased our development staff from nine
employees to 28 employees and established quality assurance, documentation and
full time research and demonstration groups to broaden our capabilities and
leverage this investment throughout our business. In addition, the increase
includes increased capitalized software costs that resulted in increased
amortization expense in this period.
GENERAL AND ADMINISTRATIVE SUPPORT EXPENSES
Our general and administrative support expenses increased $5.8 million, or
54.7%, to $16.4 million in the transition period ended December 31, 1998 from
$10.6 million for the comparable period in the prior year. General and
administrative expenses increased as a percentage of total revenues to 25.0% in
the transition period ended December 31, 1998 from 24.3% in the comparable
period in the prior year. We launched our operations group to manage
utilization, hourly billing rate, revenue per billable employee, employee
turnover and day-to-day project pipeline development. During this period, we
also increased the support level for our operations in Europe and Australia.
Prior to the end of 1998, The Bentley Group included their own operational and
management infrastructure that duplicated our capabilities. By the end of the
1998 transition period we significantly eliminated the duplication and related
expenses. In addition, we established a $2.7 million provision for uncollectible
accounts receivable related to revenues generated during the transition period,
largely from clients of The Bentley Group.
TSC CORPORATE SERVICES ALLOCATION EXPENSES
TSC corporate services allocation expenses increased $2.2 million, or 40.0%
to $7.7 million in the transition period ended December 31, 1998 from $5.5
million in the comparable period in the prior year. TSC corporate services
allocation expenses decreased as a percentage of total revenue to 12.0% in the
transition period ended December 31, 1998 from 12.7% in the comparable period in
the prior year. This decrease was due to the transition of certain management
expenses related to The Bentley Group to general and administrative expenses.
GOODWILL AMORTIZATION
Our goodwill amortization expenses increased $0.6 million or 31.6%, to $2.5
million in the transition period ended December 31, 1998 from $1.9 million in
the comparable period in the prior year. This increase was because of the
contingent purchase price payments related to the acquisitions of The Bentley
Group and Aspen Consultancy Ltd.
PROVISION FOR INCOME TAXES
Our income tax provision decreased to $0.4 million on a pre-tax loss of
$0.1 million at the end of the transition period ended December 31, 1998
compared to $0.6 million on pre-tax profits of $0.9 million at the end of the
comparable period in the prior year. This unusual income tax provision for the
transition period ended December 31, 1998 resulted from the impact of
nondeductible goodwill and expenses as well as foreign tax rate differences.
During the seven months ended December 31, 1998, operations in certain 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.
49
<PAGE> 55
FISCAL 1998 COMPARED WITH FISCAL 1997
REVENUES
Our revenues increased $41.3 million, or 95.6%, to $84.5 million in the
fiscal year ended May 31, 1998 from $43.2 million in the fiscal year ended May
31, 1997. The increase in our revenues reflected increases in both the size and
number of client projects. The Bentley Group acquisition contributed $16.4
million of revenues in fiscal year 1998. Our internal compound annual growth
rate less the revenue associated with The Bentley Group acquisition was 57.6%
for fiscal year 1998 compared with 62.8% compound annual growth rate for the
previous year.
PROJECT PERSONNEL COSTS
Our project personnel costs increased $23.2 million, or 128.2%, to $41.3
million in fiscal 1998 from $18.1 million in fiscal 1997. The increase in
project personnel costs in fiscal 1998 was primarily due to an increase in
average billable employees, as well as higher salaries. Our Gross Profit margin
decreased to 51.1% in fiscal 1998 from 58.1% in fiscal 1997. This decrease in
Gross Profit margin resulted from a substantial increase in our available
billable employees who we were not able to immediately deploy. The increase in
available billable resources was necessary to respond to the growing demand in
our North American business.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased $0.7 million, or 41.2%, to
approximately $2.4 million in fiscal 1998 from $1.7 million in fiscal 1997. The
increase in sales and marketing expenses was primarily the result of our
decision to expand our sales and marketing effort in North America. Sales and
marketing expenses decreased as a percentage of total revenues to 2.9% in fiscal
1998 from 3.9% in fiscal 1997. This decrease reflected the maturity of our North
American business and our ability to leverage our existing sales and marketing
functions in fiscal 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses increased $0.7 million, or 41.2%, to
approximately $2.4 million in fiscal 1998 from $1.7 million in fiscal 1997.
Research and development expenses decreased as a percentage of total revenues to
2.8% in fiscal 1998 from 3.9% in fiscal 1997. This decrease resulted from our
significant revenue growth in fiscal 1998 and the redeployment of our
development staff as billable employees to meet the demands of our expanding
North American business.
GENERAL AND ADMINISTRATIVE SUPPORT EXPENSES
Our general and administrative support expenses increased $8.7 million, or
75.7%, to $20.2 million in fiscal 1998 from $11.5 million in fiscal 1997.
General and administrative support expenses decreased as a percentage of total
revenues to 24.0% in fiscal 1998 from 26.6% in fiscal 1997. This decrease also
reflects the generation of additional revenue in North America without a
proportional increase in general and administrative support expenses.
TSC CORPORATE SERVICES ALLOCATION EXPENSES
TSC corporate services allocation expenses increased $5.7 million, or
114.0%, to $10.7 million in fiscal 1998 from $5.0 million in fiscal 1997. TSC
corporate services allocation expenses increased slightly as a percentage of
total revenues at 12.6% in fiscal 1998 and 11.6% in fiscal 1997. This increase
was as a result of TSC's international expansion.
50
<PAGE> 56
GOODWILL AMORTIZATION
Our goodwill amortization expenses increased $2.8 million to $3.2 million
in fiscal 1998 from $0.4 million in fiscal 1997. The increase in goodwill
amortization as a percentage of revenues to 3.8% in fiscal 1998 from 0.9% in
fiscal 1997 was primarily a result of The Bentley Group acquisition in June
1997.
PROVISION FOR INCOME TAXES
Our income tax provision increased to $2.0 million on pre-tax profits of
$4.2 million at the end of fiscal 1998 compared to $1.9 million on pre-tax
profits of $4.8 million at the end of fiscal 1997. Our effective tax rate was
47.7% in fiscal 1998 and 39.3% in fiscal 1997. The increased effective tax rate
was primarily the result of earning income in jurisdictions with relatively
higher tax rates as we expanded our international operations.
FISCAL 1997 COMPARED WITH FISCAL 1996
REVENUES
Our revenues increased $16.7 million, or 63.0%, to $43.2 million in the
fiscal year ended May 31, 1997 from $26.5 million in the fiscal year ended May
31, 1996.
The increase in our revenues of $16.7 million reflected a significant
increase in domestic billable hours and our expansion into international
operations. During fiscal 1997 we began our operations in Europe and Canada and
in May 1996 made an acquisition of Aspen Consultancy Ltd. in the United Kingdom.
PROJECT PERSONNEL COSTS
Our project personnel costs increased $6.4 million, or 54.7%, to $18.1
million in fiscal 1997 from $11.7 million in fiscal 1996. The increase in
project personnel costs in fiscal 1997 was primarily due to an increase in
average billable employees and higher salaries. Our Gross Profit margin
increased to 58.1% in fiscal 1997 from 56.0% in fiscal 1996, primarily as a
result of better utilization.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses increased $0.7 million, or 70.0%, to $1.7
million in fiscal 1997 from $1.0 million in fiscal 1996. The increase in sales
and marketing expenses resulted from expansion of our international sales effort
to generate revenue growth. Overall sales and marketing expenses remained
constant as a percentage of revenues at 3.9% for both fiscal 1997 and fiscal
1996.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses increased $1.6 million to $1.7
million in fiscal 1997 from $0.1 million in fiscal 1996. Research and
development expenses increased as a percentage of total revenues to 3.9% in
fiscal 1997 from 0.2% in fiscal 1996. During fiscal 1997 we invested in research
and development to differentiate our solutions by increasing the size of our
development group from one employee in fiscal 1996 to eight employees in fiscal
1997.
GENERAL AND ADMINISTRATIVE SUPPORT EXPENSES
Our general and administrative support expenses increased $5.9 million, or
105.4%, to $11.5 million in fiscal 1997 from $5.6 million in fiscal 1996.
General and administrative support expenses increased as a percentage of total
revenues to 26.6% in fiscal 1997 from 21.0% in fiscal 1996. This increase was
largely due to launching our business in Europe and decentralizing our
management functions in our North American region into four regions.
51
<PAGE> 57
TSC CORPORATE SERVICES ALLOCATION EXPENSES
Our corporate services allocation expenses increased $1.7 million, or
51.5%, to $5.0 million in fiscal 1997 from $3.3 million in fiscal 1996.
Corporate services allocation expenses decreased as a percentage of total
revenues to 11.6% in fiscal 1997 from 12.4% in fiscal 1996. This decrease was a
result of increased leverage of management and operational expenses and
effective cost management by TSC.
GOODWILL AMORTIZATION
Our goodwill amortization expenses were $0.4 million in fiscal 1997. We had
no goodwill amortization expenses in fiscal 1996. This goodwill is related to
the acquisition of Aspen Consulting.
PROVISION FOR INCOME TAXES
Our income tax provision was $1.9 million on pre-tax profits of $4.8
million for fiscal 1997 compared to $1.9 million on pre-tax profits of $4.9
million for fiscal 1996. Our effective tax rate was 39.3% in fiscal 1997 and
37.8% in fiscal 1996.
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<PAGE> 58
QUARTERLY PERIODS
The following table presents our quarterly results of operations for
calendar year 1998 and the three quarters of calendar year 1999. We derived
these data from unaudited financial statements and, in the opinion of
management, they include all adjustments, consisting of only normal recurring
adjustments, considered necessary for a fair presentation of such information.
The operating results for the quarterly periods are not necessarily indicative
of the results that may be expected for the entire year.
eLOYALTY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED (UNAUDITED)
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
--------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............... $ 23,643 $ 25,998 $ 28,044 $ 27,550 $ 31,491 $ 36,145 $ 40,016
Project personnel...... (11,710) (12,143) (13,611) (13,223) (15,276) (17,849) (19,461)
-------- -------- -------- -------- -------- -------- --------
REVENUES LESS PROJECT
PERSONNEL............ 11,933 13,855 14,433 14,327 16,215 18,296 20,555
-------- -------- -------- -------- -------- -------- --------
OTHER COSTS AND
EXPENSES
Sales and marketing.... 758 1,194 1,245 1,697 1,801 1,972 2,412
Research and
development.......... 466 649 1,116 1,404 1,086 1,221 1,292
General and
administrative
support.............. 5,645 6,044 7,223 7,414 6,080 7,368 9,106
TSC corporate services
allocation........... 2,806 3,377 3,042 3,544 4,385 3,555 2,829
Equity in net loss of
unconsolidated
investee............. -- -- -- 412 141 111 211
Goodwill
amortization......... 794 860 1,050 1,090 1,252 1,249 1,247
-------- -------- -------- -------- -------- -------- --------
10,469 12,124 13,676 15,561 14,745 15,476 17,097
-------- -------- -------- -------- -------- -------- --------
OPERATING INCOME
(LOSS)............... 1,464 1,731 757 (1,234) 1,470 2,820 3,458
OTHER (EXPENSE)
INCOME............... (7) 5 (7) 30 (1) 16 13
-------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES......... 1,457 1,736 750 (1,204) 1,469 2,836 3,471
INCOME TAX PROVISION
(BENEFIT)............ 629 842 458 (257) 742 1,356 1,592
-------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS)...... $ 828 $ 894 $ 292 $ (947) $ 727 $ 1,480 $ 1,879
======== ======== ======== ======== ======== ======== ========
</TABLE>
STOCK-BASED COMPENSATION
We have elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for our employee stock options. Under Accounting Principles Board
Opinion No. 25, because the exercise prices of our employee stock options equal
the fair market value of the underlying stock on the date of grant, no
compensation expense is recorded. We have adopted the disclosure-only provisions
of the Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 123.
53
<PAGE> 59
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund working capital needs and
capital expenditures in order to support revenue growth. Historically, these
capital requirements have been satisfied by funds provided by TSC. TSC has
performed cash management services for us, whereby our cash flow was directed to
TSC and TSC provided cash to us to fund our operating expenses and capital
expenditures. Following the spin-off, we will no longer participate in TSC's
cash management system and TSC will no longer be obligated, and does not intend,
to provide additional funds to us to finance our operations.
In the first nine months of 1999, net cash used in operating activities
totaled $11.4 million. Cash was provided by $4.1 million of net income, $5.0
million from depreciation and amortization and $3.8 million related to an
increase in accrued compensation. This was offset by an $19.6 million increase
in receivables. The increase in receivables was mainly due to growth in
revenues. Receivables related to amounts billed to clients increased from $23.7
million to $38.4 million, or 61.6% from December 31, 1998 to September 30, 1999.
Receivables related to engagements in process increased from $4.3 million to
$7.7 million or 76.6% from December 31, 1998 to September 30, 1999. The increase
in engagements in process resulted from an increase in certain contracts that
were invoiced based on the completion of phases of a project as opposed to our
standard monthly billing. This trend may continue in the future. In the first
nine months of 1998, net cash used in operating activities was $10.6 million,
driven by $2.0 million of net income and $3.9 million of depreciation and
amortization and offset by a $13.4 million increase in receivables.
Capital expenditures for the first nine months of 1999 were $1.6 million
for computer, furniture, equipment and leasehold improvements. Capital
expenditures may continue at the current rate throughout calendar year 1999. We
currently have no material commitments for capital expenditures.
In connection with the spin-off, we intend to enter into a revolving credit
facility with Bank of America which would be sufficient to provide the cash
needed for short term operating obligations. See "eLoyalty Financing" for a
description of the expected terms of that facility. We believe that the net
proceeds of the investment by the venture capital investors described under
"Certain Transactions," current cash and cash equivalents and additional cash to
be contributed by TSC to eLoyalty prior to the spin-off, the revolving credit
facility and cash flow from operations should be sufficient to satisfy our cash
requirements for the foreseeable future. We intend to obtain additional equity
financing in the next twelve months through a public offering. In addition, we
may obtain additional capital through a private placement of equity with
strategic or other investors or through additional debt financing. We believe
that in the future we will be able to access the capital markets on terms and in
amounts that will be satisfactory to us, although there can be no assurance in
that regard.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We provide our solutions to clients in a number of countries including the
United States, Canada, United Kingdom, Germany, France, Switzerland and
Australia. For the first nine months of 1999 and the twelve months ended
December 31, 1998, 15.2% and 17.5%, respectively, of our revenue was denominated
in foreign currencies such as Pound Sterling, Deutsche Marks, French Francs,
Swiss Francs, Euros, Australian dollars and Canadian dollars. We believe that an
increasing portion of our international revenue and costs will be denominated in
foreign currencies in the future. As a result of our exposure to foreign
currencies, our financial results could be affected by factors such as changes
in foreign currency exchange rates or weak economic conditions in those foreign
markets. Revenues of our foreign subsidiaries are currently realized or received
in U.S. dollars or in various foreign currencies. To the extent that we bill
clients in a currency other than their local currency, exchange rate
fluctuations that strengthen the 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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<PAGE> 60
RECENT ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133," is effective for fiscal years beginning after June 15, 2000 (January 1,
2001 for eLoyalty). SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. We anticipate that the
adoption of SFAS No. 133 will not have a significant effect on our results of
operations or financial position.
YEAR 2000
The Year 2000 issue is a general term used to address a class of problems
caused by the inability of computer programs to recognize various date values
around January 1, 2000. This class of problems could result in a system failure
or miscalculations causing disruptions of operations such as, among others, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
Pursuant to a Shared Services Agreement with TSC, we will be relying on TSC
to provide a number of transitional services to us, including among others
accounting, tax, benefits administration, human resources and information
systems. TSC will charge us for these services by allocating the portion of its
total costs for these functions that represents the proportion of our revenues
or employees, depending on the particular service, to those of TSC. For a more
detailed discussion of the terms governing these interim services, see
"eLoyalty's Relationship with Technology Solutions Company After the Spin-Off --
Shared Services Agreement." As a result, Year 2000 problems experienced by TSC
could have a material adverse effect on our business, financial condition or
results of operations. The discussion of the state of TSC's Year 2000 compliance
efforts set forth below is based on information furnished to us by TSC.
TSC has advised us that it has conducted an assessment of its computer
information systems and has determined the nature and extent of the work
required to ensure that its internal systems are Year 2000 compliant. The
majority of the software used by TSC has been purchased as packaged software.
TSC's internal systems can be grouped into three principal categories: its
accounting and human resources software, its legacy systems that perform a
variety of processes and its office automation software products. With respect
to the suite of software products licensed by TSC and relied upon in the
administration of accounting and human resources functions, the licensor has
indicated to TSC that the version presently employed by TSC is not currently
Year 2000 compliant and, therefore, TSC has advised us that it has replaced the
production and development versions with newer ones that are Year 2000
compliant. TSC has also advised us that it plans to apply future patches to
address the Year 2000 issue as they are made available. Based on currently
available information, TSC believes the expense associated with these efforts
will not be material. TSC expects that additional issues concerning Year 2000
compliance will be reported by the licensor to TSC and updates will be provided
by the licensor. TSC has received the most recent updates and enhancements
pursuant to a software support service agreement presently in place with the
licensor. Provided that the licensor gives such assurances concerning the
updates and enhancements to its software product suite, TSC does not expect that
it will incur additional expense aside from the cost of the software support
service agreement in order to bring its accounting and human resources software
package into Year 2000 compliance.
Other important internal business processes of TSC that we will rely upon
in whole or in part during the term of the Shared Services Agreement between us
and TSC, such as time and expense reporting and labor distribution (and their
associated back office functions), are performed by legacy systems that TSC has
re-written to be Year 2000 compliant. TSC's remaining office automation products
have been inventoried and each vendor has been contacted by TSC for the
product's Year 2000 status. All identified products have either been upgraded,
entirely replaced, determined to be Year 2000 compliant, or shown to possess no
date-associated functions within the product. TSC estimates that it is nearly
completed with the
55
<PAGE> 61
compliance project effort and expects that the identified systems will be
compliant as of December 30, 1999. TSC estimates that the cost associated with
replacing or upgrading these systems, excluding labor costs, will be less than
$0.3 million, and has provided for the replacement of these systems in its
operating and capital budgets for calendar year 1999.
TSC has contacted vendors of the standard software packages and secured
patches and/or newer versions of the applications. Distribution of the patches
and newer versions of the software occurred in the third quarter and will occur
in the fourth quarter of calendar year 1999.
TSC has advised us that, based on presently available information, it
believes that any necessary compliance efforts concerning its internal systems
will not have a material adverse effect on its business, operating results and
financial condition. However, if compliance efforts of which TSC is not
currently aware are required and are not completed on time, or if the cost of
any required updating, modification or replacement of TSC's information systems
exceeds its estimates, the Year 2000 issue could have a material adverse impact
on TSC's business, operating results and financial condition, which in turn
could have a material adverse impact on our business, operating results and
financial condition.
In addition to TSC's internal systems, TSC relies on third-party vendors in
the conduct of its business. For example, third-party vendors handle the payroll
function for TSC and TSC also relies on the services of telecommunication
companies, banks, utilities and commercial airlines, among others. We also will
rely on third-party vendors for comparable services in the conduct of our
business. TSC has sought assurances from its material vendors and suppliers that
there will be no interruption of service as a result of the Year 2000 issue and,
to the extent such assurances have not been given, TSC is finalizing contingency
plans to mitigate the effects on the conduct of TSC's business in the event the
Year 2000 issue results in the unavailability of services. We are relying on
TSC's contingency plans with respect to the availability of the transitional
services covered by the Shared Services Agreement, and are finalizing plans of
our own for other potential Year 2000 issues that may affect our business. There
can be no assurance that any contingency plans will prevent any such service
interruption on the part of one or more of our respective third-party suppliers
from having a material adverse effect on our business, operating results and
financial condition.
In addition, the failure on the part of the accounting systems of our
clients due to the Year 2000 issue could result in a delay in the payment of our
invoices for services and expenses. A failure of the accounting systems of a
significant number of our clients would have a material adverse effect on our
business, operating results and financial condition.
We have generally refrained from performing Year 2000 remediation services
for our clients. It is possible, however, that former, present and future
clients could assert that certain services performed by us from time to time
involve, or are related to, the Year 2000 issue. We have recommended,
implemented and customized various third-party software packages for our clients
and, to the extent that such software programs may not be Year 2000 compliant,
we could be subjected to claims as a result. Since our inception as a business
unit within TSC, we have also designed and developed software and systems for
our clients, and licensed our proprietary software. Due to the large number of
engagements we have undertaken over the years, there can be no assurance that
all such software programs and systems will be Year 2000 compliant, which could
also result in the assertion of claims against eLoyalty.
Our policy has been to endeavor to secure provisions in our client
contracts that, among other things, disclaim implied warranties, limit the
duration of our express warranties, relate our liability to the amount of fees
paid to us by the client in connection with the project and disclaim any
liability arising from third-party software that we implemented, customized or
installed. There can be no assurance that we will be able to secure contractual
protections in agreements concerning future projects, or that any contractual
protections we have secured in agreements governing pending and completed
projects will dissuade the other party from asserting claims against us with
respect to the Year 2000 issue.
Due to the complexity of the Year 2000 issue, upon any failure of critical
client systems or processes that may be directly or indirectly connected or
related to systems or software designed, developed,
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<PAGE> 62
licensed, customized or implemented as described above, we may be subjected to
claims regardless of whether the failure is related to the services we provided
or our proprietary software. There can be no assurance that we would be able to
establish that we did not cause or contribute to the failure of a critical
client system or process. There also can be no assurance that the contractual
protections, if any, we secure in connection with any past, present or future
clients will operate to insulate us from, or limit the amount of, any liability
arising from claims asserted against eLoyalty. If asserted, the resolution of
such claims (and the associated defense costs) could have a material adverse
effect on our business, operating results and financial condition.
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<PAGE> 63
eLOYALTY CAPITALIZATION
The following table sets forth, as of September 30, 1999, (a) the
historical capitalization of eLoyalty; (b) the pro forma capitalization to give
effect to the issuance of 41.4 million shares of eLoyalty to TSC and the sale of
2.4 million shares to venture capital investors as described in "Certain
Transactions" and the contribution of $20 million from TSC to eLoyalty and (c)
the pro forma as adjusted capitalization giving effect to the spin-off, the sale
of the shares to the venture capital investors and the expiration of eLoyalty's
obligation to repurchase such shares described in note (1) below and under
"Certain Transactions" and the contribution of $20 million from TSC to eLoyalty.
You should read the information set forth below in conjunction with "eLoyalty
Selected Financial Data," our historical financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
eLOYALTY
CAPITALIZATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999 (UNAUDITED)
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ---------- ------------
<S> <C> <C> <C>
Cash........................................................ $10,654 $ 39,468 $ 39,468
------- -------- --------
Redeemable Common Stock, $.01 par value: 2,400,000 shares
authorized; no shares issued and outstanding on an actual
basis; 2,400,000 shares issued and outstanding on a pro
forma basis; no shares issued and outstanding on a pro
forma as adjusted basis(1)................................ $ -- $ 8,400 $ --
Stockholders' Equity:
Common Stock, $.01 par value: 100,000,000 shares authorized;
100 shares issued and outstanding on an actual basis;
41,400,000 issued and outstanding on a pro forma basis;
43,800,000 shares issued and outstanding on a pro forma as
adjusted basis(2)......................................... -- 414 438
Additional paid-in capital(3)............................... -- 91,439 99,815
Net advances from TSC....................................... 71,439 -- --
Accumulated other comprehensive loss........................ (150) (150) (150)
------- -------- --------
Total stockholders' equity.................................. 71,289 91,703 100,103
------- -------- --------
Total capitalization.............................. $71,289 $100,103 $100,103
======= ======== ========
</TABLE>
- ---------------
(1) As described under "Certain Transactions," certain venture capital investors
agreed on June 22, 1999 to purchase an aggregate of 2.4 million shares of
our common stock at $3.50 per share. Such purchase is subject to the receipt
of a private letter ruling from the IRS to the effect that the spin-off will
be tax-free to TSC and its stockholders for United States Federal income tax
purposes and certain other customary conditions. If those investors purchase
our shares of common stock and the spin-off does not occur by August 13,
2000, we could become obligated to repurchase such shares at a premium
totalling $1.2 million over the price paid by the investors for such shares.
Because those shares may be repurchased prior to the spin-off, we have
classified those shares as redeemable common stock until the spin-off
occurs.
(2) Excludes 5,046,000 shares of Common Stock issuable upon exercise of options
outstanding as of September 30, 1999 and shares issuable upon exercise of
options to be issued in substitution of existing TSC options as of the date
of the spin-off, the number of which will not be ascertainable until the
spin-off. See "eLoyalty's Management -- Incentive Plans," "eLoyalty's
Relationship with Technology Solutions Company After the Spin-Off -- TSC
Stock Options" and Note 8 of the Notes to Consolidated Financial Statements.
(3) TSC has committed to contribute $20 million to eLoyalty at the time of the
spin-off.
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<PAGE> 64
eLOYALTY FINANCING
In connection with the spin-off, we intend to enter into a revolving credit
facility which would allow us to borrow up to $10 million from time to time. We
expect that Bank of America will commit to provide the financing for the
revolving credit facility on an unsecured basis. We expect that the credit
facility will automatically renew on an annual basis. Although, at the date of
this information statement/prospectus, we do not anticipate borrowing under the
facility, after the spin-off borrowings may be made under the facility for
general corporate purposes.
We believe that borrowings under the revolving credit facility will bear
interest at a rate not to exceed the prime rate plus 1%. We expect the credit
facility to contain customary representations, warranties, covenants and default
provisions, including working capital commitments and debt to equity ratios.
59
<PAGE> 65
eLOYALTY SELECTED FINANCIAL DATA
The following tables summarize certain selected financial data of eLoyalty.
This information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the historical
financial statements and notes thereto included elsewhere in this information
statement. The statement of operations data for the seven month period ended
December 31, 1998 and for each of the three years ended May 31, 1998, 1997 and
1996 and the balance sheet data as of December 31, 1998 and May 31, 1998 and
1997 below are derived from the audited combined financial statements included
in this information statement/prospectus. They should be read in conjunction
with those financial statements and the notes. The statement of operations data
for the nine month periods ended September 30, 1999 and 1998, for the seven
month period ended December 31, 1997, for the year ended December 31, 1998, and
for the years ended May 31, 1995 and 1994 and the balance sheet data as of
September 30, 1999 and May 31, 1996, 1995 and 1994 are derived from unaudited
combined financial statements.
The historical financial information may not be indicative of eLoyalty
future performance and does not necessarily reflect what the financial position
and results of operations of eLoyalty would have been had eLoyalty operated as a
separate, stand-alone entity during the period covered.
eLOYALTY
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE
MONTH PERIODS FOR THE YEAR SEVEN MONTH PERIODS
ENDED ENDED FROM JUNE 1 TO
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------------- ------------ ----------------------
1999 1998 1998 1998 1997
-------- -------- ------------ -------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................ $107,652 $ 77,685 $105,235 $ 64,415 $ 43,668
Project personnel.............. (52,586) (37,464) (50,687) (31,302) (22,329)
-------- -------- -------- -------- --------
REVENUES LESS PROJECT
PERSONNEL...................... 55,066 40,221 54,548 33,113 21,339
-------- -------- -------- -------- --------
OTHER COSTS AND EXPENSES:
Sales and marketing............ 6,185 3,197 4,894 3,456 994
Research and development....... 3,599 2,231 3,635 2,889 1,393
General and administrative..... 22,554 18,912 26,326 16,438 10,641
TSC corporate services
allocation................... 10,769 9,225 12,769 7,698 5,544
Equity in net loss of
unconsolidated investee...... 463 -- 412 412 --
Goodwill amortization.......... 3,748 2,704 3,794 2,450 1,856
-------- -------- -------- -------- --------
47,318 36,269 51,830 33,343 20,428
-------- -------- -------- -------- --------
OPERATING INCOME (LOSS)......... 7,748 3,952 2,718 (230) 911
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE).......... 28 (9) 21 85 (14)
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 7,776 3,943 2,739 (145) 897
INCOME TAX PROVISION
(BENEFIT)...................... 3,690 1,929 1,672 398 562
-------- -------- -------- -------- --------
NET INCOME (LOSS)............... $ 4,086 $ 2,014 $ 1,067 $ (543) $ 335
======== ======== ======== ======== ========
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................ $ 84,488 $ 43,181 $ 26,516 $ 6,132 $1,333
Project personnel.............. (41,329) (18,078) (11,674) (3,137) (715)
-------- -------- -------- ------- ------
REVENUES LESS PROJECT
PERSONNEL...................... 43,159 25,103 14,842 2,995 618
-------- -------- -------- ------- ------
OTHER COSTS AND EXPENSES:
Sales and marketing............ 2,429 1,663 1,032 312 40
Research and development....... 2,383 1,689 46 -- --
General and administrative..... 20,216 11,539 5,559 1,335 482
TSC corporate services
allocation................... 10,671 5,028 3,298 1,527 197
Equity in net loss of
unconsolidated investee...... -- -- -- -- --
Goodwill amortization.......... 3,201 376 -- -- --
-------- -------- -------- ------- ------
38,900 20,295 9,935 3,174 719
-------- -------- -------- ------- ------
OPERATING INCOME (LOSS)......... 4,259 4,808 4,907 (179) (101)
-------- -------- -------- ------- ------
OTHER INCOME (EXPENSE).......... (24) 15 -- -- --
-------- -------- -------- ------- ------
INCOME (LOSS) BEFORE INCOME
TAXES.......................... 4,235 4,823 4,907 (179) (101)
INCOME TAX PROVISION
(BENEFIT)...................... 2,022 1,897 1,857 (51) (103)
-------- -------- -------- ------- ------
NET INCOME (LOSS)............... $ 2,213 $ 2,926 $ 3,050 $ (128) $ 2
======== ======== ======== ======= ======
</TABLE>
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<PAGE> 66
<TABLE>
<CAPTION>
FOR THE NINE FOR THE
MONTH PERIODS FOR THE YEAR SEVEN MONTH PERIODS
ENDED ENDED FROM JUNE 1 TO
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------------- ------------ ----------------------
1999 1998 1998 1998 1997
-------- -------- ------------ -------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic net income (loss) per
common share(1)................. $ 0.10 $ 0.05 $ 0.03 $ (0.01) $ 0.01
Diluted net income (loss) per
common share(1)................ $ 0.08 $ 0.04 $ 0.02 $ (0.01) $ 0.01
Shares used to calculate basic
net income (loss) per share (in
millions)(1)................... 41.4 41.4 41.4 41.4 41.4
Shares used to calculate diluted
net income (loss) per share (in
millions(1).................... 48.5 46.5 46.6 41.4 45.8
<CAPTION>
FOR THE YEARS ENDED MAY 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic net income (loss) per
common share(1)................. $ 0.05 $ 0.07 $ 0.07 $ (0.00) $ 0.00
Diluted net income (loss) per
common share(1)................ $ 0.05 $ 0.06 $ 0.0 7 $ (0.00) $ 0.00
Shares used to calculate basic
net income (loss) per share (in
millions)(1)................... 41.4 41.4 41.4 41.4 41.4
Shares used to calculate diluted
net income (loss) per share (in
millions(1).................... 46.8 46.6 45.5 41.4 46.0
</TABLE>
- ---------------
(1) In December 1999, eLoyalty issued 41.4 million shares to TSC. Basic earnings
per share have been computed by dividing the net income/(loss) for each
period presented by the 41.4 million shares. Diluted net earnings per share
was computed by dividing the net income/(loss) for each period presented by
the 41.4 million shares plus the estimated effect of dilutive stock options
using the "treasury stock" method. See Note 8 to the Notes to the Combined
Financial Statements for a discussion of stock options.
eLOYALTY
BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF MAY 31,
SEPTEMBER 30, DECEMBER 31, -----------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
------------- ------------ ------- ------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash................. $10,654 $ 4,411 $ 4,726 $ 4,130 $ 321 $ -- $ --
Working capital...... $51,932 $26,231 $23,840 $13,506 $ 6,249 $3,130 $1,316
Total assets......... $92,792 $63,904 $54,118 $24,188 $14,008 $4,351 $2,119
Stockholder's
equity............. $71,289 $47,888 $40,893 $17,147 $ 9,312 $3,169 $1,346
</TABLE>
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<PAGE> 67
eLOYALTY'S RELATIONSHIP WITH TECHNOLOGY SOLUTIONS COMPANY
AFTER THE SPIN-OFF
The spin-off, and the transactions being undertaken in connection with the
spin-off, are being effected according to a Reorganization Agreement between
eLoyalty and TSC. In addition, we have entered into or will enter into certain
ancillary agreements contemplated by the Reorganization Agreement and certain
other agreements that will govern various ongoing relationships between us and
TSC.
Below is a summary description of the Reorganization Agreement and certain
of the ancillary agreements. This description, which summarizes the material
terms of those agreements, does not purport to be complete and is qualified in
its entirety by reference to the full text of the agreements. Certain of these
agreements, including the Reorganization Agreement and the forms of Shared
Services Agreement and Tax Sharing and Disaffiliation Agreement, have been filed
with the Securities and Exchange Commission as exhibits to the registration
statement of which this information statement/prospectus is a part.
REORGANIZATION AGREEMENT
The Reorganization Agreement will provide for, among other things, the
principal corporate transactions required to effect the separation of eLoyalty's
business from the remaining TSC business, the spin-off and certain other
agreements governing the relationship between eLoyalty and TSC after the
spin-off.
Pursuant to the Reorganization Agreement, TSC will transfer to eLoyalty
substantially all of the assets, and eLoyalty will assume substantially all of
the corresponding liabilities, of eLoyalty's business. The assets of eLoyalty's
business will be transferred to eLoyalty on an "as is, where is" basis and no
representations or warranties will be made by TSC regarding those assets.
Certain international, intellectual property, real property and other assets
relating primarily to the business of eLoyalty may still be held by TSC or its
affiliates at the time of the distribution of the eLoyalty common stock pending
receipt of consents or approvals or satisfaction of other applicable
requirements necessary for the transfer of such assets to eLoyalty. These assets
and operations are not, individually or in the aggregate, material to eLoyalty.
However, the information included in this information statement/prospectus,
including our financial statements, assumes the completion of all such
transactions.
The TSC board will have the sole discretion to determine the date of the
spin-off. The spin-off is conditioned on, among other things, declaration of the
spin-off by the TSC board of directors. Other conditions to the spin-off
include:
- TSC's receipt of the private letter ruling from the IRS described under
"The Spin-Off -- Material Federal Tax Consequences;"
- receipt by TSC's board of directors of an opinion of TSC's financial
advisor regarding the fairness to stockholders of TSC of the spin-off and
the viability of TSC and eLoyalty after the spin-off;
- receipt of all material approvals and consents necessary to consummate
the spin-off;
- the absence of any prohibition of the spin-off by any law or governmental
authority;
- registration of our common stock under the Exchange Act;
- approval for listing on The Nasdaq Stock Market's National Market of our
common stock;
- no other events or developments shall have occurred that, in the judgment
of the TSC board, would result in the spin-off having a material adverse
effect on TSC or on the stockholders of TSC; and
- final approval by TSC's board of directors of the spin-off.
Even if all of the conditions to the spin-off are satisfied, TSC has
reserved the right to amend or terminate the Reorganization Agreement and the
related transactions. The TSC board of directors has not
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<PAGE> 68
attempted to identify or establish objective criteria for evaluating the
particular events or conditions that would cause the TSC board of directors to
consider amending or terminating the spin-off. Although the conditions described
above may be waived by TSC to the extent permitted by law, the TSC board of
directors presently has no intention to proceed with the spin-off unless each of
these conditions is satisfied.
Subject to certain exceptions, the Reorganization Agreement will provide
for certain cross-indemnities principally designed to place financial
responsibility for the liabilities of eLoyalty's business with eLoyalty and
financial responsibility for the obligations and liabilities of TSC's retained
business with TSC. Specifically, eLoyalty has agreed to assume liability for,
and to indemnify TSC against, any and all liabilities associated with eLoyalty's
business. These liabilities include any litigation, proceedings or claims
relating to the products, services and operations thereof whether or not the
underlying basis for such litigation, proceeding or claim arose prior to or
after the date of the transfer of the eLoyalty business by TSC to eLoyalty. TSC
has agreed to indemnify eLoyalty against any and all liabilities associated with
TSC's retained business.
The Reorganization Agreement will provide for the allocation of benefits
between TSC and eLoyalty under existing insurance policies after the date of the
spin-off for claims made or occurrences prior to the date of the spin-off and
sets forth procedures for the administration of insured claims. In addition, the
Reorganization Agreement provides that TSC will use its reasonable efforts to
maintain directors' and officers' insurance at substantially the level of TSC's
current directors' and officers' insurance policy for a period of three years
with respect to the directors and officers of TSC who will become directors and
officers of eLoyalty as of the date of the spin-off for acts relating to periods
prior to the date of the spin-off.
The Reorganization Agreement will also provide that each of TSC and
eLoyalty will be granted access to certain records and information in the
possession of the other. This requires the retention by TSC and eLoyalty, for a
period of seven years following the spin-off, of the information in its
possession relating to the other. Further, the party in possession of the
information must use commercially reasonable efforts to notify the other party
of its intention to dispose of such information and, with respect to tax
information, the period shall be extended to one year after the expiration of
the applicable statute of limitations.
The Reorganization Agreement will also provide that for 18 months starting
December 1, 1999, neither TSC nor eLoyalty can solicit or recruit any of the
employees of the other. Further, the Reorganization Agreement will address the
treatment of employee benefit matters and other compensation arrangements for
certain former and current eLoyalty employees and their beneficiaries and
dependents. These provisions of the Reorganization Agreement contemplate that
eLoyalty will establish certain retirement savings and welfare plans. The
Reorganization Agreement will provide that the account balances (including
outstanding loans) of all eLoyalty employees participating in TSC's deferred
compensation and 401(k) plans will be transferred to eLoyalty's new deferred
compensation and 401(k) plans and assets held in trust related to such account
balances will be transferred to new trusts established by eLoyalty. The
Reorganization Agreement will also generally provide that, after the spin-off,
eLoyalty will assume all liabilities for benefits under any welfare plans
related to eLoyalty employees, other than certain claims incurred on or before
the spin-off. Moreover, the Reorganization Agreement will provide that,
effective as of the spin-off, eLoyalty will become responsible for all other
liabilities to eLoyalty employees. The Reorganization Agreement will also
provide that eLoyalty will issue stock options in substitution of outstanding
options to purchase TSC common stock and will maintain an employee stock
purchase plan substantially similar to TSC's 1995 employee stock purchase plan.
The Reorganization Agreement contains provisions that govern the resolution
of disputes, controversies or claims that may arise between or among the
parties. These provisions contemplate that efforts will be made to resolve
disputes, controversies and claims by escalation of the matter to senior
management (or other mutually agreed) representatives of the parties. Disputes
remaining unresolved are then to be submitted to mandatory mediation. If such
efforts are not successful, any party may submit the dispute, controversy or
claim to mandatory, binding arbitration, subject to the provisions of the
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<PAGE> 69
Reorganization Agreement. The Reorganization Agreement contains procedures for
the selection of a sole arbitrator of the dispute, controversy or claim and for
the conduct of the arbitration hearing, including certain limitations on
discovery rights of the parties. These procedures are intended to produce an
expeditious resolution of any such dispute, controversy or claim.
TSC STOCK OPTIONS
eLoyalty Employees and Directors. TSC and eLoyalty have agreed that as of
the spin-off, each outstanding option to purchase TSC common stock held by a
person who will be an employee or director of eLoyalty immediately after the
spin-off (and who will not also be a director of TSC) will be converted into a
substitute option to purchase eLoyalty common stock. The substitute option will
preserve the intrinsic value of the option and the ratio of the exercise price
to the fair market value of the stock by adjusting the number of shares
purchasable and the exercise price, based on a comparison of the trading price
of TSC common stock before the spin-off, which includes the value of eLoyalty
common stock, and the trading price of eLoyalty common stock after the spin-off.
The substitute option will take into account all employment with both TSC and
eLoyalty for purposes of determining when the option becomes exercisable and
when it terminates. All other terms of the substitute option will be the same as
the current TSC option.
TSC Employees and Directors, and Former Employees and Directors. Each
outstanding nonqualified TSC option granted before June 22, 1999 to a person who
will continue as an employee or director of TSC after the spin-off, or who will
not be an employee or director of either TSC or eLoyalty after the spin-off,
will be converted into both an adjusted TSC option and a substitute eLoyalty
option. These TSC options will be converted in a manner that preserves the
aggregate exercise price of each option, which will be allocated between the
adjusted TSC option and the substitute eLoyalty option based on a comparison of
the trading price of TSC common stock and the trading price of eLoyalty common
stock after the spin-off. Both options, when combined, will preserve the
intrinsic value of the existing option, and each will preserve the ratio of the
exercise price to the fair market value of the stock subject to the option.
Specifically, the number of shares of TSC common stock subject to an
adjusted TSC option will be the same as the number of shares subject to the
existing TSC option, and the current exercise price will be multiplied by the
following fraction:
TSC Stock Price (after the spin-off)
- --------------------------------------------------------------------------------
TSC Stock Price (before the spin-off)
The number of shares subject to a substitute eLoyalty option will equal the
number of shares of eLoyalty common stock that would have been received in the
spin-off with respect to the shares of TSC common stock subject to the existing
TSC option. The exercise price of the substitute eLoyalty option will equal the
exercise price of the existing TSC option multiplied by the following ratio:
eLoyalty Stock Price (after the spin-off)
- --------------------------------------------------------------------------------
TSC Stock Price (before the spin-off)
Employment with TSC will be taken into account in determining when each
substitute eLoyalty option becomes exercisable and when it terminates, and in
all other respects the terms of the substitute option will be substantially the
same as the existing TSC option.
Options Granted After June 21, 1999. Each outstanding nonqualified TSC
option granted after June 21, 1999 to a person who will continue as an employee
or director of TSC after the spin-off, or who will not be an employee or
director of either TSC of eLoyalty after the spin-off will not be adjusted as
described above, but instead will continue solely as an option to purchase
shares of TSC common stock. Each of these options will be adjusted to reflect
the spin-off, based on a comparison of the trading price of TSC common stock
before the spin-off and the trading price of TSC common stock after the spin-off
and will preserve the intrinsic value of the option and the ratio of the
exercise price to the fair market value of the stock.
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Incentive Stock Options. Each TSC option that is an incentive stock option,
within the meaning of Section 422 of the Code, will be converted into an
incentive stock option to purchase the stock of the corporation with which the
optionee is employed immediately after the spin-off. These options will be
converted based on a comparison of the trading price of the stock purchasable
under the option after the spin-off and the trading price of TSC common stock
before the spin-off and will preserve both the intrinsic value of the option and
the ratio of the exercise price to the fair market value of the stock.
TAX SHARING AND DISAFFILIATION AGREEMENT
The TSC and eLoyalty Tax Sharing and Disaffiliation Agreement will set
forth the rights and obligations of TSC and eLoyalty with respect to taxes
imposed on their respective businesses both before and after the spin-off and
with respect to "Restructuring Taxes." For purposes of the Tax Sharing and
Disaffiliation Agreement, "Restructuring Taxes" are, in effect taxes and other
liabilities imposed as a result of a determination that (1) the contribution of
the eLoyalty assets to eLoyalty failed to qualify for tax-free treatment, (2)
the spin-off failed to qualify as a tax-free spin-off under Section 355 of the
Code, or (3) TSC, under certain special rules, was subject to tax as a result of
the spin-off even though the spin-off generally qualified for tax-free treatment
under Section 355 of the Code.
General Taxes. Under the Tax Sharing and Disaffiliation Agreement, eLoyalty
will be liable for and indemnify TSC against any taxes (other than Restructuring
Taxes) that are attributable to the business carried on by eLoyalty. eLoyalty
will indemnify TSC against these taxes even though they may have been incurred
prior to the formation of eLoyalty. TSC will indemnify eLoyalty against any
taxes (other than Restructuring Taxes) that are attributable to the business
retained by TSC. The Tax Sharing and Disaffiliation Agreement sets forth rules
for determining taxes attributable to the eLoyalty business and taxes
attributable to the business retained by TSC.
Restructuring Taxes. Under the Tax Sharing and Disaffiliation Agreement, we
will, in general, be liable for any Restructuring Taxes imposed by reason of any
"eLoyalty Tainting Act," which means:
- any inaccuracy or breach of any representation, warranty or covenant that
is made by eLoyalty pursuant to a specified section of that agreement
(which section, in general, includes representations and warranties by
eLoyalty relating to the truthfulness, correctness and completeness of
the facts and representations set out in the IRS ruling and the materials
submitted to the IRS in connection with that ruling, in each case to the
extent descriptive of the eLoyalty Group (generally, our affiliates and
us) or the eLoyalty business (including the plans, proposals, intentions
and policies of the eLoyalty Group and 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 capital stock of eLoyalty in the
spin-off).
Under that agreement, TSC will, in general, be liable for any Restructuring
Taxes imposed by reason of any "TSC Tainting Act," which means:
- any inaccuracy or breach of any representation, warranty or covenant that
is made by TSC pursuant to a specified section of that agreement (which
section, in general, includes representations and warranties by TSC
relating to the truthfulness, correctness and completeness of the facts
and representations set out in the IRS ruling and the materials submitted
to the IRS in connection with that ruling, in each case to the extent
descriptive of the TSC Group (generally, TSC's affiliates and TSC) or the
business retained by TSC (including the plans, proposals, intentions and
policies of the TSC Group and the business retained by TSC)), and in each
case to the extent not also related to the eLoyalty Group or the eLoyalty
business;
- any action (or failure to take any reasonably available action) by any
member of the TSC Group; or
- any acquisition or other transaction involving the capital stock of TSC
(other than the contribution or the spin-off).
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Under that agreement, eLoyalty and TSC are each liable for 50% of
Restructuring Taxes that are not imposed as a result of either an eLoyalty
Tainting Act or a TSC Tainting Act. If a Restructuring Tax is imposed where
there is both an eLoyalty Tainting Act and a TSC Tainting Act, and each of the
eLoyalty Tainting Act and the TSC Tainting Act would alone be sufficient to
result in the imposition of such Restructuring Tax, eLoyalty and TSC are each
liable for 50% of such Restructuring Tax. Finally, in the case of a
Restructuring Tax that would not have been imposed but for the existence of both
an eLoyalty Tainting Act and a TSC Tainting Act, eLoyalty and TSC are each
liable for such Restructuring Tax to the extent the eLoyalty Tainting Act and
the TSC Tainting Act, respectively, contributed to the imposition of such
Restructuring Tax.
Option Deductions. Under the Tax Sharing and Disaffiliation Agreement, TSC
will generally be liable to us for an amount equal to (A) any actual federal
income tax reduction realized by TSC 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 TSC Affiliated Group
(generally, TSC 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 TSC
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 TSC Affiliated
Group. This liability arises only with respect to eLoyalty options exercised
after the date eLoyalty provides TSC with an opinion of tax counsel concluding
that a Net Option Deduction is available to the TSC Affiliated Group. This
opinion must be based on a change in federal income tax law (as defined in that
agreement) after the date of the spin-off to the effect that the TSC Affiliated
Group will not recognize income or gain for federal income tax purposes upon the
exercise of eLoyalty stock options by employees of any member of such group. TSC
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 TSC for losses
or expenses attributable to the reduction, elimination or deferral of a Net
Option Deduction for which TSC has previously made payment to us.
Administrative matters. The Tax Sharing and Disaffiliation Agreement will
also set forth the obligations of eLoyalty and TSC with respect to the filing of
tax returns, the administration of tax contests and other matters.
SHARED SERVICES AGREEMENT
TSC and eLoyalty will enter into a Shared Services Agreement, pursuant to
which TSC will provide to eLoyalty certain administrative services that may be
necessary to eLoyalty's business. TSC will provide eLoyalty with, among other
things, accounting, tax, benefits administration, human resources, information
systems, insurance, legal and shareholder services. This agreement will expire
on June 30, 2000 unless the parties mutually agree upon a renewal. For benefits
administration, human resources and information systems services TSC will charge
eLoyalty based on its percentage of the total number of TSC and eLoyalty
employees. For accounting, tax, insurance and other shareholder services TSC
will charge eLoyalty based on its percentage of the total revenues of TSC and
eLoyalty.
TSC INTELLECTUAL PROPERTY LICENSE AGREEMENT
TSC and eLoyalty will enter into a TSC Intellectual Property Agreement,
pursuant to which TSC will grant to eLoyalty a nonexclusive, royalty-free,
worldwide, perpetual license in and to certain intellectual properties,
processes, know-how and technical information of TSC which are not used
primarily in connection with eLoyalty's business but which are used in
connection with eLoyalty's business as of the date of the spin-off.
ELOYALTY INTELLECTUAL PROPERTY LICENSE AGREEMENT
eLoyalty and TSC will enter into an eLoyalty Intellectual Property
Agreement, pursuant to which eLoyalty will grant to TSC a nonexclusive,
royalty-free, worldwide, perpetual license in and to certain intellectual
properties, processes, know-how and technical information which were assigned to
eLoyalty, which are used primarily in connection with eLoyalty's business, and
which were also used in connection with TSC's businesses other than eLoyalty's
business as of the date of the spin-off.
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eLOYALTY'S MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below is certain information concerning the executive officers,
other key employees and members of our board of directors upon completion of the
spin-off.
The ages listed below are as of September 1, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Kelly D. Conway....................... 43 Director, President and Chief Executive Officer
Tench Coxe............................ 41 Director and Chairman of the Board of Directors
Jay C. Hoag........................... 41 Director
John T. Kohler........................ 52 Director
Michael J. Murray..................... 55 Director
John R. Purcell....................... 67 Director
Michael R. Zucchini................... 53 Director
Timothy J. Cunningham................. 46 Senior Vice President and Chief Financial Officer
Craig B. Lashmet...................... 39 Senior Vice President -- North American
Operations
Arthur J. Bird........................ 46 Senior Vice President -- European Operations
Chris J. Danson....................... 32 Senior Vice President -- Development and Support
Julie M. Fitzpatrick.................. 32 Senior Vice President -- Marketing
Jackie L. Hilt........................ 42 Senior Vice President -- Employee Loyalty
Kevin J. Kraft........................ 34 Senior Vice President -- Solutions Marketing
Stephen D. Mayers..................... 42 Senior Vice President -- Australian Operations
Michael Weintraub..................... 40 Senior Vice President -- Operations
</TABLE>
KELLY D. CONWAY has been our President and Chief Executive Officer and a
Director of eLoyalty since our incorporation in May 1999. Mr. Conway joined TSC
in November 1993 as Senior Vice President, assumed the position of Executive
Vice President in July 1995 and became Group President of TSC in October 1998.
Prior to joining TSC, he was a partner in the management consulting firm of
Spencer, Shenk and Capers from 1991 to 1993. From 1989 to 1991, he was President
and Chief Executive Officer of Telcom Technologies, a leading manufacturer of
automatic call distribution equipment. From 1984 to 1989, he held the positions
of Vice President of Finance and Vice President of Marketing for Telcom
Technologies. From 1980 to 1984, he was a consultant with Deloitte, Haskins and
Sells. In 1998, he became a board member of Edify Corporation.
TENCH COXE is our Chairman of the board of directors. Mr. Coxe has served
as a managing director of the general partner of Sutter Hill Ventures, a venture
capital company located in Palo Alto, California, since 1989. From 1984 to 1987,
Mr. Coxe served as Director of Marketing and in other management positions with
Digital Communications Associates. Mr. Coxe is currently on the Board of
Directors of Clarus Corporation, Copper Mountain Networks, Inc., Edify
Corporation, NVidia Corporation, Alteon WebSystems, Inc. and various private
companies.
JAY C. HOAG has been, since June 1995, a general partner of Technology
Crossover Ventures, a venture capital group located in Palo Alto, California.
From 1985 to 1994, he was a managing director with Chancellor Capital
Management, Inc. Mr. Hoag serves on the board of directors of Onyx Software
Corporation, Autoweb.com, Inc., iVillage, Inc. and several privately held
companies.
JOHN T. KOHLER has been a Director of eLoyalty since May 1999. Mr. Kohler
is currently TSC's President and Chief Executive Officer and has been a Director
of TSC since June 1994. He joined TSC as Senior Vice President in June 1992, was
promoted to Executive Vice President and named to the Office of the Chairman in
September 1993, became President and Chief Operating Officer in January 1994 and
became Chief Executive Officer in June 1995. From 1986 to 1992, he was Senior
Vice President and Chief Information Officer of Kimberly-Clark Corporation. From
1983 to 1986, he was a partner and
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regional practice director for the Midwest Region consulting practice of Arthur
Young. He is also currently serving as a Director of Follett Corporation and
Infosis Corp.
MICHAEL J. MURRAY has been a Director of eLoyalty since June 1999 and a
Director of TSC since July 1988. Mr. Murray is President of Global Corporate and
Investment Banking at Bank of America Corporation and a member of their Policy
Committee. Reporting to Mr. Murray are the Global Capital Raising and Global
Markets, International Corporate Banking Group, United States & Canada Group and
Principal Investing. From March 1997 until the BankAmerica-NationsBank merger in
1998, Mr. Murray headed BankAmerica Corporation's Global Wholesale Bank and was
responsible for its business with large corporate, international and government
clients around the world. Mr. Murray was named a BankAmerica vice chairman and
head of the United States and International Groups in September 1995. He had
been responsible for BankAmerica's United States Corporate Group since
BankAmerica's merger with Continental Bank Corporation in September 1994. Prior
to the BankAmerica-Continental Bank merger, he was vice chairman and head of
Corporate Banking for Continental Bank, which he joined in 1969. He is also
currently serving as a Director of CNF Transportation Inc., a transportation
company located in Palo Alto, California.
JOHN R. PURCELL has been a Director of eLoyalty since June 1999 and a
Director of TSC since July 1988. He has served as Chairman and Chief Executive
Officer of Grenadier Associates, Ltd., a venture banking, merger and acquisition
consulting firm, since 1989. From February 1991 until 1997, he served as
Chairman of Donnelley Marketing, Inc., a direct marketing company. From 1987
until 1990, he served as Chairman of Mindscape, Inc., an educational
entertainment computer software company. From 1982 until 1986, he served as
Chairman and President of SFN Companies, Inc., a communications company. He
previously served as Executive Vice President of CBS, Inc. and Senior Vice
President, Finance of Gannett Co., Inc. He is also currently serving as a
Director of Bausch & Lomb, Inc., Omnicom Group Inc. and Journal Register
Company.
MICHAEL R. ZUCCHINI has been a Director of eLoyalty since June 1999 and a
Director of TSC since October 1997. He has served as Chief Technology Officer of
Fleet Financial Group, a financial services company, since April 1997 and as
Vice Chairman since 1993. Since January 1997, he has served as Chairman of the
Bankers Roundtable Subcommittee on Legislation and Regulation charged with
interacting with Congress on issues related to technology. He is also currently
serving as a Director of Visa U.S.A., Inc., a credit card company.
TIMOTHY J. CUNNINGHAM will be eLoyalty's Senior Vice President and Chief
Financial Officer effective November 15, 1999. From October 1998 until November
1999 he held the position of Vice President -- Finance and Chief Financial
Officer of CTS Corporation, a publicly traded electronics and communications
company. Prior to joining CTS, Mr. Cunningham served as Vice
President -- Finance of the Moore Document Solutions division of Moore
Corporation from July 1996 to September 1998, and from 1995 to 1996, he was the
Group Controller for the ConAgra Refrigerated Foods group of ConAgra, Inc. Prior
to that, Mr. Cunningham served as Chief Financial Officer -- North America for
British Steel Inc., a U.S. based subsidiary of a large European industrial
products company, where he was employed from 1989 to 1994.
CRAIG B. LASHMET is the Senior Vice President of eLoyalty with overall
responsibility for Sales and Delivery in North America, which represents our
largest revenue base. Mr. Lashmet first joined TSC in October 1995 as Senior
Vice President. Prior to joining TSC he was a partner with Grant Thornton LLP,
an international accounting and consulting firm, where he managed the advanced
technology consulting practice for nine years.
ARTHUR J. BIRD is eLoyalty's Senior Vice President responsible for Sales
and Delivery in Europe. Mr. Bird joined TSC in October 1997 as a Senior Vice
President initially responsible for Sales and Delivery in the United Kingdom
and, beginning in November 1998, all of Europe. Mr. Bird previously worked for
CSC Computer Sciences, where he was European Director at the JP Morgan Pinnacle
Alliance in London from June 1995 to October 1997. Prior to working for CSC, Mr.
Bird spent two years
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with Energis plc, a wholly-owned subsidiary of The National Group, where he held
positions as Director of Customer Service and Director of Corporate Sales.
CHRIS J. DANSON leads eLoyalty's Development and Support as Senior Vice
President, and his responsibilities include managing the Loyalty Lab in Austin,
Texas and our Loyalty Support offering. Mr. Danson first joined TSC in 1993 as a
senior consultant, and became a Senior Vice President in September, 1998. He
managed several large projects and helped develop our European operations.
JULIE M. FITZPATRICK is Senior Vice President of Marketing for eLoyalty.
Ms. Fitzpatrick joined TSC in 1996 as a principal, after a seven-year career at
IBM Corporation. While at IBM, she held several positions, including account
systems engineer, product marketing manager and product manager for strategic
call center and middleware technologies.
JACKIE L. HILT is our Senior Vice President responsible for Employee
Loyalty, which includes recruiting and human resources functions with a specific
emphasis on employee relationships. Ms. Hilt has been with TSC for ten years,
most recently as the Senior Vice President of TSC's global recruiting
organization, a role she assumed in 1994. Prior to joining TSC, she was part of
Arthur Young's Midwest Consulting Practice.
KEVIN J. KRAFT is a Senior Vice President of eLoyalty responsible for
Solutions Marketing. Mr. Kraft joined TSC in 1995 as a Senior Principal, became
a Vice President in 1996, and assumed the role of Senior Vice President,
Solutions Marketing in December 1997. Prior to joining TSC, Mr. Kraft was a
senior manager in Grant Thornton LLP's advanced technology consulting practice.
STEPHEN D. MAYERS is eLoyalty's Senior Vice President responsible for Sales
and Delivery in Australia. Mr. Mayers joined TSC's ECM division in July 1998.
Previously he worked for two years with the Colonial Limited Group, a large
Australian-based financial services group, as General Manager-Strategic
Development for its retail financial services business through both its
insurance and banking divisions. From 1994 to 1996, Mr. Mayers was Assistant
General Manager for Commonwealth Bank of Australia responsible for marketing and
product development in the retail banking sector.
MICHAEL WEINTRAUB is a Senior Vice President of eLoyalty responsible for
Operations since June 1998. Mr. Weintraub joined TSC in October 1997 as a Vice
President in charge of The Bentley Group acquisition. From September 1993 to
September 1997, Mr. Weintraub was Vice President & General Manager of The
MEDSTAT Group, a health care strategy business offering consulting, applications
technology, and information services.
Messrs Kohler, Murray and Purcell intend to resign from the TSC board of
directors at the time of the spin-off.
BOARD COMPOSITION
Our board is divided into three classes that serve in staggered terms.
Directors in each class will be elected to serve for three-year terms and until
their successors are elected and qualified. Each year, the directors of one
class will stand for election as their terms of office expire. We expect that,
after the spin-off, Messrs. Coxe, Kohler and Purcell will be Class I directors,
with their terms of office expiring in 2003; Messrs. Hoag and Zucchinni will be
Class II directors, with their terms of office expiring in 2001; and Messrs.
Conway and Murray will be Class III directors, with their terms of office
expiring in 2002.
The authorized number of directors may be changed only by resolution of the
board of directors adopted by a majority of the whole board. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the total number of directors.
BOARD COMMITTEES
Prior to completion of the spin-off, our board intends to create an audit
committee and a compensation committee.
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The audit committee will review the internal accounting procedures of
eLoyalty and consult with and review the services provided by eLoyalty's
independent accountants. Following the completion of the spin-off, the audit
committee is expected to consist of Messrs. Murray and Hoag.
The compensation committee will review and recommend to the board the
compensation and benefits of all executive officers of eLoyalty, administer
eLoyalty's stock-based incentive plans and establish and review general policies
relating to compensation and benefits of employees of eLoyalty. Following the
completion of the spin-off, the compensation committee is expected to consist of
Messrs. Purcell and Coxe.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
None of our officers, directors or director nominees owns any of our common
stock. To the extent they own shares of TSC common stock at the time of the
spin-off, they will participate in the spin-off and receive shares of our common
stock on the same terms as other holders of TSC's common stock.
As described more fully under "Certain Transactions" we have agreed to sell
1,200,000 shares of our common stock to Sutter Hill Ventures and an aggregate of
1,200,000 shares of our common stock to Technology Crossover Ventures. We expect
to issue these shares prior to the spin-off. See "Certain Transactions." Mr.
Coxe is a managing director of the general partner of Sutter Hill Ventures and
as such, may be deemed to beneficially own the shares to be acquired by Sutter
Hill Ventures. Mr. Coxe disclaims beneficial ownership of those shares, except
to the extent of his interest in the partnership. Mr. Hoag is a co-managing
member of Technology Crossover Management III, L.L.C. and as such, may be deemed
to beneficially own the shares to be acquired by the entities controlled by it.
Mr. Hoag disclaims beneficial ownership of those shares, except to the extent
that he has a pecuniary interest in such shares by virtue of his interest in
Technology Crossover Management III, L.L.C.
Certain executives, including the executive officers named in the Summary
Compensation Table in the "-- Executive Compensation" section below, have been
awarded options to purchase shares of eLoyalty common stock. See "-- Outstanding
eLoyalty Stock Options."
In connection with the spin-off, each nonqualified option to purchase TSC
common stock held by an employee or director of eLoyalty (1) who will not also
be a director of TSC, will be converted into a substitute option to purchase
eLoyalty common stock, and (2) who will also be a director of TSC, will be
converted into a substitute option to purchase eLoyalty common stock and an
adjusted TSC option. In addition, each incentive stock option, within the
meaning of section 422 of the Code, held by an employee of eLoyalty will be
converted into an option to purchase eLoyalty common stock. See "eLoyalty's
Relationship with Technology Solutions Company After the Spin-Off -- TSC Stock
Options" for a more complete discussion of the treatment of options to purchase
TSC common stock in connection with the spin-off.
The following table shows the number of shares of our common stock that we
expect will be beneficially owned by each person who will be a director or
executive officer and all persons who will be directors, and executive officers
of eLoyalty after the spin-off, as a group. Except as otherwise noted, the
individual director or executive officer or his family members has or have sole
voting and investment power
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with respect to his or their shares. This information is based on our knowledge
of the number of shares of TSC common stock owned by the persons as of November
30, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME NUMBER OF SHARES OUTSTANDING SHARES
- ---- ---------------- ------------------
<S> <C> <C>
Kelly D. Conway............................................. 504,561(1) 1.0%
Tench Coxe.................................................. 278,750(2) *
Jay C. Hoag................................................. 428,750(3) *
John T. Kohler.............................................. 692,715(4) 1.4%
Michael J. Murray........................................... 352,336(5) *
John R. Purcell............................................. 806,687(6) 1.6%
Michael R. Zucchini......................................... 39,052(7) *
Timothy J. Cunningham....................................... --(8) --
Craig B. Lashmet............................................ 125,732(9) *
All Directors and Executive Officers as a group (9
persons).................................................. 3,228,583(10) 6.5%
</TABLE>
- ---------------
* Less than one percent
(1) Includes 487,406 shares Mr. Conway has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(2) Includes 278,750 shares beneficially owned by Sutter Hill Ventures, a
venture capital company. Mr. Coxe serves as a managing director of the
general partner of Sutter Hill Ventures and, by virtue of such position,
has shared voting power with respect to shares owned by Sutter Hill
Ventures. Mr. Coxe disclaims beneficial ownership of the shares held by
Sutter Hill Ventures except to the extent of his interest in the
partnership.
(3) Includes shares beneficially owned by the following four entities
controlled by Technology Crossover Management III, L.L.C. ("TCM III"): TCV
III (GP), TCV III, L.P., TCV III (Q), L.P. and TCV III Strategic Partners,
L.P. (the "Funds"). Mr. Hoag serves as a managing member of Technology
Crossover Management III, L.L.C., and by virtue of such position has,
together with one other managing member, sole investment control with
respect to TCM III and, therefore, the Funds. Mr. Hoag disclaims beneficial
ownership of the shares held by TCM III and the Funds except to the extent
that he has pecuniary interest in such shares by virtue of his interest in
TCM III.
(4) Includes 453,660 shares Mr. Kohler has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(5) Includes 94,500 shares Mr. Murray has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(6) Includes 94,500 shares Mr. Purcell has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days. Includes 33,437 shares held by Mr. Purcell's wife and 93,750 shares
held by the Purcell Foundation.
(7) Includes 31,500 shares Mr. Zucchini has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days. Includes 1,687 shares held by Mr. Zucchini's wife.
(8) Mr. Cunningham's employment began November 15, 1999.
(9) Includes 123,062 shares Mr. Lashmet has the right to acquire under options
which are currently exercisable or which will be exercisable within 60
days.
(10) Includes 1,284,628 shares all of the directors, director designees and
executive officers as a group (9 persons) have the right to acquire under
options which are currently exercisable or which will be exercisable within
60 days.
DIRECTOR COMPENSATION
Each of our directors who is not also an employee of eLoyalty or its
subsidiaries will receive $1,000 for each board and committee meeting that he or
she attends. These non-employee directors will also receive options to purchase
shares of our common stock under our 1999 Stock Incentive Plan. For more detail
regarding the options to be granted to non-employee directors, see "-- 1999
Stock Incentive Plan" below. All other directors will receive no additional
compensation for serving as a director. All of our directors will be reimbursed
for out-of-pocket expenses incurred in connection with attending board and
committee meetings.
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EXECUTIVE COMPENSATION
The following table sets forth certain compensation information paid by TSC
for our Chief Executive Officer and the two other executive officers of
eLoyalty. All information set forth in this table reflects compensation earned
by these individuals for services with TSC and its subsidiaries. The people
listed in the table below are sometimes referred to as Named Executive Officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- --------------------------- ------ -------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Kelly D. Conway............ 1998(1) $266,667 $120,000 -- 65,000 --
President and Chief 1998(2) 440,000 100,000 -- 135,000 --
Executive Officer
Timothy J. Cunningham(5)... 1998(1) -- -- -- -- --
Senior Vice President and 1998(2) -- -- -- -- --
Chief Financial
Officer
Craig B. Lashmet........... 1998(1) $266,667 $ 90,000 -- 97,750(3) --
Senior Vice President, 1998(2) 340,000 95,000 -- 33,750(4) --
North America
</TABLE>
- ---------------
(1) The compensation figures reported cover the transition period from June 1,
1998 through December 31, 1998.
(2) The compensation figures reported cover the fiscal year ended May 31, 1998.
(3) 47,750 of the 97,750 options reported for the transition period ended
December 31, 1998 were granted pursuant to a stock option repricing program
offered by TSC to all of its employees other than its executive officers.
(4) The 33,750 options reported for the fiscal year ended May 31, 1998 were
surrendered pursuant to the stock option repricing program described in
footnote 3.
(5) Mr. Cunningham's employment began November 15, 1999. He would have been a
Named Executive Officer but for the fact that he was not serving as an
executive officer at the end of the last completed fiscal year.
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<PAGE> 78
OPTION GRANTS IN LAST FISCAL YEAR
The following tables show all grants of options to acquire shares of TSC
common stock granted to the Named Executive Officers in the seven-month
transition period ended December 31, 1998 and the fiscal year ended May 31,
1998. In connection with the spin-off, each nonqualified option to purchase TSC
common stock held by an employee or director of eLoyalty (1) who will not also
be a director of TSC, will be converted into a substitute option to purchase
eLoyalty common stock, and (2) who will also be a director of TSC, will be
converted into a substitute option to purchase eLoyalty common stock and an
adjusted TSC option. In addition, each incentive stock option, within the
meaning of section 422 of the Code, held by an employee of eLoyalty will be
converted into an option to purchase shares of eLoyalty common stock. See
"eLoyalty's Relationship with Technology Solutions Company After the Spin-Off --
TSC Stock Options" for a more complete discussion of the treatment of options to
purchase TSC common stock in connection with the spin-off.
OPTION GRANTS IN TRANSITION PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(2)
----------------------------------------------------
PERCENT OF
NUMBER TOTAL POTENTIAL REALIZED VALUE
OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM
OPTIONS IN FISCAL BASE PRICE EXPIRATION -----------------------------
NAME GRANTED YEAR (PER SHARE) DATE 5%(1) 10%(1)
- ---- ---------- ---------- ----------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Kelly D. Conway............ 65,000(3) 5% 21.75 06/25/08 $ 889,100 $ 2,253,153
Timothy J. Cunningham(4)... -- -- -- -- -- --
Craig B. Lashmet........... 47,750(5) 4% 10.875 09/04/08 326,573 827,601
50,000(6) 4% 9.00 10/01/08 283,003 717,184
Potential gain by all
common stockholders(7)... $560,365,052 $1,420,075,064
</TABLE>
- ---------------
(1) Amounts reflect assumed rates of appreciation set forth in the SEC's
executive compensation disclosure rules. Actual gains, if any, on stock
option exercises depend on future performance of our common stock and
overall stock market conditions. No assurance can be given that the amounts
reflected in these columns will be achieved.
(2) Upon a sale of substantially all of the business and assets of the company,
the board may accelerate the exercise date of these options.
(3) Subject to option provisions regarding termination of employment, one third
of these options became exercisable on June 25, 1999 and 1/36 of these
options become exercisable on the last day of each calendar month for 24
months thereafter.
(4) Mr. Cunningham's employment began November 15, 1999. He would have been a
Named Executive Officer but for the fact that he was not serving as an
executive officer at the end of the last completed fiscal year.
(5) These options were granted pursuant to a stock option repricing program
offered by TSC to all of its employees other than its executive officers.
Subject to option provisions regarding termination of employment, one third
of these options became exercisable on September 4, 1999, and 1/36 of these
options become exercisable on the last day of each calendar month for 24
months thereafter.
(6) Subject to option provisions regarding termination of employment, one third
of these options became exercisable on October 1, 1999, and 1/36 of these
options become exercisable on the last day of each calendar month for 24
months thereafter.
(7) The future hypothetical value of one share of common stock based on a fair
market value of $21.75 on June 25, 1998, and assumed rates of appreciation
of five percent and ten percent through June 25, 2008, would be $35.43 and
$56.41, respectively. The potential realizable value for all holders of
common stock is based on 40,966,975 shares of common stock outstanding as of
December 31, 1998.
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<PAGE> 79
OPTION GRANTS IN FISCAL YEAR ENDED MAY 31, 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(2)
------------------------------------------------------ POTENTIAL REALIZED VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES BASE PRICE EXPIRATION --------------------------------
NAME GRANTED IN FISCAL YEAR (PER SHARE) DATE 5%(1) 10%(1)
- ---- ---------- -------------- ----------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Kelly D. Conway......... 135,000(3) 5% 15.8890 06/23/07 $ 1,348,988 $ 3,418,601
Timothy J.
Cunningham(4)......... -- -- -- -- -- --
Craig B. Lashmet........ 33,750(5) 1% N/A(4) N/A(4) N/A(4) N/A(4)
Potential gain by all
common
stockholders(6)....... -- -- -- -- $505,141,307 $1,280,127,251
</TABLE>
- ---------------
(1) Amounts reflect assumed rates of appreciation set forth in the SEC's
executive compensation disclosure rules. Actual gains, if any, on stock
option exercises depend on future performance of our common stock and
overall stock market conditions. No assurance can be given that the amounts
reflected in these columns will be achieved.
(2) Upon a sale of substantially all of the business and assets of the company,
the board may accelerate the exercise date of these options.
(3) Subject to option provisions regarding termination of employment, one third
of these options became exercisable on June 23, 1998 and 1/36 of these
options become exercisable on the last day of each calendar month for 24
months thereafter.
(4) Mr. Cunningham's employment began November 15, 1999. He would have been a
Named Executive Officer but for the fact that he was not serving as an
executive officer at the end of the last completed fiscal year.
(5) The 33,750 options reported were surrendered pursuant to a stock option
repricing program offered by TSC to all of its employees other than its
executive officers. The replacement grant is reflected in the table
captioned "Option Grants in Transition Period Ended December 31, 1998."
(6) The future hypothetical value of one share of common stock based on a fair
market value of $20.13 on May 31, 1998 and assumed rates of appreciation of
five percent and ten percent through June 23, 2007, would be $32.79 and
$52.21, respectively. The potential realizable value for all holders of
common stock is based on 39,901,684 shares of common stock outstanding as of
May 31, 1998.
OUTSTANDING ELOYALTY STOCK OPTIONS
On July 1, 1999 options to purchase shares of eLoyalty common stock with an
exercise price of $3.50 per share were awarded to Mr. Conway totaling 625,000
shares and Mr. Lashmet totaling 350,000 shares. On Mr.
Cunningham was granted options to purchase shares of eLoyalty common
stock with an exercise price of $ per share. These options have a ten-year
term, and become exercisable with respect to one-third of the number of shares
initially subject to the option on the second anniversary of the grant date. At
the end of each of the 24 calendar months following the second anniversary of
the grant, the options become exercisable with respect to an additional 1/36 of
the number of shares initially subject to the option.
EXERCISES OF STOCK OPTIONS AND FISCAL YEAR END OPTION VALUES
The following table shows aggregate exercises of options to purchase TSC
common stock in the seven-month transition period ended December 31, 1998 by the
Named Executive Officers and certain other information concerning the options to
purchase TSC common stock held by each of them at the end of such period.
In connection with the spin-off, each nonqualified option to purchase TSC
common stock held by an employee or director of eLoyalty (1) who will not also
be a director of TSC, will be converted into a substitute option to purchase
eLoyalty common stock, and (2) who will also be a director of TSC, will be
converted into a substitute option to purchase eLoyalty common stock and an
adjusted TSC option. In addition, each incentive stock option, within the
meaning of section 422 of the Code, held by an employee of eLoyalty will be
converted into an option to purchase shares of eLoyalty common stock. See
"eLoyalty's Relationship with Technology Solutions Company After the
Spin-Off -- TSC Stock Options" for a more complete discussion of the treatment
of options to purchase TSC common stock in connection with the spin-off.
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<PAGE> 80
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, 1998 AT DECEMBER 31, 1998
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kelly D. Conway............. -- -- 371,142 165,687 $1,642,934 $23,285
Timothy J. Cunningham(1).... -- -- -- -- -- --
Craig B. Lashmet............ -- -- 71,625 107,128 $ 157,494 $67,579
</TABLE>
- ---------------
(1) Mr. Cunningham's employment began November 15, 1999. He would have been a
Named Executive Officer but for the fact that he was not serving as an
executive officer at the end of the last completed fiscal year.
INCENTIVE PLANS
1999 STOCK INCENTIVE PLAN
Officers, directors, key employees, consultants, independent contractors
and agents of eLoyalty and its subsidiaries are eligible to participate in the
1999 Stock Incentive Plan. The 1999 Stock Incentive Plan provides for the grant
of non-statutory stock option awards, incentive stock option awards, stock
appreciation rights awards, restricted stock awards, bonus stock awards and
performance share awards. An aggregate of 5,340,000 shares of eLoyalty common
stock will be initially reserved for issuance under the 1999 Stock Incentive
Plan for all awards other than any awards issued in connection with the spin-off
in substitution of previously granted options to purchase shares of TSC common
stock. See "eLoyalty's Relationship with Technology Solutions Company After the
Spin-Off -- TSC Stock Options" for a more complete description of the treatment
of options to purchase TSC common stock in connection with the spin-off. The
aggregate number of shares of eLoyalty common stock available for issuance under
the 1999 Stock Incentive Plan will be increased as of the first day of each
fiscal year of eLoyalty beginning on or after January 1, 2000, by an amount
equal to 5% of the total number of shares of eLoyalty common stock then
outstanding. Subject to adjustments set forth in the 1999 Stock Incentive Plan,
the maximum number of shares of eLoyalty common stock that may be granted to any
person during (1) the 1999 fiscal year is 750,000 and (2) any other fiscal year
of eLoyalty is 300,000.
The 1999 Stock Incentive Plan also provides that each non-employee director
will receive an option to purchase 25,000 shares of common stock when he or she
commences service as a director. Each current non-employee director (other than
a non-employee director who received an option grant on July 1, 1999) received
such an option. In addition, on the day following the date of each annual
stockholders' meeting beginning with the stockholders' meeting to be held in
2000, each non-employee director (other than a non-employee director who
receives an initial grant at that meeting) will receive an option to purchase
6,000 shares of eLoyalty common stock. If the non-employee director received an
initial grant since the previous annual meeting, the annual grant will be
reduced proportionately. The stock options granted to non-employee directors
will (1) have an exercise price per share equal to the fair market value of a
share of eLoyalty common stock on the grant date, (2) expire ten years after the
grant date and (3) become exercisable in 48 equal monthly installments,
commencing with the last day of the calendar month following the calendar month
in which the option is granted.
1999 STOCK PURCHASE PLAN
eLoyalty's 1999 Employee Stock Purchase Plan was adopted by our board of
directors in October, 1999. The stock purchase plan will terminate automatically
if our stockholders do not approve the plan within 12 months after its adoption.
All of our employees (including our directors who are employees and all
employees of any participating subsidiaries) who have been continuously employed
for at least three months, and whose customary employment is more than 20 hours
per week and more than five months in any calendar year,
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<PAGE> 81
are eligible to participate in the stock purchase plan. Employees who own 5% or
more of the total combined voting power or value of our stock or any subsidiary
are not eligible to participate.
During each designated payroll deduction period, or purchase period, each
eligible employee may authorize us to deduct between 1% and 15% (in increments
of 1%) of his or her base pay. We will credit these deductions to a non-interest
bearing account for each participating employee. On the last business day of the
purchase period we will use the amount in each participating employee's account
to buy shares of eLoyalty common stock for the employee at a purchase price
equal to 85% of the average of the high and low transaction prices of a share of
eLoyalty common stock, as reported on The Nasdaq Stock Market, on either (1) the
first business day of the purchase period or (2) the last business day of the
purchase period, whichever is lower. No employee is allowed to buy shares of
common stock worth more than $25,000, based on the fair market value of the
common stock on the first day of the applicable purchase period, in any calendar
year under the plan. Each purchase period will last for three months and will
coincide with each calendar quarter. The first purchase period will begin on the
first day on which eLoyalty common stock is traded on a "when-issued" basis (or
the first business day after the record date of the spin-off, if later) and will
end on the last business day of the same calendar quarter. A purchase period
will end automatically upon termination of the plan by the board of directors or
upon a change in control of the company.
An employee must be a participant on the last day of a purchase period in
order to purchase stock under the plan. An employee's participation terminates
prior to the last day of a purchase period upon:
- the employee's withdrawal of the balance accumulated in his or her
account;
- termination of employment;
- retirement;
- death;
- transfer to a subsidiary of the company that does not participate in the
plan; or
- the subsidiary for which the employee works no longer being a subsidiary
of the company.
Upon the termination of an employee's participation, the balance in the
employee's account will be refunded to the employee. In the event of the
employee's death, the balance in the employee's account will be refunded to the
employee's beneficiary or the executor or administrator of the employee's
estate.
Because participation in the plan is voluntary, we cannot now determine the
number of shares of our common stock to be purchased by any of our current
executive officers, by all of our current executive officers as a group or by
our non-executive employees as a group.
EMPLOYMENT AGREEMENTS
Messrs. Conway, Cunningham and Lashmet have entered into employment
agreements with TSC. We intend to enter into agreements with those executive
officers in connection the spin-off.
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<PAGE> 82
OWNERSHIP OF eLOYALTY COMMON STOCK BY CERTAIN BENEFICIAL OWNERS
Prior to the sale of common stock to the investors described under "Certain
Transaction," all of the outstanding shares of our common stock will be owned by
TSC. In the spin-off, TSC stockholders will receive one share of eLoyalty common
stock per share of TSC Common Stock. The following table lists information about
people that we expect to hold more than 5% of our common stock upon completion
of the spin-off based on a review of reports filed with the SEC as of September
30, 1999 by holders of more than 5% of TSC's common stock.
<TABLE>
<CAPTION>
SHARES OF COMMON PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER STOCK OWNED(1) OUTSTANDING SHARES(1)
------------------------------------ ---------------- ---------------------
<S> <C> <C>
Massachusetts Financial Services Company.................. 4,806,779 11.2%
500 Boylston Street, Boston, MA 02116(2)
Dresdner Bank AG.......................................... 3,973,450 9.3%
Jurgen-Ponto-Platz 1, 60301 Frankfurt, Germany
Dresdner RCM Global Investors
Dresdner RCM Global Investors LLC
Four Embarcadero Center, San Francisco, California
94111(3)
GeoCapital LLC............................................ 3,172,149 7.4%
767 Fifth Ave-45th Fl, New York, NY 10153-4590(4)
Brookside Capital Partners Fund, L.P. .................... 2,718,800 6.4%
Two Copley Place, Boston, Massachusetts 02116(5)
</TABLE>
- ---------------
(1) Calculated on the basis of the actual number of outstanding shares of TSC
common stock as of September 30, 1999.
(2) Based on the most recent report on Schedule 13G/A filed with the SEC on
February 11, 1999, Massachusetts Financial Services Company is expected to
have sole voting power with respect to 4,675,854 shares of TSC common stock
and sole dispositive power with respect to 4,806,779 shares of TSC common
stock.
(3) Based on the most recent joint report on Schedule 13G, filed with the SEC on
February 16, 1999, Dresdner Bank AG is expected to have sole voting power
with respect to 2,726,000 shares of TSC common stock and dispositive power
with respect to 3,973,450 shares of TSC common stock; each of Dresdner RCM
Global Investors and Dresdner RCM Global Investors LLC is expected to have
sole voting power with respect to 2,611,050 shares of TSC common stock and
dispositive power with respect to 3,858,450 shares of TSC common stock.
(4) Based on the most recent report on Schedule 13G, filed with the SEC on
February 10, 1999, GeoCapital LLC is expected to have sole dispositive power
with respect to 3,172,149 shares of TSC common stock.
(5) Based on the most recent report on Schedule 13G, filed with the SEC on March
29, 1999, Brookside Capital Partners Fund, L.P. is expected to have sole
voting power with respect to 2,718,800 shares of TSC common stock and sole
dispositive power with respect to 2,718,800 shares of TSC common stock.
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<PAGE> 83
DESCRIPTION OF ELOYALTY CAPITAL STOCK
The authorized capital stock of eLoyalty consists of 100,000,000 shares of
common stock, $0.01 par value and 10,000,000 shares of preferred stock, $0.01
par value. Immediately following the spin-off, approximately shares of
common stock will be outstanding.
THE FOLLOWING DESCRIPTIONS ARE SUMMARIES OF THE MATERIAL TERMS OF OUR
CERTIFICATE OF INCORPORATION AND BYLAWS. REFERENCE IS MADE TO THE MORE DETAILED
PROVISIONS OF, AND SUCH DESCRIPTIONS ARE QUALIFIED IN THEIR ENTIRETY BY
REFERENCE TO, THE ELOYALTY CERTIFICATE OF INCORPORATION AND BYLAWS, COPIES OF
WHICH ARE FILED WITH THE SEC AS EXHIBITS TO THE REGISTRATION STATEMENT OF WHICH
THIS INFORMATION STATEMENT/PROSPECTUS IS A PART, AND APPLICABLE LAW.
COMMON STOCK
Holders of our common stock will be entitled to one vote per share with
respect to each matter presented to stockholders for vote. Except as may be
provided in connection with any eLoyalty preferred stock, or as may otherwise be
required by law or the certificate of incorporation, the common stock will be
the only capital stock of eLoyalty entitled to vote in the election of directors
and on all other matters presented to the stockholders of eLoyalty; provided
that holders of common stock, as such, will not be entitled to vote on any
matter that relates solely to the terms of any outstanding series of preferred
stock or the number of shares of such series and does not affect the number of
authorized shares of preferred stock or the powers, privileges and rights
pertaining to the common stock. The common stock will not have cumulative voting
rights, which means that the holders of a majority of the outstanding shares of
common stock can elect all of the directors then standing for election.
Subject to the prior rights of holders of preferred stock, if any, holders
of common stock are entitled to receive such dividends as may be lawfully
declared from time to time by our board of directors. Upon any liquidation,
dissolution or winding up of eLoyalty, whether voluntary or involuntary, holders
of common stock will be entitled to receive the assets that are legally
available for distribution to stockholders after there shall have been paid or
set apart for payment the full amounts necessary to satisfy any preferential or
participating rights to which the holders of each outstanding series of
preferred stock are entitled by the express terms of such series.
The common stock distributed in the spin-off will not have any preemptive,
subscription or conversion rights. Additional shares of authorized common stock
may be issued, as determined by our board from time to time, without stockholder
approval, except as may be required by applicable Nasdaq requirements.
We will apply to have our common stock listed on The Nasdaq Stock Market's
National Market under the symbol "ELOY."
ChaseMellon Shareholder Services, L.L.C. will serve as the transfer agent
and registrar for our common stock.
PREFERRED STOCK
Subject to Delaware law, our board may, without approval of the
stockholders, cause shares of preferred stock to be issued from time to time in
one or more series. The board will determine the number of shares of each series
as well as the designation, powers, privileges, preferences and rights of the
shares of that series. Among the specific matters that may be determined by the
board are:
- the designation of each series;
- the number of shares of each series;
- the rate of dividends, if any;
- whether dividends, if any, will be cumulative or non-cumulative;
- the terms of redemption, if any;
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<PAGE> 84
- the terms of any sinking fund providing for the purchase or redemption of
shares of each series;
- the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of eLoyalty;
- rights and terms of conversion or exchange, if any;
- restrictions on the issuance of shares of the same series or any other
series, if any; and
- voting rights, if any.
ANTITAKEOVER EFFECTS
Our amended certificate of incorporation and bylaws contain provisions that
could make the acquisition of eLoyalty more difficult by means of a tender
offer, proxy contest or otherwise.
Classified board of directors. Our amended certificate of incorporation
provides that our board of directors will be divided into three classes of
directors, with the classes to be as nearly equal in number as possible, and
with each class serving a staggered three-year term.
The classification of directors has the effect of making it more difficult
for stockholders to change the composition of the board of directors. At least
two annual meetings of stockholders, instead of one, will generally be required
to effect a change in a majority of our board. Such a delay may help ensure that
the directors, if confronted by a stockholder attempting to force a proxy
contest, a tender or exchange offer or an extraordinary corporate transaction,
would have sufficient time to review the proposal as well as any available
alternatives to the proposal and to act in what they believe to be the best
interest of eLoyalty. The classification provisions will apply to every election
of directors, however, regardless of whether a change in the composition of our
board would be beneficial to eLoyalty and our stockholders and whether a
majority of our stockholders believe that such a change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or otherwise
attempting to obtain control of eLoyalty, even though such an attempt might be
beneficial to us and our stockholders. Accordingly, the classification of our
board could increase the likelihood that incumbent directors will retain their
position.
Number of directors; removal; filling vacancies. The amended certificate of
incorporation provides that, subject to any rights of holders of eLoyalty
preferred stock to elect additional directors under specific circumstances, the
number of directors will be fixed by resolution of the board of directors
adopted by a majority of the whole board. In addition, the amended certificate
of incorporation and the bylaws provide that, subject to any rights of holders
of preferred stock, and unless the board of directors otherwise determines, any
vacancies, or newly created directorships, will be filled only by the
affirmative vote of a majority of the remaining directors, though it may be less
than a quorum. Accordingly, stockholders will not be able to increase the size
of the board in order to fill the newly created directorships with stockholder
nominees.
Under Delaware law, unless otherwise provided in the certificate of
incorporation, directors serving on a classified board may only be removed by
the stockholders for cause. The amended certificate of incorporation and the
bylaws provide that directors may be removed only for cause and only upon the
affirmative vote of holders of at least 80% of the voting power of the then
outstanding shares of our stock, voting together as a single class.
No stockholder action by written consent; limitations on the calling of
special meetings. The amended certificate of incorporation and the bylaws
provide that, subject to the rights of any holders of preferred stock to elect
additional directors under specific circumstances, effective from and after date
of the spin-off stockholder action can be taken only at an annual or special
meeting of stockholders. This provision prohibits stockholder action by written
consent in lieu of a meeting. The bylaws further provide that, subject to the
rights of holders of any series of preferred stock to elect additional directors
under specific circumstances, special meetings of stockholders can be called
only by the board pursuant to a resolution
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<PAGE> 85
adopted by a majority of the whole board. Stockholders are not permitted to call
a special meeting or to require that the board call a special meeting of
stockholders. Moreover, the business permitted to be conducted at any special
meeting of stockholders is limited to the business brought before the meeting
pursuant to the notice of special meeting given by eLoyalty.
The provisions of the amended certificate of incorporation and the bylaws
prohibiting stockholder action by written consent may have the effect of
delaying consideration of a stockholder proposal until the next annual meeting
unless a special meeting is called by a majority of the whole board. These
provisions would also prevent the holders of a majority of the voting power of
our stock from unilaterally using the written consent procedure to take
stockholder action. Moreover, a stockholder could not force stockholder
consideration of a proposal over the opposition of the board by calling a
special meeting of stockholders prior to the time a majority of the whole board
believes such consideration to be appropriate.
Advance notice provisions for stockholder nominations and stockholder
proposals. The bylaws establish an advance notice procedure for stockholders to
make nominations of candidates for election as directors, or bring other
business before an annual meeting of our stockholders. Only persons who are
nominated by, or at the direction of, our board, or by a stockholder who has
given timely written notice to our Secretary prior to the meeting at which
directors are to be elected, will be eligible for election as directors of
eLoyalty. The business to be conducted at an annual meeting will be limited to
business brought before the meeting by, or at the direction of, the board or by
a stockholder who has given timely written notice to the Secretary of his or her
intention to bring such business before such meeting.
Notice of a stockholder nomination or other business to be brought before
an annual meeting will be timely only if it is delivered to eLoyalty not earlier
than the close of business on the 100th calendar day nor later than the close of
business on the 75th calendar day prior to the first anniversary of the
preceding year's annual meeting. However, if the date of the annual meeting is
more than 30 calendar days before or more than 75 calendar days after that
anniversary date, notice by the stockholder to be timely must be delivered to
eLoyalty not earlier than the close of business on the 100th calendar day prior
to the annual meeting and not later than the close of business on the later of
(1) the 75th calendar day prior to the annual meeting and (2) the 10th calendar
day after public announcement is first made by eLoyalty of the date of the
annual meeting. Notwithstanding the foregoing, in the event that the number of
directors to be elected to the eLoyalty board is increased and there is no
public announcement by eLoyalty naming all of the nominees for directors or
specifying the size of the increased board made at least 80 calendar days prior
to the first anniversary of the preceding year's annual meeting, a stockholder's
notice will be timely, but only with respect to nominees for any new positions
created by the increase, if it is delivered to eLoyalty not later than the close
of business on the 10th calendar day after the public announcement is first
made. Notice of a stockholder nomination to be made at a special meeting at
which directors are to be elected will be timely only if it is delivered to us
not earlier than the close of business on the 100th calendar day prior to the
special meeting, and not later than the close of business on the later of (1)
the 75th calendar day prior to the special meeting and (2) the 10th calendar day
after public announcement is first made by eLoyalty of the date of the special
meeting and of the nominees proposed by the eLoyalty board to be elected at the
special meeting.
A stockholder's notice proposing to nominate a person for election as a
director must contain certain information including, without limitation, the
identity and address of the nominating stockholder, the class and number of
shares of eLoyalty common stock that are owned by the stockholder and all
information regarding the proposed nominee that would be required to be included
in a proxy statement soliciting proxies for the proposed nominee. A
stockholder's notice relating to the conduct of business other than the
nomination of directors must contain certain information about that business and
about the proposing stockholder, including, without limitation:
- a brief description of the business the stockholder proposes to bring
before the meeting;
- the reasons for conducting the business at the meeting;
- the name and address of the stockholder;
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<PAGE> 86
- the class and number of shares of eLoyalty common stock beneficially
owned by the stockholder; and
- any material interest of the stockholder in the business so proposed.
If the chairman or other officer presiding at a meeting determines that a person
was not nominated or other business was not brought before the meeting in
accordance with the bylaw provisions summarized above, the person will not be
eligible for election as a director or the proposed business will not be
conducted at the meeting, as the case may be.
Although the bylaws do not give our board any power to approve or
disapprove stockholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election of
directors or the consideration of stockholder proposals if the proper procedures
are not followed. Also, they may discourage or deter a third-party from
conducting a solicitation of proxies to elect its own slate of directors or to
approve its own proposal, without regard to whether consideration of such
nominees or proposals might be harmful or beneficial to eLoyalty and our
stockholders.
Preferred stock. The Series A Preferred Stock described under "-- Rights
Plan" below is a series of preferred stock that is being considered by our board
of directors. Although no shares of preferred stock are currently outstanding
and we have no current plans to issue preferred stock, the issuance of shares of
preferred stock, or the issuance of rights to purchase such shares, could be
used to discourage an unsolicited acquisition proposal. For example, a business
combination could be impeded by the issuance of a series of preferred stock
containing class voting rights that would enable the holder or holders of such
series to block any such transaction. Alternatively, a business combination
could be facilitated by the issuance of a series of preferred stock having
sufficient voting rights to provide a required percentage vote of the
stockholders. In addition, under certain circumstances, the issuance of
preferred stock could adversely affect the voting power and other rights of the
holders of the common stock. Although our board of directors is required to make
any determination to issue any such stock based on its judgment as to the best
interests of the stockholders of eLoyalty, it could act in a manner that would
discourage an acquisition attempt or other transaction that some, or a majority,
of the stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over prevailing market
prices. Our board of directors does not presently intend to seek stockholder
approval prior to any issuance of currently authorized stock, unless otherwise
required by law or applicable stock exchange requirements.
Rights to purchase securities and other property. The amended certificate
of incorporation authorizes the eLoyalty board to create and issue rights
entitling holders to purchase from us shares of stock or other securities of
eLoyalty or any other corporation. The times at which and terms upon which the
rights are to be issued would be determined by our board and set forth in the
contracts or other instruments that evidence those rights. The authority of the
board with respect to such rights includes, but is not limited to, determination
of:
- the initial purchase price per share or other unit of the stock or other
securities or property to be purchased upon exercise of the rights;
- provisions relating to the times at which and the circumstances under
which the rights may be exercised or sold or otherwise transferred,
either together with or separately from any other stock or other
securities of eLoyalty;
- provisions that adjust the number or exercise price of the rights or
amount or nature of the stock or other securities or property receivable
upon exercise of the rights in the event of a (1) combination, split or
recapitalization of any stock of eLoyalty, (2) a change in ownership of
eLoyalty's stock or other securities or (3) a reorganization, merger,
consolidation, sale of assets or other occurrence relating to eLoyalty or
any stock of eLoyalty, and provisions restricting the ability of eLoyalty
to enter into any such transaction absent an assumption by the other
party or parties thereto of the obligations of eLoyalty under such
rights;
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- provisions that deny the holder of a specified percentage of the
outstanding stock or other securities of eLoyalty the right to exercise
the rights and/or cause the rights held by such holder to become void;
- provisions that permit us to redeem or exchange the rights; and
- the appointment of the rights agent with respect to the rights.
This provision is intended to confirm the authority of the board to issue rights
to purchase shares of stock or other securities of eLoyalty or any other
corporation. See "-- Rights Plan."
Amendment of certain provisions in the certificate of incorporation and
bylaws. Under Delaware law, the stockholders of a corporation have the right to
adopt, amend or repeal the bylaws and, with the approval of the board of
directors, the certificate of incorporation of a corporation. In addition, under
Delaware law if the certificate of incorporation so provides, the bylaws may be
adopted, amended, or repealed by the board of directors. Our amended certificate
of incorporation provides that the affirmative vote of the holders of at least
80% of the voting power of the outstanding shares of our stock, voting together
as a single class, is required to amend provisions of the certificate of
incorporation relating to:
- the prohibition of stockholder action without a meeting;
- the number, election and term of directors;
- the removal of directors;
- the issuance of rights; and
- the adoption, amendment or repeal of the bylaws by the board of directors
or by the affirmative vote of the holders of at least 80% of the voting
power of the outstanding shares of our stock, voting together as a single
class.
The vote of the holders of a majority of the voting power of the outstanding
shares of our stock is required to amend all other provisions of our amended
certificate of incorporation. The amended certificate of incorporation further
provides that the bylaws may be amended by the eLoyalty board by a majority of
the whole board or by the affirmative vote of the holders of at least 80% of the
voting power of the outstanding shares of our stock, voting together as a single
class.
These 80% voting requirements will have the effect of making more difficult
any amendment by stockholders of the bylaws or of any of the provisions of the
certificate of incorporation described above, even if a majority of the
stockholders of eLoyalty believes that the amendment would be in their best
interests.
Other provisions. The amended certificate of incorporation expressly
authorizes the board to take such action as it may determine to be reasonably
necessary or desirable to encourage any person or entity to enter into
negotiations with our board and management respecting any transaction that may
result in a change in control of eLoyalty, and to contest or oppose any such
transaction that the eLoyalty board determines to be unfair, abusive or
otherwise undesirable to us, our businesses or our stockholders. In this
connection, the amended certificate of incorporation specifically permits the
board to adopt plans or to issue securities of eLoyalty (including common stock
or preferred stock, rights or debt securities), which securities may be
exchangeable or convertible into cash or other securities on such terms as the
board determines and may provide for differential and unequal treatment of
different holders or classes of holders. The existence of this authority or the
actions that may be taken by the board may deter potential acquirers from
proposing unsolicited transactions not approved by the board and might enable
the board to hinder or frustrate such a transaction if proposed. These
provisions are included in the amended certificate of incorporation to confirm
and support the authority of the board to take the various actions authorized
thereby. The certificate of incorporation is also designed to enable the board
to utilize such other tactics or mechanisms as are developed in the future to
carry out the general authorization set forth therein.
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RIGHTS PLAN
Our board of directors will consider adopting a Stockholder Rights Plan
(the "Rights Plan") before the spin-off. Pursuant to the Rights Plan, one Right
(a "Right") will be issued and attached to each outstanding share of common
stock. Each Right will entitle its holder, under the circumstances described
below, to purchase from eLoyalty one one-hundredth of a share of its Series A
Junior Participating Preferred Stock, $0.01 par value, (the "Series A Preferred
Stock"), at an exercise price per Right determined by our board of directors (or
a committee of our board of directors) at the time of the spin-off, subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between eLoyalty and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent. The following description of the Rights is a
summary and is qualified in its entirety by reference to the Rights Agreement,
the form of which has been filed with the SEC as an exhibit to the registration
statement of which this information statement/prospectus is a part.
Initially, the Rights will be associated with the common stock and
evidenced by the common stock certificates, which will contain a notation
incorporating the Rights Agreement by reference. The Rights initially will be
transferred with and only with underlying shares of common stock. The Rights
will become exercisable and separately certificated only upon the "Distribution
Date," which will occur upon the earlier of:
- ten days following a public announcement that a person or group (an
"Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of % or more of the outstanding shares of
common stock then outstanding (the date of the announcement being the
"Stock Acquisition Date"); or
- ten business days (or later if determined by our board of directors prior
to any person becoming an Acquiring Person) following the commencement of
a tender offer or exchange offer that would result in a person or group
becoming an Acquiring Person.
Until the Distribution Date, the surrender for transfer of any shares of
common stock outstanding will also constitute the transfer of the Rights
associated with such shares.
As soon as practicable after the Distribution Date, separate certificates
for the Rights will be mailed to holders of record of common stock as of the
close of business on the Distribution Date. From and after the Distribution
Date, the separate certificates alone will represent the Rights. Except as
otherwise provided in the Rights Agreement, only shares of common stock issued
prior to the Distribution Date will be issued with Rights.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on January , 2010 unless earlier redeemed or
exchanged by eLoyalty as described below.
In the event (a "Flip-In Event") that a person or group becomes an
Acquiring Person, each holder of a Right (other than any Acquiring Person and
certain related parties, whose Rights will automatically become null and void)
will have the right to receive, upon exercise, common stock, or, in certain
circumstances, cash, property or other securities of eLoyalty, with a value
equal to two times the exercise price of the Right. The Rights may not be
exercised following a Flip-In Event while we have the ability to cause the
Rights to be redeemed. Our ability to redeem the Rights is described below.
For example, at an exercise price of $100 per Right, each Right not owned
by an Acquiring Person (or by certain related parties) following a Flip-In Event
would entitle its holder to purchase $200 worth of common stock (or other
consideration, as noted above) for $100. Assuming that the common stock had a
per share value of $50 at that time, the holder of each valid Right would be
entitled to purchase 4 shares of Common Stock for $100.
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In the event (a "Flip-Over Event") that, at any time following the Stock
Acquisition Date:
- we are acquired in a merger or other business combination in which it is
not the surviving entity,
- we are acquired in a merger or other business combination in which it is
the surviving entity and all or part of its common stock is converted
into or exchanged for securities of another entity, cash or other
property, or
- 50% or more of our assets or earning power is sold or transferred,
then each holder of a Right (except Rights which previously have been voided as
set forth above) will have the right to receive, upon exercise, common stock of
the acquiring company having a value equal to two times the exercise price of
the Right. Flip-In Events and Flip-Over Events are collectively referred to as
"Triggering Events."
The exercise price payable, and the number of shares of Series A Preferred
Stock or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution:
- in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock;
- if holders of the Series A Preferred Stock are granted certain rights,
options or warrants to subscribe for Series A Preferred Stock or
convertible securities at less than the current market price of the
Series A Preferred Stock; or
- upon the distribution to holders of the Preferred Stock of evidences of
indebtedness or assets (excluding regular periodic cash dividends) or of
subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the exercise price will be
required until cumulative adjustments amount to at least 1% of the then current
exercise price. No fractional shares of Series A Preferred Stock will be issued
and, in lieu thereof, an adjustment in cash will be made based on the market
price of the Series A Preferred Stock on the last trading day prior to the date
of exercise. We may require prior to the occurrence of a Triggering Event that,
upon any exercise of Rights, a number of Rights be exercised so that only whole
shares of Series A Preferred Stock will be issued.
We may redeem the Rights in whole, but not in part, at a price of $0.01 per
Right (subject to adjustment and payable in cash, common stock or other
consideration deemed appropriate by our board of directors) at any time until
ten days following the Stock Acquisition Date. Immediately upon the action of
our board of directors authorizing any redemption, the Rights will terminate and
the only right of the holders of Rights will be to receive the redemption price.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by that person or group of 50% or more of the outstanding
shares of common stock, eLoyalty may exchange the Rights (other than Rights
owned by that person or group which will have become void), in whole or in part,
at an exchange ratio of one share of common stock, or one one-hundredth of a
share of Series A Preferred Stock (or of a share of a class or series of our
preferred stock having equivalent rights, preferences and privileges), per Right
(subject to adjustment).
Until a Right is exercised, its holder, as such, will have no rights as a
stockholder of eLoyalty, including, without limitation, the right to vote or to
receive dividends. While the distribution of the Rights will not result in the
recognition of taxable income by our stockholders or us, stockholders may,
depending upon the circumstances, recognize taxable income after a Triggering
Event.
The terms of the Rights may be amended by our board of directors without
the consent of the holders of the Rights. The board of directors could, among
other things, lower the thresholds described above to the greater of 10% or
.001% more than the largest percentage of the outstanding shares of common stock
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then known to us to be beneficially owned by any person or group of affiliated
or associated persons. Once a person or group has become an Acquiring Person no
amendment can adversely affect the interests of the holders of the Rights.
The Rights will have certain antitakeover effects. The rights will cause
substantial dilution to any person or group who attempts to acquire a
significant interest in eLoyalty without advance approval from our board of
directors. As a result, the overall effect of the Rights may be to render more
difficult or discourage any attempt to acquire eLoyalty, even if the acquisition
would be in the interest of our stockholders. Because we can redeem the Rights,
the Rights will not interfere with a merger or other business combination
approved by our board of directors.
Section 203 of the DGCL. We are subject to Section 203 of the Delaware
General Corporation Law, an antitakeover law. In general, Section 203 prohibits
a publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. An "interested stockholder" is a person
who is the owner of 15% or more of the outstanding voting stock of the
corporation, or an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of the corporation at any time
within the three-year period immediately prior to the date on which it is sought
to be determined whether such person is an interested stockholder. The existence
of this provision may have an antitakeover effect with respect to transactions
not approved in advance by the board of directors of eLoyalty, including
discouraging attempts that might result in a premium over the market price for
the shares of common stock held by stockholders.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its stockholders to exempt itself from coverage, provided that such bylaw or
charter amendment shall not become effective until 12 months after the date it
is adopted. Neither the certificate of incorporation nor the bylaws of eLoyalty
contains any such exclusion.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
eLoyalty's certificate of incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for:
- breach of their duty of loyalty to the corporation or its stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of liability does not apply to liabilities arising under the
federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.
eLoyalty's bylaws provide that we will indemnify our directors and officers
to the fullest extent permitted by Delaware law, except that no indemnification
will be provided to a director, officer, employee or agent if the
indemnification sought is in connection with a proceeding initiated by such
person without the authorization of our board of directors. Our bylaws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any statute, provision of our certificate of
incorporation, bylaws, agreements, vote of stockholders or disinterested
directors or otherwise. Our bylaws also permit us to secure insurance on
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behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
bylaws permit such indemnification.
Our agreement with Sutter Hill Ventures and Technology Crossover Ventures,
pursuant to which we have agreed to sell them shares of our common stock, grants
each of Sutter Hill Ventures and Technology Crossover Ventures the right to
designate a nominee to our board of directors. The agreement also provides that
we will enter into indemnification agreements with these designees. We have not
yet entered into these indemnification agreements, but we expect to do so prior
to the spin-off.
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CERTAIN TRANSACTIONS
We have entered into a common stock purchase and sale agreement with Sutter
Hill Ventures and Technology Crossover Ventures. On June 22, 1999, the investors
agreed to purchase an aggregate of 2,400,000 shares of our common stock at $3.50
per share. That price was determined by the Board of Directors of TSC to be the
fair value of the eLoyalty common stock on that date. The agreement with the
investors provides that the proposed purchase of our common stock is subject to
the receipt of a private letter ruling from the IRS to the effect that the
spin-off will be tax-free to TSC and its stockholders for United States federal
income tax purposes and certain other customary conditions. The purchase and
sale of common stock to those investors was exempt from registration under
Section 4(2) of the Securities Act because the transactions did not involve a
public offering. The agreement with the investors contains the following
additional terms.
- If TSC receives a favorable private letter ruling from the IRS regarding
the spin-off and nevertheless fails to use commercially reasonable
efforts to complete the separation of the eLoyalty business operations
from TSC, TSC could become obligated to make a liquidated damages payment
of $1.2 million to the investors.
- If the investors purchase our common stock and the spin-off does not
occur by August 13, 2000, eLoyalty could become obligated to repurchase
such shares then held by the investors at a premium totaling $1.2 million
over the price paid by the investors for such shares.
Following the completion of the sale of our common stock to the investors,
each of Sutter Hill Ventures and Technology Crossover Ventures will have the
right to designate a nominee to our board of directors. We expect Sutter Hill
Ventures to nominate Tench Coxe as its designee on our board and Technology
Crossover Ventures to nominate Jay Hoag as its designee on our board. See
"eLoyalty's Management."
On November 12, 1998, TSC made a loan of $1,200,000 to Mr. Conway with a
five-year term that, to the extent not forgiven in whole or in part as described
below, is payable on demand upon the cessation of Mr. Conway's employment with
TSC or its affiliates. The loan bears interest at the rate of 4.5% per annum
and, so long as Mr. Conway remains employed by us or our affiliates, the 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 November 30, 1999, a total of $354,120 in principal and accrued
interest has been forgiven, and Mr. Conway's outstanding balance and accrued
interest under this note on that date was $902,029.50. On December 15, 1999, TSC
made an additional loan to Mr. Conway in the amount of $125,000. The note
representing this loan provides for an interest rate of 5.74% and a payment date
of March 1, 2000. We expect that the notes representing these loans will be
assigned to eLoyalty in connection with the separation of our business
operations from TSC.
The Board of Directors of eLoyalty intends to review and, if appropriate,
approve all material transactions between eLoyalty and its affiliates consistent
with the applicable provisions of Delaware law.
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eLOYALTY'S 2001 ANNUAL MEETING OF STOCKHOLDERS
The eLoyalty bylaws provide that an annual meeting of stockholders will be
held each year on a date specified by our board of directors. The first annual
meeting of eLoyalty stockholders after the distribution will be held on a date
determined by the eLoyalty board of directors, or, if the board does not set a
date, the first Thursday in May, 2001. We expect that our board of directors
will set May 3, 2001 as the date for this annual meeting. In order to be
considered for inclusion in eLoyalty's proxy materials for the 2001 annual
meeting of stockholders, any proposals by stockholders must be received at
eLoyalty's principal executive offices at 205 North Michigan Avenue, Suite 1500,
Chicago, Illinois 60601, within a reasonable time before eLoyalty begins to
print and mail its proxy materials for the meeting. eLoyalty anticipates
commencing the mailing of proxies for the 2001 annual meeting of stockholders on
or about March 16, 2001. In addition, stockholders at the eLoyalty 2001 annual
meeting may consider stockholder proposals or nominations brought by a
stockholder of record on the record date for the 2001 annual meeting, who is
entitled to vote at such annual meeting and who has complied with the advance
notice procedures established by the eLoyalty bylaws. A stockholder proposal or
nomination intended to be brought before the eLoyalty 2001 annual meeting must
be received by the Secretary of eLoyalty on or after January 23, 2001 and on or
prior to February 19, 2001. See "Description of eLoyalty Capital
Stock -- Antitakeover Effects -- Advance notice provisions for stockholder
nominations and stockholder proposals."
LEGAL MATTERS
The validity of our common stock to be distributed in the spin-off will be
passed upon for us by Sidley & Austin, Chicago, Illinois.
EXPERTS
The financial statements of eLoyalty Corporation as of December 31, 1998
and May 31, 1998 and 1997, for the seven month period ended December 31, 1998
and for each of the three years in the period ended May 31, 1998 included in
this information statement/prospectus have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in accounting and auditing.
The financial statements of The Bentley Group, Inc. for the period from
January 1, 1997 to May 31, 1997 included in this information
statement/prospectus has been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of NexCen Technologies, Inc. as of December 31,
1998 and for the period from July 17, 1998 (date of inception) to December 31,
1998 included in this information statement/prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
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ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the eLoyalty common stock to be distributed in
the spin-off. This information statement/ prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules filed with it. Although we have provided a summary of the material
terms of the contents of certain contracts, agreements and other documents, the
summary does not describe all of the details of the contracts, agreements and
other documents. In each instance where a copy of the contract, agreement or
other document has been filed as an exhibit to the registration statement,
please refer to the registration statement. Each statement in this information
statement/prospectus regarding a contract, agreement or other document is
qualified in all respects by such exhibit.
You may read and copy all or any portion of the registration statement at
the SEC's public reference room, located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of all or any part of the registration statement may be
obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon the payment of the fees prescribed by the SEC.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference room. The SEC maintains an Internet site at http://www.sec.gov, that
contains reports, proxy and information statements and other information
regarding registrants, such as TSC and eLoyalty, that file electronically with
the SEC. Following the spin-off, eLoyalty will be required to comply with the
reporting requirements of the Exchange Act and will file periodic reports, proxy
statements and other information with the SEC. These periodic reports, proxy
statements and other information will be available for inspection and copying at
the SEC's public reference room and the SEC's Internet site.
eLoyalty intends to furnish its stockholders with annual reports containing
consolidated financial statements (beginning with fiscal year 2000) audited by
independent accountants.
You should rely only on the information contained in this information
statement/prospectus and other documents referred to in this information
statement/prospectus. TSC and eLoyalty have not authorized anyone to provide you
with information that is different. This information statement/prospectus is
being furnished by TSC solely to provide information to TSC stockholders who
will receive eLoyalty common stock in the spin-off. It is not, and is not
construed as, an inducement or encouragement to buy or sell any securities of
TSC or eLoyalty. TSC and eLoyalty believe that the information presented herein
is accurate as of the date hereof. Changes will occur after the date hereof, and
neither TSC nor eLoyalty will update the information except to the extent
required in the normal course of their respective public disclosure practices
and as required pursuant to the federal securities laws.
eLoyalty maintains an Internet site at www.eloyaltyco.com. This website and
the information contained therein shall not be deemed to be incorporated into
this information statement/prospectus.
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INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ELOYALTY CORPORATION
Report of Independent Accountants........................... F-2
Combined Balance Sheets as of September 30, 1999
(unaudited), December 31, 1998, May 31, 1998 and 1997..... F-3
Combined Statements of Operations for the nine month periods
ended September 30, 1999 and 1998 (unaudited), the seven
month period from June 1, 1998 to December 31, 1998, the
seven month period from June 1, 1997 to December 31, 1997
(unaudited), and for each of the three years in the period
ended May 31, 1998........................................ F-4
Combined Statements of Cash Flows for the nine month periods
ended September 30, 1999 and 1998 (unaudited), the seven
month period from June 1, 1998 to December 31, 1998, the
seven month period from June 1, 1997 to December 31, 1997
(unaudited) and for each of the three years in the period
ended May 31, 1998........................................ F-5
Combined Statements of Changes in Stockholder's Equity and
Comprehensive Income (Loss) for the nine month period
ended September 30, 1999 (unaudited), the seven month
period ended December 31, 1998, and for each of the three
years in the period ended May 31, 1998.................... F-6
Notes to Combined Financial Statements...................... F-7
THE BENTLEY GROUP, INC.
Report of Independent Accountants........................... F-18
Statement of Operations and Accumulated Deficit for the
period from January 1, 1997 to May 31, 1997............... F-19
Statement of Cash Flows for the period from January 1, 1997
to May 31, 1997........................................... F-20
Notes to Financial Statements............................... F-21
NEXCEN TECHNOLOGIES, INC. (A DEVELOPMENT STAGE ENTERPRISE)
Report of Independent Accountants........................... F-24
Balance Sheet as of December 31, 1998....................... F-25
Statement of Operations for the period from July 17, 1998
(date of inception) to
December 31, 1998......................................... F-26
Statement of Stockholders' Deficit for the period from
July 17, 1998 (date of inception) to December 31, 1998.... F-27
Statement of Cash Flows for the period from July 17, 1998
(date of inception) to
December 31, 1998......................................... F-28
Notes to Financial Statements............................... F-29
SCHEDULES
Schedule II -- Valuation and Qualifying Accounts............ S-1
Report of Independent Accountants on Financial Statement
Schedule.................................................. S-2
</TABLE>
F-1
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
of eLoyalty Corporation
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of cash flows and of changes in stockholder's
equity and comprehensive income (loss) present fairly, in all material respects,
the financial position of eLoyalty Corporation (the "Company") at December 31,
1998 and May 31, 1998 and 1997, and the results of its operations and its cash
flows for the seven month period ended December 31, 1998, and for each of the
three years in the period ended May 31, 1998, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
September 10, 1999
Chicago, Illinois
F-2
<PAGE> 97
eLOYALTY CORPORATION
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MAY 31, MAY 31,
1999 1998 1998 1997
------------- ------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $10,654 $ 4,411 $ 4,726 $ 4,130
Marketable securities............................ 6,714 4,486 3,656 1,560
Receivables, net of allowances of $2,369
(unaudited), $2,638, $475 and $198............. 43,658 25,443 23,898 11,748
Deferred income taxes............................ 8,954 4,711 1,311 513
Prepaid expenses................................. 2,588 2,175 2,508 1,463
Other current assets............................. 867 1,021 966 835
------- ------- ------- -------
Total current assets................... 73,435 42,247 37,065 20,249
COMPUTERS, FURNITURE AND EQUIPMENT, NET.......... 2,035 1,581 1,432 245
GOODWILL......................................... 13,397 17,201 12,614 2,194
DEFERRED INCOME TAXES............................ 2,434 1,054 1,022 --
INVESTMENT....................................... -- 463 -- --
LONG-TERM RECEIVABLES AND OTHER.................. 1,491 1,358 1,985 1,500
------- ------- ------- -------
Total assets........................... $92,792 $63,904 $54,118 $24,188
======= ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................. $ 739 $ 994 $ 347 $ 768
Accrued compensation and related costs........... 11,056 7,304 6,528 3,054
Deferred compensation............................ 6,714 4,486 3,656 1,560
Other current liabilities........................ 2,994 3,232 2,694 1,361
------- ------- ------- -------
Total current liabilities.............. 21,503 16,016 13,225 6,743
------- ------- ------- -------
DEFERRED INCOME TAXES............................ -- -- -- 298
COMMITMENTS AND CONTINGENCIES.................... -- -- -- --
------- ------- ------- -------
STOCKHOLDER'S EQUITY:
Net advances from TSC............................ 71,439 48,475 41,241 17,420
Accumulated other comprehensive loss............. (150) (587) (348) (273)
------- ------- ------- -------
Total stockholder's equity............. 71,289 47,888 40,893 17,147
------- ------- ------- -------
Total liabilities and stockholder's
equity............................... $92,792 $63,904 $54,118 $24,188
======= ======= ======= =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
F-3
<PAGE> 98
ELOYALTY CORPORATION
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTH FOR THE SEVEN MONTH
PERIODS ENDED PERIODS FROM
SEPTEMBER 30, JUNE 1 TO DECEMBER 31, FOR THE YEARS ENDED MAY 31,
------------------- ----------------------------- ------------------------------
1999 1998 1998 1997 1998 1997 1996
-------- -------- ------------- ------------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES.......................... $107,652 $ 77,685 $ 64,415 $ 43,668 $ 84,488 $ 43,181 $ 26,516
Project personnel............... (52,586) (37,464) (31,302) (22,329) (41,329) (18,078) (11,674)
-------- -------- -------- -------- -------- -------- --------
REVENUES LESS PROJECT PERSONNEL... 55,066 40,221 33,113 21,339 43,159 25,103 14,842
-------- -------- -------- -------- -------- -------- --------
OTHER COSTS AND EXPENSES:
Sales and marketing............. 6,185 3,197 3,456 994 2,429 1,663 1,032
Research and development........ 3,599 2,231 2,889 1,393 2,383 1,689 46
General and administrative...... 22,554 18,912 16,438 10,641 20,216 11,539 5,559
TSC corporate services
allocation.................... 10,769 9,225 7,698 5,544 10,671 5,028 3,298
Equity in net loss of
unconsolidated investee....... 463 -- 412 -- -- -- --
Goodwill amortization........... 3,748 2,704 2,450 1,856 3,201 376 --
-------- -------- -------- -------- -------- -------- --------
47,318 36,269 33,343 20,428 38,900 20,295 9,935
-------- -------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS)........... 7,748 3,952 (230) 911 4,259 4,808 4,907
-------- -------- -------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Net investment income........... 83 56 116 39 68 15 --
Interest expense................ (55) (65) (31) (53) (92) -- --
-------- -------- -------- -------- -------- -------- --------
28 (9) 85 (14) (24) 15 --
-------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES........................... 7,776 3,943 (145) 897 4,235 4,823 4,907
INCOME TAX PROVISION.............. 3,690 1,929 398 562 2,022 1,897 1,857
-------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS)................. $ 4,086 $ 2,014 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050
======== ======== ======== ======== ======== ======== ========
Basic net income (loss) per common
share........................... $ 0.10 $ 0.05 $ (0.01) $ 0.01 $ 0.05 $ 0.07 $ 0.07
Diluted net income (loss) per
common share.................... $ 0.08 $ 0.04 $ (0.01) $ 0.01 $ 0.05 $ 0.06 $ 0.07
Shares used to calculate basic net
income (loss) per share (in
millions)....................... 41.4 41.4 41.4 41.4 41.4 41.4 41.4
Shares used to calculate diluted
net income (loss) per share (in
millions)....................... 48.5 46.5 41.4 45.8 46.8 46.6 45.5
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
F-4
<PAGE> 99
ELOYALTY CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTH FOR THE SEVEN MONTH
PERIODS ENDED PERIODS FROM FOR THE YEARS ENDED
SEPTEMBER 30, JUNE 1 TO DECEMBER 31, MAY 31,
------------------------- --------------------------- ----------------------------
1999 1998 1998 1997 1998 1997 1996
----------- ----------- ------------ ------------ -------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)................. $ 4,086 2,014 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050
Adjustments to reconcile net
income to net cash from
operating activities:
Depreciation and amortization... 4,987 3,946 3,509 2,275 3,874 617 60
Provisions for doubtful
receivables................... 1,395 1,285 2,652 577 531 453 272
Equity losses of unconsolidated
investee...................... 463 -- 412 -- -- -- --
Deferred income taxes........... (5,622) (2,045) (3,432) (1,330) (2,118) (315) (4,306)
Changes in assets and
liabilities:
Receivables................... (19,610) (13,443) (4,197) (3,441) (10,217) (3,453) (136)
Purchases of trading
securities related to
deferred compensation
program..................... (2,228) (1,426) (830) (1,275) (2,096) (799) (761)
Other current assets.......... (259) (2,265) 278 211 (1,079) (1,177) (531)
Accounts payable.............. (255) (47) 647 (1,076) (1,184) 229 467
Accrued compensation and
related costs............... 3,751 413 776 1,202 2,674 (217) 1,115
Deferred compensation funds
from employees.............. 2,228 1,426 830 1,275 2,096 799 761
Other current liabilities..... (239) 924 538 (2,983) (2,383) 1,335 1
Other assets.................. (133) (1,423) (11) (309) (815) (339) (1,270)
-------- -------- ------- -------- -------- ------- -------
Net cash (used in) provided
by operating activities... (11,436) (10,641) 629 (4,539) (8,504) 59 (1,278)
-------- -------- ------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Capital expenditures.............. (1,637) (1,829) (570) (607) (1,065) (182) (127)
Investment in unconsolidated
investee........................ -- -- (875) -- -- -- --
Acquired businesses............... -- (4,849) (6,625) (10,360) (10,741) (940) (1,367)
-------- -------- ------- -------- -------- ------- -------
Net cash used in investing
activities................ (1,637) (6,678) (8,070) (10,967) (11,806) (1,122) (1,494)
-------- -------- ------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Transfers from TSC................ 18,878 17,340 7,777 17,288 21,608 5,182 3,093
-------- -------- ------- -------- -------- ------- -------
Net cash provided by
financing activities...... 18,878 17,340 7,777 17,288 21,608 5,182 3,093
-------- -------- ------- -------- -------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS......... 438 (1,433) (651) (782) (702) (310) --
-------- -------- ------- -------- -------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................... 6,243 (1,412) (315) 1,000 596 3,809 321
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD......................... 4,411 5,130 4,726 4,130 4,130 321 --
-------- -------- ------- -------- -------- ------- -------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................ $ 10,654 $ 3,718 $ 4,411 $ 5,130 $ 4,726 $ 4,130 $ 321
======== ======== ======= ======== ======== ======= =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
F-5
<PAGE> 100
eLOYALTY CORPORATION
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME
(LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADVANCES OTHER
(TO) COMPREHENSIVE TOTAL
FROM INCOME STOCKHOLDER'S
TSC (LOSS) EQUITY
-------- ------------- -------------
<S> <C> <C> <C>
Balance, May 31, 1995..................................... $ 3,169 $ -- $ 3,169
------- ----- -------
Net income................................................ 3,050 -- 3,050
-------
Comprehensive income.................................... 3,050
Net transfers from TSC.................................... 3,093 -- 3,093
------- ----- -------
Balance, May 31, 1996..................................... 9,312 -- 9,312
------- ----- -------
Net income................................................ 2,926 -- 2,926
Foreign currency translation.............................. -- (273) (273)
-------
Comprehensive income.................................... 2,653
Net transfers from TSC.................................... 5,182 -- 5,182
------- ----- -------
Balance, May 31, 1997..................................... 17,420 (273) 17,147
------- ----- -------
Net income................................................ 2,213 -- 2,213
Foreign currency translation.............................. -- (75) (75)
-------
Comprehensive income.................................... 2,138
Net transfers from TSC.................................... 21,608 -- 21,608
------- ----- -------
Balance, May 31, 1998..................................... 41,241 (348) 40,893
------- ----- -------
Net loss.................................................. (543) -- (543)
Foreign currency translation.............................. -- (239) (239)
-------
Comprehensive loss...................................... (782)
Net transfers from TSC.................................... 7,777 -- 7,777
------- ----- -------
Balance, December 31, 1998................................ 48,475 (587) 47,888
------- ----- -------
Net income (unaudited).................................... 4,086 -- 4,086
Foreign currency translation (unaudited).................. -- 437 437
-------
Comprehensive income (unaudited)........................ 4,523
Net transfers from TSC (unaudited)........................ 18,878 -- 18,878
------- ----- -------
Balance, September 30, 1999 (unaudited)................... $71,439 $(150) $71,289
======= ===== =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of this financial information.
F-6
<PAGE> 101
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
NOTE 1 -- THE COMPANY
eLoyalty Corporation ("eLoyalty") is a leading global information
technology services company focused on providing enterprise-wide solutions
across all customer access channels, including the Internet, that are designed
to result in lasting and profitable customer relationships for its clients.
eLoyalty defines this new category of solutions as loyalty solutions. eLoyalty's
clients generally are located throughout the United States and in Europe, Canada
and Australia.
eLoyalty is currently a wholly owned subsidiary of Technology Solutions
Company ("TSC" or the "Parent"). On March 30, 1999, TSC announced its intention
to create a separate company comprised of the TSC business and operations that
now comprise eLoyalty, and the associated assets and liabilities of such
businesses and operations (the "Separation"). TSC also announced that it intends
to distribute to its shareholders, subject to certain conditions and consents,
all of TSC's remaining equity interest in eLoyalty ("Distribution").
eLoyalty and TSC will enter into, on or prior to the Separation, certain
agreements governing various interim and ongoing relationships between eLoyalty
and TSC after the completion of the anticipated Separation and subsequent
Distribution.
The financial information included herein may not necessarily reflect the
combined results of operations, financial position, changes in stockholder's
equity and cash flows of eLoyalty in the future or what they would have been had
it been a separate, stand-alone entity during the periods presented.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The combined financial statements reflect the
results of operations, financial position, changes in stockholder's equity and
cash flows of the businesses that will be transferred to eLoyalty from TSC in
the Separation (the "eLoyalty Businesses") as if eLoyalty were a separate entity
for all periods presented. The combined financial statements have been prepared
using the historical basis in the assets and liabilities and historical results
of operations related to the eLoyalty Businesses. Changes in stockholder's
equity represent the net income of eLoyalty plus net cash transfers to or from
TSC and the effects of foreign currency translation. All significant
intercompany transactions have been eliminated. Acquired businesses are included
in the results of operations since their acquisition dates. Investments in which
eLoyalty has the ability to exercise significant influence, but which it does
not control, are accounted for under the equity method of accounting.
Investments in which eLoyalty does not have the ability to exercise significant
influence are accounted for under the cost method of accounting.
Interim Financial Statements -- The accompanying interim combined balance
sheet as of September 30, 1999 and the combined statements of operations and
combined statements of cash flows for the nine months ended September 30, 1999
and 1998 and for the seven month period from June 1, 1997 to December 31, 1997
and the related notes have not been audited by independent accountants. However,
they have been prepared in conformity with the accounting principles stated in
the audited financial statements as of December 31, 1998 and include all
adjustments, which were of a normal and recurring nature, which in the opinion
of management are necessary to present fairly the financial position of eLoyalty
and results of operations and cash flows for the periods presented. The
operating results for the interim periods, consisting of the nine month periods
ended September 30, 1999 and 1998 and the seven month period from June 1, 1997
to December 31, 1997, are not necessarily indicative of results expected for the
full years of which the aforementioned interim periods are a part.
Fiscal Year Change -- On November 22, 1998, TSC's Board of Directors voted
to change the fiscal year of TSC from a fiscal year ending on May 31 in each
year to a calendar year ending on December 31
F-7
<PAGE> 102
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
in each year. The seven month transition period of June 1, 1998 through December
31, 1998 (transition period) precedes the start of the new fiscal year. The
unaudited financial information for the seven months ended December 31, 1997
(prior period) is presented for comparative purposes and includes any
adjustments (consisting of normal, recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation.
Revenue Recognition -- eLoyalty derives substantially all of its revenues
from professional services. eLoyalty provides professional services, including
support, primarily on a time and materials basis. Although eLoyalty occasionally
performs certain projects on a fixed fee basis, the total portion of combined
net revenues derived from fixed fee engagements is not significant. For time and
materials engagements, eLoyalty recognizes revenue as services are performed,
based on hourly billing rates. For fixed fee engagements, revenue is recognized
under the percentage-of-completion basis of accounting, based on the ratio of
costs incurred to total estimated costs. From time to time, eLoyalty uses
subcontractors to supplement its resources in client engagements. Revenue
generated through subcontractors is recognized based on the terms of the related
project (time and materials or fixed fee), and the related subcontractor costs
are included in project personnel expense as incurred. eLoyalty also derives
revenues from in-house developed software. Depending on the nature of the client
engagement, eLoyalty recognizes these software revenues using contract
accounting or as the product is shipped. To date, software revenues have not
exceeded 3% of total revenues for any period. Out-of-pocket expenses (travel,
lodging, etc.) charged on client engagements are presented net of amounts billed
to clients as general and administrative expense in the accompanying combined
statements of operations. Engagements are performed in phases. Losses on
engagements, if any, are reserved in full when determined.
Project Personnel Costs -- eLoyalty expenses the cost of project personnel
as incurred. Project personnel costs consist primarily of salaries, incentive
compensation and employee benefits for eLoyalty personnel available for client
assignments, and fees paid to subcontractors for work performed on client
projects.
Cash and Cash Equivalents -- eLoyalty considers all highly liquid
investments readily convertible into cash (with original maturities of three
months or less) to be cash equivalents. These short-term investments are carried
at cost plus accrued interest, which approximates market.
Marketable Securities -- eLoyalty's marketable securities consist of
investments related to TSC's executive deferred compensation plan (see Note 4)
and are classified as trading securities, with unrealized gains and losses
included in eLoyalty's combined statements of income. Realized gains or losses
are determined on the specific identification method.
Computers, Furniture and Equipment -- Computers, furniture and equipment
are carried at cost and depreciated on a straight-line basis over their
estimated useful lives. Useful lives generally are five years or less.
Goodwill -- Goodwill is amortized on a straight-line basis, typically over
a five-year period. Accumulated amortization of goodwill as of September 30,
1999, December 31, 1998, May 31, 1998 and 1997 was $9,752, $6,042, $3,573 and
$371, respectively.
Research and Development Costs -- Research and development costs are
expensed as incurred, except for costs incurred for the development of computer
software that will be sold. Research and development expenses relate primarily
to the dedicated research and development facility maintained by eLoyalty, and
consist primarily of salaries, incentive compensation and employee benefits
costs for dedicated personnel, occupancy costs, staff recruiting costs,
administrative costs, travel expenses and depreciation.
F-8
<PAGE> 103
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
Software Development Costs -- eLoyalty capitalizes software development
costs once technological feasibility is established and prior to general
release. Amortization is computed as the greater of the amount computed using
the (a) ratio of current revenues to the total current and anticipated future
revenues or (b) the straight-line method over the estimated economic life of the
product. Included in long-term receivables and other on eLoyalty's combined
balance sheets as of May 31, 1998 and 1997 are $447 and $801 of net software
development costs. There are no net software development costs included on
eLoyalty's combined balance sheet in any other period presented. Amortization
expense associated with software development costs was $447, $354 and $110 for
the seven month transition period ended December 31, 1998 and the fiscal years
ended May 31, 1998 and 1997, respectively. There was no amortization expense of
software development costs during the fiscal year ended May 31, 1996.
Stockholder's Equity -- Stockholder's equity includes amounts transferred
from TSC primarily for operations and working capital requirements, offset by
cash collected by TSC. The balances are primarily the result of eLoyalty's
participation in TSC's central cash management system, wherein all of eLoyalty's
domestic cash receipts are collected by TSC and all domestic cash disbursements
are funded by TSC. Other transactions include the Company's share of TSC's
combined income tax liability and other administrative expenses incurred by TSC
on behalf of eLoyalty. Such amounts do not have repayment terms and do not bear
interest.
Earnings (Loss) Per Common Share -- In December 1999, eLoyalty issued 41.4
million shares to TSC. Basic earnings per share have been computed by dividing
the net income/(loss) for each period presented by the 41.4 million shares.
Diluted net earnings per share was computed by dividing the net income/(loss)
for each period presented by the 41.4 million shares plus the estimated effect
of dilutive stock options using the "treasury stock" method. See Note 8, "Stock
Options" for a discussion of stock options.
Foreign Currency Translation -- All assets and liabilities of foreign
subsidiaries are translated to U.S. dollars at end of period exchange rates. The
resulting translation adjustments are recorded as a component of stockholder's
equity. Income and expense items are translated at average exchange rates
prevailing during the period. Gains and losses from foreign currency
transactions of these subsidiaries are included in the combined statements of
income. The functional currencies for eLoyalty's foreign subsidiaries are their
local currencies.
Fair Value of Financial Instruments -- The carrying values of current
assets and liabilities and long-term receivables approximated their fair values
at September 30, 1999, December 31, 1998, May 31, 1998 and 1997, respectively.
Concentration of Credit Risk -- No client accounted for 10 percent or more
of revenues during the nine-month period ended September 30, 1999, the
transition period ended December 31, 1998, fiscal 1998 or fiscal 1997. During
fiscal 1996, one customer accounted for 21 percent of revenues. No client
accounted for 10 percent or more of gross accounts receivables as of December
31, 1998, May 31, 1998 or May 31, 1997.
Stock-Based Compensation -- eLoyalty accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations.
Income Taxes -- Historically, eLoyalty's results have been included in
TSC's consolidated federal and state income tax returns. The income tax
provision is calculated and deferred tax assets and liabilities are recorded as
if eLoyalty had operated as an independent entity. eLoyalty uses an asset and
liability
F-9
<PAGE> 104
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
approach to financial accounting and reporting for income taxes. Deferred income
taxes are provided when tax laws and financial accounting standards differ with
respect to the amount of income for a year and the basis of assets and
liabilities. eLoyalty does not provide U.S. deferred income taxes on earnings of
foreign subsidiaries which are expected to be indefinitely reinvested.
New Accounting Standards -- On June 15, 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," is effective for fiscal years
beginning after June 15, 2000 (January 1, 2001 for eLoyalty). SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. eLoyalty anticipates that the adoption of SFAS No. 133
will not have a significant effect on eLoyalty's results of operations or its
financial position.
Estimates and Assumptions -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 3 -- ACQUISITIONS/INVESTMENTS
In June 1997, eLoyalty acquired The Bentley Group, Inc., (Bentley), a
business and operations consulting firm. Total consideration aggregated $17.5
million, including cash of $12.0 million, 44,303 shares of TSC Common Stock and
stock options. Goodwill of approximately $18.1 million resulted from the Bentley
acquisition and is being amortized over five years.
In February 1997, eLoyalty acquired Geising International, a German-based
business consulting firm. Total consideration aggregated $1.4 million, including
cash of $1.0 million and 37,962 shares of TSC's Common Stock. Goodwill of
approximately $1.0 million resulted from the Geising International acquisition
and is being amortized over five years.
In May 1996, eLoyalty acquired Aspen Consultancy Ltd., (Aspen). Aspen is a
United Kingdom-based consulting firm. Total cash consideration aggregated $3.4
million. Goodwill of approximately $3.5 million resulted from the Aspen
acquisition and is being amortized over a five year period.
These acquisitions have been accounted for under the purchase method and
accordingly their results have been included in eLoyalty's results since the
date of acquisition.
During 1998, eLoyalty invested in NexCen Technologies, Inc. (NexCen), a
development stage enterprise. eLoyalty's investment in NexCen is comprised of
both Series A redeemable convertible preferred stock ("Series A Stock") and
warrants to purchase Series A Stock at an exercise price of $.01 per share
("Warrants").
Each share of Series A Stock in convertible into common stock at the option
of eLoyalty under a formula which currently results in a 1-for-1 conversion
rate. Each share of Series A Stock is entitled to the number of votes equal to
that number of shares of common stock into which shares of Series A Stock can be
converted. Assuming the conversion of all of the Series A Stock and Warrants
into common stock,
F-10
<PAGE> 105
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
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 equity method of accounting. Notwithstanding
the fact that eLoyalty does not own any of the common stock of NexCen, eLoyalty
has recorded 60 percent of NexCen's losses. NexCen, which was incorporated in
July, 1998, has funded its operating losses solely through the sale of the
Series A Stock and Warrants. The recording of 60 percent of the losses
represents eLoyalty's share of NexCen's total Series A Stock and Warrants.
For the period from July 17, 1998 (date of inception) to December 31, 1998,
NexCen had no revenues, a $704 operating loss and a $684 net loss. Summarized
balance sheet information of NexCen at December 31, 1998 is as follows:
<TABLE>
<S> <C>
Current assets.............................................. $1,070
Noncurrent assets........................................... 58
Current liabilities......................................... 187
Redeemable stock............................................ $1,640
</TABLE>
NOTE 4 -- RELATED PARTY TRANSACTIONS
Employees of eLoyalty are eligible to participate in the TSC 401(k) Savings
Plan (the "Plan"). The Plan allows employees to contribute up to 15 percent of
their annual compensation, subject to Internal Revenue Service statutory
limitations. Contributions to the Plan are made at the discretion of TSC and the
related expense is allocated to eLoyalty based on the actual employees covered.
Plan expense allocated to eLoyalty by TSC totaled $794 in the nine-month period
ended September 30, 1999, $487 in the seven-month period ended December 31, 1998
and $470 and $336 in the years ended May 31, 1998 and 1997, respectively.
eLoyalty participates in TSC's nonqualified executive deferred compensation
plan. All eLoyalty executives (defined as Vice Presidents and above) are
eligible to participate in this voluntary program which permits participants to
elect to defer receipt of a portion of their compensation. Deferred
contributions and investment earnings are payable to participants upon various
specified events, including retirement, disability or termination. The
accompanying combined balance sheets include the deferred compensation
liability, including investment earnings thereon, owed to participants. The
accompanying combined balance sheets also include eLoyalty's portion of the
investments, classified as trading securities, purchased by TSC with the
deferred funds. These investments remain assets of eLoyalty and are available to
the general creditors of eLoyalty in the event of eLoyalty's insolvency.
eLoyalty intends to implement a similar plan subsequent to the Distribution.
Project expenses have been recorded on an individual project basis. The
financial statements include expenses which have been allocated to eLoyalty by
TSC on a specific identification basis. Further, eLoyalty shares certain
employees and other resources with TSC. Allocations from TSC for indirect
expenses for such shared resources have been made primarily on a proportional
cost allocation method based on revenues and headcount. Management believes
these allocations are reasonable and that such expenses would not have differed
materially had eLoyalty operated on a stand-alone basis for all periods
F-11
<PAGE> 106
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
presented. Such allocations of general corporate overhead expenses are included
in eLoyalty's combined statement of operations as follows:
<TABLE>
<CAPTION>
FOR THE NINE FOR THE SEVEN MONTH
MONTH PERIODS ENDED PERIODS FROM JUNE 1
SEPTEMBER 30, TO DECEMBER 31, FOR THE YEARS ENDED MAY 31,
------------------- --------------------------- ----------------------------
1999 1998 1998 1997 1998 1997 1996
-------- -------- ------------ ------------ -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and marketing.............. $ 795 $ 1,005 $ 731 $ 405 $ 972 $ 586 $ 633
Other corporate services
allocation..................... 10,769 9,225 7,698 5,544 10,671 5,028 3,298
------- ------- ------ ------ ------- ------ ------
Total allocated general
corporate overhead.... $11,564 $10,230 $8,429 $5,949 $11,643 $5,614 $3,931
------- ------- ------ ------ ------- ------ ------
</TABLE>
On November 12, 1998, TSC made a loan of $1,200 to Mr. Conway with a
five-year term that, to the extent not forgiven in whole or in part as described
below, is payable on demand upon the cessation of Mr. Conway's employment with
TSC or its affiliates. The loan bears interest at the rate of 4.5% per annum
and, so long as Mr. Conway remains employed by eLoyalty, the principal amount of
the loan (and interest accrued thereon) will be forgiven over a five-year period
as follows: 25% of the principal amount on November 12, 1999; $25 in principal
per month for the next twelve months; $20 in principal per month for the next
twenty-four months; and $10 in principal per month for the next twelve months.
The amounts forgiven will be reflected as a compensation expense. Mr. Conway's
outstanding balance and accrued interest as of September 30, 1999 was $1,248. It
is expected that the note representing this loan will be assigned to eLoyalty.
NOTE 5 -- RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
AS OF AS OF AS OF MAY 31,
SEPTEMBER 30, DECEMBER 31, -----------------
1999 1998 1998 1997
------------- ------------ ------- -------
<S> <C> <C> <C> <C>
Amounts billed to clients........................ $38,356 $23,737 $20,712 $ 7,518
Engagements in process........................... 7,671 4,344 3,661 4,428
------- ------- ------- -------
46,027 28,081 24,373 11,946
Receivable allowances............................ (2,369) (2,638) (475) (198)
------- ------- ------- -------
$43,658 $25,443 $23,898 $11,748
======= ======= ======= =======
</TABLE>
Amounts billed to clients represent professional fees and reimbursable
project-related expenses. Engagements in process represent unbilled professional
fees and project costs such as out-of-pocket expense, materials and
subcontractor costs. Amounts billed to clients are unsecured and primarily due
within 30 days.
F-12
<PAGE> 107
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
NOTE 6 -- COMPUTERS, FURNITURE AND EQUIPMENT
Computers, furniture and equipment consist of the following:
<TABLE>
<CAPTION>
AS OF AS OF AS OF MAY 31,
SEPTEMBER 30, DECEMBER 31, ---------------
1999 1998 1998 1997
------------- ------------ ------- -----
<S> <C> <C> <C> <C>
Computers and software............................ $ 3,415 $ 2,486 $ 1,835 $ 547
Furniture and equipment........................... 1,464 756 743 27
------- ------- ------- -----
4,879 3,242 2,578 574
Accumulated depreciation.......................... (2,844) (1,661) (1,146) (329)
------- ------- ------- -----
$ 2,035 $ 1,581 $ 1,432 $ 245
======= ======= ======= =====
</TABLE>
Depreciation expense was $1,183, $773, $421, $308, $131 and $60 for the
nine month periods ended September 30, 1999 and 1998, the transition period
ended December 31, 1998 and for the fiscal years ended May 31, 1998, 1997, and
1996, respectively.
NOTE 7 -- INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE SEVEN MONTH
PERIOD FROM
JUNE 1 TO FOR THE YEARS ENDED MAY 31,
DECEMBER 31, ---------------------------
1998 1998 1997 1996
------------------- ------- ------- -------
<S> <C> <C> <C> <C>
Current:
Federal................................ $(1,929) $ 115 $1,427 $1,655
State.................................. (275) 16 204 236
Foreign................................ (830) (227) (49) --
------- ------ ------ ------
Total current.................. (3,034) (96) 1,582 1,891
------- ------ ------ ------
Deferred:
Federal................................ 1,941 1,357 256 (30)
State.................................. 277 194 37 (4)
Foreign................................ 1,214 567 22 --
------- ------ ------ ------
Total deferred................. 3,432 2,118 315 (34)
------- ------ ------ ------
Provision for income taxes............... $ 398 $2,022 $1,897 $1,857
======= ====== ====== ======
</TABLE>
F-13
<PAGE> 108
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
Total income tax provision differed from the amount computed by applying
the federal statutory income tax rate to income from continuing operations due
to the following:
<TABLE>
<CAPTION>
FOR THE SEVEN MONTH
PERIOD FROM
JUNE 1 TO FOR THE YEARS ENDED MAY 31,
DECEMBER 31, ---------------------------
1998 1998 1997 1996
------------------- ------- ------- -------
<S> <C> <C> <C> <C>
Federal tax (benefit) provision, at
statutory rate........................... $(50) $1,475 $1,688 $1,718
State tax (benefit) provision, net of
Federal benefit........................ (6) 211 241 245
Effect of foreign tax rate differences... 303 34 (58) --
Nondeductible expenses................... 61 96 48 51
Nondeductible goodwill................... 170 172 150 --
Other.................................... (80) 34 (172) (157)
---- ------ ------ ------
Income tax provision..................... $398 $2,022 $1,897 $1,857
==== ====== ====== ======
</TABLE>
Deferred tax assets and liabilities were comprised of the following:
<TABLE>
<CAPTION>
AS OF AS OF MAY 31,
DECEMBER 31, ------------------
1998 1998 1997
------------ ------- ------
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation and bonuses....................... $1,794 $ 1,462 $ 624
Equity losses of unconsolidated investee................ 215 -- --
Receivable allowances................................... 844 197 187
Other accruals.......................................... 743 464 252
Net operating loss...................................... 1,803 -- --
Depreciation and amortization........................... 1,054 1,277 22
------ ------- ------
Total deferred tax assets....................... 6,453 3,400 1,085
------ ------- ------
Deferred tax liabilities:
Prepaid expenses........................................ (688) (812) (550)
Capitalized software development costs.................. -- (255) (320)
------ ------- ------
Total deferred tax liabilities.................. (688) (1,067) (870)
------ ------- ------
Net deferred tax asset.................................. $5,765 $ 2,333 $ 215
====== ======= ======
</TABLE>
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
FOR THE SEVEN MONTH
PERIOD FROM
JUNE 1 TO FOR THE YEARS ENDED MAY 31,
DECEMBER 31, ----------------------------
1998 1998 1997 1996
------------------- ------ ------ ------
<S> <C> <C> <C> <C>
United States.............................. $(164) $3,781 $4,527 $4,907
Foreign.................................... 19 454 296 --
----- ------ ------ ------
Total............................ $(145) $4,235 $4,823 $4,907
===== ====== ====== ======
</TABLE>
F-14
<PAGE> 109
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
NOTE 8 -- STOCK OPTIONS
As of the Distribution, each outstanding option to purchase TSC common
stock held by a person who will be an employee or director of eLoyalty
immediately after the Distribution (and who will not also be a director of TSC)
will be converted into a substitute option to purchase eLoyalty common stock.
The conversion of the options will be done in such a manner that (1) the
aggregate intrinsic value of the options immediately before and after the
exchange are the same, (2) the ratio of the exercise price per option to the
market value per option is not reduced, and (3) the vesting provisions and
option period of the replacement options are the same as the original vesting
terms and option period. The substitute option will take into account all
employment with both TSC and eLoyalty for purposes of determining when the
option becomes exercisable and when it terminates. All other terms of the
substitute option will be the same as the current TSC option.
Each outstanding nonqualified TSC option granted before June 22, 1999 to a
person who will continue as an employee or director of TSC after the
Distribution, or who will not be an employee or director of either TSC or
eLoyalty after the Distribution, will be converted into both an adjusted TSC
option and a substitute eLoyalty option. The conversion of the options will be
done in such a manner that (1) the aggregate intrinsic value of the options
immediately before and after the exchange are the same, (2) the ratio of the
exercise price per option to the market value per option is not reduced, and (3)
the vesting provisions and option period of the replacement options are the same
as the original vesting terms and option period. Employment with TSC will be
taken into account in determining when each substitute eLoyalty option becomes
exercisable and when it terminates, and in all other respects will be
substantially the same as the existing TSC option.
Each outstanding nonqualified TSC option granted after June 21, 1999 to a
person who will continue as an employee or director of TSC after the
Distribution, or who will not be an employee or director of either TSC or
eLoyalty after the Distribution, will continue solely as an option to purchase
shares of TSC common stock.
Each TSC option that is an incentive stock option, within the meaning of
Section 422 of the Code, will be converted into an incentive stock option to
purchase the stock of the corporation with which the optionee is employed
immediately after the Distribution. These options will be converted based on the
relative trading prices of the stock purchasable under the option before and
after the Distribution, and will preserve both the intrinsic value of the option
and the ratio of the exercise price to the fair market value of the stock.
In June of 1999, eLoyalty's shareholder approved the 1999 eLoyalty Stock
Incentive Plan (the "Plan") for eLoyalty's directors, officers, employees and
key advisors. The total number of shares of eLoyalty common stock initially
reserved for issuance under the Plan is 5,340,000. Awards granted under the Plan
are at the discretion of the Compensation Committee of eLoyalty's board of
directors (or, prior to the Distribution, the Compensation Committee of the TSC
board of directors) (the "Compensation Committee), and may be in the form of
incentive or nonqualified stock options. These options have a maximum term of 10
years. Upon adoption of the Plan, the Compensation Committee granted options to
purchase 4,824,000 shares of eLoyalty's common stock to eLoyalty employees and
certain employees of TSC who are instrumental to eLoyalty's operations up to and
including the Distribution. These options have a ten-year term and 1/3 of these
options vest on the second anniversary of the grant date and the remaining 2/3
vest ratably on a monthly basis over the next two years. As the $3.50 exercise
price of these options is equal to the then fair market value of the underlying
eLoyalty common stock, no compensation expense was recognized in accordance with
APB 25.
F-15
<PAGE> 110
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
Pro forma net earnings and earnings per share information, as required by
SFAS No. 123, "Accounting for Stock-Based Compensation," has been determined as
if TSC had accounted for employee stock options granted to eLoyalty employees
under the fair value method prescribed by SFAS No. 123. The fair value of these
options was estimated at grant date using the Black-Scholes option pricing model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
FOR THE
SEVEN MONTH
PERIOD ENDED FOR THE YEARS ENDED MAY 31,
DECEMBER 31, ---------------------------------------
1998 1998 1997 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Expected volatility........... 43.6%-49.8% 41.9%-44.1% 40.9%-51.4% 50.6%-52.0%
Risk-free interest rates...... 4.1%-5.6% 5.3%-6.5% 5.3%-6.8% 5.3%-6.4%
Expected lives................ 4.5 years 4.5 years 4.5 years 4.5 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of options
is amortized over the four-year average vesting period of the options. The pro
forma effect of recognizing compensation expense in accordance with SFAS No. 123
would have been to reduce eLoyalty's reported net earnings by $2,031 in the
seven-month period ended December 31, 1998, and $2,713, $1,275 and $366 in the
years ended May 31, 1998, 1997 and 1996, respectively.
NOTE 9 -- SEGMENT INFORMATION
eLoyalty operates as a single reportable segment. The following is revenue
and long-lived asset information by geographic area as of and for the nine month
period ended September 30, 1999, the transition period ended December 31, 1998
and the fiscal years ended May 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
UNITED EUROPE AND COMBINED
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 STATES CANADA AUSTRALIA TOTAL
- -------------------------------------------------- ------- ------ ---------- --------
<S> <C> <C> <C> <C>
Revenues.......................................... $83,392 $5,801 $18,459 $107,652
Identifiable Assets............................... $62,258 $3,645 $26,889 $ 92,792
</TABLE>
<TABLE>
<CAPTION>
UNITED EUROPE AND COMBINED
FOR THE SEVEN MONTH PERIOD FROM JUNE 1 TO DECEMBER 31, 1998 STATES CANADA AUSTRALIA TOTAL
- ----------------------------------------------------------- ------- ------ ---------- --------
<S> <C> <C> <C> <C>
Revenues.............................................. $50,139 $3,729 $10,547 $ 64,415
Identifiable Assets................................... $42,715 $3,300 $17,889 $ 63,904
</TABLE>
<TABLE>
<CAPTION>
UNITED COMBINED
FOR THE YEAR ENDED MAY 31, 1998 STATES CANADA EUROPE TOTAL
- ------------------------------- ------- ------ ---------- --------
<S> <C> <C> <C> <C>
Revenues.......................................... $61,882 $6,296 $16,310 $ 84,488
Identifiable Assets............................... $34,711 $3,008 $16,399 $ 54,118
</TABLE>
<TABLE>
<CAPTION>
UNITED COMBINED
FOR THE YEAR ENDED MAY 31, 1997 STATES CANADA EUROPE TOTAL
- ------------------------------- ------- ------ ---------- --------
<S> <C> <C> <C> <C>
Revenues.......................................... $30,346 $1,963 $10,872 $ 43,181
Identifiable Assets............................... $11,068 $2,598 $10,522 $ 24,188
</TABLE>
F-16
<PAGE> 111
ELOYALTY CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS)
(INFORMATION PRESENTED AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIODS
ENDED
SEPTEMBER 30, 1999 AND 1998 AND FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31,
1997 IS UNAUDITED)
<TABLE>
<CAPTION>
UNITED COMBINED
FOR THE YEAR ENDED MAY 31, 1996 STATES CANADA EUROPE TOTAL
- ------------------------------- ------- ------ ---------- --------
<S> <C> <C> <C> <C>
Revenues.......................................... $26,516 $ -- $ -- $ 26,516
Identifiable Assets............................... $10,381 $ -- $ 3,627 $ 14,008
</TABLE>
Foreign revenue is based on the country in which eLoyalty's operations are
domiciled.
NOTE 10 -- COMMITMENTS
eLoyalty leases various office facilities under operating leases expiring
at various dates through July 31, 2004. Additionally, eLoyalty leases various
property and office equipment under operating leases expiring at various dates.
Rental expense for all operating leases approximated $789, $524, $469, $738,
$133 and $0 for the nine month periods ended September 30, 1999 and 1998, the
transition period ended December 31, 1998 and for the fiscal years ended May 31,
1998, 1997, and 1996, respectively. Future minimum rental commitments under
noncancelable operating leases with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
CALENDAR YEAR AMOUNT
- ------------- ------
<S> <C>
1999....................................................... $1,047
2000....................................................... 570
2001....................................................... 404
2002....................................................... 221
2003....................................................... 47
------
$2,289
======
</TABLE>
eLoyalty had no capital leases as of December 31, 1998.
NOTE 11 -- LITIGATION
eLoyalty is not a party to any material legal proceedings.
NOTE 12 -- SUBSEQUENT EVENTS
On June 22, 1999, certain venture capital investors agreed to purchase an
aggregate of 2.4 million shares of eLoyalty common stock at $3.50 per share.
Such purchase is subject to the receipt of a private letter ruling from the IRS
to the effect that the spin-off will be tax-free to TSC and its stockholders for
United States Federal income tax purposes and certain other customary
conditions. If those venture capital investors purchase shares of eLoyalty
common stock and the spin-off does not occur by August 13, 2000, eLoyalty could
become obligated to repurchase such shares at a premium totalling $1.2 million
over the price paid by the venture capital investors for such shares. Because
these shares may be repurchased prior to the spin-off, eLoyalty will classify
these shares as redeemable common stock until the spin-off occurs. In addition,
each of the venture capital investors has the right to designate a nominee to
the eLoyalty Board of Directors.
As part of the agreement the venture capital investors purchased 500,000
shares of TSC common stock at $9.013 per share (the average last reported sales
price for the ten days ending June 25, 1999).
F-17
<PAGE> 112
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
of eLoyalty Corporation:
In our opinion, the accompanying statements of operations and accumulated
deficit and of cash flows for the period from January 1, 1997 to May 31, 1997,
present fairly, in all material respects, the results of operations and cash
flows of The Bentley Group, Inc. for the period from January 1, 1997 to May 31,
1997, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
December 21, 1999
F-18
<PAGE> 113
THE BENTLEY GROUP, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
(IN THOUSANDS)
FOR THE PERIOD FROM JANUARY 1, 1997 TO MAY 31, 1997
<TABLE>
<S> <C>
Revenue..................................................... $4,630
------
Operating expenses:
Project personnel......................................... 3,079
Selling and marketing..................................... 352
General and administrative................................ 1,165
------
Total operating expenses............................... 4,596
------
Income from operations................................. 34
Interest expense............................................ 94
Other expense............................................... 16
------
Net loss and comprehensive loss........................ $ (76)
======
Accumulated deficit at January 1, 1997...................... $ (247)
Net loss.................................................. (76)
Distribution to stockholders.............................. (2)
------
Accumulated deficit at May 31, 1997......................... $ (325)
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE> 114
THE BENTLEY GROUP, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE PERIOD FROM JANUARY 1, 1997 TO MAY 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss............................................... $(76)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation......................................... 68
Loss on disposal of fixed assets..................... 16
Amortization of deferred debt issuance costs......... 17
Changes in assets and liabilities:
Accounts receivable............................... (294)
Other current assets.............................. (31)
Accounts payable.................................. 170
Accrued expenses.................................. 24
Deferred revenues................................. (106)
----
Net cash used in operating activities............. (212)
----
Cash flows from investing activities:
Purchases of property and equipment....................... (133)
Increase in other assets.................................. (32)
----
Net cash used in investing activities..................... (165)
----
Cash flows from financing activities:
Borrowings................................................ 411
Payments under capital lease obligations.................. (32)
Distribution to stockholders.............................. (2)
----
Net cash provided by financing activities................. 377
----
Net change in cash.......................................... --
Cash, beginning of period................................... --
----
Cash, end of period......................................... $ --
====
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................... $ 76
Supplement disclosure of noncash investing activities:
Acquisition of assets under capital lease obligations..... $116
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE> 115
THE BENTLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(1) OPERATIONS
The Bentley Group, Inc. (the Company) was founded in 1988. The Company is a
consulting and systems integration organization specializing in customer service
and support. The Company provides consulting services, system implementation and
integration, information services and other solutions for all facets of customer
services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue from consulting services is recognized on a time and materials
basis as the services are performed or, for fixed price contracts, upon the
completion of certain project milestones. Deferred revenue represents amounts
collected by the Company in advance of services performed or the completion of
certain milestones.
DEPRECIATION AND AMORTIZATION
The Company provides for depreciation using the straight-line method by
charges to operations in amounts that allocate the cost of property and
equipment over their estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSETS CLASSIFICATION USEFUL LIFE
- --------------------- ------------------
<S> <C>
Computer equipment and software............................ 3-5 years
Office equipment........................................... 3-5 years
Capital lease assets....................................... Life of lease
Vehicles................................................... 3 years
Leasehold improvements..................................... Life of lease, or
useful life,
whichever is less
Furniture and fixtures..................................... 3-7 years
</TABLE>
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, requires disclosure of
any significant off-balance-sheet and credit risk concentration. The Company has
no significant off-balance-sheet concentration of credit risk such as foreign
currency exchange contracts or other hedging arrangements. Financial instruments
that subject the Company to credit risk consist of accounts receivable. To
reduce risk, the Company routinely assesses the financial strength of its
customers and, as a consequence, believes that its accounts receivable credit
risk exposure is limited. The Company maintains an allowance for potential
credit losses but has not experienced any significant losses related to
individual customers or groups of customers in any particular industry or
geographic area. For the period from January 1, 1997 to May 31, 1997, one
customer represented 24% of total revenues.
F-21
<PAGE> 116
THE BENTLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(3) INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
federal or state income taxes on its taxable income. Instead, the stockholders
are liable for the individual federal and state income taxes on their respective
share of the Company's taxable income. Pro forma results reflecting the
treatment of the Company as a tax paying entity are not included since the
Company incurred a net loss.
(4) STOCK OPTION PLAN
The Company maintains an incentive stock option plan (the Plan), which
allows for the granting of options to purchase up to 300 shares of the Company's
common stock. The Plan provides for incentive stock options to be granted to
employees and directors of the Company. The option price, which is determined by
the Board of Directors, may not be less than the fair market value of the stock
on the date of grant. The terms of exercise of the options are determined by the
Board of Directors and are not to exceed ten years (five years for 10% or
greater stockholders). A summary of all stock option activity for the period
from January 1, 1997 through May 31, 1997 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Options at January 1, 1997.................................. 216 $1.26
Granted................................................... 42 4.73
--- -----
Options Outstanding at May 31, 1997......................... 258 $1.82
=== =====
Options Exercisable at May 31, 1997......................... 91 $1.20
=== =====
</TABLE>
The weighted average grant date fair value of options granted during the
period was $1.29.
In connection with the renewal of its line of credit in December 1996, the
Company issued warrants to purchase 30 shares of its common stock to a bank. The
warrants are immediately exercisable and have an exercise price of $3.00 per
share. The fair value of the warrants issued to the bank was determined to total
$30, and is being recorded as interest expense through September 30, 1997, which
represents the expiration of the related line of credit facility.
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value of stock options, including stock purchase plans,
or warrants granted to nonemployees and employees to be included in the
statement of operations or disclosed in the notes to financial statements. The
Company has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
elect the disclosure-only alternative under SFAS No. 123. The Company has
computed the pro forma disclosures required under SFAS No. 123 for options and
warrants granted in 1997, 1996 and 1995 using the Black-Scholes options pricing
model prescribed by SFAS No. 123. The weighted average assumptions used for
options and warrants granted in 1997 are:
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
Risk-free interest rate..................................... 6.47%-6.72%
Expected dividend yield..................................... --
Expected life............................................... 6.5 years
Expected volatility......................................... .01%
</TABLE>
F-22
<PAGE> 117
THE BENTLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
Had the Company accounted for stock-based compensation using the fair value
approach permitted by SFAS No. 123, an additional $19 of compensation expense
would have been recognized during the period from January 1, 1997 to May 31,
1997.
The resulting pro forma compensation expense may not be representative of
the amount to be expected in future years as pro forma compensation expense may
vary based on the number of options and warrants granted.
(5) RELATED-PARTY TRANSACTION
The Company has a note payable due to a stockholder, which matured on
December 31, 1997 and bears interest at a rate of 9% per annum. At May 31, 1997,
the unpaid principal balance on the note was $60.
(6) LINE OF CREDIT
During 1996, the Company entered into a $2,000 line-of-credit agreement
with a bank. The first $1.0 million of borrowings under the line bear interest
at the bank's prime rate plus 1.0%. Borrowings in excess of $1.0 million bear
interest at the bank's prime rate plus 2.0%. At May 31, 1997, there was
approximately $1,673 outstanding under the line-of-credit agreement.
(7) 401(k) RETIREMENT PLAN
The Company maintains a qualified 401(k) retirement plan (the 401(k) Plan).
The 401(k) Plan covers substantially all employees who have satisfied a
three-month service requirement and have attained the age of 21. The 401(k) Plan
provides for an optional Company contribution for any plan year at the Company's
discretion. The Plan provides for immediate vesting of Company contributions.
There were no Company contributions to the plan for the period from January 1,
1997 through May 31, 1997.
(8) SUBSEQUENT EVENT
In June 1997, Technology Solutions Company acquired the Company.
F-23
<PAGE> 118
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of NexCen Technologies, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of NexCen Technologies, Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
period from July 17, 1998 (date of inception) to December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 20, 1999
F-24
<PAGE> 119
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,068
Prepaid and other current assets.......................... 2
------
Total current assets.............................. 1,070
Property and equipment, net (Note C)........................ 58
------
Total assets...................................... $1,128
======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
WARRANTS AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 45
Related party payable..................................... 125
Accrued expenses.......................................... 17
------
Total current liabilities......................... 187
------
Commitments and contingencies (Note D)
Series A redeemable convertible preferred stock, $.01 par
value, 909 shares authorized; 318 shares issued and
outstanding at (liquidation preference $890) (Note E)..... 890
Warrants -- Series A redeemable convertible preferred stock
(Note E).................................................. 750
------
Total redeemable convertible preferred stock and
warrants........................................ 1,640
------
Stockholders' deficit:
Common stock $.01 par value, 3,000 shares authorized; 770
shares issued and outstanding (Note F)................. 8
Receivable for sale of stock.............................. (8)
Deficit accumulated during the development stage.......... (699)
------
Total stockholders' deficit....................... (699)
------
Total liabilities, redeemable convertible
preferred stock and warrants and stockholders'
deficit......................................... $1,128
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE> 120
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
(IN THOUSANDS)
FOR THE PERIOD FROM JULY 17, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
Marketing expenses.......................................... $ (80)
General and administrative expenses......................... (218)
Research and development expenses........................... (406)
-----
Loss from operations........................................ (704)
Interest income............................................. 20
Net loss and comprehensive loss............................. (684)
-----
Accrued dividends on Series A redeemable preferred stock.... (15)
Net loss attributable to common stockholders................ $(699)
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 121
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
FOR THE PERIOD FROM JULY 17, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK RECEIVABLE TOTAL
--------------- FOR SALE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT OF STOCK DEFICIT DEFICIT
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at July 17, 1998................. $ --
Common stock issued...................... 770 $8 $(8) --
Accrued dividends........................ $ (15) (15)
Net loss................................. (684) (684)
--- -- --- ----- -----
Balance at December 31, 1998............. 770 $8 $(8) $(699) $(699)
=== == === ===== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 122
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE PERIOD FROM JULY 17, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<S> <C>
Operating activities:
Net loss.................................................. $ (684)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation......................................... 12
Changes in operating assets and liabilities:
Prepaid and other assets........................... (2)
Accounts payable................................... 45
Related party payable.............................. 125
Accrued expenses................................... 17
------
Net cash used by operating activities....................... (487)
------
Investment activities:
Purchase of property and equipment........................ (70)
------
Financing activities:
Proceeds from issuance of redeemable preferred stock...... 875
Proceeds from issuance of preferred stock warrants........ 750
------
Net cash provided by financing activities................... 1,625
------
Net increase in cash and cash equivalents................... 1,068
Cash and cash equivalents at beginning of year.............. --
------
Cash and cash equivalents at end of year.................... $1,068
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE> 123
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
A. NATURE OF BUSINESS:
NexCen Technologies (a development stage enterprise) (the "Company"), was
incorporated in the State of Delaware on July 17, 1998. The Company is
developing customer relationship management software (CRM) that enables,
simplifies and tracks business-to-business transactions through the internet and
the telephone expenses.
The Company is subject to risks common to companies in the industry
including, but not limited to, new technological innovations, dependence on key
personnel, protection of proprietary technology, compliance with government
regulations, uncertainty of market acceptance of products and the need to obtain
additional financing.
The accompanying financial statements have been prepared on a basis which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The Company has generated no
revenues through December 31, 1998 and expects continued future losses. The
Company will require additional financing to continue its planned operations
beyond 1999. Management believes the Company has the ability to raise such
financing.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
The Company considers investments with maturities of 90 days or less at the
time of acquisition to be cash equivalents. At December 31, 1998, cash and cash
equivalents includes cash on deposit and investments in money market type mutual
funds.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated depreciation.
Expenditures for repairs and maintenance are charged to expense as incurred.
When assets are retired or disposed of, the assets and related accumulated
depreciation are eliminated from accounts and any resulting gain or loss is
reflected in income. Depreciation is calculated using the straight line method
over the estimated useful lives of the assets, which are as follows:
<TABLE>
<S> <C>
Computer equipment and software............................. 1-3 years
Office equipment............................................ 3 years
</TABLE>
RESEARCH AND DEVELOPMENT COSTS
Costs related to research, design and development of computer software are
charged to expense when incurred. Upon the establishment of technological
feasibility, eligible costs will be capitalized.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
F-29
<PAGE> 124
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) -- (CONTINUED)
RISKS AND UNCERTAINTIES
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of money market funds. The
Company maintains substantially all of its money market funds with one banking
institution.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and contingent
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
C. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at December 31, 1998:
<TABLE>
<S> <C>
Computer equipment and software............................. $45
Office equipment............................................ 25
---
Total property and equipment.............................. 70
Less accumulated depreciation............................... 12
---
Property and equipment, net................................. $58
===
</TABLE>
D. COMMITMENTS AND CONTINGENCIES:
LEASE OBLIGATIONS
The Company leases office facilities leases. The facilities lease includes
tax and operating expense escalation clauses. Rental expense for operating
leases was $12 for the year ended December 31, 1998. Future annual payments
under operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASE
---------
<S> <C>
1999........................................................ $34
2000........................................................ 1
---
$35
===
</TABLE>
E. REDEEMABLE PREFERRED STOCK:
On August 28, 1998, the Company issued 318 shares at $2.75 per share of
Series A redeemable convertible preferred stock ("Series A Stock") for proceeds
of $875. Each share of Series A Stock is convertible into common stock at the
option of the holder under a formula which currently results in a 1-for-1
conversion rate. Each share of Series A Stock automatically converts into shares
of common stock under a formula, at the closing of an initial public offering
with an offering price of not less than $5.50 per share and gross proceeds of
not less than $10,000. An equivalent number of common shares is reserved for
conversion.
Each holder of a share of Series A Stock is entitled to the number of votes
equal to that number of shares of common stock into which such shares of Series
A Stock can be converted.
Each holder of Series A Stock is entitled to dividends at a cumulative rate
of five percent (5%) per year compounded annually before any dividends are paid
to common stockholders. These dividends
F-30
<PAGE> 125
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) -- (CONTINUED)
accumulate from the date of issue and are payable to holders on dates determined
by the Board. Accrued dividends at December 31, 1998 totaled $15.
The holders of the Series A Stock have preference as to the assets of the
Company upon liquidation in an amount equal to $2.75 per share, plus an amount
equal to all declared but unpaid dividends and a pro rata share of the remaining
assets on an as-converted basis.
The holders of the Series A Stock have the option to redeem for cash all or
any portion of the outstanding shares on or after August 28, 2005, at a
redemption price of $2.75 per share plus accrued and unpaid dividends whether or
not earned or declared.
In connection with the Series A Stock, the Company issued stock purchase
warrants to a holder of the Series A Stock for proceeds of $750, granting the
warrant-holder the right to purchase 279 shares of redeemable convertible
preferred stock of the Corporation at an exercise price of $.01 per share. The
warrants are exercisable beginning February 28, 1999 and expire August 28, 2015.
The warrants are recorded as redeemable securities on the balance sheet.
F. COMMON STOCK:
The Company issued a total of 770 shares of common stock in 1998 to the
four founders of the Company. Of this total, 220 shares were pursuant to
restricted stock agreements where the founders may not sell, transfer, or
dispose of the restricted shares of common stock prior to vesting of such stock.
The vesting period begins at date of issue and occurs over four years with 25%
vesting at the end of year one. The Company has a receivable related to this
issuance of $8.
G. INCOME TAXES:
The Company's deferred income taxes as of December 31, 1998 were as
follows:
<TABLE>
<S> <C>
Deferred income taxes assets:
Net operating losses...................................... $ 270
Other..................................................... 6
Tax credit carryforwards.................................. 4
-----
Net total deferred income tax assets........................ 280
Valuation allowance......................................... (280)
-----
Net deferred income taxes................................... $ --
=====
</TABLE>
At December 31, 1998, the Company has available net operating loss
carryforwards for federal and state tax purposes of approximately $671 which
begin to expire in 2018 and 2003, respectively. The Company also has available
research and experimental credit carryforwards to offset future federal income
taxes of approximately $4 which begin to expire in 2013. Under the provisions of
the Internal Revenue Code, certain substantial changes in NexCen's ownership may
have limited, or may limit in the future, the amount of net operating loss and
research and development tax credit carryforwards which could be used annually
to offset future taxable income and income tax liability. The amount of any
annual limitation is determined based upon NexCen's value prior to an ownership
change.
Management of the Company has evaluated the positive and negative evidence
bearing upon the realizability of its deferred tax assets, which are comprised
principally of net operating loss carryforwards. Due to the uncertainty of the
ability to use the net operating losses in the future, management has recorded a
full valuation allowance.
F-31
<PAGE> 126
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) -- (CONTINUED)
H. STOCK OPTION PLAN:
On August 26, 1998, the Board of Directors adopted the Stock Incentive Plan
(the "Plan"). The Plan enables the Company to grant options to purchase common
stock and restricted stock awards to employees, members of the Board of
Directors, and consultants of the Company. Stock options entitle the holder to
purchase common stock from the Company, for a specified exercise price, during a
period specified by the applicable option agreement. Generally, the options vest
over four years. The options expire on the date determined by the Board of
Directors, not to exceed 10 years following the date of the grant. The total
number of shares of common stock which may be issued under the Plan is 230. This
number can be increased by a Board resolution, subject to the approval of the
shareholders. All options granted to date vest over four years and expire ten
years from the date of the grant.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------
WEIGHTED
AVERAGE
OPTIONS SHARES EXERCISE PRICE
- ------- ------ --------------
<S> <C> <C>
Outstanding of beginning of period.......................... -- --
Granted..................................................... 52 $0.22
Exercised................................................... -- --
Cancelled................................................... -- --
-- -----
Outstanding at December 31, 1998............................ 52 $0.22
== =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE PRICE
- ------------------------ -------------- ----------- ---------
<S> <C> <C> <C>
$0.10 -- 0.30......................................... 52,000 9.77 years $0.22
</TABLE>
There were no options exercisable at December 31, 1998.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related Interpretations in
accounting for the Plan and accordingly no compensation expense has been
recorded for options issued to employees since the option exercise prices were
set by the Board of Directors at the estimated fair market value at the date of
the grant.
Pursuant to the requirements of SFAS 123 the Company has estimated the
value of its stock options by applying a present value approach which does not
consider expected volatility of the underlying stock ("minimum value method")
using an assumed risk free interest rate of 4.67% and an assumed life of six
years and no expected dividends for the year ended December 31, 1998.
The pro forma compensation charge results of applying the SFAS 123
calculation did not have a material effect on the results of operations as
reported for the year ended December 31, 1998.
I. RELATED PARTIES:
The Company entered into a software license agreement with one of its
investors and owes the investor $125. This amount is included in accounts
payable as of December 31, 1998. This agreement has been subsequently amended as
described in footnote J.
F-32
<PAGE> 127
NEXCEN TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION) -- (CONTINUED)
J. SUBSEQUENT EVENTS:
On January 26, 1999 the Company adopted an employee benefit plan under
Section 401(k) of the Internal Revenue Code covering substantially all
employees. The plan allows employees to make contributions up to a specified
percentage of their compensation. The Company has not made any contributions to
the Plan to date.
In September 1999, the Company renegotiated its license agreement with one
of its investors (Note I). The Company entered into a $100 promissory note
maturing on August 15, 2014 which replaced the payable due at December 31, 1998
of $125. In addition to the promissory note, the Company entered an amended
royalty payment schedule based on the future software sales by the Company.
In September 1999, the Company entered into three Demand Convertible
Promissory Notes for a total of $500 plus interest of prime plus 2%. In
addition, warrants to purchase common stock were issued at $.30 per share. The
number of shares is determined as twenty percent of the value of the notes plus
accrued and unpaid interest divided by the per share price of the next round of
financing. If the next round of financing does not occur prior to March 1, 2000,
the notes and warrants convert to Series A Preferred Stock at $2.75 per share.
F-33
<PAGE> 128
ELOYALTY CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1998
AND FOR THE YEARS ENDED MAY 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DESCRIPTION OF BEGINNING END OF
ALLOWANCE AND RESERVES OF YEAR ADDITIONS DEDUCTIONS YEAR
---------------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
May 31, 1996
Valuation allowances and receivable reserves for
potential losses................................... $ 48 $ 272 $(136) $ 184
May 31, 1997
Valuation allowances and receivable reserves for
potential losses................................... $184 $ 453 $(439) $ 198
May 31, 1998
Valuation allowances and receivable reserves for
potential losses................................... $198 $ 531 $(254) $ 475
December 31, 1998
Valuation allowances and receivable reserves for
potential losses................................... $475 $2,652 $(489) $2,638
</TABLE>
S-1
<PAGE> 129
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholder
of eLoyalty Corporation:
Our audits of the combined financial statements of eLoyalty Corporation
referred to in our report dated September 10, 1999, appearing in this Form S-1
also included an audit of the financial statement schedule appearing on page S-1
of this Form S-1. In our opinion, this financial statement schedule present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related combined financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
September 10, 1999
S-2
<PAGE> 130
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the
Registrant in connection with the securities being registered. All amounts are
estimates except the SEC registration fee and The Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 20,096
Nasdaq National Market Listing Fee.......................... *
Printing Costs.............................................. *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
Blue Sky Fees and Expenses.................................. *
Transfer Agent and Registrar Fees........................... *
Miscellaneous............................................... *
--------
Total............................................. *
========
</TABLE>
- ---------------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
Delaware corporation to indemnify any persons who are, or are threatened to be
made, parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person was an officer or director of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe his
conduct was illegal. A Delaware corporation may indemnify officers and directors
in an action by or in the right of the corporation under the same conditions,
except that no indemnification is permitted without judicial approval if the
officer or director is adjudged to be liable to the corporation in the
performance of his duty. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director actually and reasonably incurred.
The company's bylaws provide that it will indemnify its directors and
officers to the fullest extent permitted by Delaware law, except that no
indemnification will be provided to a director, officer, employee or agent if
the indemnification sought is in connection with a proceeding initiated by such
person without the authorization of the board of directors. The bylaws also
provide that the right of directors and officers to indemnification shall be a
contract right and shall not be exclusive of any other right now possessed or
hereafter acquired under any statute, provision of the Certificate of
Incorporation, bylaws, agreements, vote of stockholders or disinterested
directors or otherwise. The bylaws also permit the company to secure insurance
on behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
bylaws permit such indemnification.
In accordance with Section 102(b)(7) of the DGCL, the company's amended
Certificate of Incorporation provides that directors shall not be personally
liable for monetary damages for breaches of their fiduciary duty as directors
except for (i) breaches of their duty of loyalty to the company or its
stockholders, (ii) acts of omissions not in good faith or which involve
intentional misconduct or knowing
II-1
<PAGE> 131
violations of law, (iii) certain transactions under Section 174 of the DGCL
(unlawful payment of dividends or unlawful stock purchases or redemptions) or
(iv) transactions from which a director derives an improper personal benefit.
The effect of this provision is to eliminate the personal liability of directors
for monetary damages for actions involving a breach of their fiduciary duty of
care, including any actions involving gross negligence.
The company has directors' and officers' liability insurance which
provides, subject to certain policy limits, deductible amounts and exclusions,
coverage for all persons who have been, are or may in the future be, directors
or officers of the company, against amounts which such persons may pay resulting
from claims against them by reason of their being such directors or officers
during the policy period for certain breaches of duty, omissions or other acts
done or wrongfully attempted or alleged. Such policies provide coverage to
certain situations where the company cannot directly provide indemnification
under the DGCL.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
We have entered into a common stock purchase and sale agreement with Sutter
Hill Ventures and Technology Crossover Ventures. On June 22, 1999, the investors
agreed to purchase an aggregate of 2,400,000 shares of our common stock at $3.50
per share. The agreement with the investors provides that the proposed purchase
of our common stock is subject to the receipt of a private letter ruling from
the IRS to the effect that the spin-off will be tax-free to TSC and its
stockholders for United States federal income tax purposes and certain other
customary conditions. The purchase and sale of common stock to those investors
was exempt from registration under Section 4(2) of the Securities Act because
the transactions did not involve a public offering.
In December 1999, we issued to TSC an aggregate of 41,400,000 shares of our
common stock for an aggregate consideration of $414,000. The purchase and sale
of our common stock to TSC was exempt from registration under Section 4(2) of
the Securities Act because the transaction did not involve a public offering.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
2.1 Form of Reorganization Agreement between TSC and eLoyalty
3.1 Certificate of Incorporation of eLoyalty, as amended
3.2 Bylaws of eLoyalty
4.1 Form of Rights Agreement between eLoyalty and ChaseMellon
Shareholder Services, L.L.C. as Rights Agent
5* Opinion of Counsel
10.1 1999 Stock Incentive Plan and Amendment Number One
10.2 1999 Employee Stock Purchase Plan
10.3 Common Stock Purchase and Sale Agreement dated August 13,
1999 among TSC, eLoyalty, Sutter Hill Ventures, TCV III
(GP), TCV III, L.P., TCV III (Q), L.P. and TCV III Strategic
Partners, L.P.
10.4 Registration Rights Agreement dated August 13, 1999 among
TSC, Sutter Hill Ventures, TCV III (GP), TCV III, L.P., TCV
III (Q), L.P. and TCV III Strategic Partners, L.P.
10.5 Form of Shared Services Agreement between TSC and eLoyalty
10.6 Form of Tax Sharing and Disaffiliation Agreement between TSC
and eLoyalty
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
</TABLE>
II-2
<PAGE> 132
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
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
21 Subsidiaries of eLoyalty
23.1 Consent of PricewaterhouseCoopers LLP, Chicago, Illinois,
Independent Accountants
23.2 Consent of PricewaterhouseCoopers LLP, Boston Massachusetts,
Independent Accountants
23.2* Consent of Counsel (included in Exhibit 5)
27 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 133
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on January 7, 2000.
ELOYALTY CORPORATION
By: /s/ KELLY D. CONWAY
----------------------------------
Kelly D. Conway
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ KELLY D. CONWAY Director, President and Chief January 7, 2000
- ----------------------------------------------------- Executive Officer (principal
Kelly D. Conway executive officer)
/s/ TIMOTHY J. CUNNINGHAM Chief Financial Officer January 7, 2000
- ----------------------------------------------------- (principal financial officer
Timothy J. Cunningham and principal accounting
officer)
Director, Interim Chairman of
- ----------------------------------------------------- the Board of Directors
John T. Kohler
Director
- -----------------------------------------------------
Michael J. Murray
/s/ JOHN R. PURCELL Director January 7, 2000
- -----------------------------------------------------
John R. Purcell
/s/ MICHAEL R. ZUCCHINI Director January 7, 2000
- -----------------------------------------------------
Michael R. Zucchini
</TABLE>
II-4
<PAGE> 1
Exhibit 2.1
REORGANIZATION AGREEMENT
DATED AS OF [ ]
BY AND BETWEEN
TECHNOLOGY SOLUTIONS COMPANY
AND
eLOYALTY CORPORATION
<PAGE> 2
TABLE OF CONTENTS
PAGE
ARTICLE I - DEFINITIONS AND INTERPRETATION...................................-2-
1.1. Definitions................................................-2-
1.2. Interpretation.............................................-9-
ARTICLE II - THE DISTRIBUTION...............................................-10-
2.1. Issuance and Delivery of eLoyalty Shares..................-10-
2.2. Distribution of eLoyalty Shares...........................-10-
2.3. TSC Board Action..........................................-11-
2.4. Additional Approvals......................................-11-
ARTICLE III - FORMATION OF ELOYALTY/CORPORATE GOVERNANCE....................-11-
3.1. Certificate of Incorporation of eLoyalty..................-11-
3.2. By-laws...................................................-11-
3.3. Election of Board of Directors............................-11-
3.4. Appointment of Officers...................................-12-
3.5. Capital Stock of eLoyalty.................................-12-
3.6. Name Reservations and Registrations.......................-12-
3.7. Foreign Qualifications....................................-12-
3.8. Corporate Seal............................................-12-
3.9. Adoption of Stockholders Rights Plan......................-12-
ARTICLE IV - ASSET SEPARATION...............................................-13-
4.1. Transfer of Assets........................................-13-
4.2. Assumption of Liabilities.................................-16-
4.3. Retained Assets...........................................-17-
4.4. Retained Liabilities......................................-18-
4.5. Termination of Existing Intercompany Agreements...........-18-
4.6. Shared Contracts..........................................-18-
ARTICLE V - ASSET SEPARATION CLOSING MATTERS................................-19-
5.1. Delivery of Instruments of Conveyance.....................-19-
5.2. Delivery of Other Agreements..............................-19-
5.3. Provision of Corporate Records............................-19-
ARTICLE VI - NO REPRESENTATIONS AND WARRANTIES..............................-19-
ARTICLE VII - CERTAIN COVENANTS.............................................-20-
7.1. Third Party Consents......................................-20-
7.2. Material Governmental Approvals and Consents..............-20-
7.3. Non-Assignable Contracts..................................-20-
7.4. Novation of Assumed Liabilities...........................-21-
<PAGE> 3
7.5. Further Assurances........................................-21-
7.6. Nominee Shares............................................-22-
7.7. Collection of Accounts Receivable.........................-23-
7.8. Election of eLoyalty Board of Directors...................-23-
7.9. Late Payments.............................................-23-
7.10. Registration and Listing..................................-23-
7.11. No Noncompetition; Nonhiring; Nonsolicitation.............-24-
7.12. Litigation................................................-24-
7.13. eLoyalty Bank Accounts....................................-25-
7.14. Signs; Use of Company Name................................-25-
7.15. Reasonable Efforts........................................-25-
7.16. Use of Transferred Intellectual Property..................-26-
ARTICLE VIII - CONDITIONS TO THE DISTRIBUTION...............................-26-
8.1. Approval by TSC Board of Directors........................-26-
8.2. Receipt of IRS Private Letter Tax Ruling..................-26-
8.3. Compliance with State and Foreign Securities
and "Blue Sky" Laws.......................................-26-
8.4. SEC Filings and Approvals.................................-26-
8.5. Filing and Effectiveness of Registration Statement;
No Stop Order.............................................-27-
8.6. Dissemination of Information to TSC Stockholders..........-27-
8.7. Approval of NASDAQ Listing Application....................-27-
8.8. Receipt of Viability and Fairness Opinion of
Financial Advisor.........................................-27-
8.9. Operating Agreements......................................-27-
8.10. Resignations..............................................-27-
8.11. Consents..................................................-27-
8.12. No Actions................................................-28-
8.13. Consummation of Pre-Distribution Transactions.............-28-
8.14. No Other Events...........................................-28-
8.15. Satisfaction of Conditions................................-28-
ARTICLE IX - EMPLOYEES AND EMPLOYEE BENEFIT MATTERS.........................-28-
9.1. Employment of eLoyalty Employees..........................-28-
9.2. Severance.................................................-28-
9.3. Withdrawal from Participation in TSC Plans
and Establishment of eLoyalty Plans.......................-29-
9.4. Transfer of Savings Plan Account Balances.................-29-
9.5. Welfare Benefits Provided Under eLoyalty Plans............-29-
9.6. Stock Purchase Plans......................................-30-
9.7. Deferred Compensation Plan................................-30-
9.8. Stock Options.............................................-31-
9.9. Workers' Compensation.....................................-32-
9.10. WARN Act..................................................-32-
9.11. Information to be Provided to TSC.........................-32-
ARTICLE X - INSURANCE MATTERS...............................................-32-
<PAGE> 4
10.1. Insurance Prior to the Distribution Date..................-32-
10.2. Ownership of Existing Policies and Programs...............-33-
10.3. Procurement of Insurance for eLoyalty.....................-33-
10.4. Acquisition and Maintenance of Post-Distribution eLoyalty
Insurance Policies and Programs...........................-33-
10.5. eLoyalty Directors' and Officers' Insurance...............-34-
10.6. Post-Distribution Insurance Claims Administration.........-34-
10.7. Non-Waiver of Rights to Coverage..........................-35-
10.8. Scope of Affected Policies of Insurance...................-35-
ARTICLE XI - EXPENSES.......................................................-35-
11.1. Allocation of Expenses....................................-35-
ARTICLE XII - INDEMNIFICATION...............................................-36-
12.1. Release of Pre-Distribution Claims........................-36-
12.2. Indemnification by eLoyalty...............................-38-
12.3. Indemnification by TSC....................................-39-
12.4. Applicability of and Limitation on Indemnification........-40-
12.5. Adjustment of Indemnifiable Losses........................-40-
12.6. Procedures for Indemnification of Third Party Claims......-41-
12.7. Procedures for Indemnification of Direct Claims...........-43-
12.8. Contribution..............................................-44-
12.9. Remedies Cumulative.......................................-44-
12.10. Survival..................................................-44-
ARTICLE XIII - DISPUTE RESOLUTION...........................................-44-
13.1. Agreement to Arbitrate....................................-44-
13.2. Escalation and Mediation..................................-45-
13.3. Procedures for Arbitration................................-45-
13.4. Selection of Arbitrator...................................-46-
13.5. Hearings..................................................-47-
13.6. Discovery and Certain Other Matters.......................-47-
13.7. Certain Additional Matters................................-48-
13.8. Continuity of Service and Performance.....................-49-
13.9. Law Governing Arbitration Procedures......................-49-
13.10. Choice of Forum............................................-49-
ARTICLE XIV - ACCESS TO INFORMATION AND SERVICES............................-49-
14.1. Agreement for Exchange of Information.....................-49-
14.2. Ownership of Information..................................-50-
14.3. Compensation for Providing Information....................-50-
14.4. Retention of Records......................................-50-
14.5. Limitation of Liability...................................-50-
14.6. Production of Witnesses...................................-50-
14.7. Confidentiality...........................................-51-
<PAGE> 5
14.8. Privileged Matters........................................-51-
ARTICLE XV - MISCELLANEOUS..................................................-52-
15.1. Entire Agreement..........................................-52-
15.2. Choice of Law and Forum...................................-53-
15.3. Amendment.................................................-53-
15.4. Waiver....................................................-53-
15.5. Partial Invalidity........................................-53-
15.6. Execution in Counterparts.................................-53-
15.7. Successors and Assigns....................................-53-
15.8. Third Party Beneficiaries.................................-54-
15.9. Notices...................................................-54-
15.10. Performance...............................................-55-
15.11. Force Majeure.............................................-55-
15.12. No Public Announcement....................................-55-
15.13. Termination...............................................-55-
<PAGE> 6
EXHIBITS
Exhibit A - eLoyalty Business
Exhibit B1 - Form of TSC Intellectual Property License Agreement
Exhibit B2 - Form of eLoyalty Intellectual Property License Agreement
Exhibit C - Form of Shared Services Agreement
Exhibit D - Form of Tax Sharing and Disaffiliation Agreement
Exhibit E - Stockholder Rights Plan
Exhibit F - Balance Sheet Assets
Exhibit G - eLoyalty Board of Directors
Exhibit H - List of Mediators
SCHEDULES
Schedule 4.1(d) - Real Estate Leases
Schedule 4.1(e) - Personal Property Leases
Schedule 4.1(f) - Intellectual Property
Schedule 4.1(g)(i) - Contracts Related to Acquisitions or Divestitures
Schedule 4.1(g)(ii) - Service, License, Maintenance and Support Contracts
Schedule 4.1(g)(iii) - Supplier Contracts
Schedule 4.1(g)(iv) - Joint Development and Alliance Contracts
Schedule 4.1(g)(v) - Third-Party Service Contracts
Schedule 4.1(g)(vi) - Telecommunications Contracts
Schedule 4.1(j) - Subsidiaries, Joint Ventures and Minority Interests
Schedule 4.1(m) - Trademarks
Schedule 4.1(n) - Loans to Transferred Employees
Schedule 4.1(o) - Industry Awards
Schedule 4.5 - Surviving Intercompany Agreements
Schedule 7.13 - eLoyalty Bank Accounts
Schedule 9.1 - Transferred Employees
<PAGE> 7
REORGANIZATION AGREEMENT
REORGANIZATION AGREEMENT, dated as of [________], 2000, by and
between Technology Solutions Company, a Delaware corporation ("TSC"), and
eLoyalty Corporation, a Delaware corporation ("eLoyalty") and, as of the date
hereof, a wholly-owned Subsidiary (as hereinafter defined) of TSC.
WHEREAS, TSC provides, inter alia, information technology
consulting and strategic business consulting services that help clients improve
operations, transform customer relationships and build and enhance customer
loyalty (as more fully described in Exhibit A hereto, the "eLoyalty Business");
WHEREAS, the Board of Directors of TSC has determined that it
would be advisable and in the best interests of TSC and its stockholders for TSC
to transfer to eLoyalty the business, operations, assets and liabilities related
to the eLoyalty Business;
WHEREAS, TSC has agreed to transfer and assign, or cause to be
transferred and assigned, to eLoyalty substantially all of the assets and
properties of the eLoyalty Business held by TSC and/or one or more of its
Subsidiaries, and eLoyalty has agreed to assume, or cause to be assumed by one
or more of its Subsidiaries, certain liabilities and obligations arising out of
or relating to the eLoyalty Business (collectively, the "Contribution");
WHEREAS, the Board of Directors of TSC has determined that it
would be advisable and in the best interests of TSC and its stockholders for TSC
to distribute on a pro-rata basis to the holders of record of TSC common stock,
par value $.01 per share (the "TSC Common Stock"), without any consideration
being paid by such holders, all of the outstanding shares of eLoyalty common
stock, par value $.01 per share (the "eLoyalty Common Stock") owned directly and
indirectly by TSC (the "Distribution");
WHEREAS, for federal income tax purposes, the Contribution and
Distribution are intended to qualify for tax-free treatment under Sections 355
and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code");
and
WHEREAS, it is appropriate and desirable to set forth the
principal corporate transactions required to effect the Contribution and
Distribution and certain other agreements that will govern the relationship of
TSC and eLoyalty following the Distribution;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, TSC and eLoyalty
agree as follows:
<PAGE> 8
ARTICLE I
DEFINITIONS AND INTERPRETATION
1.1. DEFINITIONS. In this Agreement, the following terms
have the meanings specified or referred to in this Section 1.1:
"ACTION" means any action, claim, suit, arbitration, inquiry,
subpoena, discovery request, proceeding or investigation by or before any court
or grand jury, any governmental or other regulatory or administrative entity,
agency or commission or any arbitration tribunal.
"AFFILIATE" means, with respect to any Person, any other
Person that directly or indirectly controls, is controlled by or is under common
control with such Person. For the purpose of this definition, the term "control"
means the power to direct the management of an entity, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the term "controlled" has the meaning correlative to the foregoing. After
the Distribution Date, eLoyalty and TSC shall not be deemed to be under common
control for purposes hereof due solely to the fact that eLoyalty and TSC have
common stockholders.
"APPLICABLE DEADLINE" has the meaning specified in Section
13.3(b).
"ARBITRATION ACT" means the United States Arbitration Act, 9
U.S.C. ss.ss.1-16, as the same may be amended from time to time.
"ARBITRATION DEMAND DATE" has the meaning specified in Section
13.3(a).
"ARBITRATION DEMAND NOTICE" has the meaning specified in
Section 13.3(a).
"ASSET TRANSFER DATE" means the date determined by the Board
of Directors of TSC as the date on which the Transferred Assets are transferred
to eLoyalty.
"ASSUMED ACTIONS" has the meaning specified in Section
7.12(a).
"ASSUMED LIABILITIES" has the meaning specified in Section
4.2.
"BALANCE SHEET" has the meaning specified in Section 4.1(a).
"BOARD OF DIRECTORS" means the board of directors of the
referenced corporation or any duly authorized committee thereof.
"CODE" has the meaning specified in the sixth paragraph of
this Agreement.
"COMBINED VALUE" has the meaning specified in Section 9.8(a).
"CONTRACTS" has the meaning specified in Section 4.1(g).
<PAGE> 9
"CONTRIBUTION" has the meaning specified in the fourth
paragraph of this Agreement.
"CONVEYANCING INSTRUMENTS" has the meaning specified in
Section 5.1.
"COPYRIGHTS" means United States and foreign copyrights, both
registered and unregistered, along with the registrations and applications to
register any such copyrights.
"DISTRIBUTION" has the meaning specified in the fifth
paragraph of this Agreement.
"DISTRIBUTION DATE" means the date determined by the Board of
Directors of TSC as the date on which the eLoyalty Shares are distributable to
holders of record of TSC Common Stock as of the Record Date.
"ELOYALTY" has the meaning specified in the first paragraph of
this Agreement.
"ELOYALTY BUSINESS" has the meaning specified in the second
paragraph of this Agreement.
"ELOYALTY COMMON STOCK" has the meaning specified in the fifth
paragraph of this Agreement.
"ELOYALTY DEFERRED COMPENSATION PLAN" has the meaning
specified in Section 9.3(b).
"ELOYALTY DISTRIBUTABLE SHARE" means one (1) eLoyalty Share.
"ELOYALTY INDEMNIFIED PARTIES" has the meaning specified in
Section 12.3.
"ELOYALTY SAVINGS PLAN" has the meaning specified in Section
9.3(b).
"ELOYALTY SHARE" means one share of eLoyalty Common Stock.
"ELOYALTY VALUE" has the meaning specified in Section 9.8(a).
"ESCALATION NOTICE" has the meaning specified in Section
13.2(a).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended (together with the rules and regulations promulgated thereunder).
"EXPENSES" means any and all expenses incurred in connection
with investigating, defending or asserting any claim, action, suit or proceeding
incident to any matter indemnified against hereunder (including court filing
fees, court costs, arbitration fees or costs, witness fees, and reasonable fees
and disbursements of legal counsel, investigators, expert witnesses,
consultants, accountants and other professionals).
<PAGE> 10
"FOREIGN EXCHANGE RATE" means, with respect to any currency
other than United States dollars, as of any date of determination, the average
of the opening bid and asked rates on such date at which such currency may be
exchanged for United States dollars as quoted by Bank of America, N.A.
"GOVERNMENTAL AUTHORITY" means any foreign, federal, state,
local or other government, governmental, statutory or administrative authority,
regulatory body or commission or any court, tribunal or judicial or arbitral
body.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and the regulations promulgated thereunder.
"INDEMNIFIED PARTY" has the meaning specified in Section
12.5(a).
"INDEMNIFYING PARTY" has the meaning specified in Section
12.5(a).
"INDEMNITY PAYMENT" has the meaning specified in Section
12.5(a).
"INFORMATION" has the meaning specified in Section 14.1(a).
"INFORMATION STATEMENT" has the meaning specified in Section
7.10(a).
"INSURANCE AMOUNT" has the meaning specified in Section 10.5.
"INSURANCE CHARGES" has the meaning specified in Section 10.6.
"INSURANCE POLICIES" means the insurance policies written by
insurance carriers unaffiliated with TSC pursuant to which eLoyalty or one or
more of its Subsidiaries (or their respective officers or directors) will be
insured parties after the Distribution Date.
"INSURANCE PROCEEDS" means those monies (i) received by an
insured from an insurance carrier, (ii) paid by an insurance carrier on behalf
of the insured or (iii) received from any third Person in the nature of
insurance, contribution or indemnification in respect of any Liability, in each
such case net of any applicable premium adjustments (including reserves and
retrospectively-rated premium adjustments) and net of any costs or expenses
(including allocated costs of in-house counsel and other personnel) incurred in
the collection thereof.
"INSURED CLAIMS" means those Liabilities that, individually or
in the aggregate, are covered within the terms and conditions of any of the TSC
Policies, whether or not subject to deductibles, co-insurance, uncollectability,
premium adjustments (including reserves), retrospectively-rated premium
adjustments or retentions, but only to the extent that such Liabilities are
within applicable TSC Policy limits, including aggregates and deductibles.
"INTELLECTUAL PROPERTY LICENSE AGREEMENTS" means the TSC and
eLoyalty intellectual property license
<PAGE> 11
agreements in substantially the forms of Exhibits B-1 and B-2 hereto.
"INTERCOMPANY AGREEMENTS" means any Contract between TSC and
eLoyalty entered into prior to the Distribution Date.
"INTERFACES" means software that creates interfaces between
the Software and third-party software programs.
"INVESTORS" has the meaning specified in Section 3.3.
"IRS" means the Internal Revenue Service.
"LIABILITY" means any and all debts, liabilities and
obligations, absolute or contingent, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising (unless
otherwise specified in this Agreement), including all costs and expenses
relating thereto, and including, without limitation, those debts, liabilities
and obligations arising under any law, rule, regulation, Action, threatened
Action, order or consent decree of any Governmental Authority or any award of
any arbitrator of any kind, and those arising under any contract, commitment or
undertaking.
"LOSSES" means any and all losses, costs, obligations,
liabilities, settlement payments, awards, judgments, fines, penalties, damages,
fees, expenses, deficiencies, claims or other charges, absolute or contingent,
matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or
unknown (including, without limitation, the costs and expenses of any and all
Actions, threatened Actions, demands, assessments, judgments, settlements and
compromises relating thereto and attorneys' fees and any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any such Actions or threatened Actions).
"MATERIAL GOVERNMENTAL APPROVALS AND CONSENTS" means any
material notices, reports or other filings to be made with or to, or any
consents, registrations, approvals, permits, clearances or authorizations to be
obtained from, any Governmental Authority.
"METHODOLOGIES" means methodologies, architectures, processes,
algorithms and technologies, including, without limitation, all related trade
secrets and know-how.
"NASDAQ" means The NASDAQ Stock Market's National Market
System or any successor thereto.
"NON-PERMITTED NAMES" has the meaning specified in Section
7.14.
"OPERATING AGREEMENTS" means the Intellectual Property License
Agreements, the Tax Sharing Agreement, the Shared Services Agreement and any
other agreement regarding the ongoing business and service relationships between
TSC and eLoyalty and their respective Subsidiaries and Affiliates following the
Distribution.
<PAGE> 12
"PARTY" means TSC or eLoyalty.
"PATENTS" means United States and foreign patents and
applications for patents, including any continuations, continuations-in-part,
divisions, renewals, reissues and extensions thereof.
"PERSON" means any individual, corporation, partnership, joint
venture, limited liability company, association, joint-stock company, trust,
unincorporated organization or Governmental Authority.
"PERSONAL PROPERTY LEASES" has the meaning specified in
Section 4.1(e).
"PRIME RATE" means the rate that Bank of America, N.A. (or any
successor thereto or other major money center commercial bank agreed to by the
Parties) announces from time to time as its prime lending rate, as in effect
from time to time.
"PRIVILEGE" OR "PRIVILEGES" has the meaning specified in
Section 14.8(a).
"PRIVILEGED INFORMATION" has the meaning specified in Section
14.8(a).
"PURCHASE AGREEMENT" has the meaning specified in Section 3.3.
"REAL ESTATE LEASES" has the meaning specified in Section
4.1(d).
"RECEIVABLES" has the meaning specified in Section 4.1(b)(i).
"RECORD DATE" means the date determined by the Board of
Directors of TSC as the record date for determining stockholders of TSC entitled
to receive shares of eLoyalty Common Stock in the Distribution.
"REGISTRATION STATEMENT" has the meaning specified in Section
7.10(a).
"RETAINED ASSETS" has the meaning specified in Section 4.3.
"RETAINED BUSINESS" means those portions of the business of
TSC and its current Subsidiaries that are not part of the eLoyalty Business.
"RETAINED LIABILITIES" has the meaning specified in Section
4.4.
"RIGHTS PLAN" has the meaning specified in Section 3.9.
"SEC" means the United States Securities and Exchange
Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended
(together with the rules and regulations promulgated thereunder).
<PAGE> 13
"SECURITY INTEREST" means any mortgage, security interest,
pledge, lien, charge, claim, option, right to acquire, voting or other
restriction, right-of-way, covenant, condition, easement, encroachment,
restriction on transfer or other encumbrance of any nature whatsoever.
"SHARED CONTRACT" means a Contract with a third Person that
directly benefits both TSC and eLoyalty.
"SHARED CONTRACTUAL LIABILITIES" mean Liabilities in respect
of Shared Contracts.
"SHARED SERVICES AGREEMENT" means the shared services
agreement in substantially the form of Exhibit H hereto.
"SOFTWARE" means computer software programs, in source code
and object code form, including, without limitation, all related source
diagrams, flow charts, specifications, documentation and all other materials and
documentation necessary to allow a reasonably skilled third party programmer or
technician to maintain, support or enhance the Software.
"SUBSIDIARY" means, when used with reference to any Person,
any corporation or other organization whether incorporated or unincorporated of
which at least a majority of the securities or interests having by the terms
thereof ordinary voting power to elect at least a majority of the board of
directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or controlled
by such Person or by any one or more of its Subsidiaries, or by such Person and
one or more of its Subsidiaries; provided, however, that no Person that is not
directly or indirectly wholly-owned by any other Person shall be a Subsidiary of
such other Person unless such other Person controls, or has the right, power or
ability to control, that Person.
"TAX" (and, with correlative meaning, "Taxes" and "Taxable")
means:
(i) any federal, state, local or foreign net income, gross
income, gross receipts, windfall profit, severance, property,
production, sales, use, license, excise, franchise, employment,
payroll, withholding, alternative or add-on minimum, ad valorem,
value-added, transfer, stamp, or environmental tax, or any other tax,
custom, duty, governmental fee or other like assessment or charge of
any kind whatsoever, together with any interest or penalty, addition
to tax or additional amount imposed by any Governmental Authority; and
(ii) any Liability of either Party for the payment of amounts
with respect to payments of a type described in clause (i) as a result
of being a member of an affiliated, consolidated, combined or unitary
group, or as a result of any obligation of either Party under any Tax
sharing arrangement or Tax indemnity arrangement.
"TAX SHARING AGREEMENT" means the Tax Sharing and
Disaffiliation Agreement in substantially the form of Exhibit B hereto.
<PAGE> 14
"THIRD PARTY CLAIM" has the meaning specified in Section
12.6(a).
"THIRD PARTY CONSENTS" has the meaning specified in Section
7.1.
"TRADEMARKS" has the meaning specified in Section 4.1(m).
"TRANSFER AGENT" means ChaseMellon Shareholder Services,
L.L.C., the transfer agent appointed by TSC to distribute shares of eLoyalty
Common Stock pursuant to the Distribution.
"TRANSFERRED ACTIONS" has the meaning specified in Section
7.12(b).
"TRANSFERRED ASSETS" has the meaning specified in Section 4.1.
"TRANSFERRED EMPLOYEES" has the meaning specified in Section
9.1.
"TRANSFERRED INTELLECTUAL PROPERTY" has the meaning specified
in Section 4.1(f).
"TSC" has the meaning specified in the first paragraph of this
Agreement.
"TSC COMMON STOCK" has the meaning specified in the fifth
paragraph of this Agreement.
"TSC DEFERRED COMPENSATION PLAN" has the meaning specified in
Section 9.7.
"TSC INDEMNIFIED PARTIES" has the meaning specified in Section
12.2(a).
"TSC PLANS" has the meaning specified in Section 9.3(a).
"TSC POLICY" and "TSC POLICIES" have the meanings specified in
Section 10.2.
"TSC SAVINGS PLAN" has the meaning specified in Section 9.4.
"TSC VALUE" has the meaning specified in Section 9.8(b).
"VOTING STOCK" means all of the capital stock of eLoyalty
entitled to vote generally in the election of directors but excluding any class
or series of capital stock entitled to vote only in the event of dividend
arrearages thereon, whether or not at the time of determination there are any
such dividend arrearages.
"WARN ACT" has the meaning specified in Section 9.10.
1.2. INTERPRETATION. (a) In this Agreement, unless the context
clearly indicates otherwise:
<PAGE> 15
(i) words used in the singular include the plural and words in
the plural include the singular;
(ii) reference to any Person includes such Person's successors
and assigns but, if applicable, only if such successors and assigns are
permitted by this Agreement;
(iii) reference to any gender includes the other gender;
(iv) the word "including" means "including but not limited
to";
(v) reference to any Article, Section, Exhibit or Schedule
means such Article or Section of, or such Exhibit or Schedule to, this
Agreement, as the case may be, and references in any Section or
definition to any clause means such clause of such Section or
definition;
(vi) the words "herein," "hereunder," "hereof," "hereto" and
words of similar import shall be deemed references to this Agreement as
a whole and not to any particular Section or other provision hereof;
(vii) reference to any agreement, instrument or other document
means such agreement, instrument or other document as amended,
supplemented and modified from time to time to the extent permitted by
the provisions thereof and by this Agreement;
(viii) reference to any law (including statutes and
ordinances) means such law (including all rules and regulations
promulgated thereunder) as amended, modified, codified or reenacted, in
whole or in part, and in effect at the time of determining compliance
or applicability;
(ix) relative to the determination of any period of time,
"from" means "from and including," "to" means "to but excluding" and
"through" means "through and including";
(x) accounting terms used herein shall have the meanings
historically ascribed to them by TSC and its Subsidiaries based upon
TSC's internal financial policies and procedures in effect prior to the
date of this Agreement;
(xi) in the event of any conflict between the provisions of
the body of this Agreement and the Exhibits or Schedules hereto, the
provisions of the body of this Agreement shall control; and
(xii) the titles to Articles and headings of Sections
contained in this Agreement have been inserted for convenience of
reference only and shall not be deemed to be a part of or to affect the
meaning or interpretation of this Agreement.
(b) This Agreement was negotiated by the Parties with the
benefit of legal representation, and any rule of construction or interpretation
otherwise requiring this Agreement to be construed or interpreted against either
Party shall not apply to any construction or
<PAGE> 16
interpretation hereof.
ARTICLE II
THE DISTRIBUTION
2.1. ISSUANCE AND DELIVERY OF ELOYALTY SHARES. eLoyalty shall
issue to TSC the number of eLoyalty Shares required so that the total number of
eLoyalty Shares held by TSC on the Distribution Date is equal to the total
number of eLoyalty Shares distributable pursuant to Section 2.2. TSC shall
deliver to the Transfer Agent one or more stock certificates representing all of
the eLoyalty Shares held by TSC, together with one or more stock power(s) duly
endorsed in blank. The Transfer Agent will then transfer and distribute such
shares in the manner described in Section 2.2 below.
2.2. DISTRIBUTION OF ELOYALTY SHARES. eLoyalty shall provide
to the Transfer Agent sufficient certificates in such denominations as the
Transfer Agent may request in order to effect the Distribution. TSC shall
instruct the Transfer Agent (i) to distribute to all holders of record of TSC
Common Stock as of the Record Date the eLoyalty Distributable Share for each
share of TSC Common Stock outstanding and held of record by such holder as of
the Record Date, and (ii) to deliver to eLoyalty, as a contribution to eLoyalty,
all of the remaining eLoyalty Shares, if any, then held by the Transfer Agent.
Any such returned eLoyalty Shares shall be canceled immediately by eLoyalty, and
the Board of Directors of eLoyalty shall take appropriate action so that such
returned shares shall not constitute treasury shares. All of the distributed
eLoyalty Shares shall be validly issued, fully paid and nonassessable and shall
be free of any preemptive rights.
2.3. TSC BOARD ACTION. The Board of Directors of TSC shall, in
its sole discretion, determine the Record Date and the Distribution Date and all
appropriate procedures in connection with the Distribution. The Board of
Directors of TSC also shall have the right to adjust at any time prior to the
Distribution Date the eLoyalty Distributable Share. The consummation of the
transactions provided for in this Article II shall be effected only after the
Distribution has been declared by the Board of Directors of TSC and after all of
the conditions set forth in Article VIII hereof shall have been satisfied or
waived by TSC.
2.4. ADDITIONAL APPROVALS. TSC shall cooperate with eLoyalty
in effecting, and if so requested by eLoyalty, TSC shall, as the majority
stockholder of eLoyalty prior to the Distribution, ratify all actions that are
reasonably necessary or desirable to be taken by eLoyalty to effectuate, the
transactions referenced in or contemplated by this Agreement in a manner
consistent with the terms of this Agreement.
ARTICLE III
FORMATION OF ELOYALTY/CORPORATE GOVERNANCE
<PAGE> 17
3.1. CERTIFICATE OF INCORPORATION OF ELOYALTY. The original
Certificate of Incorporation of eLoyalty was filed with the Secretary of State
of the State of Delaware on May 11, 1999. On July 9, 1999, an amendment to the
Certificate of Incorporation was filed that (i) changed the name of the company
from TSC/ECM Inc. to eLoyalty Corporation and (ii) increased the number of
authorized shares of capital stock to 110,000,000, consisting of 10,000,000
shares of eLoyalty preferred stock, par value $.01 per share, and 100,000,000
shares of eLoyalty Common Stock. On January 3, 2000 an additional amendment to
the Certificate of Incorporation was filed whereby eLoyalty elected to be
governed by Section 203 of the General Corporation Law of the State of Delaware.
3.2. BY-LAWS. The original By-laws of eLoyalty were adopted on
June 21, 1999 by written action of the sole incorporator of eLoyalty.
3.3. ELECTION OF BOARD OF DIRECTORS. The initial Board of
Directors of eLoyalty, consisting of Messrs. Conway, Kohler and Waltrip, was
elected on June 22, 1999 by written action of TSC in its capacity as the sole
stockholder of eLoyalty. On June 25, 1999 the Board of Directors of eLoyalty, by
written action, increased the size of the Board from three to six and elected
Messrs. Murray, Purcell and Zucchini as additional directors. On August 13, 1999
TSC and eLoyalty entered into a Common Stock Purchase and Sale Agreement (the
"Purchase Agreement") that, among other things, grants each of Sutter Hill
Ventures and Technology Crossover Management III, L.L.C. (together, the
"Investors") the right to designate a nominee to the Board of Directors of
eLoyalty. The Investors' nominees are Messrs. Coxe and Hoag. On January 3, 2000
the Board of Directors of eLoyalty, by written action, accepted the resignations
of Messrs. Waltrip and Kohler from the Board and reduced the size of the Board
from six to five. Messrs. Kohler and Purcell were elected as additional
directors on January 3, 2000 by written action of TSC in its capacity as the
sole stockholder of eLoyalty. Messrs. Waltrip will resign from the Board of
Directors of eLoyalty on or prior to the Distribution Date.
3.4. APPOINTMENT OF OFFICERS. On June 22, 1999 the Board of
Directors of eLoyalty, by written action, appointed Kelly D. Conway as the
President and Chief Executive Officer, Paul R. Peterson as the Secretary and
Timothy P. Dimond as the Treasurer of eLoyalty. On December 16, 1999, the Board
of Directors of eLoyalty, by written action, appointed Timothy J. Cunningham as
the Assistant Treasurer and Chief Financial Officer. On January 3, 2000, Messrs.
Peterson and Dimond resigned from their respective positions as officers of
eLoyalty and the Board of Directors of eLoyalty, by written action, appointed
John R. Purcell as the Iterim Chairman, Kelly D. Conway as the President and
Chief Executive Officer and Timothy J. Cunningham as the Chief Financial
Officer, Secretary and Treasurer.
3.5. CAPITAL STOCK OF ELOYALTY. On June 22, 1999 the Board of
Directors of eLoyalty, by written action, approved the issuance and delivery to
TSC of a stock certificate evidencing TSC's ownership of 100 shares of eLoyalty
Common Stock. On December 16, 1999 the Board of Directors of eLoyalty issued
41,399,900 additional shares of eLoyalty Common Stock to TSC in exchange for a
cash payment of $413,999. The Purchase Agreement provides, among other things,
for the sale of 1,200,000 shares of eLoyalty Common Stock to Sutter Hill
Ventures and an aggregate of 1,200,000 shares of eLoyalty Common Stock to four
entities controlled by Technology Crossover Management III, L.L.C. The number of
shares of eLoyalty Common Stock actually sold to those investors is subject to
adjustment. As of December 31, 1999, options to acquire 5,340,000 shares of
eLoyalty Common Stock have been issued under eLoyalty's 1999 Stock Incentive
Plan.
<PAGE> 18
3.6. NAME RESERVATIONS AND REGISTRATIONS. eLoyalty has reserved the name
"eLoyalty Corporation" in all states except for Florida, which does not allow
such a reservation. eLoyalty has registered the name "eLoyalty Corporation" in
South Dakota and New Mexico.
3.7. FOREIGN QUALIFICATIONS. eLoyalty has qualified or will qualify in all
jurisdictions (other than its place of incorporation) in which it intends to
conduct business.
3.8. CORPORATE SEAL. On June 22, 1999 the Board of Directors of eLoyalty,
by written action, approved the form of the corporate seal. Inscribed thereon is
the name "eLoyalty Corporation" and the words "Corporate Seal, Delaware."
3.9. ADOPTION OF STOCKHOLDERS RIGHTS PLAN. On December 16, 1999 the Board
of Directors of eLoyalty met to discuss, among other things, the desirability of
adopting a stockholder rights plan. In connection with that meeting, a
presentation was made to the Board of Directors of eLoyalty to assist them with
their analysis of the merits of taking such action. On January , 2000 the Board
of Directors of eLoyalty, by written action, will consider the adoption of the
Stockholders Rights Plan (the "Rights Plan") in substantially the form attached
as Exhibit C hereto, and the establishment of a committee of the Board of
Directors of eLoyalty to set the strike price under the Rights Plan.
ARTICLE IV
ASSET SEPARATION
4.1. TRANSFER OF ASSETS. Subject to the terms and conditions of this
Agreement, on or prior to the Distribution Date, TSC shall convey, assign,
transfer, contribute and set over, or cause to be conveyed, assigned,
transferred, contributed and set over, to eLoyalty, and eLoyalty shall accept
and receive, all right, title and interest of TSC in and to the tangible and
intangible assets of the eLoyalty Business (all of such assets being hereinafter
referred to as the "Transferred Assets"), including the following:
(a) Balance Sheet Assets. All assets reflected or disclosed on the
unaudited balance sheet of the eLoyalty Business as of September 30, 1999
attached as Exhibit D hereto (the "Balance Sheet"), including all
machinery, equipment, furniture and other tangible personal property,
whether owned or leased, used primarily in the operation of the eLoyalty
Business, subject to acquisitions, dispositions and adjustments in the
ordinary course of the eLoyalty Business, consistent with past practice,
after such date;
(b) Receivables.
(i) All accounts receivable, notes receivable, lease
receivables, prepayments (other than prepaid insurance), advances
and other receivables arising out of or produced by the eLoyalty
Business and owing by any Persons (the "Receivables");
<PAGE> 19
(ii) all cash payments received after the Distribution Date
on account of the Receivables;
(iii) all manufacturers' warranties or guarantees related to
the Transferred Assets or related to any of the Assumed
Liabilities; and
(iv) any and all manufacturers' or third party service or
replacement programs relating to the Transferred Assets;
(c) Inventories. All supplies, packaging and other inventories related
to the eLoyalty Business.
(d) Real Property Leases. Those certain real estate leases set forth
on Schedule 4.1(d) hereto (the "Real Estate Leases") and any and all
improvements, fixtures, machinery, equipment and other property located on
the premises demised under such Real Estate Leases;
(e) Personal Property Leases. Those certain machinery, equipment or
other tangible personal property leases (the "Personal Property Leases")
set forth on Schedule 4.1(e) hereto;
(f) Intellectual Property. All Copyrights, Interfaces, Methodologies,
Patents and Software to the extent the foregoing are used primarily in
connection with the eLoyalty Business, including (i) those set forth on
Schedule 4.1(f) hereto; (ii) all business and technical information,
nonpatented inventions, discoveries, processes, formulations, trade
secrets, know-how and technical data used primarily in connection with the
eLoyalty Business made or conceived by employees, consultants or
contractors of TSC or its Subsidiaries as to which TSC or its Subsidiaries
have rights under any agreement or otherwise relating to the foregoing;
(iii) all business and technical information, nonpatented inventions,
discoveries, processes, formulations, trade secrets, know-how and technical
data used primarily in connection with the eLoyalty Business made or
conceived by third parties as to which TSC or its Subsidiaries have rights
pursuant to executory agreements with said third parties relating to the
foregoing; and (iv) all permits, grants, contracts, agreements and licenses
running to or from TSC or its Subsidiaries relating to the foregoing; and
all rights that are associated with the foregoing (collectively, the
"Transferred Intellectual Property");
(g) Contracts. All of the following contracts, agreements,
arrangements, leases (other than Real Estate Leases and Personal Property
Leases), manufacturers' warranties, memoranda, understandings and offers
open for acceptance of any nature, whether written or oral (the
"Contracts"):
(i) all Contracts related to acquisitions or divestitures of
assets or stock related primarily to the eLoyalty Business, including
Contracts related to the transactions set forth on Schedule 4.1(g)(i)
hereto, except to the extent any such
<PAGE> 20
Contracts relate to the Retained Business and except to the extent
indicated on Schedule 4.1(g)(i);
(ii) all service, license, maintenance and support Contracts with
customers related primarily to the eLoyalty Business, including those
set forth on Schedule 4.1(g)(ii) hereto;
(iii) all supplier Contracts related primarily to the eLoyalty
Business relating either to raw materials or distributed products,
including those set forth on Schedule 4.1(g)(iii) hereto;
(iv) all joint development and alliance Contracts related
primarily to the eLoyalty Business, including those set forth on
Schedule 4.1(g)(iv) hereto;
(v) all Contracts with third-parties related primarily to the
eLoyalty Business relating to services provided to, or for the benefit
of, eLoyalty, including those set forth on Schedule 4.1(g)(v) hereto;
(vi) the telecommunications Contracts related primarily to the
eLoyalty Business, including those set forth on Schedule 4.1(g)(vi)
hereto;
(vii) the Shared Contracts that are designated as being assigned
to eLoyalty; and
(viii) all other Contracts related primarily to the eLoyalty
Business.
(h) Permits and Licenses. All permits, approvals, licenses,
franchises, authorizations or other rights granted by any Governmental
Authority held or applied for by TSC and its Subsidiaries and that are used
primarily in the eLoyalty Business or that relate primarily to the
Transferred Assets, and all other consents, grants and other rights that
are used primarily for the lawful ownership of the Transferred Assets or
the operation of the eLoyalty Business and that are legally transferable to
eLoyalty;
(i) Claims and Indemnities. All rights, claims, demands, causes of
action, judgments, decrees and rights to indemnity or contribution, whether
absolute or contingent, contractual or otherwise, in favor of TSC relating
primarily to the eLoyalty Business, including the right to sue, recover and
retain such recoveries and the right to continue in the name of TSC and its
Subsidiaries any pending actions relating to the foregoing, and to recover
and retain any damages therefrom;
(j) Subsidiaries, Joint Ventures and Minority Interests. All shares of
capital stock or equity or debt or other interests owned by TSC or its
Subsidiaries in the Subsidiaries, joint ventures and minority investments
set forth on Schedule 4.1(j) hereto;
(k) Books And Records. All books and records (including all records
<PAGE> 21
pertaining to customers, suppliers and personnel), wherever located, that
relate primarily to the operation of the eLoyalty Business;
(l) Supplies. All office supplies, production supplies, spare parts,
purchase orders, forms, labels, shipping material, art work, catalogues,
sales brochures, operating manuals and advertising and promotional material
and all other printed or written material that relate primarily to the
operation of the eLoyalty Business;
(m) Trademarks. All United States, state and foreign trademarks,
service marks, logos, trade dress and trade names (including all assumed or
fictitious names under which TSC is conducting the eLoyalty Business),
whether registered or unregistered, including all goodwill associated with
the foregoing, and all registrations and pending applications to register
the foregoing to the extent the foregoing are used or intended to be used
primarily in connection with the eLoyalty Business, including those set
forth on Schedule 4.1(m) hereto (collectively, the "Trademarks");
(n) Loans to Transferred Employees. All loans, notes or other debts
owed to TSC and its Subsidiaries by any Transferred Employees (as
hereinafter defined), including those set forth on Schedule 4.1(n) hereto;
(o) Industry Awards. All industry awards that are sponsored primarily
by the eLoyalty Business, including those set forth on Schedule 4.1(o)
hereto;
(p) Tax Credits. Any right, title or interest in any tax refund,
credit or benefit to which eLoyalty or any of its Subsidiaries is entitled
in accordance with the terms of the Tax Sharing Agreement; and
(q) Other Assets. All other assets, tangible or intangible, including
all goodwill, that are used primarily in or relate primarily to the
operations of the eLoyalty Business, including, without limitation, e-mail
addresses, domain names and websites.
4.2. ASSUMPTION OF LIABILITIES. Except as expressly limited in this Article
IV, eLoyalty shall assume, effective on or before the Distribution Date, and
pay, comply with and discharge all contractual and other Liabilities of TSC
arising out of or relating to the eLoyalty Business, whether due or to become
due, including:
(a) All Liabilities of TSC that are reflected, disclosed or reserved
for on the Balance Sheet, as such Liabilities may be increased or decreased
in the operation of the eLoyalty Business from the date of the Balance
Sheet through the Distribution Date in the ordinary course of business
consistent with past practice;
(b) All Liabilities of TSC under or related to the Real Estate Leases,
the Personal Property Leases and the Contracts, such assumption to occur as
(i) assignee if such Real Estate Leases, Personal Property Leases and
Contracts are assignable and are assigned or otherwise transferred to
eLoyalty, or (ii) subcontractor, sublessee or sublicensee as
<PAGE> 22
provided in Section 7.3 below if assignment of such Real Estate Leases,
Personal Property Leases and Contracts and/or the proceeds thereof is
prohibited by law, by the terms thereof or not permitted by the other
contracting party;
(c) All warranty, performance and similar obligations entered into or
made by TSC prior to the Distribution Date with respect to the products or
services of the eLoyalty Business;
(d) All Liabilities of TSC in connection with claims of past or
current employees of the eLoyalty Business, except as otherwise expressly
provided in this Agreement;
(e) All Liabilities of TSC related to any and all Actions asserting a
violation of any law, rule or regulation related to or arising out of the
operations of the eLoyalty Business, whether before or after the
Distribution Date and the Liabilities relating to any Assumed Actions (as
hereinafter defined);
(f) All Liabilities for which eLoyalty is liable in accordance with
the terms of the Tax Sharing Agreement;
(g) All Liabilities of TSC related to the immigrant and nonimmigrant
status of any foreign national employees who are Transferred Employees (as
hereinafter defined); and
(h) All other Liabilities of TSC relating to the eLoyalty Business,
whether existing on the date hereof or arising at any time or from time to
time after the date hereof, and whether based on circumstances, events or
actions arising heretofore or hereafter, whether or not such Liabilities
shall have been disclosed herein, and whether or not reflected on the books
and records of TSC or eLoyalty or the Balance Sheet.
The Liabilities described in this Section 4.2 are referred to in this
Agreement collectively as the "Assumed Liabilities."
4.3. RETAINED ASSETS. Notwithstanding anything to the contrary herein, the
following assets (the "Retained Assets") are not, and shall not be deemed to be,
Transferred Assets:
(a) Cash and cash equivalents, any cash on hand or in bank accounts,
certificates of deposit, commercial paper and similar securities, except
for (i) deposits securing bonds, letters of credit, leases and all other
obligations related to the eLoyalty Business, (ii) petty cash and impressed
funds related to the eLoyalty Business, (iii) cash held in foreign bank
accounts and (iv) $20,000,000;
(b) Any right, title or interest in any tax refund, credit or benefit
to which TSC or any of its Subsidiaries is entitled in accordance with the
terms of the Tax Sharing Agreement.
(c) Any amounts accrued on the books and records of TSC and its
Subsidiaries or
<PAGE> 23
the eLoyalty Business with respect to any Retained Liabilities (as
hereinafter defined);
(d) Except as provided in Sections 9.4 and 9.7, assets relating to the
provision of benefits to present or former employees of the eLoyalty
Business; and
(e) Any intellectual property rights in and to the name "TSC" and the
related emblem design, and any variants thereof, and the trademarks and
trade names used by TSC or its Subsidiaries in relation to the Retained
Business, except as provided in the Intellectual Property License
Agreements attached as Exhibits B-1 and B-2 hereto.
4.4. RETAINED LIABILITIES. Notwithstanding anything to the contrary in this
Agreement, neither eLoyalty nor any of its Subsidiaries shall assume any of the
following Liabilities of TSC or its Subsidiaries (the "Retained Liabilities"):
(a) Except as provided in Article IX, the Liabilities under all the
TSC Plans; and
(b) All Liabilities for which TSC is liable in accordance with the
terms of the Tax Sharing Agreement.
4.5. TERMINATION OF EXISTING INTERCOMPANY AGREEMENTS. Except as otherwise
expressly provided in this Agreement, the Operating Agreements or the agreements
set forth on Schedule 4.5, all Intercompany Agreements and all other
intercompany arrangements and course of dealings, whether or not in writing and
whether or not binding, in effect immediately prior to the Distribution Date,
shall be terminated and be of no further force and effect from and after the
Distribution Date.
4.6. SHARED CONTRACTS. (a) With respect to Shared Contractual Liabilities
pursuant to, arising under or relating to any Shared Contract, such Shared
Contractual Liabilities shall be allocated between TSC and eLoyalty as follows:
(i) First, if a Liability is incurred exclusively in respect of a
benefit received by one Party, the Party receiving such benefit shall be
responsible for such Liability;
(ii) Second, if a Liability cannot be so allocated under clause (i),
such Liability shall be allocated between the Parties based on the relative
proportions of total benefit received (over the term of the Shared
Contract, measured as of the date of the allocation) under the relevant
Shared Contract. Notwithstanding the foregoing, each Party shall be
responsible for any and all Liabilities arising out of or resulting from
its breach of the relevant Shared Contract.
(b) If either TSC or eLoyalty improperly receives any benefit or payment
under any Shared Contract that was intended for the other Party, the Party
receiving such benefit or payment will use commercially reasonable efforts to
deliver, transfer or otherwise afford such benefit or payment (on an after-tax
basis) to the other Party.
<PAGE> 24
ARTICLE V
ASSET SEPARATION CLOSING MATTERS
5.1. DELIVERY OF INSTRUMENTS OF CONVEYANCE. In order to
effectuate the transactions contemplated by Article IV, the Parties shall
execute and deliver, or cause to be executed and delivered, prior to or as of
the Distribution Date such deeds, bills of sale, instruments of assumption,
instruments of assignment, stock powers, certificates of title and other
instruments of assignment, transfer, assumption and conveyance (collectively,
the "Conveyancing Instruments") as the Parties shall reasonably deem necessary
or appropriate to effect such transactions.
5.2. DELIVERY OF OTHER AGREEMENTS. Prior to or as of the
Distribution Date, the Parties shall execute and deliver, or shall cause to be
executed and delivered, each of the Operating Agreements.
5.3. PROVISION OF CORPORATE RECORDS. Prior to or as promptly
as practicable after the Distribution Date, TSC shall deliver to eLoyalty all
corporate books and records of eLoyalty and copies of all corporate books and
records of TSC relating to the eLoyalty business, including in each case all
active agreements, litigation files and government filings. From and after the
Distribution Date, all books, records and copies so delivered shall be the
property of eLoyalty.
ARTICLE VI
NO REPRESENTATIONS AND WARRANTIES
Except as expressly set forth herein or in any Operating
Agreement, TSC does not represent or warrant in any way (i) as to the value or
freedom from encumbrance of, or any other matter concerning, any of the
Transferred Assets or (ii) as to the legal sufficiency to convey title to any of
the Transferred Assets on the execution, delivery and filing of the Conveyancing
Instruments. ALL SUCH ASSETS ARE BEING TRANSFERRED ON AN "AS IS, WHERE IS" BASIS
WITHOUT ANY REPRESENTATION OR WARRANTY OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, MARKETABILITY, TITLE, VALUE, FREEDOM FROM ENCUMBRANCE OR ANY
OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, and eLoyalty shall bear
the economic and legal risks that any conveyances of such assets shall prove to
be insufficient or that eLoyalty's title to any such assets shall be other than
good and marketable and free of encumbrances. Except as expressly set forth in
this Agreement or in any Operating Agreement, TSC does not represent or warrant
that the obtaining of the consents or approvals, the execution and delivery of
any amendatory agreements and the making of the filings and applications
contemplated by this Agreement shall satisfy the provisions of all applicable
agreements or the requirements of all applicable laws or judgments, and, subject
to Section 7.4, eLoyalty shall bear
<PAGE> 25
the economic and legal risk that any necessary consents or approvals are not
obtained or that any requirements of law or judgments are not complied with.
Notwithstanding the foregoing, the Parties shall fully cooperate and use
reasonable efforts to obtain all consents and enter into all amendatory
agreements and to make all filings and applications that may be required for the
consummation of the transactions contemplated by this Agreement.
ARTICLE VII
CERTAIN COVENANTS
7.1. THIRD PARTY CONSENTS. To the extent that the transactions
contemplated by this Agreement require any material consents, approvals or
waivers from third parties (the "Third Party Consents"), the Parties will use
commercially reasonable efforts to obtain any such Third Party Consents.
7.2. MATERIAL GOVERNMENTAL APPROVALS AND CONSENTS. To the
extent that the transactions contemplated by this Agreement require any
approvals or consents of any Governmental Authority, the Parties will use
commercially reasonable efforts to obtain any Material Governmental Approvals
and Consents.
7.3. NON-ASSIGNABLE CONTRACTS. In the event and to the extent
that TSC is unable to obtain any consent, approval or amendment to any Contract,
lease, license or other rights relating to the eLoyalty Business that would
otherwise be transferred or assigned to eLoyalty as contemplated by this
Agreement or any other agreement or document contemplated hereby, (i) TSC shall
continue to be bound thereby and the purported transfer or assignment to
eLoyalty shall automatically be deemed deferred until such time as all legal
impediments are removed and/or all necessary consents have been obtained, and
(ii) unless not permitted by the terms thereof or by law, eLoyalty shall pay,
perform and discharge fully all of the obligations of TSC thereunder from and
after the Distribution Date, or such earlier date as such transfer or assignment
would otherwise have taken place, and indemnify TSC for all indemnifiable Losses
arising out of such performance by eLoyalty. TSC shall, without further
consideration therefor, pay and remit to eLoyalty promptly all monies, rights
and other considerations received in respect of such performance. TSC shall
exercise or exploit its rights and options under all such Contracts, leases,
licenses and other rights and commitments referred to in this Section 7.3 only
as reasonably directed by eLoyalty and at eLoyalty's expense. If and when any
such consent shall be obtained or such Contract, lease, license or other right
shall otherwise become assignable or be able to be novated, TSC shall promptly
assign and novate (to the extent permissible) all of its rights and obligations
thereunder to eLoyalty without payment of further consideration, and eLoyalty
shall, without the payment of any further consideration therefor, assume such
rights and obligations. To the extent that the assignment of any Contract,
lease, license or other right (or the proceeds thereof) pursuant to this Section
7.3 is prohibited by law, the assignment provisions of this Section 7.3 shall
operate to create a subcontract with eLoyalty to perform each relevant
unassignable TSC Contract at a subcontract price equal to the monies, rights and
other considerations received by TSC with respect to the performance by eLoyalty
under such
<PAGE> 26
subcontract.
7.4. NOVATION OF ASSUMED LIABILITIES. (a) Except as otherwise
specifically provided in Section 4.6 with respect to Shared Contracts and
elsewhere in this Agreement, it is expressly understood and agreed to by the
Parties that upon the assumption by eLoyalty of the Assumed Liabilities, TSC,
its Subsidiaries and their respective officers, directors and employees shall be
released unconditionally by eLoyalty from any and all Liability, whether joint,
several or joint and several, for the discharge, performance or observance of
any of the Assumed Liabilities, so that eLoyalty will be solely responsible for
such Assumed Liabilities.
(b) eLoyalty, at the reasonable request of TSC, shall use
commercially reasonable efforts to obtain, or cause to be obtained, any consent,
approval, release, substitution or amendment required to novate (including with
respect to any federal government contract) or assign all obligations under the
Assumed Liabilities, or to obtain in writing the unconditional release of all
parties to such arrangements other than eLoyalty; provided, however, that
eLoyalty shall not be obligated to pay any consideration therefor to any third
party from whom such consents, approvals, releases, substitutions or amendments
are requested.
(c) If eLoyalty is unable to obtain, or to cause to be
obtained, any such required consent, approval, release, substitution or
amendment, TSC shall continue to be bound by such Assumed Liability and, unless
not permitted by law or the terms thereof, eLoyalty shall, as agent or
subcontractor for TSC, pay, perform and discharge fully all of the obligations
or other Liabilities of TSC thereunder from and after the date hereof. eLoyalty
shall indemnify and hold harmless TSC against any Liabilities arising in
connection with such Assumed Liability or with eLoyalty's payment, performance
and discharge of such Assumed Liability. Except as otherwise set forth in this
Agreement, TSC shall, without further consideration, pay and remit, or cause to
be paid or remitted, to eLoyalty promptly the after-tax amount of all money,
rights and other consideration received by it in respect of such performance
(unless any such consideration is a Retained Asset), increased by any actual tax
benefit derived by TSC as a result of such payment or remittance (with such tax
benefit determined pursuant to Section 12.5(d)). If and when any such consent,
approval, release, substitution or amendment shall be obtained or such Assumed
Liability shall otherwise become assignable or be able to be novated, TSC shall
thereafter assign, or cause to be assigned, all of its rights, obligations and
other Liabilities thereunder to eLoyalty without payment of further
consideration and eLoyalty shall, without the payment of any further
consideration, assume such rights and obligations.
7.5. FURTHER ASSURANCES. (a) In addition to the actions
specifically provided for elsewhere in this Agreement, each of the Parties shall
use commercially reasonable efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things reasonably necessary, proper or
advisable under applicable laws, regulations and agreements to consummate and
make effective the Distribution and the other agreements and documents
contemplated hereby. Without limiting the generality of the foregoing, each
Party shall cooperate with the other Party to execute and deliver, or use
commercially reasonable efforts to cause to be executed and delivered, all
instruments, including instruments of conveyance, assignment and transfer, and
to make all filings with, and to obtain all consents, approvals or
authorizations of, any governmental or regulatory authority or any other Person
under any permit, license, Contract or other
<PAGE> 27
instrument, and to take all such other actions as such Party may
reasonably be requested to take by the other Party from time to time, consistent
with the terms of this Agreement, in order to confirm the title of eLoyalty to
all of the eLoyalty Business, to put eLoyalty in actual possession and operating
control thereof and to permit eLoyalty to exercise all rights with respect
thereto and to effectuate the provisions and purposes of this Agreement and the
other agreements and documents contemplated hereby or thereby.
(b) If, as a result of mistake or oversight, any asset
reasonably necessary to the conduct of the eLoyalty Business is not transferred
to eLoyalty, or any asset reasonably necessary to the conduct of the Retained
Business is transferred to eLoyalty, TSC and eLoyalty shall negotiate in good
faith after the Distribution Date to determine whether such asset should be
transferred to eLoyalty or to TSC, as the case may be, and/or the terms and
conditions upon which such asset shall be made available to eLoyalty or to TSC,
as the case may be. Unless expressly provided to the contrary in this Agreement
or any Operating Agreement, if, as a result of mistake or oversight, any
Liability arising out of or relating to the eLoyalty Business is retained by
TSC, or any Liability arising out of or relating to the Retained Business is
assumed by eLoyalty, TSC and eLoyalty shall negotiate in good faith after the
Distribution Date to determine whether such Liability should be transferred to
eLoyalty or TSC, as the case may be, and/or the terms and conditions upon which
any such Liability shall be transferred.
(c) If either Party identifies any commercial or other service
that is needed to assure a smooth and orderly transition of the businesses in
connection with the consummation of the transactions contemplated hereby or any
desired modification to any such service, including any service that is governed
by the provisions of any Operating Agreement, the Parties shall give reasonable
notice of such service or proposed modification, and shall cooperate in
implementing any such service or modification and in determining the mutually
acceptable arm's-length basis on which one Party will provide such service to
the other Party.
7.6. NOMINEE SHARES. TSC agrees to use commercially reasonable
efforts to cause to be transferred to, or as directed by, eLoyalty all
director's qualifying or other shares of capital stock of any of the transferred
Subsidiaries held as of the Distribution Date by persons who are not employees
of eLoyalty. eLoyalty agrees to use commercially reasonable efforts to cause to
be transferred to, or as directed by, TSC all director's qualifying or other
shares of capital stock of any TSC Subsidiary other than eLoyalty and the
transferred Subsidiaries held as of the Distribution Date by employees of
eLoyalty.
7.7. COLLECTION OF ACCOUNTS RECEIVABLE. (a) TSC shall be
entitled to control all collection actions related to the Retained Assets,
including the determination of what actions are necessary or appropriate and
when and how to take any such action.
(b) eLoyalty shall be entitled to control all collection
actions related to the Transferred Assets, including the determination of what
actions are necessary or appropriate and when and how to take any such action.
(c) If, after the Distribution Date, eLoyalty shall receive
any remittance from any
<PAGE> 28
account debtors with respect to the accounts receivable arising out of the
Retained Assets or other amounts due TSC in respect of services rendered by TSC
after the Distribution Date, or TSC shall receive any remittance from any
account debtors with respect to the accounts receivable arising out of the
Transferred Assets or other amounts due eLoyalty in respect of services rendered
by eLoyalty after the Distribution Date, such Party shall receive and deposit
the after-tax amount of such remittance and deliver cash in an amount equal
thereto to the other Party, increased by any actual tax benefit derived by such
Party as a result of payment to such other Party (with such tax benefit
determined pursuant to Section 12.5(d)) as soon as practicable and, in any
event, within five (5) business days of receiving such remittance. The Parties
shall reconcile any amounts due and owed under this Section 7.7 on a daily
basis.
(d) Each Party shall deliver to the other such schedules and
other information with respect to the accounts receivable included in the
Transferred Assets and those not included therein as each shall reasonably
request from time to time in order to permit such Parties to reconcile their
respective records and to monitor the collection of all accounts receivable
(whether or not Transferred Assets). Each Party shall afford the other
reasonable access to its books and records relating to any accounts receivable.
7.8. ELECTION OF ELOYALTY BOARD OF DIRECTORS. Prior to the
Distribution Date, TSC agrees to vote all shares of eLoyalty Common Stock held
by it in favor of the nominees to the Board of Directors of eLoyalty, as set
forth on Exhibit F hereto.
7.9. LATE PAYMENTS. Except as expressly provided to the
contrary in this Agreement or in any Operating Agreement, any amount not paid
when due pursuant to this Agreement or any Operating Agreement (and any amounts
billed or otherwise invoiced or demanded and properly payable that are not paid
within thirty (30) days of such bill, invoice or other demand) shall accrue
interest at a rate per annum equal to the Prime Rate plus 2%.
7.10. REGISTRATION AND LISTING. Prior to the Distribution
Date:
(a) TSC and eLoyalty shall prepare a registration statement on
Form 10, including such amendments or supplements thereto as may be
necessary (together, the "Registration Statement") to effect the
registration of the eLoyalty Common Stock under the Exchange Act, which
Registration Statement shall include an information statement to be
sent by TSC to its stockholders in connection with the Distribution
(the "Information Statement"). eLoyalty shall file the Registration
Statement with the SEC and shall use commercially reasonable efforts to
cause the Registration Statement to become and remain effective under
the Exchange Act as soon as reasonably practicable. After the
Registration Statement becomes effective, TSC shall mail the
Information Statement to the holders of TSC Common Stock as of the
Record Date.
(b) The Parties shall use commercially reasonable efforts to
take all such action as may be necessary or appropriate under state and
foreign securities and "Blue Sky" laws in connection with the
transactions contemplated by this Agreement.
<PAGE> 29
(c) TSC and eLoyalty shall prepare, and eLoyalty shall file
and seek to make effective, an application for the listing of the
eLoyalty Common Stock on the NASDAQ, subject to official notice of
issuance.
(d) The Parties shall cooperate in preparing, filing with the
SEC and causing to become effective any registration statements or
amendments thereto that are necessary or appropriate in order to effect
the transactions contemplated hereby or to reflect the establishment
of, or amendments to, any employee benefit plans contemplated hereby.
7.11. NO NONCOMPETITION; NONHIRING; NONSOLICITATION. (a) After
the Distribution Date, neither Party shall have any duty to refrain from (i)
engaging in the same or similar activities or lines of business as the other
Party, (ii) doing business with any potential or actual supplier or customer of
the other Party or (iii) engaging in, or refraining from, any other activities
whatsoever relating to any of the potential or actual suppliers or customers of
the other Party.
(b) During the period beginning on December 1, 1999 and ending
eighteen (18) months after such date, neither TSC nor eLoyalty shall, nor shall
either Party permit any of its respective Subsidiaries, Affiliates or agents to,
directly or indirectly, without the prior written consent of the other, actively
solicit or recruit for employment any then current employee of the other Party
or of any of the other Party's Subsidiaries or Affiliates. However, nothing
contained in this Section 7.11(b) shall (i) prohibit the hiring of any employee
who is seeking employment on his or her own initiative without prior contact
initiated by any employee or agent of the company where employment is sought, or
any of such company's Affiliates, provided that such employee has obtained
authorization from an officer (or a direct report to a current officer) of his
or her current employer; or (ii) prohibit TSC or eLoyalty or any of their
respective Subsidiaries or Affiliates from hiring any person who has terminated
employment with the other Party. The foregoing restriction shall cease to apply
on July 1, 2001.
7.12. LITIGATION. (a) On or as of the Distribution Date,
eLoyalty shall assume and pay all Liabilities that may result from the Assumed
Actions (as hereinafter defined) and all fees and costs relating to the defense
of the Assumed Actions, including attorneys' fees and costs incurred after the
Distribution Date. "Assumed Actions" shall mean those cases, claims and
investigations (on which TSC, its Subsidiaries or its Affiliates, other than
eLoyalty, are a defendant or the party against whom the claim or investigation
is directed) primarily related to the eLoyalty Business.
(b) TSC and its Subsidiaries shall transfer the Transferred
Actions (as hereinafter defined) to eLoyalty, and eLoyalty shall receive and
have the benefit of all of the proceeds of such Transferred Actions.
"Transferred Actions" shall mean those cases and claims (on which TSC, its
Subsidiaries or its Affiliates are a plaintiff or claimant) primarily relating
to the eLoyalty Business.
7.13. ELOYALTY BANK ACCOUNTS. On or prior to the Distribution
Date, TSC and its Subsidiaries shall transfer the bank accounts set forth on
Schedule 7.13 hereto to eLoyalty. eLoyalty shall cause any amounts received, by
mistake or otherwise, in such accounts after the Distribution Date on account of
the Retained Business to be transferred promptly to TSC and its
<PAGE> 30
Subsidiaries, as appropriate. TSC shall cause any amounts received, by mistake
or otherwise, after the Distribution Date on account of the eLoyalty Business to
be transferred promptly to eLoyalty.
7.14. SIGNS; USE OF COMPANY NAME. As soon as practicable, and
in any event within sixty (60) days after the Distribution Date, the Parties, at
eLoyalty's expense, shall remove (or, if necessary, on an interim basis cover
up) any and all exterior and interior signs and identifiers that refer or
pertain to TSC or the Retained Business on the Transferred Assets, in the case
of eLoyalty, or that refer or pertain to eLoyalty or the Transferred Business on
the Retained Assets, in the case of TSC. After such period, (i) eLoyalty shall
not use or display the names "TSC," "Technology Solutions Company" or any
variations thereof, or other trademarks, tradenames, logos or identifiers using
any of such names or otherwise owned by or licensed to TSC that have not been
assigned or licensed to eLoyalty, and (ii) TSC shall not use or display the name
"eLoyalty," "eLoyalty Corporation" or any variations thereof, or other
trademarks, tradenames, logos or identifiers using any of such names or
otherwise owned by or licensed to eLoyalty that have not been assigned or
licensed to TSC (collectively, the "Non-Permitted Names"), without the prior
written consent of the other Party; provided, however, that notwithstanding the
foregoing, nothing contained in this Agreement shall prevent either Party from
using the other's name in public filings with Governmental Authorities,
materials intended for distribution to either Party's stockholders or any other
communication in any medium that describes the relationship between the Parties.
7.15. REASONABLE EFFORTS. Upon the terms and subject to the
conditions set forth in this Agreement, each of the Parties agrees to use all
commercially reasonable efforts to take, or cause to be taken, all actions and
to do, or cause to be done, and to assist and cooperate with the other Parties
in doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the transactions
contemplated by this Agreement, including (i) the obtaining of all necessary
actions or non-actions, waivers, consents and approvals from Governmental
Authorities and the making of all necessary registrations and filings (including
filings with Governmental Authorities) and the taking of all reasonable steps as
may be necessary to obtain an approval or waiver from, or to avoid an action or
proceeding by, any Governmental Authority (including those in connection with
the HSR Act, if any), (ii) the obtaining of all necessary consents, approvals or
waivers from third parties, (iii) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to
have any stay or temporary restraining order entered by any court or other
Governmental Authority vacated or reversed and (iv) the execution and delivery
of any additional instruments necessary to consummate the transactions
contemplated by this Agreement.
7.16. USE OF TRANSFERRED INTELLECTUAL PROPERTY. As of the
Distribution Date, and except as permitted pursuant to the terms and conditions
of the Intellectual Property License Agreements, TSC and its Subsidiaries, other
than eLoyalty and its Subsidiaries, shall cease all use of the Transferred
Intellectual Property, and TSC agrees to terminate any license granted to its
Subsidiaries, other than eLoyalty and its Subsidiaries, with respect to the
foregoing.
<PAGE> 31
ARTICLE VIII
CONDITIONS TO THE DISTRIBUTION
The obligation of TSC to effect the Distribution is subject to
the satisfaction or the waiver by TSC, at or prior to the Distribution Date, of
each of the following conditions:
8.1. APPROVAL BY TSC BOARD OF DIRECTORS. This Agreement and
the transactions contemplated hereby, including the declaration of the
Distribution, shall have been duly approved by the Board of Directors of TSC in
accordance with applicable law and the Certificate of Incorporation, as amended,
and By-laws of TSC.
8.2. RECEIPT OF IRS PRIVATE LETTER TAX RULING. TSC shall have
received a ruling from the IRS or, at TSC's sole discretion, an opinion of its
tax counsel Sidley & Austin, substantially to the effect that the Contribution
will qualify as a tax-free transaction for federal income tax purposes under
Section 368(a)(1)(D) or Section 351 of the Code, that the Distribution will
qualify as a tax-free distribution for federal income tax purposes under Section
355 of the Code, and that no income, gain or loss will be recognized by TSC,
eLoyalty or their respective stockholders upon the Contribution or the
Distribution.
8.3. COMPLIANCE WITH STATE AND FOREIGN SECURITIES AND "BLUE
SKY" LAWS. The Parties shall have taken all such action as may be necessary or
appropriate under state and foreign securities and "blue sky" laws in connection
with the Distribution.
8.4. SEC FILINGS AND APPROVALS. The Parties shall have
prepared and eLoyalty shall, to the extent required under applicable law, have
filed with the SEC any such documentation and any requisite no action letters
that TSC reasonably determines are necessary or desirable to effectuate the
Distribution, and each Party shall use commercially reasonable efforts to obtain
all necessary approvals from the SEC with respect thereto as soon as
practicable.
8.5. FILING AND EFFECTIVENESS OF REGISTRATION STATEMENT; NO
STOP ORDER. The Registration Statement shall have been filed with and declared
effective by the SEC, and no stop order suspending the effectiveness of the
Registration Statement shall have been initiated or, to the knowledge of either
of the Parties, threatened by the SEC.
8.6. DISSEMINATION OF INFORMATION TO TSC STOCKHOLDERS. Prior
to the Distribution Date, the Parties shall have prepared and mailed to the
holders of TSC Common Stock such information concerning eLoyalty, its business,
operations and management, the Distribution and such other matters as TSC shall
reasonably determine and as may be required by law.
8.7. APPROVAL OF NASDAQ LISTING APPLICATION. The eLoyalty
Common Stock to be distributed in the Distribution shall have been approved for
listing on the NASDAQ, subject to official notice of issuance.
<PAGE> 32
8.8. RECEIPT OF VIABILITY AND FAIRNESS OPINION OF FINANCIAL
ADVISOR. The TSC Board of Directors shall have received a written opinion of
Credit Suisse First Boston, in form acceptable to TSC, to the effect that (i)
the Distribution will not have a material adverse effect on the financial
viability of TSC or of eLoyalty through the period ending December 31, 200__,
and (ii) the Distribution is fair to the TSC stockholders from a financial point
of view, which opinion shall not have been withdrawn or modified.
8.9. OPERATING AGREEMENTS. Each of the Operating Agreements
shall have been executed and delivered, and each of such agreements shall be in
full force and effect.
8.10. RESIGNATIONS. On or prior to the Distribution Date, TSC
shall cause all of its designees to resign or to be removed as officers and from
all Boards of Directors or similar governing bodies of eLoyalty and its
Affiliates.
8.11. CONSENTS. (a) All Material Governmental Approvals and
Consents required to permit the valid consummation of the Distribution shall
have been obtained without any conditions being imposed that would have a
material adverse effect on TSC or eLoyalty.
(b) TSC shall have obtained the consent, approval or waiver of
each Person (other than the Governmental Authorities referred to in Section
8.11(a)) whose consent, approval or waiver shall be required in connection with
the Distribution, except those for which the failure to obtain such consents or
approvals would not, in the reasonable opinion of TSC, individually or in the
aggregate have a material adverse effect on TSC, eLoyalty or the consummation of
the Distribution.
8.12. NO ACTIONS. No action, suit or proceeding shall have
been instituted or threatened by or before any court or quasi-judicial or
administrative agency of any federal, state, local or foreign jurisdiction or
before any arbitrator to restrain, enjoin or otherwise prevent the Distribution
or the other transactions contemplated this Agreement (including but not limited
to a stop order with respect to the effectiveness of the Registration
Statement), and no order, injunction, judgment, ruling or decree issued by any
court of competent jurisdiction shall be in effect restraining the Distribution
or such other transactions.
8.13. CONSUMMATION OF PRE-DISTRIBUTION TRANSACTIONS. The
pre-Distribution transactions contemplated by Articles III-V of this Agreement
shall have been consummated in all material respects.
8.14. NO OTHER EVENTS. No other events or developments shall
have occurred that, in the judgment of the TSC Board of Directors, would result
in the Distribution having a material adverse effect on TSC or its stockholders.
8.15. SATISFACTION OF CONDITIONS. The satisfaction of the
foregoing conditions are for the sole benefit of TSC and shall not give rise to
or create any duty on the part of TSC or the TSC Board of Directors to waive or
not waive any such condition, to effect the Distribution
<PAGE> 33
or in any way limit TSC's power of termination set forth in Section 15.13 .
ARTICLE IX
EMPLOYEES AND EMPLOYEE BENEFIT MATTERS
9.1. EMPLOYMENT OF ELOYALTY EMPLOYEES. On the Asset Transfer
Date, eLoyalty shall, or shall cause its Subsidiaries to, employ each employee
of the eLoyalty Business ("Transferred Employees") set forth on Schedule 9.1
hereto, and TSC shall cause all such Transferred Employees to resign from all
positions as officers or employees of TSC and its Subsidiaries. eLoyalty and TSC
(and their respective Subsidiaries) shall use commercially reasonable efforts to
accomplish any transfers of employment required by this Section 9.1 in a timely
manner. As of the Asset Transfer Date, eLoyalty shall assume each employment
agreement between TSC and a Transferred Employee and shall be solely responsible
for all of the obligations of the employer thereunder.
9.2. SEVERANCE. (a) Transferred Employees shall not be
eligible for any severance benefits from TSC or its Subsidiaries or Affiliates
as a result of either their employment with eLoyalty or its Subsidiaries or
Affiliates or their subsequent termination of employment with eLoyalty or its
Subsidiaries or Affiliates.
(b) eLoyalty (or the applicable eLoyalty Subsidiary) shall
have the obligation to pay severance benefits to any employee or former employee
of the eLoyalty Business whose employment terminates on or after January 1,
2000. TSC shall continue to have the obligation to pay severance benefits to any
employee or former employee of the eLoyalty Business whose employment terminated
prior to January 1, 2000.
9.3. WITHDRAWAL FROM PARTICIPATION IN TSC PLANS AND
ESTABLISHMENT OF ELOYALTY PLANS. (a) No later than the Distribution Date,
Transferred Employees shall cease to participate in the TSC employee benefit
plans and programs (the "TSC Plans"), except as otherwise specifically provided
in this Article IX.
(b) No later than the Distribution Date, eLoyalty or an
eLoyalty Subsidiary shall establish its own employee benefit plans and programs
for the benefit of eligible employees of eLoyalty and its Subsidiaries that
shall be substantially similar to the TSC Plans, including but not limited to a
401(k) savings plan (the "eLoyalty Savings Plan"), a nonqualified executive
deferred compensation plan (the "eLoyalty Deferred Compensation Plan"), a
medical and dental plan, a group vision care plan, a cafeteria plan, a group
term life and accidental death and dismemberment plan, a long-term disability
plan and a group legal expense plan.
9.4. TRANSFER OF SAVINGS PLAN ACCOUNT BALANCES. Subject to
applicable law and the provisions of the Technology Solutions Company d.b.a. TSC
401(k) Plan (the "TSC Savings Plan"), as soon as administratively practicable
following the establishment of the eLoyalty Savings Plan, or effective as of any
other date as agreed to in writing by the plan administrator for
<PAGE> 34
the TSC Savings Plan and the plan administrator for the eLoyalty Savings Plan,
the account balances (including outstanding loans) of all TSC Savings Plan
participants who are Transferred Employees shall be transferred from the TSC
Savings Plan to the eLoyalty Savings Plan. Each Transferred Employee shall
receive credit for all purposes under the eLoyalty Savings Plan for periods of
service with TSC or any of its Affiliates. The plan administrator for the
eLoyalty Savings Plan shall take any other action reasonably requested by the
plan administrator for the TSC Savings Plan that is necessary or advisable, in
the opinion of the plan administrator for the TSC Savings Plan, to maintain the
tax-qualified status of the TSC Savings Plan or to avoid the imposition of any
penalties with respect to such plan.
9.5. WELFARE BENEFITS PROVIDED UNDER ELOYALTY PLANS. (a) Each
Transferred Employee who becomes eligible to participate in an eLoyalty welfare
benefit plan shall be credited under such plan with (i) any deductibles and
copayments paid by such employee during the same plan year under the medical or
dental plan maintained by TSC and (ii) periods of service with TSC or any of its
Affiliates for all purposes under such plan. Amounts paid under a TSC medical or
dental plan that are taken into account for purposes of determining each
eLoyalty employee's lifetime maximum benefits under such plan shall be taken
into account for purposes of determining such eLoyalty employee's lifetime
maximum benefits under the eLoyalty medical or dental plan.
(b) eLoyalty (or the applicable eLoyalty Subsidiary) shall pay
all costs associated with the provision of disability benefits to any employee
or former employee of the eLoyalty Business, other than an employee or former
employee whose long-term disability benefits commenced prior to the earlier of
(i) the Distribution Date or (ii) the effective date of the eLoyalty long-term
disability insurance plan. Any employee or former employee of the eLoyalty
Business receiving benefits under the TSC long-term disability insurance plan
prior to such date shall continue to receive benefits under the terms of such
plan and the insurance contract used to fund such plan, and neither eLoyalty nor
any eLoyalty Subsidiary shall be charged for the payment of such benefits.
(c) TSC (or the applicable TSC Subsidiary) shall pay all
claims under the TSC medical plan (including dental benefits) relating to
Transferred Employees that have been incurred but not paid prior to the earlier
of (i) the Distribution Date or (ii) the effective date of the eLoyalty medical
plan, but only if claims for such costs are submitted in written form to the
authorized agents of TSC (or the applicable TSC Subsidiary) during the
nine-month period beginning on such date.
(d) As of the earlier of (i) the Distribution Date or (ii) the
date eLoyalty adopts a cafeteria plan, within the meaning of Section 125 of the
Code, for the benefit of its employees, eLoyalty (or the applicable eLoyalty
Subsidiary) shall assume all of the obligations of TSC under its cafeteria plan
with respect to participants who are Transferred Employees.
9.6. STOCK PURCHASE PLANS. No later than the record date of
the Distribution, Transferred Employees shall cease to be eligible to purchase
TSC Common Stock under the terms of the TSC 1995 Employee Stock Purchase Plan,
and as of the later of (i) the first business day after the record date of the
Distribution or (ii) the first day on which eLoyalty Common Stock is
<PAGE> 35
traded on a "when issued" basis, Transferred Employees shall become eligible to
participate in the eLoyalty 1999 Employee Stock Purchase Plan.
9.7. DEFERRED COMPENSATION PLAN. No later than the
Distribution Date, eLoyalty shall establish the eLoyalty Deferred Compensation
Plan, which shall be substantially similar to the TSC Executive Deferred
Compensation Plan (the "TSC Deferred Compensation Plan") in effect immediately
prior to the date the eLoyalty Deferred Compensation Plan is established. As of
its effective date, the eLoyalty Deferred Compensation Plan shall assume all
Liabilities with respect to amounts credited to the accounts of Transferred
Employees under the TSC Deferred Compensation Plan, and the TSC Deferred
Compensation Plan shall be relieved of all Liabilities for such benefits and
payments thereof. On or before the Distribution Date, TSC shall direct the
trustee of the trust established by TSC with respect to the TSC Deferred
Compensation Plan to transfer to the trust established by eLoyalty with respect
to the eLoyalty Deferred Compensation Plan an amount equal to the fair market
value (determined as of the date of transfer) of the amount credited to the
accounts of Transferred Employees under the TSC Deferred Compensation Plan.
9.8. STOCK OPTIONS. (a) As of the Distribution, each outstanding
nonqualified option to purchase shares of TSC Common Stock held by a Transferred
Employee or a director of eLoyalty (who is not also a director of TSC) shall be
converted into a substitute option to purchase shares of eLoyalty Common Stock.
The exercise price of each substitute option, and the number of shares of
eLoyalty Common Stock subject thereto, shall be equal to the exercise price of
the existing TSC option and the number of shares subject thereto, adjusted to
reflect the Distribution based on a comparison of (i) the trading price of TSC
Common Stock prior to the Distribution (the "Combined Value") and (ii) the
trading price of eLoyalty Common Stock after the Distribution (the "eLoyalty
Value").
(b) As of the Distribution, each outstanding nonqualified
option to purchase shares of TSC Common Stock that was granted on or before June
21, 1999 to a person other than a person described in Section 9.8(a) shall be
converted into an adjusted option to purchase TSC Common Stock and a substitute
option to purchase shares of eLoyalty Common Stock. Such options shall be
converted in a manner that preserves the aggregate exercise price of each
option, and allocates the exercise price between the TSC option and the eLoyalty
option based on a comparison of (i) the eLoyalty Value and (ii) the trading
price of TSC Common Stock after the Distribution (the "TSC Value").
(c) Each nonqualified option to purchase TSC Common Stock
granted after June 21, 1999 to a person other than a person described in Section
9.8(a) and each option to purchase eLoyalty Common Stock (other than an option
granted in substitution of an outstanding option to purchase TSC Common Stock)
shall continue solely as an option to purchase TSC Common Stock or eLoyalty
Common Stock, as the case may be. Each such option to purchase TSC Common Stock
shall be adjusted to reflect the Distribution, based on a comparison of (i) the
Combined Value and (ii) the TSC Value. Each such option to purchase eLoyalty
Common Stock shall not be adjusted.
<PAGE> 36
(d) Each option to purchase TSC Common Stock that is an
incentive stock option, within the meaning of Section 422 of the Code, shall be
converted into an incentive stock option to purchase the stock of the
corporation with which the optionee is employed immediately after the
Distribution. Such options converted into substitute options to purchase
eLoyalty Common Stock shall be adjusted in the manner described in Section
9.8(a) and such options converted into adjusted options to purchase TSC Common
Stock shall be adjusted in the manner described in Section 9.8(c).
(e) TSC and eLoyalty agree to assist each other as appropriate
with respect to the ongoing administration of the outstanding options issued to
employees of the other Party, or issued by the other Party to its employees,
under the TSC stock incentive plans and the eLoyalty stock incentive plans, as
applicable.
9.9. WORKERS' COMPENSATION. eLoyalty shall assume the
Liability for any workers' compensation or similar workers' protection claims
with respect to any employee of the eLoyalty Business, whether incurred prior
to, on or after the Distribution Date which are the result of an injury or
illness originating prior to or on the Distribution Date.
9.10. WARN ACT. eLoyalty and its Subsidiaries agree that they
shall not, at any time during the 90-day period following the Distribution Date,
(i) effectuate a "plant closing" as defined in the Worker Adjustment and
Retraining Notification Act of 1988 (the "WARN Act") affecting any site of
employment or operating units within any site of employment of the eLoyalty
Business, or (ii) take any action to precipitate a "mass layoff" as defined in
the WARN Act affecting any site of employment of the eLoyalty Business, except,
in either case, after complying fully with the notice and other requirements of
the WARN Act. eLoyalty agrees to indemnify TSC and its Subsidiaries and to
defend and hold harmless TSC and its Subsidiaries from and against any and all
claims, losses, damages, expenses, obligations and liabilities (including
attorney's fees and other costs of defense) that TSC and its Subsidiaries may
incur in connection with any suit or claim of violation brought against TSC
under the WARN Act, which relates in whole or in part to actions taken by
eLoyalty or its Subsidiaries with regard to any site of employment of eLoyalty
or operating units within any site of employment of the eLoyalty Business.
9.11. INFORMATION TO BE PROVIDED TO TSC. eLoyalty (or the
applicable eLoyalty Subsidiary) shall provide any information that TSC (or any
TSC Subsidiary) may reasonably request, including but not limited to information
relating to dates of termination of employment, in order to provide benefits to
any eligible employee of eLoyalty or any of its Subsidiaries under the terms and
conditions described herein or under the applicable TSC Plans. Any information
relating to an employee's termination of employment shall be provided by
eLoyalty (or the applicable eLoyalty Subsidiary) to TSC as soon as available to
eLoyalty or any of its Subsidiaries, but in any event no later than 30 days
after such information is made available to eLoyalty or any such Subsidiaries.
eLoyalty (or the applicable eLoyalty Subsidiary) shall, as necessary, update the
system used to keep such information in such timely manner as is required to
administer the TSC Plans.
<PAGE> 37
ARTICLE X
INSURANCE MATTERS
10.1. INSURANCE PRIOR TO THE DISTRIBUTION DATE. eLoyalty does
hereby agree that TSC shall not have any Liability whatsoever as a result of the
insurance policies and practices of TSC in effect at any time prior to the
Distribution Date, including as a result of the level or scope of any such
insurance, the creditworthiness of any insurance carrier, the terms and
conditions of any policy and the adequacy or timeliness of any notice to any
insurance carrier with respect to any claim or potential claim or otherwise.
10.2. OWNERSHIP OF EXISTING POLICIES AND PROGRAMS. TSC or one
or more of its Subsidiaries shall continue to own all property, casualty and
liability insurance policies and programs, including, without limitation,
primary and excess general liability, errors and omissions, automobile, workers'
compensation, property, fire, crime and surety insurance policies, in effect on
or before the Distribution Date (collectively, the "TSC Policies" and
individually, a "TSC Policy"). TSC shall use reasonable efforts to maintain the
TSC Policies in full force and effect up to and including the Distribution Date,
and, subject to the provisions of this Agreement, TSC and its Subsidiaries shall
retain all of their respective rights, benefits and privileges, if any, under
the TSC Policies. Nothing contained herein shall be construed to be an attempted
assignment of or to change the ownership of the TSC Policies.
10.3. PROCUREMENT OF INSURANCE FOR ELOYALTY. To the extent not
already provided for by the terms of a TSC Policy, TSC shall use reasonable
efforts to cause eLoyalty to be named as an additional insured under TSC
Policies whose effective policy periods include the Distribution Date, in
respect of claims arising out of or relating to periods prior to the
Distribution Date; provided, however, that nothing contained herein shall be
construed to require TSC or any of its Subsidiaries to pay any additional
premium or other charges in respect to, or waive or otherwise limit any of its
rights, benefits or privileges under, any TSC Policy in order to effect the
naming of eLoyalty as such an additional insured.
10.4. ACQUISITION AND MAINTENANCE OF POST-DISTRIBUTION
ELOYALTY INSURANCE POLICIES AND PROGRAMS. Commencing on and as of the
Distribution Date, eLoyalty shall be responsible for establishing and
maintaining separate property, casualty and liability insurance policies and
programs (including, without limitation, primary and excess general liability,
errors and omissions, automobile, workers' compensation, property, fire, crime,
surety and other similar insurance policies) for activities and claims involving
eLoyalty or any of its Subsidiaries or Affiliates. In addition to the foregoing,
eLoyalty shall obtain insurance covering its contractual obligations to
indemnify TSC and the TSC Indemnified Parties under this Agreement and shall
arrange for TSC and the TSC Indemnified Parties to be named insureds under such
policies. All insurance policies required to be maintained by eLoyalty shall be
with insurers reasonably acceptable to TSC with respect to financial condition
and claims paying ability. eLoyalty will exercise commercially reasonable
efforts to secure liability insurance to avoid potential gaps in coverage for
claims arising from events prior to the Distribution Date, which gap would not
exist
<PAGE> 38
had the eLoyalty Business continued to be covered with the same retroactive
dates existing in the TSC Policies in effect on the Distribution Date. eLoyalty
and each of its Subsidiaries and Affiliates, as appropriate, shall be
responsible for all administrative and financial matters relating to insurance
policies established and maintained by eLoyalty and its Subsidiaries or
Affiliates for claims relating to any period on or after the Distribution Date
involving eLoyalty or any of its Subsidiaries or Affiliates. Notwithstanding any
other agreement or understanding to the contrary, except as set forth in Section
10.6 with respect to claims administration and financial administration of the
TSC Policies, neither TSC nor any of its Subsidiaries or Affiliates shall have
any responsibility for or obligation to eLoyalty or any of its Subsidiaries or
Affiliates relating to property and casualty insurance matters for any period,
whether prior to, on or after the Distribution Date.
10.5. ELOYALTY DIRECTORS' AND OFFICERS' INSURANCE. TSC shall
use commercially reasonable efforts to cause the persons currently serving as
officers and/or directors of TSC or any of its Subsidiaries to be covered for a
period of three (3) years from the Distribution Date by the directors' and
officers' liability insurance policy maintained by TSC (including corporate
reimbursement) (provided that TSC may substitute therefor policies of at
least the same coverage and amounts containing terms and conditions that are not
less advantageous than such policy) with respect to matters covered under the
existing policy occurring prior to the Distribution Date that were committed by
such officers and/or directors in their capacity as such; provided, however,
that in no event shall TSC be required to expend with respect to any year more
than 200% of the current annual premium expended by TSC (the "Insurance Amount")
to maintain or procure insurance coverage pursuant hereto; and provided,
further, that if TSC is unable to maintain or obtain the insurance called for by
this Section 10.5, TSC shall use commercially reasonable efforts to obtain as
much comparable insurance as available for the Insurance Amount. In the event
TSC or any of its successors or assigns (i) consolidates with or merges into any
other Person and shall not be the continuing or surviving corporation or entity
of such consolidation or merger, or (ii) transfers or conveys all or
substantially all of its properties and assets to any Person, then, and in each
such case, to the extent necessary, proper provision shall be made so that the
successors and assigns of TSC assume the obligations set forth in this Section
10.5. The provisions of this Section 10.5 are intended to be for the benefit of,
and shall be enforceable by, each such officer and director and his or her heirs
and representatives. As provided in Section 12.5, any amount eLoyalty is
required to pay to TSC as an indemnity under this Agreement is reduced to the
extent TSC receives insurance proceeds from the above coverage, but only to the
extent such proceeds are actually received by TSC.
10.6. POST-DISTRIBUTION INSURANCE CLAIMS ADMINISTRATION. TSC
and its Subsidiaries shall have the primary right, responsibility and authority
for claims administration and financial administration of claims that relate to
or affect the TSC Policies. Upon notification by eLoyalty or one of its
Subsidiaries or Affiliates of a claim relating to eLoyalty or a Subsidiary or
Affiliate thereof under one or more of the TSC Policies, TSC shall cooperate
with eLoyalty in asserting and pursuing coverage and payment for such claim by
the appropriate insurance carrier(s). In asserting and pursuing such coverage
and payment, TSC shall have sole power and authority to make binding decisions,
determinations, commitments and stipulations on its own
<PAGE> 39
behalf and on behalf of eLoyalty and its Subsidiaries and Affiliates, which
decisions, determinations, commitments and stipulations shall be final and
conclusive if reasonably made to maximize the overall economic benefit of the
TSC Policies. eLoyalty and its Subsidiaries and Affiliates shall assume
responsibility for, and shall pay to the appropriate insurance carriers or
otherwise, any premiums, retrospectively-rated premiums, defense costs,
indemnity payments, deductibles, retentions or other charges (collectively,
"Insurance Charges") whenever arising, which shall become due and payable under
the terms and conditions of any applicable TSC Policy in respect of any
liabilities, losses, claims, actions or occurrences, whenever arising or
becoming known, involving or relating to any of the assets, businesses,
operations or liabilities of eLoyalty or any of its Subsidiaries or Affiliates,
whether the same relate to the period prior to, on or after the Distribution
Date. To the extent that the terms of any applicable TSC Policy provide that TSC
or any of its Subsidiaries shall have an obligation to pay or guarantee the
payment of any Insurance Charges relating to eLoyalty or any of its
Subsidiaries, TSC shall be entitled to demand that eLoyalty make such payment
directly to the Person or entity entitled thereto. In connection with any such
demand, TSC shall submit to eLoyalty a copy of any invoice received by TSC
pertaining to such Insurance Charges together with appropriate supporting
documentation, to the extent available. In the event that eLoyalty fails to pay
any such Insurance Charges when due and payable, whether at the request of the
Person entitled to payment or upon demand by TSC, TSC and its Subsidiaries may
(but shall not be required to) pay such insurance charges for and on behalf of
eLoyalty and, thereafter, eLoyalty shall forthwith reimburse TSC for such
payment. Subject to the other provisions of this Article X, the retention by TSC
of the TSC Policies and the responsibility for claims administration and
financial administration of such policies are in no way intended to limit,
inhibit or preclude any right of eLoyalty, TSC or any other insured to insurance
coverage for any Insured Claims under the TSC Policies.
10.7. NON-WAIVER OF RIGHTS TO COVERAGE. An insurance carrier
that would otherwise be obligated to pay any claim shall not be relieved of the
responsibility with respect thereto, or, solely by virtue of the provisions of
this Article X, have any subrogation rights with respect thereto, it being
expressly understood and agreed that no insurance carrier or any third party
shall be entitled to a windfall (i.e., a benefit they would not be entitled to
receive had no Distribution occurred or in the absence of the provisions of this
Article X) by virtue of the provisions hereof.
10.8. SCOPE OF AFFECTED POLICIES OF INSURANCE. The provisions
of this Article X relate solely to matters involving liability, casualty and
workers' compensation insurance, and shall not be construed to affect any
obligation of or impose any obligation on the Parties with respect to any life,
health and accident, dental or medical insurance policies applicable to any of
the officers, directors, employees or other representatives of the Parties or
their Affiliates.
ARTICLE XI
EXPENSES
11.1. ALLOCATION OF EXPENSES. (a) Except as otherwise provided
in this
<PAGE> 40
Agreement or any other agreement contemplated hereby, or as otherwise
agreed to in writing by the Parties, all fees and expenses incurred in
connection with the transactions contemplated hereby or thereby shall be paid by
TSC. Specifically, (i) TSC shall absorb all of the costs associated with the
dedication of internal resources and personnel to such transaction at all times
prior to the Distribution Date, and (ii) TSC shall pay all fees and expenses
that are related directly to the implementation of the Distribution transactions
on or prior to the Distribution Date.
(b) Without limiting the generality of the foregoing, TSC shall
be solely responsible for the following costs incurred in connection with the
transactions contemplated hereby: (i) the reasonable fees and expenses of Sidley
& Austin in connection with its representation of TSC; (ii) the reasonable fees
and expenses of investment banks relating to their financial advisory services
rendered to TSC and eLoyalty in connection with the Distribution; (iii) the
reasonable fees and expenses of PricewaterhouseCoopers LLP in connection with
its audit and tax services rendered to TSC; (iv) all SEC registration and "blue
sky" filing fees associated with the Registration Statement; (v) the printing,
mailing and distribution of the Information Statement to TSC's stockholders;
(vi) the reasonable fees and expenses of eLoyalty's Transfer Agent and registrar
relating to the initial issuance of eLoyalty Shares as a dividend to TSC's
stockholders; (vii) the NASDAQ listing fees for the eLoyalty Shares; (viii) the
design and initial printing of certificates of the eLoyalty Shares; (ix) the
design and initial printing of certificates of eLoyalty Common Stock as a
dividend to TSC stockholders; (x) the development, search and registration of
the name "eLoyalty"; (xi) third party vendors for software licenses; and (xii)
various international professional services related directly to the
Distribution.
(c) Notwithstanding Section 11.1(a) (i) above, eLoyalty shall
be solely responsible for all fees, expenses and other costs incurred in
connection with the transactions contemplated hereby related to: (i) the
reasonable fees and expenses of Sidley & Austin in connection with its
representation of eLoyalty related to the creation of benefits plans; (ii) the
reasonable fees and expenses relating to the syndication and arrangement of
revolving credit facilities for eLoyalty; and (iii) the reasonable fees or
expenses of any financial advisors, other than those approved by TSC, retained
by eLoyalty in connection with any "road shows" or presentations to investors.
ARTICLE XII
INDEMNIFICATION
12.1. RELEASE OF PRE-DISTRIBUTION CLAIMS. (a) Except as
provided in Section 12.1(b), effective as of the Distribution Date, each Party
does hereby, on behalf of itself and its respective Subsidiaries and Affiliates,
successors and assigns and all Persons who at any time prior to the Distribution
Date have been shareholders, directors, officers, agents or employees of either
Party (in each case, in their respective capacities as such), remise, release
and forever discharge the other Party, its respective Subsidiaries and
Affiliates, successors and assigns and all Persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of such Party (in each case, in their respective capacities as such),
and their respective heirs, executors, administrators, successors and assigns,
from any and all Liabilities
<PAGE> 41
whatsoever, whether at law or in equity (including any right of contribution),
whether arising under any contract or agreement, by operation of law or
otherwise, existing or arising from any acts or events occurring or failing to
occur or alleged to have occurred or to have failed to occur or any conditions
existing or alleged to have existed on or before the Distribution Date,
including in connection with the transactions and all other activities to
implement the Distribution.
(b) Nothing contained in Section 12.1(a) shall impair any
right of any Person to enforce this Agreement, any Operating Agreement or any
agreements, arrangements, commitments or understandings that are specified in
Section 4.5 or the applicable Schedules thereto not to terminate as of the
Distribution Date, in each case in accordance with its terms.
Nothing contained in Section 12.1(a) shall release any Person from:
(i) any Liability provided in or resulting from any
agreement of the Parties that is specified in Section 4.5 or
the applicable Schedules thereto as not to terminate as of the
Distribution Date, or any other Liability specified in Section
4.5 as not to terminate as of the Distribution Date;
(ii) any Liability, contingent or otherwise, assumed,
transferred, assigned, retained or allocated to a Party in
accordance with, or any other Liability of any Party under,
this Agreement or any Operating Agreement;
(iii) any Liability for the sale, lease, construction
or receipt of goods, property or services purchased, obtained
or used in the ordinary course of business by one Party from
the other Party prior to the Distribution Date;
(iv) any Liability for unpaid amounts for products or
services or refunds owing on products or services due on a
value-received basis for work done by one Party at the request
or on behalf of the other Party; or
(v) any Liability that the Parties may have with
respect to indemnification or contribution pursuant to this
Agreement for claims brought against the Parties by third
Persons, which Liability shall be governed by the provisions
of this Article XIII and, if applicable, the appropriate
provisions of the Operating Agreements.
(c) Neither Party shall make, nor permit any of its
Subsidiaries or Affiliates to make, any claim or demand, or commence any Action
asserting any claim or demand, including any claim of contribution or
indemnification, against the other Party, or any other Person released pursuant
to Section 12.1(a), with respect to any Liability released pursuant to Section
12.1(a).
(d) It is the intent of each of the Parties by virtue of the
provisions of this Section 12.1 to provide for a full and complete release and
discharge of all Liabilities existing or arising from all acts and events
occurring or failing to occur or alleged to have occurred or to have failed to
occur and all conditions existing or alleged to have existed on or before the
Distribution Date, between the Parties (including any contractual agreements or
arrangements existing or alleged to exist between the Parties on or before the
Distribution Date), except as expressly set forth in Section 12.1(b). At any
time, at the reasonable request of either Party, the other Party shall
<PAGE> 42
execute and deliver releases reflecting the provisions hereof.
12.2. INDEMNIFICATION BY ELOYALTY. (a) Except as provided in
Section 12.5, eLoyalty shall indemnify, defend and hold harmless TSC and each of
its Affiliates, directors, officers, employees and agents, and each of the
heirs, executors, successors and assigns of any of the foregoing (collectively,
the "TSC Indemnified Parties"), from and against any and all Expenses or Losses
incurred or suffered by TSC (and/or one or more of the TSC Indemnified Parties),
in connection with, relating to, arising out of or due to, directly or
indirectly, any of the following items:
(i) any claim that the information included in the
Registration Statement or the Information Statement that
relates to the eLoyalty Business or any other information
relating to the eLoyalty Business provided to TSC or
distributed to third parties by employees of eLoyalty or
individuals who were employees of the eLoyalty Business prior
to the Distribution Date, is or was false or misleading with
respect to any material fact or omits or omitted to state any
material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading,
regardless of whether the occurrence, action or other event
giving rise to the applicable matter took place prior to or
subsequent to the Distribution Date;
(ii) the eLoyalty Business as conducted by TSC or its
Subsidiaries, Affiliates or predecessors on or at any time
prior to the Distribution Date;
(iii) the Transferred Assets;
(iv) the Assumed Liabilities;
(v) the breach by eLoyalty or any of its Subsidiaries
of any covenant or agreement set forth in this Agreement, any
Operating Agreement or any Conveyancing Instrument, regardless
of when or where the loss, claim, accident, occurrence, event
or happening giving rise to the Expense or Loss took place, or
whether any such loss, claim, accident, occurrence, event or
happening is known or unknown, or reported or unreported;
(vi) the employee benefits provided or the actions
taken or omitted to be taken with respect thereto in
connection with this Agreement or otherwise relating to the
provision of employee benefits to employees or former
employees of eLoyalty (or its Subsidiaries), their
beneficiaries, alternate payees or any other person claiming
benefits through them (except to the extent such Expenses or
Losses are specifically allocated to TSC pursuant to Article
IX), including, without limitation, Expenses or Losses arising
in connection with (A) eLoyalty's reduction, elimination or
failure to provide any benefit provided prior to or after the
Distribution Date to its employees or employees of any of its
Subsidiaries or (B) the transfer of account balances from the
TSC Savings Plan to the eLoyalty Savings Plan where such
Expenses or Losses are incurred as a result of (1) any act
<PAGE> 43
or omission by eLoyalty (or eLoyalty's representative) or
(2) a determination by the IRS that the eLoyalty Savings
Plan is not a tax-qualified plan; or
(vii) any use of, access to or reliance upon the
technical information or data made available to eLoyalty or
its Subsidiaries pursuant to Section 14.1.
(b) In addition, except as provided in Section 12.5, eLoyalty
shall indemnify, defend and hold harmless the TSC Indemnified Parties from and
against fifty percent (50%) of any Expenses or Losses incurred or suffered by
TSC (and/or one or more of the TSC Indemnified Parties), in connection with,
relating to, arising out of or due to, directly or indirectly, any claims of any
infrastructure employee of TSC to the extent such claim relates to the period
prior to the Distribution Date.
12.3. INDEMNIFICATION BY TSC. Except as provided in Section
12.5, TSC shall indemnify, defend and hold harmless eLoyalty and each of its
Affiliates, directors, officers, employees and agents, and each of the heirs,
executors, successors and assigns of any of the foregoing (collectively, the
"eLoyalty Indemnified Parties"), from and against any and all Expenses or Losses
incurred or suffered by eLoyalty (and/or one or more of the eLoyalty Indemnified
Parties) in connection with, relating to, arising out of or due to, directly or
indirectly, any of the following items:
(a) the business (other than the eLoyalty Business) conducted
by TSC or its Subsidiaries, Affiliates or predecessors on or at any
time prior to the Distribution Date;
(b) the assets owned by TSC or its Subsidiaries other than the
Transferred Assets;
(c) the Liabilities (including the Retained Liabilities) of
TSC or its Subsidiaries other than the Assumed Liabilities;
(d) the breach by TSC or any of its Subsidiaries of any
covenant or agreement set forth in this Agreement, any Operating
Agreement or any Conveyancing Instrument, regardless of when or where
the loss, claim, accident, occurrence, event or happening giving rise
to the Expense or Loss took place, or whether any such loss, claim,
accident, occurrence, event or happening is known or unknown, or
reported or unreported; and
(e) TSC's reduction, elimination or failure to provide any
benefit provided prior to or after the Distribution Date to its
employees (or employees of its Subsidiaries), other than a benefit
assumed by eLoyalty pursuant to Article IX, or any act or omission by
TSC in connection with the transfer of assets and liabilities from the
TSC Savings Plan to the eLoyalty Savings Plan.
12.4. APPLICABILITY OF AND LIMITATION ON INDEMNIFICATION. EXCEPT
AS EXPRESSLY PROVIDED HEREIN, THE INDEMNITY OBLIGATION UNDER THIS ARTICLE XII
SHALL APPLY NOTWITHSTANDING ANY INVESTIGATION MADE BY OR ON BEHALF OF ANY
INDEMNIFIED PARTY AND SHALL APPLY WITHOUT
<PAGE> 44
REGARD TO WHETHER THE LOSS, LIABILITY, CLAIM, DAMAGE, COST OR EXPENSE FOR WHICH
INDEMNITY IS CLAIMED HEREUNDER IS BASED ON STRICT LIABILITY, ABSOLUTE LIABILITY
OR ARISES AS AN OBLIGATION FOR CONTRIBUTION.
12.5. ADJUSTMENT OF INDEMNIFIABLE LOSSES. (a) The amount that
any Party (an "Indemnifying Party") is required to pay to any Person entitled to
indemnification hereunder (an "Indemnified Party") shall be reduced (including,
without limitation, retroactively) by any Insurance Proceeds and other amounts
actually recovered by or on behalf of such Indemnified Party in reduction of the
related Expense or Loss. If an Indemnified Party receives a payment (an
"Indemnity Payment") required by this Agreement from an Indemnifying Party in
respect of any Expense or Loss and subsequently actually receives Insurance
Proceeds or other amounts in respect of such Expense or Loss, then such
Indemnified Party shall pay to the Indemnifying Party a sum equal to the lesser
of (1) the after-tax amount of such Insurance Proceeds or other amounts actually
received or (2) the net amount of Indemnity Payments actually received
previously, in each case increased by any actual tax benefit derived by the
Indemnified Party as a result of such payment (with such tax benefit determined
pursuant to Section 12.5(d)). The Indemnified Party agrees that the Indemnifying
Party shall be subrogated to such Indemnified Party under any insurance policy.
(b) An insurer who would otherwise be obligated to pay any
claim shall not be relieved of the responsibility with respect thereto, or,
solely by virtue of the indemnification provisions hereof, have any subrogation
rights with respect thereto, it being expressly understood and agreed that no
insurer or any other third party shall be entitled to a "windfall" (i.e., a
benefit he or she would not be entitled to receive in the absence of the
indemnification provisions) by virtue of the indemnification provisions hereof.
(c) If any Indemnified Party realizes a Tax benefit or
detriment in one or more Tax periods by reason of having incurred an Expense or
a Loss for which such Indemnified Party receives an Indemnity Payment from an
Indemnifying Party (or by reason of the receipt of any Indemnity Payment), then
such Indemnified Party shall pay to such Indemnifying Party an amount equal to
the Tax benefit or such Indemnifying Party shall pay to such Indemnified Party
an additional amount equal to the Tax detriment (taking into account, without
limitation, any Tax detriment resulting from the receipt of such additional
amounts), as the case may be. The amount of any Tax benefit or any Tax detriment
for a Tax period realized by an Indemnified Party by reason of having incurred
an Expense or a Loss (or by reason of the receipt of any Indemnity Payment)
shall be deemed to equal the product obtained by multiplying (i) the amount of
any deduction or loss or inclusion in income for such period resulting from such
Expense or Loss (or the receipt of any Indemnity Payment or additional amount),
as the case may be without regard to whether such deduction or loss or such
inclusion in income results in any actual decrease or increase in Tax liability
for such period (with the amount of any deduction or loss or inclusion in income
determined in accordance with Section 12.5(d) below), by (ii) the highest
applicable marginal Tax rate for such period (provided, however, that the amount
of any Tax benefit attributable to an amount that is creditable shall be deemed
to equal the amount of such creditable item). Any payment due under this Section
12.5(c) with respect to a Tax benefit or Tax detriment realized by an
Indemnified Party in a Tax period shall be due and payable within 30 days from
the
<PAGE> 45
time the return for such Tax period is due, without taking into account any
extension of time granted to the Party filing such return.
(d) Amounts paid by TSC to or for the benefit of eLoyalty, or
by eLoyalty to or for the benefit of TSC, under this Article XII (and under
other specified provisions of this Agreement) shall be treated by the Parties,
for all applicable Tax purposes, as adjustments to the amount of Transferred
Assets.
(e) In the event that an Indemnity Payment shall be
denominated in a currency other than United States dollars, the amount of such
payment shall be translated into United States dollars using the Foreign
Exchange Rate for such currency determined in accordance with the following
rules:
(i) with respect to an Expense or a Loss arising from payment
by a financial institution under a guarantee, comfort letter, letter of
credit, foreign exchange contract or similar instrument, the Foreign
Exchange Rate for such currency shall be determined as of the date on
which such financial institution shall have been reimbursed;
(ii) with respect to an Expense or a Loss covered by
insurance, the Foreign Exchange Rate for such currency shall be the
Foreign Exchange Rate employed by the insurance company providing such
insurance in settling such Expense or Loss with the Indemnifying Party;
and
(iii) with respect to an Expense or a Loss not covered by
clause (i) or (ii) above, the Foreign Exchange Rate for such currency
shall be determined as of the date that notice of the claim with
respect to such Expense or Loss shall be given to the Indemnified
Party.
12.6. PROCEDURES FOR INDEMNIFICATION OF THIRD PARTY CLAIMS.
(a) If any third party shall make any claim or commence any arbitration
proceeding or suit (collectively, a "Third Party Claim") against any one or more
of the Indemnified Parties with respect to which an Indemnified Party intends to
make any claim for indemnification against eLoyalty under Section 12.2 or
against TSC under Section 12.3, such Indemnified Party shall promptly give
written notice to the Indemnifying Party describing such Third Party Claim in
reasonable detail, and the following provisions shall apply. Notwithstanding the
foregoing, the failure of any Indemnified Party to provide notice in accordance
with this Section 12.6(a) shall not relieve the related Indemnifying Party of
its obligations under this Article XII, except to the extent that such
Indemnifying Party is actually prejudiced by such failure to provide notice.
(b) The Indemnifying Party shall have 20 business days after
receipt of the notice referred to in Section 12.6(a) to notify the Indemnified
Party that it elects to conduct and control the defense of such Third Party
Claim. If the Indemnifying Party does not give the foregoing notice, the
Indemnified Party shall have the right to defend, contest, settle or compromise
such Third Party Claim in the exercise of its exclusive discretion subject to
the provisions of Section 12.6(c), and the Indemnifying Party shall, upon
request from any of the Indemnified Parties, promptly pay to such Indemnified
Parties in accordance with the other terms of this Section
<PAGE> 46
12.6(b) the amount of any Expense or Loss resulting from their liability to the
third party claimant. If the Indemnifying Party gives the foregoing notice, the
Indemnifying Party shall have the right to undertake, conduct and control,
through counsel reasonably acceptable to the Indemnified Party, and at its sole
expense, the conduct and settlement of such Third Party Claim, and the
Indemnified Party shall cooperate with the Indemnifying Party in connection
therewith, provided that (i) the Indemnifying Party shall not thereby permit any
lien, encumbrance or other adverse charge to thereafter attach to any asset of
any Indemnified Party; (ii) the Indemnifying Party shall not thereby permit any
injunction against any Indemnified Party; (iii) the Indemnifying Party shall
permit the Indemnified Party and counsel chosen by the Indemnified Party and
reasonably acceptable to the Indemnifying Party to monitor such conduct or
settlement and shall provide the Indemnified Party and such counsel with such
information regarding such Third Party Claim as either of them may reasonably
request (which request may be general or specific), but the fees and expenses of
such counsel (including allocated costs of in-house counsel and other personnel)
shall be borne by the Indemnified Party unless (A) the Indemnifying Party and
the Indemnified Party shall have mutually agreed to the retention of such
counsel or (B) the named parties to any such Third Party Claim include the
Indemnified Party and the Indemnifying Party and in the reasonable opinion of
counsel to the Indemnified Party representation of both parties by the same
counsel would be inappropriate due to actual or likely conflicts of interest
between them, in either of which cases the reasonable fees and disbursements of
counsel for such Indemnified Party (including allocated costs of in-house
counsel and other personnel) shall be reimbursed by the Indemnifying Party to
the Indemnified Party; and (iv) the Indemnifying Party shall agree promptly to
reimburse to the extent required under this Article XII the Indemnified Party
for the full amount of any Expense or Loss resulting from such Third Party Claim
and all related expenses incurred by the Indemnified Party. In no event shall
the Indemnifying Party, without the prior written consent of the Indemnified
Party, settle or compromise any claim or consent to the entry of any judgment
that does not include as an unconditional term thereof the giving by the
claimant or the plaintiff to the Indemnified Party a release from all liability
in respect of such claim.
If the Indemnifying Party shall not have undertaken the
conduct and control of the defense of any Third Party Claim as provided above,
the Indemnifying Party shall nevertheless be entitled through counsel chosen by
the Indemnifying Party and reasonably acceptable to the Indemnified Party to
monitor the conduct or settlement of such claim by the Indemnified Party, and
the Indemnified Party shall provide the Indemnifying Party and such counsel with
such information regarding such Third Party Claim as either of them may
reasonably request (which request may be general or specific), but all costs and
expenses incurred in connection with such monitoring shall be borne by the
Indemnifying Party.
(c) So long as the Indemnifying Party is contesting any such
Third Party Claim in good faith, the Indemnified Party shall not pay or settle
any such Third Party Claim. Notwithstanding the foregoing, the Indemnified Party
shall have the right to pay or settle any such Third Party Claim, provided that
in such event the Indemnified Party shall waive any right to indemnity therefor
by the Indemnifying Party, and no amount in respect thereof shall be claimed as
an Expense or a Loss under this Article XII.
If the Indemnified Party shall have undertaken the conduct and
control of the defense of any Third Party Claim as provided above, the
Indemnified Party, on not less than 30
<PAGE> 47
days prior written notice to the Indemnifying Party, may make settlement
(including payment in full) of such Third Party Claim, and such settlement shall
be binding upon the Parties for the purposes hereof, unless within said 30-day
period the Indemnifying Party shall have requested the Indemnified Party to
contest such Third Party Claim at the expense of the Indemnifying Party. In such
event, the Indemnified Party shall promptly comply with such request and the
Indemnifying Party shall have the right to direct the defense of such claim or
any litigation based thereon subject to all of the conditions of Section
12.6(b). Notwithstanding anything in this Section 12.6(c) to the contrary, if
the Indemnified Party, in the belief that a claim may materially and adversely
affect it other than as a result of money damages or other money payments,
advises the Indemnifying Party that it has determined to settle a claim, the
Indemnified Party shall have the right to do so at its own cost and expense,
without any requirement to contest such claim at the request of the Indemnifying
Party, but without any right under the provisions of this Article XII for
indemnification by the Indemnifying Party.
(d) To the extent that, with respect to any Claim (as defined
in the Tax Sharing Agreement) governed by Article V of the Tax Sharing
Agreement, there is any inconsistency between the provisions of such Article V
and of this Section 12.6, the provisions of Article V of the Tax Sharing
Agreement shall control with respect to such Claim (as defined in the Tax
Sharing Agreement).
12.7. PROCEDURES FOR INDEMNIFICATION OF DIRECT CLAIMS. Any
claim for indemnification on account of an Expense or a Loss made directly by
the Indemnified Party against the Indemnifying Party and that does not result
from a Third Party Claim shall be asserted by written notice from the
Indemnified Party to the Indemnifying Party specifically claiming
indemnification hereunder. Such Indemnifying Party shall have a period of 30
business days after the receipt of such notice within which to respond thereto.
If such Indemnifying Party does not respond within such 30 business-day period,
such Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such claim.
If such Indemnifying Party does respond within such 30 business-day period and
rejects such claim in whole or in part, such Indemnified Party shall be free to
pursue resolution as provided in Article XIII.
12.8. CONTRIBUTION. If the indemnification provided for in
this Article XII is unavailable to an Indemnified Party in respect of any
Expense or Loss arising out of or related to information contained in the
Registration Statement or the Information Statement, then the Indemnifying
Party, in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such Expense or
Loss in such proportion as is appropriate to reflect the relative fault of the
eLoyalty Indemnified Parties, on the one hand, or the TSC Indemnified Parties,
on the other hand, in connection with the statements or omissions that resulted
in such Expense or Loss. The relative fault of any eLoyalty Indemnified Party,
on the one hand, and of any TSC Indemnified Party, on the other hand, shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission of a
material fact relates to information about or supplied by the eLoyalty Business
or an eLoyalty Indemnified Party, on the one hand, or about or by the Retained
Business or a TSC Indemnified Party, on the other hand.
<PAGE> 48
12.9. REMEDIES CUMULATIVE. The remedies provided in this
Article XII shall be cumulative and, subject to the provisions of Article XIII
below, shall not preclude assertion by an Indemnified Party of any other rights
or the seeking of any and all other remedies against any Indemnifying Party.
12.10. SURVIVAL. All covenants and agreements of the Parties
contained in this Agreement relating to indemnification shall survive the
Distribution Date indefinitely, unless a specific survival or other applicable
period is expressly set forth herein.
ARTICLE XIII
DISPUTE RESOLUTION
13.1. AGREEMENT TO ARBITRATE. Except as otherwise specifically
provided in any Operating Agreement, the procedures for discussion, negotiation
and arbitration set forth in this Article XIII shall apply to all disputes,
controversies or claims (whether sounding in contract, tort or otherwise) that
may arise out of or relate to, or arise under or in connection with, this
Agreement or any Operating Agreement, or the transactions contemplated hereby or
thereby (including all actions taken in furtherance of the transactions
contemplated hereby or thereby on or prior to the date hereof), or the
commercial or economic relationship of the Parties. Each Party agrees on behalf
of itself and its respective Subsidiaries and Affiliates that the procedures set
forth in this Article XIII shall be the sole and exclusive remedy in connection
with any dispute, controversy or claim relating to any of the foregoing matters
and irrevocably waives any right to commence any Action in or before any
Governmental Authority, except as expressly provided in Section 13.7(b) and
except to the extent provided under the Arbitration Act in the case of judicial
review of arbitration results or awards. EACH PARTY ON BEHALF OF ITSELF AND ITS
RESPECTIVE SUBSIDIARIES AND AFFILIATES IRREVOCABLY WAIVES ANY RIGHT TO ANY TRIAL
IN A COURT THAT WOULD OTHERWISE HAVE JURISDICTION OVER ANY CLAIM, CONTROVERSY OR
DISPUTE SET FORTH IN THE FIRST SENTENCE OF THIS SECTION 13.1.
13.2. ESCALATION AND MEDIATION. (a) The Parties agree to use
commercially reasonable efforts to resolve expeditiously any dispute,
controversy or claim between them with respect to the matters covered hereby
that may arise from time to time on a mutually acceptable negotiated basis. In
furtherance of the foregoing, any Party involved in a dispute, controversy or
claim may deliver a notice (an "Escalation Notice") demanding an in-person
meeting involving representatives of the Parties at a senior level of management
of the Parties (or if the Parties agree, of the appropriate strategic business
unit or division within such entity). A copy of any such Escalation Notice shall
be given to the General Counsel, or like officer or official, of each Party
involved in the dispute, controversy or claim (which copy shall state that it is
an Escalation Notice pursuant to this Agreement). Any agenda, location or
procedures for such discussions or negotiations between the Parties may be
established by the Parties from time to time; provided, however, that the
Parties shall use commercially reasonable efforts to meet within 30 days of the
<PAGE> 49
Escalation Notice.
(b) The Parties must retain a mediator to aid the Parties in
their discussions and negotiations by informally providing advice to the
Parties. Any opinion expressed by the mediator shall be strictly advisory and
shall not be binding on the Parties, nor shall any opinion expressed by the
mediator be admissible in any arbitration proceeding. The mediator shall be
selected by the Party that did not deliver the applicable Escalation Notice from
the list of individuals set forth on Exhibit I, the names of which individuals
were supplied to the Parties by JAMS/Endispute. Costs of the mediation shall be
borne equally by the Parties involved in the matter, except that each Party
shall be responsible for its own expenses. Mediation is a prerequisite to a
demand for arbitration under Section 13.3.
13.3. PROCEDURES FOR ARBITRATION. (a) At any time after the
completion of the mediation required by Section 13.2(b) (the "Arbitration Demand
Date"), any Party involved in the dispute, controversy or claim (regardless of
whether such Party delivered the Escalation Notice) may, unless the Applicable
Deadline (as hereinafter defined) has occurred, make a written demand (the
"Arbitration Demand Notice") that the dispute be resolved by binding
arbitration, which Arbitration Demand Notice shall be given to the Parties to
the dispute, controversy or claim in the manner set forth in Section 15.9. In
the event that any Party shall deliver an Arbitration Demand Notice to another
Party, such other Party may itself deliver an Arbitration Demand Notice to such
first Party with respect to any related dispute, controversy or claim with
respect to which the Applicable Deadline has not passed without the requirement
of delivering an Escalation Notice. No Party may assert that the failure to
resolve any matter during any discussions or negotiations, the course of conduct
during the discussions or negotiations or the failure to agree on a mutually
acceptable time, agenda, location or procedures for the meeting, in each case,
as contemplated by Section 13.2, is a prerequisite to a demand for arbitration
under this Section 13.3. In the event that any Party delivers an Arbitration
Demand Notice with respect to any dispute, controversy or claim that is the
subject of any then pending arbitration proceeding or of a previously delivered
Arbitration Demand Notice, all such disputes, controversies and claims shall be
resolved in the arbitration proceeding for which an Arbitration Demand Notice
was first delivered unless the arbitrator in his or her sole discretion
determines that it is impracticable or otherwise inadvisable to do so.
(b) Except as may be expressly provided in any Operating
Agreement, any Arbitration Demand Notice may be given until one year and 45 days
after the later of (i) the occurrence of the act or event giving rise to the
underlying claim or (ii) the date on which such act or event was, or should have
been, in the exercise of reasonable due diligence, discovered by the Party
asserting the claim (as applicable and as it may in a particular case be
specifically extended by the Parties in writing, the "Applicable Deadline"). Any
discussions, negotiations or mediations between the Parties pursuant to this
Agreement or otherwise will not toll the Applicable Deadline unless expressly
agreed in writing by the Parties. Each Party agrees on behalf of itself and its
respective Subsidiaries and Affiliates that if an Arbitration Demand Notice with
respect to a dispute, controversy or claim is not given prior to the expiration
of the Applicable Deadline, such dispute, controversy or claim will be barred.
Subject to Section 13.7(d), upon delivery of an Arbitration Demand Notice
pursuant to Section 13.3(a) prior to the Applicable Deadline, the
<PAGE> 50
dispute, controversy or claim shall be decided by a sole arbitrator in
accordance with the rules set forth in this Article XIII.
13.4. SELECTION OF ARBITRATOR. (a) If the amount in dispute is
less than $500,000, the mediator selected by the provisions set forth in Section
13.2(b) above shall also serve as the sole arbitrator. If the amount is dispute
equals or exceeds $500,000, the mediator selected by the provisions set forth in
Section 13.2(b) above shall select a sole arbitrator from a list provided by
JAMS/Endispute. After selection of such sole arbitrator, the mediator shall have
no further role with respect to the dispute. Any arbitrator selected pursuant to
this paragraph (a) shall be disinterested with respect to any of the Parties and
the matter and shall be reasonably competent in the applicable subject matter.
(b) The sole arbitrator selected pursuant to paragraph (a)
above will set a time for the hearing of the matter which will commence no later
than 90 days after the date of appointment of the sole arbitrator pursuant to
paragraph (a) above, and such hearing will be no longer than 30 days (unless in
the judgment of the arbitrator the matter is unusually complex and sophisticated
and thereby requires a longer time, in which event such hearing shall be no
longer than 90 days). The final decision of such arbitrator will be rendered in
writing to the Parties not later than 60 days after the last hearing date,
unless otherwise agreed by the Parties in writing.
13.5. HEARINGS. Within the time period specified in Section
13.4(d), the matter shall be presented to the arbitrator at a hearing by means
of written submissions of memoranda and verified witness statements, filed
simultaneously, and responses, if necessary in the judgment of the arbitrator or
both of the Parties. If the arbitrator deems it to be essential to a fair
resolution of the dispute, live cross-examination or direct examination may be
permitted, but is not generally contemplated to be necessary. The arbitrator
shall actively manage the arbitration with a view to achieving a just, speedy
and cost-effective resolution of the dispute, claim or controversy. The
arbitrator may, in his or her sole discretion, set time and other limits on the
presentation of each Party's case, its memoranda or other submissions, and
refuse to receive any proffered evidence that the arbitrator, in his or her sole
discretion, finds to be cumulative, unnecessary, irrelevant or of low probative
nature. Except as otherwise set forth herein, any arbitration hereunder will be
conducted in accordance with the JAMS/Endispute Streamlined Rules for
Commercial, Real Estate and Construction Cases then prevailing. The decision of
the arbitrator will be final and binding on the Parties, and judgment thereon
may be had and will be enforceable in any court having jurisdiction over the
Parties. Arbitration awards will bear interest at an annual rate of the
Prime Rate plus 2% per annum. To the extent that the provisions of this
Agreement and the prevailing rules of JAMS/Endispute conflict, the provisions of
this Agreement shall govern.
13.6. DISCOVERY AND CERTAIN OTHER MATTERS. (a) Any Party
involved in the applicable dispute may request limited document production from
the other Party of specific and expressly relevant documents, with the
reasonable expenses of the producing Party incurred in such production paid by
the requesting Party. Any such discovery (which rights to documents shall be
substantially less than document discovery rights prevailing under the Federal
Rules of Civil Procedure) shall be conducted expeditiously and shall not cause
the hearing provided for in Section 13.5 to be adjourned except upon consent of
all of the Parties or upon an extraordinary
<PAGE> 51
showing of cause demonstrating that such adjournment is necessary to permit
discovery essential to a Party to the proceeding. Depositions, interrogatories
or other forms of discovery (other than the document production set forth above)
shall not occur except by consent of all of the Parties. Disputes concerning the
scope of document production and enforcement of the document production requests
will be determined by written agreement of the Parties or, failing such
agreement, will be referred to the arbitrator for resolution. All discovery
requests will be subject to the Parties' rights to claim any applicable
privilege. The arbitrator will adopt procedures to protect the proprietary
rights of the Parties and to maintain the confidential treatment of the
arbitration proceedings (except as may be required by law). Subject to the
foregoing, the arbitrator shall have the power to issue subpoenas to compel the
production of documents relevant to the dispute, controversy or claim.
(b) The arbitrator shall have full power and authority to
determine issues of arbitrability but shall otherwise be limited to interpreting
or construing the applicable provisions of this Agreement or any Operating
Agreement, and will have no authority or power to limit, expand, alter, amend,
modify, revoke or suspend any condition or provision of this Agreement or any
Operating Agreement; it being understood, however, that the arbitrator will have
full authority to implement the provisions of this Agreement or any Operating
Agreement and to fashion appropriate remedies for breaches of this Agreement
(including interim or permanent injunctive relief); provided, however, that the
arbitrator shall not have any authority in excess of the authority a court
having jurisdiction over the Parties and the controversy or dispute would have
absent these arbitration provisions. It is the intention of the Parties that in
rendering a decision the arbitrator give effect to the applicable provisions of
this Agreement and the Operating Agreements and follow applicable law (it being
understood and agreed that this sentence shall not give rise to a right of
judicial review of the arbitrator's award).
(c) If a Party fails or refuses to appear at and participate
in an arbitration hearing after due notice, the arbitrator may hear and
determine the controversy upon evidence produced by the appearing Party.
(d) Arbitration costs will be borne equally by each Party
involved in the matter, except that each Party will be responsible for its own
attorney's fees and other costs and expenses, including the costs of witnesses
selected by such Party.
13.7. CERTAIN ADDITIONAL MATTERS. (a) Any arbitration award
shall be a bare award limited to a holding for or against a Party and shall be
without findings as to facts, issues or conclusions of law (including with
respect to any matters relating to the validity or infringement of patents or
patent applications) and shall be without a statement of the reasoning on which
the award rests, but must be in adequate form so that a judgment of a court may
be entered thereupon. Judgment upon any arbitration award hereunder may be
entered in any court having jurisdiction thereof.
(b) Prior to the time at which an arbitrator is appointed
pursuant to Section 13.4, any Party may seek one or more temporary restraining
orders in a court of competent jurisdiction if necessary in order to preserve
and protect the status quo. Neither the request for, nor the grant or denial of,
any such temporary restraining order shall be deemed a waiver of the obligation
to
<PAGE> 52
arbitrate as set forth herein, and the arbitrator may dissolve, continue or
modify any such order. Any such temporary restraining order shall remain in
effect until the first to occur of the expiration of the order in accordance
with its terms or the dissolution thereof by the arbitrator.
(c) Except as required by law, the Parties shall hold, and
shall cause their respective officers, directors, employees, agents and other
representatives to hold, the existence, content and result of mediation or
arbitration in confidence in accordance with the provisions of Article XIV and
except as may be required in order to enforce any award. Each of the Parties
shall request that any mediator or arbitrator comply with such confidentiality
requirement.
(d) In the event that at any time the sole arbitrator shall
fail to serve as an arbitrator for any reason, the Parties shall select a new
arbitrator who shall be disinterested as to the Parties and the matter in
accordance with the procedure set forth herein for the selection of the initial
arbitrator. The extent, if any, to which testimony previously given shall be
repeated or as to which the replacement arbitrator elects to rely on the
stenographic record (if there is one) of such testimony shall be determined by
the replacement arbitrator.
13.8. CONTINUITY OF SERVICE AND PERFORMANCE. Unless otherwise
agreed in writing, the Parties will continue to provide service and honor all
other commitments under this Agreement and each Operating Agreement during the
course of dispute resolution pursuant to the provisions of this Article XIII
with respect to all matters not subject to such dispute, controversy or claim.
13.9. LAW GOVERNING ARBITRATION PROCEDURES. The interpretation
of the provisions of this Article XIII, only insofar as they relate to the
agreement to arbitrate and any procedures pursuant thereto, shall be governed by
the Arbitration Act and other applicable federal law. In all other respects, the
interpretation of this Agreement shall be governed as set forth in Section 15.2.
13.10. CHOICE OF FORUM. Any arbitration hereunder shall take
place in Chicago, Illinois, unless otherwise agreed in writing by the Parties.
ARTICLE XIV
ACCESS TO INFORMATION AND SERVICES
14.1. AGREEMENT FOR EXCHANGE OF INFORMATION. (a) At all times
from and after the Distribution Date for a period of ten (10) years, as soon as
reasonably practicable after written request: (i) TSC shall afford to eLoyalty,
its Subsidiaries and their authorized accountants, counsel and other designated
representatives reasonable access during normal business hours to, or, at
eLoyalty's expense, provide copies of, all records, books, contracts,
instruments, data, documents and other information (collectively, "Information")
in the possession or under the control of TSC immediately following the
Distribution Date that relates to eLoyalty, the eLoyalty Business or the
eLoyalty Employees; and (ii) eLoyalty shall afford to TSC, its Subsidiaries and
their authorized accountants, counsel and other designated representatives
reasonable access
<PAGE> 53
during normal business hours to, or, at TSC's expense, provide copies of, all
Information in the possession or under the control of eLoyalty immediately
following the Distribution Date that relates to TSC, the TSC Business or the TSC
Employees; provided, however, that in the event that either Party determines
that any such provision of or access to Information could be commercially
detrimental, violate any law or agreement or waive any attorney-client
privilege, the Parties shall take all reasonable measures to permit the
compliance with such obligations in a manner that avoids any such harm or
consequence.
(b) Either Party may request Information under Section 14.1(a)
(i) to comply with reporting, disclosure, filing or other requirements imposed
on the requesting party (including under applicable securities or tax laws) by a
Governmental Authority having jurisdiction over the requesting party, (ii) for
use in any other judicial, regulatory, administrative, tax or other proceeding
or in order to satisfy audit, accounting, claims defense, regulatory filings,
litigation, tax or other similar requirements, (iii) for use in compensation,
benefit or welfare plan administration or other bona fide business purposes or
(iv) to comply with its obligations under this Agreement or any Operating
Agreement.
14.2. OWNERSHIP OF INFORMATION. Any Information owned by one
Party that is provided to a requesting Party pursuant to Section 14.1 shall be
deemed to remain the property of the providing Party. Unless specifically set
forth herein, nothing contained in this Agreement shall be construed to grant or
confer rights of license or otherwise in any such Information.
14.3. COMPENSATION FOR PROVIDING INFORMATION. The Party
requesting Information agrees to reimburse the providing Party for the
reasonable costs, if any, of creating, gathering and copying such Information,
to the extent that such costs are incurred for the benefit of the requesting
Party. Except as otherwise specifically provided in this Agreement, such costs
shall be computed in accordance with the providing Party's standard methodology
and procedures.
14.4. RETENTION OF RECORDS. To facilitate the possible
exchange of Information pursuant to this Article XIV after the Distribution
Date, the Parties agree to use commercially reasonable efforts to retain all
Information in their respective possession or control on the Distribution Date
in accordance with the policies and procedures of TSC as in effect on the
Distribution Date. No party will destroy, or permit any of its Subsidiaries or
Affiliates to destroy, any Information that the other Party may have the right
to obtain pursuant to this Agreement prior to the seventh anniversary of the
date hereof, and thereafter without first using commercially reasonable efforts
to notify the other Party of the proposed destruction and giving the other Party
the opportunity to take possession of such Information prior to such
destruction; provided, however, that in the case of any Information relating to
Taxes, such period shall be extended to one year after the expiration of the
applicable statute of limitations (giving effect to any extensions thereof).
14.5. LIMITATION OF LIABILITY. No Party shall have any
liability to the other Party (i) if any Information exchanged or provided
pursuant to this Agreement that is an estimate or forecast, or that is based on
an estimate or forecast, is found to be inaccurate, in the absence of
<PAGE> 54
willful misconduct by the Party providing such Information, or (ii) if any
Information is destroyed after commercially reasonable efforts to comply with
the provisions of Section 14.4.
14.6. PRODUCTION OF WITNESSES. At all times from and after the
Distribution Date, each Party shall use commercially reasonable efforts to make
available to the other Party (without cost (other than reimbursement of actual
out-of-pocket expenses) to, and upon prior written request of, the other Party)
its directors, officers, employees and agents as witnesses to the extent that
the same may reasonably be required by the other Party in connection with any
legal, administrative or other proceeding in which the requesting Party may from
time to time be involved with respect to the eLoyalty Business, the Retained
Business or any transactions contemplated hereby.
14.7. CONFIDENTIALITY. (a) From and after the Distribution
Date, each of TSC and eLoyalty shall hold, and shall cause their respective
directors, officers, employees, agents, consultants, advisors and other
representatives to hold, in strict confidence, with at least the same degree of
care that applies to TSC's confidential and proprietary information pursuant to
policies in effect as of the Distribution Date, all non-public information
concerning or belonging to the other Party or any of its Subsidiaries or
Affiliates obtained by it prior to the Distribution Date, accessed by it
pursuant to Section 14.1 hereof, or furnished to it by the other Party or any of
its Subsidiaries or Affiliates pursuant to this Agreement or any agreement or
document contemplated hereby, including, without limitation, any trade secrets,
technology, know-how and other non-public, proprietary intellectual property
rights licensed pursuant to the Intellectual Property License Agreements and
shall not release or disclose such information to any other Person, except its
representatives, who shall be bound by the provisions of this Section 14.7;
provided, however, that TSC and eLoyalty and their respective directors,
officers, employees, agents, consultants, advisors and other representatives may
disclose such information if, and only to the extent that, (i) a disclosure of
such information is compelled by judicial or administrative process or, in the
opinion of such Party's counsel, by other requirements of law (in which case the
disclosing Party will provide, to the extent practicable under the
circumstances, advance written notice to the other Party of its intent to make
such disclosure), or (ii) such Party can show that such information (A) is
published or is or otherwise becomes available to the general public as part of
the public domain without breach of this Agreement; (B) has been furnished or
made known to the recipient without any obligation to keep it confidential by a
third party under circumstances which are not known to the recipient to involve
a breach of the third party's obligations to a Party hereto; (C) was developed
independently of information furnished to the recipient under this Agreement; or
(D) in the case of information furnished after the Distribution Date, was not
known to the recipient at the time of the Distribution but became known to the
recipient prior to the time of receipt thereof from the other Party.
(b) Each Party acknowledges that the other Party would not
have an adequate remedy at law for the breach by the acknowledging Party of any
one or more of the covenants contained in this Section 14.7 and agrees that, in
the event of such breach, the other Party may, in addition to the other remedies
that may be available to it, apply to a court for an injunction to prevent
breaches of this Section 14.7 and to enforce specifically the terms and
provisions of this Section. Notwithstanding any other Section hereof, the
provisions of this Section 14.7 shall survive the Distribution Date
indefinitely.
<PAGE> 55
14.8. PRIVILEGED MATTERS. (a) Each of TSC and eLoyalty agrees
to maintain, preserve and assert all privileges, including, without limitation,
privileges arising under or relating to the attorney-client relationship (which
shall include without limitation the attorney-client and work product
privileges), not heretofore waived, that relate to the eLoyalty Business and the
Transferred Assets for any period prior to the Distribution Date ("Privilege" or
"Privileges"). Each Party agrees that it shall not waive any Privilege that
could be asserted under applicable law without the prior written consent of the
other Party. The rights and obligations created by this Section 14.8 shall apply
to all information relating to the eLoyalty Business as to which, but for the
Distribution, either Party would have been entitled to assert or did assert the
protection of a Privilege ("Privileged Information"), including without
limitation, (i) any and all information generated prior to the Distribution Date
but which, after the Distribution, is in the possession of either Party; and
(ii) all information generated, received or arising after the Distribution Date
that refers to or relates to Privileged Information generated, received or
arising prior to the Distribution Date.
(b) Upon receipt by either Party of any subpoena, discovery or
other request that may call for the production or disclosure of Privileged
Information or if either Party obtains knowledge that any current or former
employee of TSC or eLoyalty has received any subpoena, discovery or other
request that may call for the production or disclosure of Privileged
Information, such Party shall notify promptly the other Party of the existence
of the request and shall provide the other Party a reasonable opportunity to
review the information and to assert any rights it may have under this Section
14.8 or otherwise to prevent the production or disclosure of Privileged
Information. Each Party agrees that it will not produce or disclose any
information that may be covered by a Privilege under this Section 14.8 unless
(i) the other Party has provided its written consent to such production or
disclosure (which consent shall not be unreasonably withheld), or (ii) a court
of competent jurisdiction has entered a final, nonappealable order finding that
the information is not entitled to protection under any applicable Privilege.
(c) TSC's transfer of books and records and other information
to eLoyalty, and TSC's agreement to permit eLoyalty to possess Privileged
Information existing or generated prior to the Distribution Date, are made in
reliance on eLoyalty's agreement, as set forth in Sections 14.7 and 14.8, to
maintain the confidentiality of Privileged Information and to assert and
maintain all applicable Privileges. The access to information being granted
pursuant to Section 14.1, the agreement to provide witnesses and individuals
pursuant to Section 14.6 and the transfer of Privileged Information to eLoyalty
pursuant to this Agreement shall not be deemed a waiver of any Privilege that
has been or may be asserted under this Section 14.8 or otherwise. Nothing in
this Agreement shall operate to reduce, minimize or condition the rights granted
to TSC in, or the obligations imposed upon eLoyalty by, this Section 14.8.
ARTICLE XV
MISCELLANEOUS
<PAGE> 56
15.1. ENTIRE AGREEMENT. This Agreement and the Operating
Agreements, including the Schedules and Exhibits referred to herein and therein
and the documents delivered pursuant hereto and thereto, constitute the entire
agreement between the Parties with respect to the subject matter contained
herein or therein, and supersede all prior agreements, negotiations,
discussions, understandings, writings and commitments between the Parties with
respect to such subject matter.
15.2. CHOICE OF LAW AND FORUM. This Agreement shall be
governed by and construed and enforced in accordance with the substantive laws
(except for any otherwise applicable conflicts of law provisions) of the State
of Illinois and the federal laws of the United States of America applicable
therein, as though all acts and omissions related hereto occurred in Illinois.
Any lawsuit arising from or related to this Agreement or any of the Operating
Agreements shall be brought only in the United States District Court for the
Northern District of Illinois or the Circuit Court of Cook County, Illinois. To
the extent permissible by law, the Parties hereby consent to the jurisdiction
and venue of such courts. Each Party hereby waives, releases and agrees not to
assert, and agrees to cause its Affiliates to waive, release and not to assert,
any rights such Party or its Affiliates may have under any foreign law or
regulation that would be inconsistent with the terms of this Agreement as
governed by Illinois law.
15.3. AMENDMENT. This Agreement shall not be amended, modified
or supplemented except by a written instrument signed by an authorized
representative of each of the Parties.
15.4. WAIVER. Any term or provision of this Agreement may be
waived, or the time for its performance may be extended, by the Party or Parties
entitled to the benefit thereof. Any such waiver shall be validly and
sufficiently given for the purposes of this Agreement if, as to any Party, it is
in writing signed by an authorized representative of such Party. The failure of
any Party to enforce at any time any provision of this Agreement shall not be
construed to be a waiver of such provision, or in any way to affect the validity
of this Agreement or any part hereof or the right of any Party thereafter to
enforce each and every such provision. No waiver of any breach of this Agreement
shall be held to constitute a waiver of any other or subsequent breach.
15.5. PARTIAL INVALIDITY. Wherever possible, each provision
hereof shall be interpreted in such a manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such provision or provisions shall be ineffective to the extent, but
only to the extent, of such invalidity, illegality or unenforceability without
invalidating the remainder of such provision or provisions or any other
provisions hereof, unless such a construction would be unreasonable.
15.6. EXECUTION IN COUNTERPARTS. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an original
instrument, but all of which shall be considered one and the same agreement, and
shall become binding when one or more counterparts have been signed by and
delivered to each of the Parties.
<PAGE> 57
15.7. SUCCESSORS AND ASSIGNS. (a) This Agreement and each
Operating Agreement shall be binding upon and inure to the benefit of the
Parties hereto and thereto, respectively, and their successors and permitted
assigns; provided, however, that the rights of either Party under this Agreement
and each Operating Agreement shall not be assignable by such Party without the
prior written consent of the other Party. The successors and permitted assigns
hereunder shall include, without limitation, any permitted assignee as well as
the successors in interest to such permitted assignee (whether by merger,
liquidation (including successive mergers or liquidations) or otherwise).
15.8. THIRD PARTY BENEFICIARIES. Except to the extent
otherwise provided in Section 10.5 or Article XII hereof or in any Operating
Agreement, the provisions of this Agreement and each Operating Agreement are
solely for the benefit of the Parties and their respective Affiliates,
successors and permitted assigns and shall not confer upon any third Person any
remedy, claim, liability, reimbursement or other right in excess of those
existing without reference to this Agreement or any Operating Agreement. Nothing
in this Agreement or any Operating Agreement shall obligate TSC or eLoyalty to
assist any eLoyalty Employee to enforce any rights such employee may have with
respect to any of the employee benefits described in this Agreement.
15.9. NOTICES. All notices, requests, claims, demands and
other communications required or permitted hereunder shall be in writing and
shall be deemed given or delivered (i) when delivered personally, (ii) if
transmitted by facsimile when confirmation of transmission is received, (iii) if
sent by registered or certified mail, postage prepaid, return receipt requested,
on the third business day after mailing or (iv) if sent by private courier when
received; and shall be addressed as follows:
If to TSC, to:
Technology Solutions Company
205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
Attention: General Counsel
Telecopy: (312) 228-4500
Facsimile: (312) 228-4501
If to eLoyalty, to:
eLoyalty Corporation
205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
Attention: Chief Financial Officer
Telecopy: (312) 228-4500
Facsimile: (312) 228-4501
<PAGE> 58
or to such other address as such Party may indicate by a notice delivered to the
other Party.
15.10. PERFORMANCE. Each Party shall cause to be performed,
and hereby guarantees the performance of, all actions, agreements and
obligations set forth herein to be performed by any Subsidiary or Affiliate of
such Party.
15.11. FORCE MAJEURE. No Party shall be deemed in fault of
this Agreement or any Operating Agreement to the extent that any delay or
failure in the performance of its obligations under this Agreement or any
Operating Agreement results from any cause beyond its reasonable control and
without its fault or negligence, including, without limitation, acts of God,
acts of civil or military authority, embargoes, epidemics, war, riots,
insurrections, fires, explosions, earthquakes, floods, unusually severe weather
conditions, labor problems or unavailability of parts, or, in the case of
computer systems, any failure in electrical or air conditioning equipment. In
the event of any such excused delay, the time for performance shall be extended
for a period equal to the time lost by reason of the delay.
15.12. NO PUBLIC ANNOUNCEMENT. Neither TSC nor eLoyalty shall,
without the approval of the other, make any press release or other public
announcement concerning the transactions contemplated by this Agreement, except
as and to the extent that any such Party shall be so obligated by law or the
rules of any stock exchange or quotation system, in which case the other Party
shall be advised and the Parties shall use commercially reasonable efforts to
cause a mutually agreeable release or announcement to be issued; provided,
however, that the foregoing shall not preclude communications or disclosures
necessary to implement the provisions of this Agreement or to comply with the
accounting and SEC disclosure obligations or the rules of any stock exchange.
15.13. TERMINATION. Notwithstanding any provisions hereof,
this Agreement may be terminated and the Distribution abandoned at any time
prior to the Distribution Date by and in the sole discretion of the Board of
Directors of TSC without the prior the approval of any Person. In the event of
such termination, this Agreement shall forthwith become void and no Party shall
have any liability to any Person by reason of this Agreement, except that TSC
shall be liable for any costs and expenses, including attorneys' fees, incurred
by eLoyalty or its Subsidiaries prior to or arising out of such termination.
<PAGE> 59
IN WITNESS WHEREOF, the Parties have caused this Agreement to
be executed by their authorized representatives as of the date first above
written.
TECHNOLOGY SOLUTIONS COMPANY
By: _____________________________________________
Jack Hayden
[Title]
eLOYALTY CORPORATION
By: _____________________________________________
Kelly D. Conway
President and Chief Executive Officer
SIGNATURE PAGE
TO THE
REORGANIZATION AGREEMENT
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
TSC/ECM INC.
ARTICLE I
The name of the corporation (which is hereinafter referred to as the
"Corporation") is:
TSC/ECM INC.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is The Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of the Corporation's registered agent
at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware.
ARTICLE IV
(A) Authorized Capital Stock. The total number of shares of capital
stock which the Corporation shall have authority to issue is 5,500, consisting
of 5,000 shares of common stock, with the par value of $.01 per share ("Common
Stock"), and 500 shares of preferred stock, with the par value of $.01 per share
("Preferred Stock").
(B) Preferred Stock. The Preferred Stock may be issued from time to
time in one or more series. The Board of Directors is hereby authorized to
create and provide for the issuance of shares of Preferred Stock in series and,
by filing a certificate pursuant to the applicable law of the State of Delaware
(hereinafter referred to as a "Preferred Stock Designation"), to establish from
time to time the number of shares to be included in each such series, and to fix
the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
(i) The designation of the series, which may be by
distinguishing number, letter or title;
(ii) The number of shares of the series, which number the
Board of Directors may thereafter (except where otherwise provided in
the Preferred Stock
<PAGE> 2
Designation) increase or decrease (but not below the number of shares
thereof then outstanding);
(iii) Whether dividends, if any, shall be cumulative or
noncumulative and the dividend rate of the series;
(iv) The dates at which dividends, if any, shall be payable;
(v) The redemption rights and price or prices, if any, for
shares of the series;
(vi) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series;
(vii) The amounts payable on, and the preferences, if any, of
shares of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
Corporation;
(viii) Whether the shares of the series shall be convertible
into shares of any other class or series, or any other security, of the
Corporation or any other corporation, and, if so, the specification of
such other class or series of such other security, the conversion price
or prices or rate or rates, any adjustments thereof, the date or dates
at which such shares shall be convertible and all other terms and
conditions upon which such conversion may be made;
(ix) Restrictions on the issuance of shares of the same series
or of any other class or series;
(x) The voting rights, if any, of the holders of shares of the
series; and
(xi) Such other powers, preferences and relative,
participating, optional and other special rights, and the
qualifications, limitations and restrictions thereof as the Board of
Directors shall determine.
(C) Common Stock. The Common Stock shall be subject to the express
terms of the Preferred Stock and any series thereof. Each share of Common Stock
shall be equal to each other share of Common Stock. The holders of shares of
Common Stock shall be entitled to one vote for each such share upon all
questions presented to the stockholders.
(D) Vote. Except as may be provided in this Certificate of
Incorporation or in a Preferred Stock Designation, or as may be required by
applicable law, the Common Stock shall have the exclusive right to vote for the
election of directors and for all other purposes, and holders of shares of
Preferred Stock shall not be entitled to receive notice of any meeting of
stockholders at which they are not entitled to vote.
-2-
<PAGE> 3
(E) Record Holders. The Corporation shall be entitled to treat the
person in whose name any share of its stock is registered on the stock transfer
books of the Corporation as the owner thereof for all purposes and shall not be
bound to recognize any equitable or other claim to, or interest in, such share
on the part of any other person, whether or not the Corporation shall have
notice thereof, except as expressly provided by applicable law.
ARTICLE V
The name and mailing address of the incorporator is as follows:
Name Mailing Address
---- ---------------
Jessie Couch Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
ARTICLE VI
The Board of Directors is hereby authorized to create and issue,
whether or not in connection with the issuance and sale of any of its stock or
other securities or property, rights entitling the holders thereof to purchase
from the Corporation shares of stock or other securities of the Corporation or
any other corporation. The times at which and the terms upon which such rights
are to be issued will be determined by the Board of Directors and set forth in
the contracts or instruments that evidence such rights. The authority of the
Board of Directors with respect to such rights shall include, but not be limited
to, determination of the following:
(A) The initial purchase price per share or other unit of the stock or
other securities or property to be purchased upon exercise of such rights;
(B) Provisions relating to the times at which and the circumstances
under which such rights may be exercised or sold or otherwise transferred,
either together with or separately from, any other stock or other securities of
the Corporation;
(C) Provisions which adjust the number or exercise price of such rights
or amount or nature of the stock or other securities or property receivable upon
exercise of such rights in the event of a combination, split or recapitalization
of any stock of the Corporation, a change in ownership of the Corporation's
stock or other securities or a reorganization, merger, consolidation, sale of
assets or other occurrence relating to the Corporation or any stock of the
Corporation, and provisions restricting the ability of the Corporation to enter
into any such transaction absent an assumption by the other party or parties
thereto of the obligations of the Corporation under such rights;
(D) Provisions which deny the holder of a specified percentage of the
outstanding stock or other securities of the Corporation the right to exercise
such rights and/or cause the rights held by such holder to become void;
-3-
<PAGE> 4
(E) Provisions which permit the Corporation to redeem or exchange such
rights; and
(F) The appointment of a rights agent with respect to such rights.
ARTICLE VII
(A) In furtherance and not in limitation of the powers conferred by
law, the Board of Directors is expressly authorized and empowered:
(i) to adopt, amend or repeal the By-Laws of the Corporation,
provided, however, that the By-Laws may also be altered, amended or
repealed by the affirmative vote of the holders of at least 80 percent
of the voting power of the then outstanding Voting Stock (as defined
below), voting together as a single class; and
(ii) from time to time to determine whether and to what
extent, and at what times and places, and under what conditions and
regulations, the accounts and books of the Corporation, or any of them,
shall be open to inspection of stockholders; and, except as so
determined, or as expressly provided in this Certificate of
Incorporation or in any Preferred Stock Designation, no stockholder
shall have any right to inspect any account, book or document of the
Corporation other than such rights as may be conferred by applicable
law.
(B) In addition to any other considerations which the Board of
Directors may lawfully take into account, in determining whether to take or to
refrain from taking corporate action on any matter, including proposing any
matter to the stockholders of the Corporation, the Board of Directors may take
into account the long-term as well as short-term interests of the Corporation
and its stockholders (including the possibility that these interests may be best
served by the continued independence of the Corporation), and the interests of
creditors, customers, employees and other constituencies of the Corporation and
its subsidiaries, including the effect upon communities in which the Corporation
and its subsidiaries do business.
(C) The Corporation may in its By-Laws confer powers upon the Board of
Directors in addition to the foregoing and in addition to the powers and
authorities expressly conferred upon the Board of Directors by law.
ARTICLE VIII
Effective from and after the date upon which the Corporation shall be
subject to the reporting requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, subject to the rights of the holders of any
series of Preferred Stock to elect additional directors under specific
circumstances or to consent to specific actions taken by the Corporation, any
action required or permitted to be taken by the stockholders of the Corporation
must be effected at a duly called annual or special meeting of stockholders of
the Corporation and may not be effected by any consent in writing in lieu of a
meeting of such stockholders.
-4-
<PAGE> 5
ARTICLE IX
(A) Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specific circumstances, the number of
directors that shall constitute the whole Board of Directors of the Corporation
shall be the number from time to time fixed by the Board of Directors.
(B) Subject to the rights of the holders of any series of Preferred
Stock to fill any newly created directorships or vacancies, any vacancy on the
Board of Directors that results from an increase in the number of directors or
for any other reason may be filled by a majority of the directors then in
office, although less than a quorum, or by a sole remaining director.
(C) Unless and except to the extent that the By-Laws of the Corporation
shall so require, the election of directors of the Corporation need not be by
written ballot.
(D) The directors, other than those who may be elected by the holders
of any series of Preferred Stock, shall be divided into three classes, as nearly
equal in number as possible, and designated as Class I, Class II and Class III.
Class I directors shall be initially elected for a term expiring at the 2000
annual meeting of stockholders, Class II directors shall be initially elected
for a term expiring at the 2001 annual meeting of stockholders, and Class III
directors shall be initially elected for a term expiring at the 2002 annual
meeting of stockholders. Members of each class shall hold office until their
successors are duly elected and qualified. At each succeeding annual meeting of
the stockholders of the Corporation, the successors of the class of directors
whose term expires at that meeting shall be elected by a plurality of the votes
of the shares of Voting Stock present in person or represented by proxy at such
meeting and entitled to vote on the election of directors and shall hold office
for a term expiring at the annual meeting of stockholders held in the third year
following the year of their election, and until their successors are duly
elected and qualified, subject to death, resignation or removal from office.
(E) Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of Preferred Stock issued by the Corporation shall have
the right, voting separately by class or series, to elect directors at an annual
or special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation applicable thereto, and such
directors shall not be divided into classes pursuant to this Article IX unless
expressly provided by such terms.
(F) Subject to the rights of the holders of any series of Preferred
Stock, any director may be removed from office at any time, but only for cause
and only by the affirmative vote of the holders of at least 80 percent of the
voting power of the then outstanding Voting Stock, voting together as a single
class.
ARTICLE X
Notwithstanding anything contained in this Certificate of Incorporation
to the contrary, the affirmative vote of at least 80 percent of the voting power
of the then outstanding Voting
-5-
<PAGE> 6
Stock, voting together as a single class, shall be required to amend or repeal,
or adopt any provisions inconsistent with, Article VI, subparagraph (i) of
paragraph (A) of Article VII, Article VIII, Article IX or this Article X of this
Certificate of Incorporation. For the purposes of this Certificate of
Incorporation, "Voting Stock" shall mean the outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of directors.
ARTICLE XI
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which the director derived
an improper personal benefit. Any amendment or repeal of this Article XI by the
stockholders shall not adversely affect any right or protection of a director of
the Corporation existing hereunder in respect of any act or omission occurring
prior to such amendment or repeal.
ARTICLE XII
Each person who is or was or had agreed to become a director or officer
of the Corporation, or each person who is or was serving or who had agreed to
serve at the request of the Board of Directors or an officer of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise (including the heirs, executors,
administrators of estate of such person), shall be indemnified by the
Corporation in accordance with and pursuant to the By-Laws of the Corporation.
The Corporation may provide indemnification to employees and agents of the
Corporation to the extent provided by action of the Board of Directors pursuant
to the By-Laws. Without limiting the generality or the effect of the foregoing,
the Corporation may enter into one or more agreements with any person which
provide for indemnification greater or different than that provided in this
Article XII. Any amendment or repeal of this Article XII shall not adversely
affect any right or protection existing hereunder in respect of any act or
omission occurring prior to such amendment or repeal.
ARTICLE XIII
In furtherance and not in limitation of the powers conferred by law or
in this Certificate of Incorporation, the Board of Directors (and any committee
of the Board of Directors) is expressly authorized, to the extent permitted by
law, to take such action or actions as the Board of Directors or such committee
may determine to be reasonably necessary or desirable to (A) encourage any
individual, limited partnership, general partnership, corporation or other firm
or entity (a "person") to enter into negotiations with the Board of Directors
and management of the Corporation with respect to any transaction which may
result in a change in control of the Corporation which is proposed or initiated
by such person or (B) contest or oppose any such transaction which the Board of
Directors or such committee determines to be unfair, abusive or otherwise
undesirable with respect to the Corporation and its business, assets or
properties or the
-6-
<PAGE> 7
stockholders of the Corporation, including, without limitation, the adoption of
such plans or the issuance of such rights, options, capital stock, notes,
debentures or other evidences of indebtedness or other securities of the
Corporation, which rights, options, capital stock, notes, debentures or other
evidences of indebtedness and other securities (i) may be exchangeable for or
convertible into cash or other securities on such terms and conditions as may be
determined by the Board of Directors or such committee and (ii) may provide for
the treatment of any holder or class of holders thereof designated by the Board
of Directors or any such committee in respect of the terms, conditions,
provisions and rights of such securities which is different from, and unequal
to, the terms, conditions, provisions and rights applicable to all other holders
thereof.
ARTICLE XIV
The Corporation reserves the right at any time and from time to time to
amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, or any Preferred Stock Designation, and any other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted, in the manner now or hereafter prescribed herein or by law;
and all rights, preferences and privileges of whatsoever nature conferred upon
stockholders, directors or any other persons whomsoever by and pursuant to this
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the right reserved in this Article XIV; provided, however,
that any amendment or repeal of Article XI or Article XII of this Certificate of
Incorporation shall not adversely affect any right or protection existing
hereunder in respect of any act or omission occurring prior to such amendment or
repeal; and provided further that no Preferred Stock Designation shall be
amended after the issuance of any shares of the series of Preferred Stock
created thereby, except in accordance with the terms of such Preferred Stock
Designation and the requirements of applicable law.
ARTICLE XV
In accordance with Section 203(b)(1) of the General Corporation Law of
the State of Delaware, the Corporation expressly elects not to be governed by
Section 203 of the General Corporation Law of the State of Delaware.
THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, does make this certificate, hereby declaring and certifying
that this is my act and deed and the facts herein stated are true, and
accordingly have hereunto set my hand this 10th day of May, 1999.
/s/ Jessie J. Couch
---------------------------------
Jessie J. Couch, Incorporator
-7-
<PAGE> 8
TSC/ECM INC.
(A DELAWARE CORPORATION)
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
TSC/ECM INC.
TSC/ECM INC., a Delaware corporation (the "Corporation"),
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, DOES HEREBY CERTIFY:
1. That Article I of the Certificate of Incorporation of the
Corporation is hereby amended to read in its entirety as follows:
"The name of the corporation (which is hereinafter referred
to as the "Corporation") is:
eLoyalty Corporation."
2. That Article IV paragraph (A) of the Certificate of
Incorporation of the Corporation is hereby amended to read in its
entirety as follows:
"The total number of shares of capital stock which
the Corporation shall have authority to issue is
110,000,000, consisting of 100,000,000 shares of
common stock, with the par value of $.01 per share
("Common Stock"), and 10,000,000 shares of preferred
stock, with the par value of $.01 per share
("Preferred Stock")."
3. That, in accordance with the applicable provisions of
Sections 141(f), 228(a) and 242 of the General Corporation Law of the
State of Delaware, the aforesaid Amendments were duly adopted by the
unanimous written consent of the Board of Directors and the sole
stockholder of the Corporation.
<PAGE> 9
IN WITNESS WHEREOF, TSC/ECM INC. has caused this Certificate
of Amendment to be executed on its behalf by its Secretary Paul R. Peterson and
to be attested by its Treasurer Timothy P. Dimond, this 7th day of July, 1999.
TSC/ECM INC.
By: /s/ Paul R. Peterson
----------------------
Paul R. Peterson
Secretary
ATTEST: /s/ Timothy P. Dimond
----------------------------
Timothy P. Dimond
Treasurer
-2-
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
ELOYALTY CORPORATION
i
<PAGE> 2
BY-LAWS
OF
ELOYALTY CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I - OFFICES AND RECORDS.................................................................................-1-
Section 1.1. Delaware Office......................................................................-1-
Section 1.2. Other Offices........................................................................-1-
Section 1.3. Books and Records....................................................................-1-
ARTICLE II - STOCKHOLDERS.......................................................................................-1-
Section 2.1. Annual Meeting.......................................................................-1-
Section 2.2. Special Meeting......................................................................-2-
Section 2.3. Place of Meeting.....................................................................-2-
Section 2.4. Notice of Meeting....................................................................-2-
Section 2.5. Quorum and Adjournment...............................................................-2-
Section 2.6. Voting and Proxies...................................................................-3-
Section 2.7. Notice of Stockholder Business and Nominations.......................................-4-
Section 2.8. Stockholder Vote Required............................................................-6-
Section 2.9. Inspectors of Elections; Opening and Closing the Polls...............................-6-
Section 2.10. Fixing Date of Determination of Stockholders of Record...............................-7-
Section 2.11. List of Stockholders Entitled to Vote................................................-7-
ARTICLE III - BOARD OF DIRECTORS................................................................................-8-
Section 3.1. General Powers.......................................................................-8-
Section 3.2. Regular Meetings.....................................................................-8-
Section 3.3. Special Meetings.....................................................................-8-
Section 3.4. Notice...............................................................................-8-
Section 3.5. Quorum...............................................................................-9-
Section 3.6. Vacancies............................................................................-9-
Section 3.7. Executive and Other Committees.......................................................-9-
Section 3.8. Removal.............................................................................-10-
Section 3.9. Telephonic Meetings.................................................................-10-
Section 3.10. Informal Action by Directors........................................................-10-
Section 3.11. Reliance upon Records...............................................................-10-
Section 3.12. Interested Directors................................................................-11-
Section 3.13. Compensation........................................................................-11-
Section 3.14. Presumption of Assent...............................................................-11-
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE IV - OFFICERS..........................................................................................-12-
Section 4.1. Elected Officers....................................................................-12-
Section 4.2. Other Officers......................................................................-12-
Section 4.3. Resignation and Removal.............................................................-12-
Section 4.4. Vacancies...........................................................................-12-
Section 4.5. Chairman............................................................................-12-
Section 4.6. President...........................................................................-13-
Section 4.7. Vice Presidents and Assistant Vice Presidents.......................................-13-
Section 4.8. Secretary...........................................................................-13-
Section 4.9. Treasurer...........................................................................-13-
Section 4.10. Assistant Officers..................................................................-13-
Section 4.11. Compensation........................................................................-14-
ARTICLE V - CONTRACTS AND PROXIES..............................................................................-14-
Section 5.1. Contracts...........................................................................-14-
Section 5.2. Proxies.............................................................................-14-
ARTICLE VI - INDEMNIFICATION AND INSURANCE.....................................................................-15-
ARTICLE VII - STOCK CERTIFICATES AND TRANSFERS.................................................................-17-
ARTICLE VIII - MISCELLANEOUS PROVISIONS........................................................................-17-
Section 8.1. Fiscal Year.........................................................................-17-
Section 8.2. Dividends...........................................................................-17-
Section 8.3. Seal................................................................................-17-
ARTICLE IX - AMENDMENTS........................................................................................-18-
</TABLE>
iii
<PAGE> 4
BY-LAWS
OF
ELOYALTY CORPORATION
(June 22, 1999)
Incorporated under the Laws of the State of Delaware
ARTICLE I
OFFICES AND RECORDS
SECTION 1.1. DELAWARE OFFICE
The principal office of eLoyalty Corporation (the "Corporation") in the
State of Delaware shall be located in the City of Wilmington, County of New
Castle, and the name and address of its registered agent is The Corporation
Trust Company, 1209 Orange Street, Wilmington, Delaware.
SECTION 1.2. OTHER OFFICES
The Corporation may have such other offices, either within or without
the State of Delaware, as the Board of Directors may from time to time designate
or as the business of the Corporation may from time to time require.
SECTION 1.3. BOOKS AND RECORDS
The books and records of the Corporation may be kept outside the State
of Delaware at such place or places as may from time to time be designated by
the Board of Directors.
ARTICLE II
STOCKHOLDERS
SECTION 2.1. ANNUAL MEETING
The annual meeting of stockholders of the Corporation shall be held at
such place, either within or without the State of Delaware, and at such time and
date as the Board of Directors, by resolution, shall determine for the purpose
of electing directors and for the transaction of such other business as may be
properly brought before the meeting. If the Board fails to determine the time,
date and place of meeting, the annual meeting of stockholders shall be held at
the principal office of the Corporation on the first Thursday in May commencing
in 2000. If the date of the annual meeting shall fall upon a weekend or legal
holiday, the meeting shall be held on the next succeeding business day.
<PAGE> 5
SECTION 2.2. SPECIAL MEETING
Subject to the rights of the holders of any Preferred Stock (as defined
in the Certificate of Incorporation of the Corporation) to elect additional
directors under specific circumstances, special meetings of the stockholders may
be called only by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of directors which the Corporation would have if
there were no vacancies (the "Whole Board").
SECTION 2.3. PLACE OF MEETING
The Board of Directors may designate the place of meeting for any
meeting of the stockholders. If no designation is made by the Board, the place
of meeting shall be the principal office of the Corporation.
SECTION 2.4. NOTICE OF MEETING
Written or printed notice, stating the place, day and hour of a meeting
and the purpose or purposes for which the meeting is called, shall be prepared
and delivered by the Corporation not less than ten days nor more than sixty days
before the date of the meeting, either personally or by mail, to each
stockholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail with
postage thereon prepaid, addressed to the stockholder at such stockholder's
address as it appears on the stock transfer books of the Corporation. Only such
business shall be conducted at a special meeting of stockholders as shall have
been brought before the meeting pursuant to the Corporation's notice of meeting.
Any previously scheduled meeting of the stockholders may be postponed by
resolution of the Board of Directors upon public notice given prior to the time
previously scheduled for such meeting of stockholders.
SECTION 2.5. QUORUM AND ADJOURNMENT
Except as otherwise provided by law or by the Certificate of
Incorporation, the holders of a majority of the voting power of the outstanding
shares of the Corporation entitled to vote generally in the election of
directors (the "Voting Stock"), represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders, except that when specified
business is to be voted on by a class or series voting as a class, the holders
of a majority of the voting power of the shares of such class or series shall
constitute a quorum for the transaction of such business. The chairman of the
meeting or a majority of the shares of Voting Stock so represented may adjourn
the meeting from time to time, whether or not there is such a quorum (or, in the
case of specified business to be voted on by a class or series, the chairman or
a majority of the shares of such class or series so represented may adjourn the
meeting with respect to such specified business). Notice need not be given of
any such adjourned meeting if the date, time and place thereof are announced at
the meeting at which the adjournment is taken. At the adjourned meeting any
business may be transacted which might have been transacted at the original
meeting. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the adjourned meeting in accordance with Section 2.4 of these By-Laws.
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<PAGE> 6
The stockholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 2.6. VOTING AND PROXIES
(A) Voting Rights of other Corporations. Voting Stock standing in the
name of another corporation and entitled to vote may be voted by such officer,
agent or proxy as the By-Laws or other internal regulations of such other
corporation may prescribe or, in the absence of such provision, as the Board of
Directors or comparable body of such other corporation may determine.
(B) Voting Rights of Fiduciaries. Voting Stock standing in the name of
a deceased person, a minor, an incompetent or a debtor in a case under Title 11,
United States Code, and entitled to vote may be voted by an administrator,
executor, guardian, conservator, debtor-in-possession or trustee, as the case
may be, either in person or by proxy, without transfer of such shares into the
name of the official or other person so voting.
(C) Voting Rights of Pledgors. A stockholder whose Voting Stock is
pledged shall be entitled to vote such stock unless on the transfer records of
the Corporation the pledgor has expressly empowered the pledgee to vote such
shares, in which case only the pledgee, or such pledgee's proxy, may represent
such shares and vote thereon.
(D) Voting Rights of Joint Owners. If Voting Stock is held of record in
the names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or if
two or more persons have the same fiduciary relationship respecting the same
shares, unless the Secretary is given written notice to the contrary and is
furnished with a copy of the instrument or order appointing them or creating the
relationship wherein it is so provided, their acts with respect to voting shall
have the following effect: (i) if only one votes, such act binds all; (ii) if
more than one votes, the act of the majority so voting binds all; and (iii) if
more than one votes, but the vote is evenly split on any particular matter, each
faction may vote such Voting Stock proportionally, or any person voting the
shares, or a beneficiary, if any, may apply to the Court of Chancery of the
State of Delaware or such other court as may have jurisdiction to appoint an
additional person to act with the persons so voting such Voting Stock, which
shall then be voted as determined by a majority of such persons and the person
appointed by the Court. If the instrument so filed shows that any such tenancy
is held in unequal interests, a majority or even split for the purpose of this
subsection shall be a majority or even split in interest.
(E) The Corporation's Rights Respecting the Voting Stock. Voting Stock
belonging to the Corporation, or to another corporation a majority of the shares
entitled to vote in the election of directors of such other corporation of which
are held by the Corporation, shall not be voted at any meeting of stockholders
and shall not be counted in the total number of outstanding shares for the
purpose of determining whether a quorum is present. Nothing in this Section 2.6
shall limit the right of the Corporation to vote shares of Voting Stock held by
it in a fiduciary capacity.
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<PAGE> 7
(F) Proxies. At all meetings of stockholders, a stockholder may vote by
proxy executed in writing by the stockholder or as may be permitted by law, or
by such stockholder's duly authorized attorney-in-fact. Such proxy must be filed
with the Secretary of the Corporation or such stockholder's representative at or
before the time of the meeting. No such proxy shall be voted or acted upon after
three years from its date, unless the proxy provides for a longer period. A duly
executed proxy shall be irrevocable if it states that it is irrevocable and if,
and only as long as, it is coupled with an interest sufficient in law to support
an irrevocable power. A stockholder may revoke any proxy which is not
irrevocable by attending the meeting and voting in person or by filing with the
Secretary an instrument in writing revoking the proxy or another duly executed
proxy bearing a later date.
SECTION 2.7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS
(A) Annual Meetings of Stockholders. (1) Nominations of persons for
election to the Board of Directors of the Corporation and the proposal of
business to be considered by the stockholders may be made at an annual meeting
of stockholders (a) pursuant to the Corporation's notice of meeting delivered
pursuant to Section 2.4 of these By-Laws, (b) by or at the direction of the
Board of Directors or (c) by any stockholder of the Corporation who is entitled
to vote at the meeting, who complied with the notice procedures set forth in
clauses (2) and (3) of this paragraph (A) of this By-Law and who was a
stockholder of record at the time such notice was delivered to the Secretary of
the Corporation.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of
this By-Law, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation and such other business must otherwise be a
proper matter for stockholder action. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal office of the Corporation not
earlier than the close of business on the 100th calendar day nor later than the
close of business on the 75th calendar day prior to the date of the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of an annual meeting is more than 30 calendar days
before or more than 75 calendar days after the date of the first anniversary of
the preceding year's annual meeting, notice by the stockholder to be timely must
be so delivered not earlier than the close of business on the 100th calendar day
prior to such annual meeting and not later than the close of business on the
later of (i) the 75th calendar day prior to such annual meeting and (ii) the
10th calendar day after the day on which public announcement of the date of such
annual meeting is first made by the Corporation. For the purpose of determining
whether a stockholder's notice shall have been delivered in a timely manner for
the 2000 annual meeting, the date of the first anniversary of the preceding
year's meeting shall be deemed to be May 6, 2000. Such stockholder's notice
shall set forth (a) as to each person whom the stockholder proposes to nominate
for election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the regulations promulgated thereunder, including such person's written consent
to being named in the proxy statement as a nominee and to serving as a director
if elected; (b) as to any other business that the stockholder proposes to bring
before the
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<PAGE> 8
meeting, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and the beneficial owner,
if any, on whose behalf the proposal is made; and (c) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (i) the name and address of such stockholder, as
they appear on the Corporation's stock transfer books, and of such beneficial
owner and (ii) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2)
of this By-Law to the contrary, in the event that the number of directors to be
elected to the Board of Directors of the Corporation is increased and there is
no public announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
Corporation at least 80 calendar days prior to the date of the first anniversary
of the preceding year's annual meeting, a stockholder's notice required by this
By-Law shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to the
Secretary at the principal office of the Corporation not later than the close of
business on the 10th calendar day after the day on which such public
announcement is first made by the Corporation. For the purpose of determining
whether a stockholder's notice shall have been delivered in a timely manner for
the 2000 meeting, the first anniversary of the preceding year's meeting shall be
deemed to be May 6, 2000.
(B) Special Meetings of Stockholders. Subject to the rights of the
holders of any Preferred Stock, only such business shall be conducted at a
special meeting of stockholders as shall have been brought before the meeting
pursuant to the Corporation's notice of meeting pursuant to Section 2.4 of these
By-Laws. Subject to the rights of the holders of any Preferred Stock,
nominations of persons for election to the Board of Directors may be made at a
special meeting of stockholders at which directors are to be elected pursuant to
the Corporation's notice of meeting (1) by or at the direction of the Board or
(2) by any stockholder of the Corporation who is entitled to vote at the
meeting, who complies with the notice procedures set forth in this By-Law and
who is a stockholder of record at the time such notice is delivered to the
Secretary of the Corporation. Nominations by stockholders of persons for
election to the Board may be made at such a special meeting of stockholders if
the stockholder's notice as required by paragraph (A)(2) of this By-Law shall be
delivered to the Secretary at the principal executive offices of the Corporation
not earlier than the close of business on the 100th calendar day prior to such
special meeting and not later than the close of business on the later of (i) the
75th calendar day prior to such special meeting and (ii) the 10th calendar day
after the day on which public announcement is first made of the date of such
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
(C) General. (1) Subject to the rights of the holders of any Preferred
Stock, only persons who are nominated in accordance with the procedures set
forth in this By-Law shall be eligible to serve as directors and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
By-Law. Except as otherwise provided by law, the Certificate of Incorporation or
these By-Laws, the
-5-
<PAGE> 9
chairman of the meeting shall have the power and duty to determine whether a
nomination or any business proposed to be brought before the meeting was made or
proposed in accordance with the procedures set forth in this By-Law and, if any
proposed nomination or business is not in compliance with this By-Law, to
declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this By-Law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-Law, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this By-Law. So long as a stockholder proponent otherwise complies with
the requirements of this By-Law, nothing in this By-Law shall be deemed to
affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
SECTION 2.8. STOCKHOLDER VOTE REQUIRED
Election of directors at all meetings of the stockholders at which
directors are to be elected shall be by written ballot. Subject to the rights of
the holders of any series of Preferred Stock to elect additional directors under
specific circumstances, directors shall be elected by a plurality of the votes
of the shares of Voting Stock present in person or represented by proxy at the
meeting and entitled to vote on the election of directors. Except as otherwise
provided by law, the Certificate of Incorporation or these By-Laws, in all
matters other than the election of directors, the affirmative vote of the
majority of the shares of Voting Stock present in person or represented by proxy
at the meeting and entitled to vote on the subject matter shall be the act of
the stockholders.
SECTION 2.9. INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS
(A) Inspectors of Election. The Board of Directors by resolution shall
appoint one or more inspectors, which inspector or inspectors may include
individuals who serve the Corporation in other capacities, including, without
limitation, as officers, employees, agents or representatives of the
Corporation, to act at a meeting of stockholders and make a written report
thereof. One or more persons may be designated as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate has been
appointed to act, or if all inspectors or alternates who have been appointed are
unable to act at a meeting of stockholders, the chairman of the meeting shall
appoint one or more inspectors to act at the meeting. Each inspector, before
discharging his or her duties, shall take and sign an oath faithfully to execute
the duties of inspector with strict impartiality and according to the best of
his or her ability.
(B) Duties. The inspectors shall (i) ascertain the number of shares of
Voting Stock outstanding and the voting power of each, (ii) determine the number
of shares of Voting Stock
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<PAGE> 10
present in person or by proxy at such meeting and the validity of proxies and
ballots, (iii) count all votes and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors and (v) certify their determination of the
number of such shares present in person or by proxy at such meeting and their
count of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist them in the performance of their duties.
(C) Opening and Closing the Polls. The chairman or secretary of the
meeting shall announce at the meeting the date and time of the opening and the
closing of the polls for each matter upon which the stockholders will vote at a
meeting. No ballots, proxies or votes, nor any revocations thereof or changes
thereto, shall be accepted by the inspectors after the closing of the polls
unless the Court of Chancery of the State of Delaware upon application by any
stockholder shall determine otherwise.
SECTION 2.10. FIXING DATE OF DETERMINATION OF STOCKHOLDERS OF RECORD
(A) Fixing the Record Date. In order that the Corporation may determine
the stockholders entitled (i) to notice of or to vote at any meeting of
stockholders or any adjournment thereof, (ii) to receive payment of any dividend
or other distribution or allotment of any rights, (iii) to exercise any rights
in respect of any change, conversion or exchange of stock or (iv) to take,
receive or participate in any other action, the Board of Directors may fix a
record date, which shall not be earlier than the date upon which the resolution
fixing the record date is adopted by the Board and which (1) in the case of a
determination of stockholders entitled to notice of or to vote at any meeting of
stockholders or adjournment thereof, shall, unless otherwise required by law, be
not more than 60 nor less than ten days before the date of such meeting; and (2)
in the case of any other action, shall be not more than 60 days before such
action.
(B) If Record Date is Not Fixed. If no record date is fixed, (i) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, and (ii) the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
(C) Adjourned Meetings. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting, but the Board of Directors may fix a new record date
for the adjourned meeting.
SECTION 2.11. LIST OF STOCKHOLDERS ENTITLED TO VOTE
The Secretary shall prepare, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in
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<PAGE> 11
the notice of meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof and may be inspected by any
stockholder who is present. The stock ledger shall be the only evidence as to
who are the stockholders entitled to examine the stock ledger, the list of
stockholders or the books of the corporation, or to vote in person or by proxy
at any meeting of stockholders.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1. GENERAL POWERS
The business and affairs of the Corporation shall be managed by or
under the direction of its Board of Directors. In addition to the powers and
authorities expressly conferred upon them by these By-Laws, the Board may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by law or by the Certificate of Incorporation or by these
By-Laws required to be exercised or done by the stockholders.
SECTION 3.2. REGULAR MEETINGS
A regular meeting of the Board of Directors may be held without other
notice than this By-Law immediately after, and at the same place as, each annual
meeting of stockholders. The Board may, by resolution, provide the time and
place for the holding of additional regular meetings without other notice than
such resolution.
SECTION 3.3. SPECIAL MEETINGS
Special meetings of the Board of Directors may be called by the
Chairman, the Secretary or two or more directors. The person or persons
authorized to call special meetings of the Board of Directors may fix the place
and time of the meetings.
SECTION 3.4. NOTICE
Notice of each special meeting of the Board shall be given by the
Secretary. Notice of each such meeting shall state the date, time and place of
the meeting, and shall be delivered to each director either personally or by
telephone, telegraph, cable, or similar means, at least twenty-four hours before
the time at which such meeting is to be held or mailed by first-class mail,
postage prepaid, addressed to the director at his residence or usual place of
business, at least five days before the day on which such meeting is to be held.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the Board need be specified in the notice of such meeting,
except for amendments to these By-Laws as provided under Article IX hereof. A
meeting may be held at any time without notice if all of the directors are
present or if those not present waive notice of the meeting in writing, either
before or after such meeting.
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<PAGE> 12
SECTION 3.5. QUORUM
A whole number of directors equal to at a majority of the Whole Board
shall constitute a quorum for the transaction of business, but if at any meeting
of the Board there shall be less than a quorum present, a majority of the
directors present may adjourn the meeting from time to time without further
notice. The act of the majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors. The directors
present at a duly organized meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough directors to leave less
than a quorum.
SECTION 3.6. VACANCIES
Subject to the rights of the holders of any series of Preferred Stock
to elect additional directors under specific circumstances, and unless the Board
of Directors otherwise determines, vacancies resulting from death, resignation,
retirement, disqualification, removal from office or other cause, and newly
created directorships resulting from any increase in the authorized number of
directors, may be filled only by the affirmative vote of a majority of the
remaining directors, though less than a quorum of the Board, and each director
so chosen shall hold office for a term expiring at the annual meeting of
stockholders at which the term of office of the class to which he or she has
been elected expires and until his or her successor has been duly elected and
qualified or until his or her earlier death, resignation or removal from office.
No decrease in the number of authorized directors constituting the Whole Board
shall shorten the term of any incumbent director.
SECTION 3.7. EXECUTIVE AND OTHER COMMITTEES
The Board of Directors may, by resolution adopted by a majority of the
Whole Board, designate an Executive Committee to exercise, subject to applicable
provisions of law, all of the powers of the Board in the management of the
business and affairs of the Corporation when the Board is not in session,
including without limitation the power to declare dividends, to authorize the
issuance of the Corporation's capital stock and to adopt a certificate of
ownership and merger pursuant to Section 253 of the General Corporation Law of
the State of Delaware, and may, by resolution similarly adopted, designate one
or more other committees. The Executive Committee and each such other committee
shall consist of two or more directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee may to the extent permitted by law exercise such powers and shall
have such responsibilities as shall be specified in the designating resolution.
In the absence or disqualification of any member of such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not constituting a quorum, may unanimously
appoint another member of the Board to act at the meeting in the place of any
such absent or disqualified member. Each committee shall keep written minutes of
its proceedings and shall report such proceedings to the Board when required.
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<PAGE> 13
A majority of any committee may determine its action and fix the time
and place of its meetings, unless the Board shall otherwise provide. Notice of
such meetings shall be given to each member of the committee in the manner
provided for in Section 3.4 of these By-Laws. The Board shall have power at any
time to fill vacancies in, to change the membership of or to dissolve any such
committee. Nothing herein shall be deemed to prevent the Board from appointing
one or more committees consisting in whole or in part of persons who are not
directors of the Corporation; provided, however, that no such committee shall
have or may exercise any authority of the Board of Directors.
SECTION 3.8. REMOVAL
Subject to the rights of the holders of any series of Preferred Stock
to elect additional directors under specific circumstances, any director, or the
entire Board of Directors, may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at least 80 percent of
the voting power of the then outstanding Voting Stock, voting together as a
single class.
SECTION 3.9. TELEPHONIC MEETINGS
Directors, or any committee of directors designated by the Board, may
participate in a meeting of the Board or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
pursuant to this Section 3.9 shall constitute presence in person at such
meeting.
SECTION 3.10. INFORMAL ACTION BY DIRECTORS
Unless otherwise provided in the Certificate of Incorporation or these
By-Laws, any action required or permitted to be taken at any meeting of the
Board of Directors, or of any committee thereof, may be taken without a meeting
if all members of the Board or such committee, as the case may be, consent
thereto in writing (which may be in counterparts), and the written consent or
consents are filed with the minutes of proceedings of the Board or such
committee.
SECTION 3.11. RELIANCE UPON RECORDS
Every director, and every member of any committee of the Board of
Directors, shall, in the performance of his or her duties, be fully protected in
relying in good faith upon the records of the Corporation and upon such
information, opinions, reports or statements presented to the Corporation by any
of its officers or employees, or committees of the Board, or by any other person
as to matters the director or member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation, including, but not limited
to, such records, information, opinions, reports or statements as to the value
and amount of the assets, liabilities and/or net profits of the Corporation, or
any other facts pertinent to the existence and amount of surplus or other funds
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from which dividends might properly be declared and paid, or with which the
Corporation's capital stock might properly be purchased or redeemed.
SECTION 3.12. INTERESTED DIRECTORS
A director who is directly or indirectly a party to a contract or
transaction with the Corporation, or is a director or officer of or has a
financial interest in any other corporation, partnership, association or other
organization which is a party to a contract or transaction with the Corporation,
may be counted in determining whether a quorum is present at any meeting of the
Board or a committee thereof at which such contract or transaction is considered
or authorized, and such director may participate in such meeting and vote on
such authorization if the material facts as to such director's relationship or
interest and as to the contract or transaction are disclosed or are known to the
Board or the committee, and the Board or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors are less than a
quorum.
SECTION 3.13. COMPENSATION
The Board of Directors shall have the authority to fix the
compensation, including fees and reimbursement of expenses, of directors for
services to the Corporation in any capacity, provided that no such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
SECTION 3.14. PRESUMPTION OF ASSENT
Unless otherwise provided by the laws of the State of Delaware, a
director who is present at a meeting of the Board of Directors or a committee
thereof at which action is taken on any matter shall be presumed to have
assented to the action taken unless his or her dissent shall be entered in the
minutes of such meeting or unless he or she shall file his or her written
dissent to such action with the person acting as secretary of such meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the Secretary immediately after the adjournment of such meeting. Such right
to dissent shall not apply to a director who voted in favor of such action.
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ARTICLE IV
OFFICERS
SECTION 4.1. ELECTED OFFICERS
Unless otherwise determined by the Board of Directors, the officers of
the Corporation may consist of the Chairman, the President, one or more Vice
Presidents, the Secretary and the Treasurer. Any two or more offices may be held
by the same person. The Board may designate the Chairman or the President as the
Chief Executive Officer of the Corporation. Such officers shall be elected from
time to time by the Board to hold office until their respective successors shall
have been duly elected and qualified, or until death, resignation or removal, as
hereafter provided in these By-Laws.
SECTION 4.2. OTHER OFFICERS
The Board may from time to time elect, or the Chairman may appoint,
such other officers (including one or more Assistant Vice Presidents, Assistant
Secretaries and Assistant Treasurers) and such agents, as may be necessary or
desirable for the conduct of the business of the Corporation. Such other
officers and agents shall have such duties and shall hold their offices for such
terms as shall be provided in these By-Laws or as may be prescribed by the Board
or by the Chairman.
SECTION 4.3. RESIGNATION AND REMOVAL
Any officer or agent of the Corporation may resign at any time by
giving a written notice of resignation to the Board of Directors, the Chairman,
the President or the Secretary. Any such resignation shall take effect at the
time specified therein or, if the time when it shall become effective shall not
be specified therein, immediately upon its receipt. Unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective. Any officer or agent of the Corporation may be removed, either with
or without cause, at any time, by a vote of the majority of the Whole Board, or,
except in the case of an officer or agent elected by the Board, by the Chairman.
Such removal shall be without prejudice to the contractual rights, if any, of
the person so removed.
SECTION 4.4. VACANCIES
A vacancy in any office, whether arising from death, resignation,
removal or any other cause, may be filled for the unexpired portion of the term
of the office which shall be vacant in the manner prescribed in these By-Laws
for the regular election or appointment of such office.
SECTION 4.5. CHAIRMAN
The Chairman shall have the general control and management of the
business and affairs of the Corporation, under the direction of the Board of
Directors. He shall have power: (i) to select
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and appoint all necessary officers and employees of the Corporation except such
officers as under these By-Laws are to be elected by the Board; (ii) to remove
all appointed officers or employees whenever he shall deem it necessary, and to
make new appointments to fill the vacancies; and (iii) to suspend from office
for cause any elected officer, which shall be forthwith declared in writing to
the Board. The Chairman shall have such other authority and shall perform such
other duties as may be determined by the Board.
SECTION 4.6. PRESIDENT
The President shall have such authority and perform such duties
relative to the business and affairs of the Corporation as may be determined by
the Board of Directors or the Chairman. In the absence of the Chairman, the
President shall preside at meetings of the stockholders and of the directors. If
the Board shall not have elected a Chairman, the President shall have such
authority and shall perform such additional duties as in these By-Laws is
provided for the office of Chairman.
SECTION 4.7. VICE PRESIDENTS AND ASSISTANT VICE PRESIDENTS
Each Vice President and each Assistant Vice President shall have such
powers and perform all such duties as from time to time may be determined by the
Board of Directors, the Chairman, the President or the senior officer to whom
such officer reports.
SECTION 4.8. SECRETARY
The Secretary shall record the proceedings of all meetings of the Board
of Directors, the committees of the Board and the stockholders; shall see that
all notices are duly given in accordance with the provisions of these By-Laws
and as required by law; shall be custodian of the records and the seal of the
Corporation and, if necessary or appropriate, affix and attest the seal to all
documents to be executed on behalf of the Corporation under its seal; shall see
that the books, reports, statements, certificates and other documents and
records required by law to be kept and filed are properly kept and filed; and in
general, shall perform all the duties incident to the office of Secretary and
such other duties as from time to time may be determined by the Board, the
Chairman or the President.
SECTION 4.9. TREASURER
The Treasurer shall exercise general supervision over the receipt,
custody and disbursement of corporate funds. The Treasurer shall have such
further powers and duties as may be determined from time to time by the Board of
Directors, the Chairman or the President.
SECTION 4.10. ASSISTANT OFFICERS
Any Assistant Secretary or Assistant Treasurer elected or appointed as
heretofore provided shall perform the duties and exercise the powers of the
Secretary and Treasurer, respectively, in their absence or inability to act, and
shall perform such other duties and have such
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other powers as the Board of Directors, the Chairman, the President, the
Secretary or the Treasurer (as the case may be) may from time to time prescribe.
SECTION 4.11. COMPENSATION
The compensation of the officers of the Corporation for their services
as such officers shall be fixed from time to time by the Board of Directors;
provided, however, that the Board may by resolution delegate to the Chairman the
power to fix compensation of non-elected officers and agents appointed by the
Chairman. An officer of the Corporation shall not be prevented from receiving
compensation by reason of the fact that such officer is also a director of the
Corporation, but any such officer who shall also be a director shall not have
any vote in the determination of such officer's compensation.
ARTICLE V
CONTRACTS AND PROXIES
SECTION 5.1. CONTRACTS
Except as otherwise required by law, the Certificate of Incorporation
or these By-Laws, any contracts or other instruments may be executed and
delivered in the name and on behalf of the Corporation by such officer or
officers (including any assistant officer) of the Corporation as the Board of
Directors may from time to time direct. Such authority may be general or
confined to specific instances as the Board of Directors may determine. The
Chairman, the President or any Vice President may execute bonds, contracts,
deeds, leases and other instruments to be made or executed for or on behalf of
the Corporation. Subject to any restrictions imposed by the Board, the Chairman,
the President or any Vice President of the Corporation may delegate contractual
power to others under his jurisdiction, it being understood, however, that any
such delegation of power shall not relieve such officer of responsibility with
respect to the exercise of such delegated power.
SECTION 5.2. PROXIES
Unless otherwise provided by resolution adopted by the Board of
Directors, the Chairman, the President or any Vice President may from time to
time appoint an attorney or attorneys or agent or agents of the Corporation, in
the name and on behalf of the Corporation, to cast the votes which the
Corporation may be entitled to cast as the holder of stock or other securities
or interests in any other corporation or entity, any of whose stock or other
securities or interests may be held by the Corporation, at meetings of the
holders of the stock or other securities or interests, of such other corporation
or entity, or to consent in writing, in the name of the Corporation as such
holder, to any action by such other corporation or entity, and may instruct the
person or persons so appointed as to the manner of casting such votes or giving
such consent, and may execute or cause to be executed in the name and on behalf
of the Corporation and under its
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corporate seal or otherwise, all such written proxies or other instruments as he
may deem necessary or proper in the premises.
ARTICLE VI
INDEMNIFICATION AND INSURANCE
(A) Right to Indemnification. Each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit, or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she or a person
of whom he or she is the legal representative is or was a director or officer of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of any other corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the General Corporation Law of the State of Delaware as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including, without limitation, attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred by such person in connection therewith, and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that except as provided in paragraph (B) of
this Article VI with respect to proceedings seeking to enforce rights to
indemnification, the Corporation shall indemnify any such person seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such person only if such proceeding (or part thereof) initiated by such person
was authorized by the Board of Directors of the Corporation. The Corporation
may, by action of its Board of Directors, provide indemnification to employees
and agents of the Corporation with the same scope and effect as the
indemnification of directors and officers provided for in this paragraph (A).
(B) Recovery of Unpaid Indemnification. If a claim under paragraph (A)
of this By-Law is not paid in full by the Corporation within 30 days after a
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant also shall be
entitled to be paid the expense of prosecuting such claim. It shall be a defense
to any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the General Corporation Law of the State of Delaware for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of
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Directors, independent legal counsel or stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the General Corporation Law of the
State of Delaware, nor an actual determination by the Corporation (including the
Board of Directors, independent legal counsel or stockholders) that the claimant
has not met such applicable standard of conduct, shall be a defense to the
action or create a presumption that the claimant has not met the applicable
standard of conduct.
(C) Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this By-Law shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or
disinterested directors or otherwise.
(D) Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the General Corporation Law of the State of Delaware.
(E) Contractual Right. The right to indemnification conferred in this
By-Law shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance of
its final disposition; provided, however, that if the General Corporation Law of
the State of Delaware requires, the payment of such expenses incurred by a
director or officer in his or her capacity as a director or officer (and not in
any other capacity in which service was or is rendered by such person while a
director or officer, including, without limitation, service to an employee
benefit plan), in advance of the final disposition of a proceeding, shall be
made only upon delivery to the Corporation of an undertaking by or on behalf of
such director or officer to repay all amounts so advanced if it shall ultimately
be determined that such director or officer is not entitled to be indemnified
under this By-Law or otherwise.
(F) Amendment or Repeal. Any amendment or repeal of this Article VI
shall not adversely affect any right or protection existing hereunder in respect
of any act or omission occurring prior to such amendment or repeal.
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ARTICLE VII
STOCK CERTIFICATES AND TRANSFERS
(A) Certificated Shares and Transfers. The interest of each stockholder
of the Corporation shall be evidenced by certificates for shares of stock in
such form as the appropriate officers of the Corporation may from time to time
prescribe, unless it shall be determined by, or pursuant to, a resolution
adopted by the Board of Directors that the shares representing such interest be
uncertificated. The shares of the stock of the Corporation shall be transferred
on the books of the Corporation by the holder thereof in person or by such
person's attorney, upon surrender for cancellation of certificates for the same
number of shares, with an assignment and power of transfer endorsed thereon or
attached thereto, duly executed, with such proof of the authenticity of the
signature as the Corporation or its agents may reasonably require.
(B) Accepted Signatures. The certificates of stock shall be signed,
countersigned and registered in such manner as the Board of Directors may by
resolution prescribe, which resolution may permit all or any of the signatures
on such certificates to be in facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
SECTION 8.1. FISCAL YEAR
The fiscal year of the Corporation shall be the calendar year, unless
otherwise determined by resolution of the Board of Directors.
SECTION 8.2. DIVIDENDS
The Board of Directors may from time to time declare, and the
Corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law and its Certificate of Incorporation.
SECTION 8.3. SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation and the words "Corporate Seal, Delaware". The seal may be used by
causing it, or a facsimile thereof, to be impressed or affixed or reproduced or
otherwise.
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ARTICLE IX
AMENDMENTS
These By-Laws may be amended, added to, rescinded or repealed at any
meeting of the Board of Directors or of the stockholders, provided notice of the
proposed change was given in the notice of the meeting and, in the case of a
meeting of the Board of Directors, in a notice given no less than twenty-four
hours prior to the meeting; provided, however, that, in the case of amendments
by stockholders, notwithstanding any other provisions of these By-Laws or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the stock required by law, the Certificate of Incorporation or these
By-Laws, the affirmative vote of the holders of at least 80 percent of the
voting power of the then outstanding Voting Stock, voting together as a single
class, shall be required to alter, amend or repeal any provision of these
By-Laws.
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Exhibit 4.1
- --------------------------------------------------------------------------------
------------------
eLoyalty Corporation
and
ChaseMellon Shareholder Services, L.L.C.
Rights Agent
------------------------------------
Rights Agreement
Dated as of [ ]
- --------------------------------------------------------------------------------
<PAGE> 2
Table of Contents
Section Page
- ------- ----
Section 1. Certain Definitions....................................... 1
Section 2. Appointment of Rights Agent............................... 5
Section 3. Issue of Rights Certificates.............................. 6
Section 4. Form of Rights Certificates............................... 8
Section 5. Countersignature and Registration......................... 9
Section 6. Transfer, Split Up, Combination and Exchange
of Rights Certificates; Mutilated, Destroyed,
Lost or Stolen Rights Certificates................ 10
Section 7. Exercise of Rights; Purchase Price;
Expiration Date of Rights......................... 11
Section 8. Cancellation and Destruction of Rights
Certificates...................................... 13
Section 9. Reservation and Availability of Capital
Stock............................................. 13
Section 10. Preferred Stock Record Date.............................. 15
Section 11. Adjustment of Purchase Price, Number and
Kind of Shares or Number of Rights............... 16
Section 12. Certificate of Adjusted Purchase Price or
Number of Shares................................. 25
Section 13. Consolidation, Merger or Sale or Transfer
of Assets or Earning Power....................... 26
Section 14. Fractional Rights and Fractional Shares.................. 28
Section 15. Rights of Action......................................... 30
Section 16. Agreement of Rights Holders.............................. 30
Section 17. Rights Certificate Holder Not Deemed a
Stockholder...................................... 31
Section 18. Concerning the Rights Agent.............................. 32
Section 19. Merger or Consolidation or Change of Name
of Rights Agent.................................. 32
Section 20. Duties of Rights Agent................................... 33
Section 21. Change of Rights Agent................................... 36
Section 22. Issuance of New Rights Certificates...................... 37
Section 23. Redemption and Termination............................... 37
Section 24. Exchange................................................. 38
Section 25. Notice of Certain Events................................. 40
Section 26. Notices.................................................. 41
Section 27. Supplements and Amendments............................... 41
Section 28. Successors............................................... 42
Section 29. Determination and Actions by the Board of
Directors, etc................................... 42
Section 30. Benefits of this Agreement............................... 43
Section 31. Severability............................................. 43
Section 32. Governing Law............................................ 43
Section 33. Counterparts............................................. 43
Section 34. Descriptive Headings..................................... 43
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<PAGE> 3
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of [ ] (the "Agreement"),
between eLoyalty Corporation, a Delaware corporation (the "Company"), and
ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability company
(the "Rights Agent").
W I T N E S S E T H:
WHEREAS, on [ ] (the "Rights Dividend Declaration
Date"), the Board of Directors of the Company authorized and declared a dividend
distribution of one Right (as hereinafter defined) for each share of Common
Stock (as hereinafter defined) of the Company outstanding at the Close of
Business on [ ], after giving effect to the distribution of shares of
Common Stock (the "Spin-off") by Technology Solutions to its stockholders (the
"Record Date"), each Right initially representing the right to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock of the
Company having the rights, powers and preferences set forth in the form of
Certificate of Designations attached hereto as Exhibit A, upon the terms and
subject to the conditions hereinafter set forth (the "Rights"), and has further
authorized the issuance of one Right (as such number may hereinafter be adjusted
pursuant to the provisions of Section 11(p) hereof) for each share of Common
Stock of the Company issued between the Record Date and the earlier of the
Distribution Date and the Expiration Date (as such terms are hereinafter
defined) or, in certain circumstances provided in Section 22 hereof, after the
Distribution Date;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this
Agreement, the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which,
together with all Affiliates and Associates of such Person, shall be
the Beneficial Owner of 15% or more of the shares of Common Stock then
outstanding, but shall not include the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or of any Subsidiary
of the Company, or any Person organized, appointed or established by
the Company for or pursuant to the terms of any such plan.
Notwithstanding the foregoing, no Person shall become an "Acquiring
Person" as the result of an acquisition of shares of Common Stock by
the Company which, by reducing the number of shares outstanding,
increases
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the proportionate number of shares beneficially owned by such Person to
15% or more of the shares of Common Stock then outstanding; provided,
however, that if a Person shall become the Beneficial Owner of 15% or
more of the shares of Common Stock then outstanding by reason of share
purchases by the Company and shall, after such share purchases by the
Company, become the Beneficial Owner of any additional shares of Common
Stock (other than pursuant to a dividend or distribution paid or made
by the Company on the outstanding Common Stock or pursuant to a split
or subdivision of the outstanding Common Stock), then such Person shall
be deemed to be an "Acquiring Person". Notwithstanding the foregoing,
if the Board of Directors of the Company determines in good faith that
a Person who would otherwise be an "Acquiring Person" (as defined
pursuant to the foregoing provisions of this paragraph (a)) has become
such inadvertently, and such Person divests as promptly as practicable
a sufficient number of shares of Common Stock so that such Person would
no longer be an "Acquiring Person" (as defined pursuant to the
foregoing provisions of this paragraph (a)), then such Person shall not
be deemed to be an "Acquiring Person" for any purposes of this
Agreement.
(b) "Act" shall mean the Securities Act of 1933, as amended.
(c) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended and
in effect on the date of this Agreement (the "Exchange Act").
(d) A Person shall be deemed the "Beneficial Owner" of, and
shall be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the
right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any
agreement, arrangement or understanding (whether or not in
writing) or upon the exercise of conversion rights, exchange
rights, rights, warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the "Beneficial
Owner" of, or to "beneficially own," (A) securities tendered
pursuant to a tender or exchange offer made by such Person or
any of such Person's
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<PAGE> 5
Affiliates or Associates until such tendered securities are
accepted for purchase or exchange, or (B) securities issuable
upon exercise of Rights at any time prior to the occurrence of
a Triggering Event, or (C) securities issuable upon exercise
of Rights from and after the occurrence of a Triggering Event
which Rights were acquired by such Person or any such Person's
Affiliates or Associates prior to the Distribution Date or
pursuant to Section 3(a) or Section 22 hereof (the "Original
Rights") or pursuant to Section 11(i) hereof in connection
with an adjustment made with respect to any Original Rights;
(ii) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the
right to vote or dispose of or has "beneficial ownership" of
(as determined pursuant to Rule 13d-3 of the General Rules and
Regulations under the Exchange Act), including pursuant to any
agreement, arrangement or understanding, whether or not in
writing; provided, however, that a Person shall not be deemed
the "Beneficial Owner" of, or to "beneficially own," any
security under this subparagraph (ii) as a result of an
agreement, arrangement or understanding to vote such security
if such agreement, arrangement or understanding: (A) arises
solely from a revocable proxy given in response to a public
proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the General
Rules and Regulations under the Exchange Act, and (B) is not
also then reportable by such Person on Schedule 13D under the
Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate
thereof) with which such Person (or any of such Person's
Affiliates or Associates) has any agreement, arrangement or
understanding (whether or not in writing), for the purpose of
acquiring, holding, voting (except pursuant to a revocable
proxy as described in the proviso to subparagraph (ii) of this
paragraph (d)) or disposing of any voting securities of the
Company;
provided, however, that nothing in this paragraph (d) shall cause a
Person engaged in business as an underwriter of securities to be the
"Beneficial Owner" of, or to "beneficially own," any securities
acquired
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<PAGE> 6
through such Person's participation in good faith in a firm commitment
underwriting until the expiration of forty days after the date of such
acquisition.
(e) "Business Day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in the State of Illinois
are authorized or obligated by law or executive order to close.
(f) "Close of Business" on any given date shall mean 5:00
P.M., Chicago time, on such date, provided, however, that if such date
is not a Business Day it shall mean 5:00 P.M., Chicago time, on the
next succeeding Business Day.
(g) "Common Stock" shall mean the common stock, par value $.01
per share, of the Company, except that "Common Stock" when used with
reference to any Person other than the Company shall mean the capital
stock of such Person with the greatest voting power, or the equity
securities or other equity interest having power to control or direct
the management, of such Person.
(h) "Person" shall mean any individual, firm, limited
liability company, corporation, partnership or other entity and shall
include any successor (by merger or otherwise) of such entity.
(i) "Preferred Stock" shall mean shares of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the
Company, and, to the extent that there is not a sufficient number of
shares of Series A Junior Participating Preferred Stock authorized to
permit the full exercise of the Rights, any other series of preferred
stock, par value $.01 per share, of the Company designated for such
purpose containing terms substantially similar to the terms of the
Series A Junior Participating Preferred Stock.
(j) "Section 11(a)(ii) Event" shall mean the event described
in Section 11(a)(ii) hereof.
(k) "Section 13 Event" shall have the meaning set forth in
Section 13(a) hereof.
(l) "Stock Acquisition Date" shall mean the first date of
public announcement (which, for purposes of this definition, shall
include, without limitation, a report filed pursuant to Section 13(d)
under the Exchange Act) by the Company or an Acquiring Person that an
Acquiring Person has become such.
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<PAGE> 7
(m) "Subsidiary" shall mean, with reference to any Person, any
corporation or other entity of which an amount of voting securities
sufficient to elect at least a majority of the directors of such
corporation or other entity is beneficially owned, directly or
indirectly, by such Person, or otherwise controlled by such Person.
(n) "Triggering Event" shall mean any Section 11(a)(ii) Event
or any Section 13 Event.
In addition, for purposes of this Agreement, the following
terms have the meanings indicated in specified sections of this Agreement: (i)
"Adjustment Shares" shall have the meaning set forth in Section 11(a)(ii)
hereof; (ii) "common stock equivalents" shall have the meaning set forth in
Section 11(a)(iii) hereof; (iii) "current market price" shall have the meaning
set forth in Section 11(d) hereof; (iv) "Current Value" shall have the meaning
set forth in Section 11(a)(iii) hereof; (v) "Distribution Date" shall have the
meaning set forth in Section 3(a) hereof; (vi) "equivalent preferred stock"
shall have the meaning set forth in Section 11(b) hereof; (vii) "Exchange Ratio"
shall have the meaning set forth in Section 24(a) hereof; (viii) "Expiration
Date" shall have the meaning set forth in Section 7(a) hereof; (ix) "Final
Expiration Date" shall have the meaning set forth in Section 7(a) hereof; (x)
"Nasdaq" shall have the meaning set forth in Section 11(d)(i) hereof; (xi)
"Principal Party" shall have the meaning set forth in Section 13(b) hereof;
(xii) "Purchase Price" shall have the meaning set forth in Section 4(a) hereof;
(xiii) "Record Date" shall have the meaning set forth in the recitals hereof;
(xiv) "Redemption Price" shall have the meaning set forth in Section 23(a)
hereof; (xv) "Rights" shall have the meaning set forth in the recitals hereof;
(xvi) "Rights Certificates" shall have the meaning set forth in Section 3(a)
hereof; (xvii) "Section 11(a)(ii) Trigger Date" shall have the meaning set forth
in Section 11(a)(iii) hereof; (xviii) "Spread" shall have the meaning set forth
in Section 11(a)(iii) hereof; (xix) "Substitution Period" shall have the meaning
set forth in Section 11(a)(iii) hereof; (xx) "Summary of Rights" shall have the
meaning set forth in Section 3(b) hereof and (xxi) "Trading Day" shall have the
meaning set forth in Section 11(d)(i) hereof.
Section 2. Appointment of Rights Agent. The Company hereby
appoints the Rights Agent to act as agent for the Company in accordance with the
terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint such co-Rights Agents as
it may deem necessary or desirable. The Rights Agent shall have no duty to
supervise, and in no event shall be liable for, the acts or omissions of any
such co-Rights Agent.
Section 3. Issue of Rights Certificates.
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(a) Until the earlier of (i) the Close of Business on the
tenth day after the Stock Acquisition Date (or, if the tenth day after the Stock
Acquisition Date occurs before the Record Date, the Close of Business on the
Record Date) or (ii) the Close of Business on the tenth Business Day (or such
later date as may be determined by action of the Board of Directors of the
Company prior to such time as any Person becomes an Acquiring Person) after the
date that a tender or exchange offer by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company, or any Person organized, appointed or established by
the Company for or pursuant to the terms of any such plan) is first published or
sent or given within the meaning of Rule 14d-2(a) of the General Rules and
Regulations under the Exchange Act, if upon consummation thereof, such Person
would be the Beneficial Owner of 15% or more of the shares of Common Stock then
outstanding (the earlier of (i) and (ii) being herein referred to as the
"Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of paragraph (b) of this Section 3) by the certificates for the
Common Stock registered in the names of the holders of the Common Stock (which
certificates for Common Stock shall be deemed also to be certificates for
Rights) and not by separate certificates and (y) the Rights will be transferable
only in connection with the transfer of the underlying shares of Common Stock
(including a transfer to the Company). As soon as practicable after the
Distribution Date, the Rights Agent (to the extent provided with all necessary
information) will send by first-class, insured, postage prepaid mail, to each
record holder of the Common Stock as of the Close of Business on the
Distribution Date, at the address of such holder shown on the records of the
Company, one or more Rights certificates, in substantially the form of Exhibit B
hereto (the "Rights Certificates"), evidencing one Right for each share of
Common Stock so held, subject to adjustment as provided herein. In the event
that an adjustment in the number of Rights per share of Common Stock has been
made pursuant to Section 11(p) hereof, at the time of distribution of the Rights
Certificates, the Company shall make the necessary and appropriate rounding
adjustments (in accordance with Section 14(a) hereof) so that Rights
Certificates representing only whole numbers of Rights are distributed and cash
is paid in lieu of any fractional Rights. As of and after the Distribution Date,
the Rights will be evidenced solely by such Rights Certificates.
(b) As promptly as practicable following the Record Date, the
Company will send a copy of a Summary of Rights to Purchase Preferred Stock, in
substantially the form attached hereto as Exhibit C (the "Summary of Rights"),
by postage prepaid mail, to each record holder of the Common Stock as of the
Close of Business on the Record Date, at the address of such holder shown on the
records of the Company. With respect to certificates for the Common Stock
outstanding as of the Record Date, until the Distribution Date, the Rights will
be evidenced
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<PAGE> 9
by such certificates registered in the names of the holders thereof together
with a copy of the Summary of Rights attached thereto. Until the earlier of the
Distribution Date or the Expiration Date, the surrender for transfer of any
certificate representing shares of Common Stock in respect of which Rights have
been issued, with or without a copy of the Summary of Rights attached thereto,
shall also constitute the transfer of the Rights associated with such shares of
Common Stock.
(c) Rights shall be issued in respect of all shares of Common
Stock which are issued (whether originally issued or from the Company's
treasury) after the Record Date but prior to the earlier of the Distribution
Date or the Expiration Date or, in certain circumstances provided in Section 22
hereof, after the Distribution Date. Certificates representing such shares of
Common Stock shall also be deemed to be certificates for Rights, and shall bear
a legend substantially in the following form:
This certificate also evidences and entitles the holder hereof
to certain rights as set forth in the Rights Agreement between eLoyalty
Corporation (the "Company") and ChaseMellon Shareholder Services,
L.L.C. (the "Rights Agent") dated as of [ ], as the same may be
amended from time to time (the "Rights Agreement"), the terms of which
are hereby incorporated herein by reference and a copy of which is on
file at the principal offices of the Company. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will
be evidenced by separate certificates and will no longer be evidenced
by this certificate. The Company will mail to the holder of this
certificate a copy of the Rights Agreement, as in effect on the date of
mailing, without charge promptly after receipt of a written request
therefor. Under certain circumstances set forth in the Rights
Agreement, Rights issued to, or held by, any Person who is, was or
becomes an Acquiring Person or any Affiliate or Associate thereof (as
such terms are defined in the Rights Agreement), whether currently held
by or on behalf of such Person or by any subsequent holder, may become
null and void.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the surrender
for transfer of any of such certificates shall also constitute the transfer of
the Rights associated with the Common Stock represented by such certificates. In
the event the Company purchases or acquires any shares of its Common Stock after
the Record Date but prior to the Distribution Date, any Rights
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<PAGE> 10
associated with such shares shall be deemed cancelled and retired so that the
Company shall not be entitled to exercise any Rights associated with shares of
Common Stock that are not outstanding.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to
purchase and of assignment to be printed on the reverse thereof) shall each be
substantially in the form set forth in Exhibit B hereto and may have such marks
of identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate (but which do not affect the
duties or responsibilities of the Rights Agent) and as are not inconsistent with
the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform to usage. Subject to the provisions of Section 11
and Section 22 hereof, the Rights Certificates, whenever distributed, shall be
dated as of the Record Date or, in the case of Rights with respect to shares of
Common Stock issued or becoming outstanding after the Record Date, the same date
as the stock certificate evidencing such shares, and on their face shall entitle
the holders thereof to purchase such number of one one-hundredths of a share of
Preferred Stock as shall be set forth therein at the price set forth therein
(such exercise price per one one-hundredth of a share, the "Purchase Price"),
but the amount and type of securities purchasable upon the exercise of each
Right and the Purchase Price thereof shall be subject to adjustment from time to
time as provided in Sections 11 and 13(a) hereof.
(b) Any Rights Certificate issued pursuant to Section 3(a) or
Section 22 hereof that represents Rights beneficially owned by any Person known
to be: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring
Person, (ii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee after the Acquiring Person becomes such, or
(iii) a transferee of an Acquiring Person (or of any such Associate or
Affiliate) who becomes a transferee prior to or concurrently with the Acquiring
Person becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom such
Acquiring Person has any continuing agreement, arrangement or understanding
regarding the transferred Rights or (B) a transfer which the Board of Directors
of the Company has determined is part of a plan, arrangement or understanding
which has as a primary purpose or effect avoidance of Section 7(e) hereof, and
any Rights Certificate issued pursuant to Section 6 or Section 11 hereof upon
transfer, exchange, replacement or adjustment of any other Rights Certificate
referred to in this
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<PAGE> 11
sentence, shall contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Rights Certificate
and the Rights represented hereby may become null and void in the
circumstances specified in Section 7(e) of such Agreement.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the
Company by its Chairman of the Board, its President or any Vice President,
either manually or by facsimile signature, and shall have affixed thereto the
Company's seal or a facsimile thereof which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. The Rights Certificates shall be countersigned manually or by
facsimile signature by the Rights Agent and shall not be valid for any purpose
unless so countersigned. In case any officer of the Company who shall have
signed any of the Rights Certificates shall cease to be such officer of the
Company before countersignature by the Rights Agent and issuance and delivery by
the Company, such Rights Certificates, nevertheless, may be countersigned by the
Rights Agent and issued and delivered by the Company with the same force and
effect as though the person who signed such Rights Certificates had not ceased
to be such officer of the Company; and any Rights Certificates may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Rights Certificate, shall be a proper officer of the Company to sign such
Rights Certificate, although at the date of the execution of this Rights
Agreement any such person was not such an officer.
(b) Following the Distribution Date and subject to receipt of
the relevant materials and information, the Rights Agent will keep or cause to
be kept, at its principal office or offices designated as the appropriate place
for surrender of Rights Certificates upon exercise or transfer, books for
registration and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the Rights
Certificates, the number of Rights evidenced on its face by each of the Rights
Certificates and the certificate number and the date of each of the Rights
Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b), Section 7(e) and Section 14
hereof, at any time
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after the Close of Business on the Distribution Date, and at or prior to the
Close of Business on the Expiration Date, any Rights Certificate or Certificates
(other than Rights Certificates representing Rights that have become null and
void pursuant to Section 7(e) or that have been exchanged pursuant to Section 24
hereof) may be transferred, split up, combined or exchanged for another Rights
Certificate or Certificates, entitling the registered holder to purchase a like
number of one one-hundredths of a share of Preferred Stock (or, following a
Triggering Event, Common Stock, other securities, cash or other assets, as the
case may be) as the Rights Certificate or Certificates surrendered then entitled
such holder (or former holder in the case of a transfer) to purchase. Any
registered holder desiring to transfer, split up, combine or exchange any Rights
Certificate or Certificates shall make such request in writing delivered to the
Rights Agent, and shall surrender the Rights Certificate or Certificates to be
transferred, split up, combined or exchanged at the principal office or offices
of the Rights Agent designated for such purpose. Neither the Rights Agent nor
the Company shall be obligated to take any action whatsoever with respect to the
transfer of any such surrendered Rights Certificate until the registered holder
shall have completed and signed the certificate contained in the form of
assignment on the reverse side of such Rights Certificate and shall have
provided such additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) or Affiliates or Associates thereof as the Company or
the Rights Agent shall reasonably request. Thereupon the Rights Agent shall,
subject to Section 4(b), Section 7(e), Section 14 and Section 24 hereof,
countersign and deliver to the Person entitled thereto a Rights Certificate or
Rights Certificates, as the case may be, as so requested. The Company may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer, split up, combination or
exchange of Rights Certificates. The Rights Agent shall have no duty or
obligation to take any action under any Section of this Agreement which
requires the payment by a Rights holder of applicable taxes and governmental
charges unless and until the Rights Agent is satisfied that all such taxes
and/or charges have been paid.
(b) Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Rights Certificate, and, in case of loss, theft or destruction,
of indemnity or security satisfactory to them, and reimbursement to the Company
and the Rights Agent of all reasonable expenses incidental thereto, and upon
surrender to the Rights Agent and cancellation of the Rights Certificates if
mutilated, the Company will execute and deliver a new Rights Certificate of like
tenor to the Rights Agent for countersignature and delivery to the registered
owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date
of Rights. (a) Subject to Section 7(e) hereof, the registered holder of any
Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability
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<PAGE> 13
set forth in Section 9(c), Section 11(a)(iii) and Section 23(a) hereof) in whole
or in part at any time after the Distribution Date upon surrender of the Rights
Certificate, with the form of election to purchase and the certificate on the
reverse side thereof duly executed, to the Rights Agent at the principal office
or offices of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price with respect to the total number of one
one-hundredths of a share of Preferred Stock (or other securities, cash or other
assets, as the case may be) as to which such surrendered Rights are then
exercisable, at or prior to the earliest of (i) the Close of Business on
[ ] (the "Final Expiration Date"), (ii) the time at which the Rights
are redeemed as provided in Section 23 hereof or (iii) the time at which such
Rights are exchanged pursuant to Section 24 hereof (the earliest of (i), (ii)
and (iii) being herein referred to as the "Expiration Date").
(b) The Purchase Price for each one one-hundredth of a share
of Preferred Stock pursuant to the exercise of a Right shall initially be
$[ ], and shall be subject to adjustment from time to time as provided in
Sections 11 and 13(a) hereof and shall be payable in accordance with
paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing
exercisable Rights, with the form of election to purchase and the certificate
duly executed, accompanied by payment, with respect to each Right so exercised,
of the Purchase Price per one one-hundredth of a share of Preferred Stock (or
other shares, securities, cash or other assets, as the case may be) to be
purchased as set forth below and an amount equal to any applicable transfer tax
required to be paid by the holder of the Rights Certificate in accordance with
Section 9(e) hereof, the Rights Agent shall, subject to Section 20(k) hereof,
thereupon promptly (i) (A) requisition from any transfer agent of the shares of
Preferred Stock (or make available, if the Rights Agent is the transfer agent
for such shares) certificates for the total number of one one-hundredths of a
share of Preferred Stock to be purchased and the Company hereby irrevocably
authorizes its transfer agent to comply with all such requests, or (B) if the
Company shall have elected to deposit the total number of shares of Preferred
Stock issuable upon exercise of the Rights hereunder with a depositary agent,
requisition from the depositary agent depositary receipts representing such
number of one one-hundredths of a share of Preferred Stock as are to be
purchased (in which case certificates for the shares of Preferred Stock
represented by such receipts shall be deposited by the transfer agent with the
depositary agent) and the Company will direct the depositary agent to comply
with such request, (ii) requisition from the Company the amount of cash, if any,
to be paid in lieu of fractional shares in accordance with Section 14 hereof,
(iii) after receipt of such certificates or depositary receipts, cause the same
to be delivered to or upon the order of the registered holder of such Rights
Certificate, registered in such name or
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<PAGE> 14
names as may be designated by such holder, and (iv) after receipt thereof,
deliver such cash, if any, to or upon the order of the registered holder of such
Rights Certificate. The payment of the Purchase Price (as such amount may be
reduced pursuant to Section 11(a)(iii) hereof) shall be made in cash or by
certified bank check or bank draft payable to the order of the Company. In the
event that the Company is obligated to issue other securities (including Common
Stock) of the Company, pay cash and/or distribute other property pursuant to
Section 11(a) hereof, the Company will make all arrangements necessary so that
such other securities, cash and/or other property are available for distribution
by the Rights Agent, if and when necessary to comply with the terms of this
Agreement. The Company reserves the right to require prior to the occurrence of
a Triggering Event that, upon any exercise of Rights, a number of Rights be
exercised so that only whole shares of Preferred Stock would be issued.
(d) In case the registered holder of any Rights Certificate
shall exercise less than all the Rights evidenced thereby, a new Rights
Certificate evidencing Rights equivalent to the Rights remaining unexercised
shall be issued by the Rights Agent and delivered to, or upon the order of, the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder, subject to the provisions of Section 14
hereof.
(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section 11(a) (ii) Event, any
Rights beneficially owned by (i) an Acquiring Person or an Associate or
Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee after the Acquiring
Person becomes such, or (iii) a transferee of an Acquiring Person (or of any
such Associate or Affiliate) who becomes a transferee prior to or concurrently
with the Acquiring Person becoming such and receives such Rights pursuant to
either (A) a transfer (whether or not for consideration) from the Acquiring
Person (or any Affiliate or Associate thereof) to holders of equity interests in
such Acquiring Person (or any Affiliate or Associate thereof) or to any Person
with whom the Acquiring Person (or any Affiliate or Associate thereof) has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect the avoidance of this Section 7(e), shall become null
and void without any further action and no holder of such Rights shall have any
rights whatsoever with respect to such Rights, whether under any provision of
this Agreement or otherwise. The Company shall use all reasonable efforts to
ensure that the provisions of this Section 7(e) and Section 4(b) hereof are
complied with, but neither the Company nor the Rights Agent shall have any
liability to any holder of Rights Certificates or other Person as a result of
the Company's
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<PAGE> 15
failure to make any determinations with respect to an Acquiring Person or any of
its Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) properly completed and signed the certificate contained in
the form of election to purchase set forth on the reverse side of the Rights
Certificate surrendered for such exercise, and (ii) provided such additional
evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company or the Rights Agent shall
reasonably request.
Section 8. Cancellation and Destruction of Rights
Certificates. All Rights Certificates surrendered for the purpose of exercise,
transfer, split up, combination or exchange shall, if surrendered to the Company
or any of its agents, be delivered to the Rights Agent for cancellation or in
cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by
it, and no Rights Certificates shall be issued in lieu thereof, except as
expressly permitted by any of the provisions of this Agreement. The Company
shall deliver to the Rights Agent for cancellation and retirement, and the
Rights Agent shall so cancel and retire, any other Rights Certificates purchased
or acquired by the Company otherwise than upon the exercise thereof. The Rights
Agent shall deliver all cancelled Rights Certificates to the Company, or shall,
at the written request of the Company, destroy such cancelled Rights
Certificates, and in such case shall deliver a certificate of destruction
thereof to the Company.
Section 9. Reservation and Availability of Capital Stock. (a)
The Company covenants and agrees that it will cause to be reserved and kept
available out of its authorized and unissued shares of Preferred Stock (and,
following the occurrence of a Triggering Event, out of its authorized and
unissued shares of Common Stock and/or other securities) or out of its
authorized and issued shares held in its treasury, the number of shares of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock and/or other securities) that, as provided in this Agreement, including
Section 11(a)(iii) hereof, will be sufficient to permit the exercise in full of
all outstanding Rights.
(b) So long as the shares of Preferred Stock (and, following
the occurrence of a Triggering Event, Common Stock and/or other securities)
issuable and deliverable upon the exercise of the Rights may be listed on any
national securities exchange or The Nasdaq National Market (or any successor),
the
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<PAGE> 16
Company shall use its best efforts to cause, from and after such time as the
Rights become exercisable, all shares reserved for such issuance to be listed on
such exchange or The Nasdaq National Market (or any successor), upon official
notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as
soon as practicable following the earliest date after the first occurrence of a
Section 11(a)(ii) Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined in accordance with
Section 11(a)(iii) hereof, a registration statement under the Act with respect
to the securities purchasable upon exercise of the Rights on an appropriate
form, (ii) cause such registration statement to become effective as soon as
practicable after such filing, and (iii) cause such registration statement to
remain effective (with a prospectus at all times meeting the requirements of the
Act) until the earlier of (A) the date as of which the Rights are no longer
exercisable for such securities, and (B) the date of the expiration of the
Rights. The Company will also take such action as may be appropriate under, or
to ensure compliance with, the securities or "blue sky" laws of the various
states in connection with the exercisability of the Rights. The Company may
temporarily suspend, for a period of time not to exceed ninety (90) days after
the date set forth in clause (i) of the first sentence of this Section 9(c), the
exercisability of the Rights in order to prepare and file such registration
statement and permit it to become effective. Upon any such suspension, the
Company shall issue a public announcement stating that the exercisability of the
Rights has been temporarily suspended, as well as a public announcement at such
time as the suspension is no longer in effect. In addition, if the Company shall
determine that a registration statement is required following the Distribution
Date, and a Section 11(a)(ii) Event has not occurred, the Company may
temporarily suspend (and shall give the Rights Agent prompt notice thereof) the
exercisability of Rights until such time as a registration statement has been
declared effective. Notwithstanding any provision of this Agreement to the
contrary, the Rights shall not be exercisable in any jurisdiction if the
requisite qualification or exemption in such jurisdiction shall not have been
obtained, the exercise thereof shall not be permitted under applicable law or a
registration statement shall not have been declared effective.
(d) The Company covenants and agrees that it will take all
such actions as may be necessary to ensure that all one one-hundredths of a
share of Preferred Stock (and, following the occurrence of a Triggering Event,
Common Stock and/or other securities) delivered upon exercise of Rights shall,
at the time of delivery of the certificates for such shares (subject to payment
of the Purchase Price), be duly and validly authorized and issued and fully paid
and nonassessable.
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<PAGE> 17
(e) The Company further covenants and agrees that it will pay,
when due and payable, any and all transfer taxes and governmental charges which
may be payable in respect of the issuance or delivery of the Rights Certificates
and of any certificates for a number of one one-hundredths of a share of
Preferred Stock (or Common Stock and/or other securities, as the case may be)
upon the exercise of Rights. The Company shall not, however, be required to pay
any transfer tax which may be payable in respect of any transfer or delivery of
Rights Certificates to a Person other than, or the issuance or delivery of a
number of one one-hundredths of a share of Preferred Stock (or Common Stock
and/or other securities, as the case may be) in respect of a name other than
that of, the registered holder of the Rights Certificates evidencing Rights
surrendered for exercise or to issue or deliver any certificates for a number of
one one-hundredths of a share of Preferred Stock (or Common Stock and/or other
securities, as the case may be) in a name other than that of the registered
holder upon the exercise of any Rights until such tax shall have been paid (any
such tax being payable by the holder of such Rights Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
Section 10. Preferred Stock Record Date. Each Person in whose
name any certificate for a number of one one-hundredths of a share of Preferred
Stock (or Common Stock and/or other securities, as the case may be) is issued
upon the exercise of Rights shall for all purposes be deemed to have become the
holder of record of such fractional shares of Preferred Stock (or Common Stock
and/or other securities, as the case may be) represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and all applicable transfer taxes) was made; provided, however, that if the
date of such surrender and payment is a date upon which the Preferred Stock (or
Common Stock and/or other securities, as the case may be) transfer books of the
Company are closed, such Person shall be deemed to have become the record holder
of such shares (fractional or otherwise) on, and such certificate shall be
dated, the next succeeding Business Day on which the Preferred Stock (or Common
Stock and/or other securities, as the case may be) transfer books of the Company
are open. Prior to the exercise of the Rights evidenced thereby, the holder of a
Rights Certificate shall not be entitled to any rights of a stockholder of the
Company with respect to shares or other securities for which the Rights shall be
exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall
not be entitled to receive any notice of any proceedings of the Company, except
as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights. The Purchase Price, the
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number and kind of shares covered by each Right and the number of Rights
outstanding are subject to adjustment from time to time as provided in this
Section 11.
(a)(i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Stock
payable in shares of Preferred Stock, (B) subdivide the outstanding
Preferred Stock, (C) combine the outstanding Preferred Stock into a
smaller number of shares, or (D) issue any shares of its capital stock
in a reclassification of the Preferred Stock (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a) and Section 7(e) hereof, the
Purchase Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification, and the number and kind of shares of Preferred Stock
or capital stock, as the case may be, issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised
after such time shall be entitled to receive, upon payment of the
Purchase Price then in effect, the aggregate number and kind of shares
of Preferred Stock or capital stock, as the case may be, which, if such
Right had been exercised immediately prior to such date and at a time
when the Preferred Stock transfer books of the Company were open, such
holder would have owned upon such exercise and been entitled to receive
by virtue of such dividend, subdivision, combination or
reclassification. If an event occurs which would require an adjustment
under both this Section 11(a)(i) and Section 11(a)(ii) hereof, the
adjustment provided for in this Section 11(a)(i) shall be in addition
to, and shall be made prior to, any adjustment required pursuant to
Section 11(a)(ii) hereof.
(ii) Subject to Section 24 hereof, in the event any Person
becomes an Acquiring Person, then each holder of a Right (except as
provided below and in Section 7(e) hereof) shall thereafter have the
right to receive, upon exercise thereof at a price equal to the then
current Purchase Price in accordance with the terms of this Agreement,
in lieu of a number of one one-hundredths of a share of Preferred
Stock, such number of shares of Common Stock of the Company as shall
equal the result obtained by (x) multiplying the then current Purchase
Price by the then number of one one-hundredths of a share of Preferred
Stock for which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event and (y) dividing that product
(which, following such first
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<PAGE> 19
occurrence shall thereafter be referred to as the "Purchase Price" for
each Right and for all purposes of this Agreement) by 50% of the
current market price (determined pursuant to Section 11(d) hereof) per
share of Common Stock on the date of such first occurrence (such number
of shares, the "Adjustment Shares").
(iii) In the event that the number of shares of Common Stock which
are authorized by the Company's certificate of incorporation, as
amended, but not outstanding or reserved for issuance for purposes
other than upon exercise of the Rights, is not sufficient to permit the
exercise in full of the Rights in accordance with the foregoing
subparagraph (ii) of this Section 11(a), the Company shall: (A)
determine the value of the Adjustment Shares issuable upon the exercise
of a Right (the "Current Value"), and (B) with respect to each Right,
make adequate provision to substitute for the Adjustment Shares, upon
payment of the applicable Purchase Price, (1) cash, (2) a reduction in
the Purchase Price, (3) Common Stock or other equity securities of the
Company (including, without limitation, shares, or units of shares, of
preferred stock, such as the Preferred Stock, which the Board of
Directors of the Company has deemed to have substantially the same
value or economic rights as shares of Common Stock (such shares of
preferred stock, "common stock equivalents")), (4) debt securities of
the Company, (5) other assets, or (6) any combination of the foregoing,
having an aggregate value equal to the Current Value (less the amount
of any reduction in the Purchase Price), where such aggregate value has
been determined by the Board of Directors of the Company based upon the
advice of a nationally recognized investment banking firm selected by
the Board of Directors of the Company; provided, however, if the
Company shall not have made adequate provision to deliver value
pursuant to clause (B) above within thirty (30) days following the
later of (x) the first occurrence of a Section 11(a)(ii) Event and (y)
the date on which the Company's right of redemption pursuant to Section
23(a) expires (the later of (x) and (y) being referred to herein as the
"Section 11(a)(ii) Trigger Date"), then the Company shall be obligated
to deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, shares of Common Stock (to the
extent available) and then, if necessary, cash, which shares and/or
cash have an aggregate value equal to the Spread. For purposes of the
preceding sentence, the term "Spread" shall mean the excess of (i) the
Current Value over (ii) the Purchase Price. If the Board of Directors
of the Company shall determine in good faith that it is likely
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<PAGE> 20
that sufficient additional shares of Common Stock could be authorized
for issuance upon exercise in full of the Rights, the thirty (30) day
period set forth above may be extended to the extent necessary, but not
more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in
order that the Company may seek stockholder approval for the
authorization of such additional shares (such thirty (30) day period,
as it may be extended, the "Substitution Period"). To the extent that
action is to be taken pursuant to the first and/or third sentences of
this Section 11(a)(iii), the Company (x) shall provide, subject to
Section 7(e) hereof, that such action shall apply uniformly to all
outstanding Rights, and (y) may suspend the exercisability of the
Rights until the expiration of the Substitution Period in order to seek
such stockholder approval for such authorization of additional shares
and/or to decide the appropriate form of distribution to be made
pursuant to such first sentence and to determine the value thereof. In
the event of any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as
the suspension is no longer in effect (with prompt notice of such
announcements to the Rights Agent). For purposes of this Section
11(a)(iii), the value of each Adjustment Share shall be the current
market price (as determined pursuant to Section 11(d) hereof) per share
of Common Stock on the Section 11(a)(ii) Trigger Date and the value of
any "common stock equivalent" shall be deemed to equal the current
market price (as determined pursuant to Section 11(d) hereof) per share
of the Common Stock on such date.
(b) In case the Company shall fix a record date for the
issuance of rights (other than the Rights), options or warrants to all holders
of Preferred Stock entitling them to subscribe for or purchase (for a period
expiring within forty-five (45) calendar days after such record date) Preferred
Stock (or shares having the same rights, privileges and preferences as the
shares of Preferred Stock ("equivalent preferred stock")) or securities
convertible into Preferred Stock or equivalent preferred stock at a price per
share of Preferred Stock or per share of equivalent preferred stock (or having a
conversion price per share, if a security convertible into Preferred Stock or
equivalent preferred stock) less than the current market price (as determined
pursuant to Section 11(d) hereof) per share of Preferred Stock on such record
date, the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of shares
of Preferred Stock outstanding on such record date, plus the number of shares of
Preferred Stock which the aggregate
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<PAGE> 21
offering price of the total number of shares of Preferred Stock and/or
equivalent preferred stock so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such current market price, and the denominator of which shall be the number
of shares of Preferred Stock outstanding on such record date, plus the number of
additional shares of Preferred Stock and/or equivalent preferred stock to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible). In case such subscription price may
be paid by delivery of consideration part or all of which may be in a form other
than cash, the value of such consideration shall be as determined in good faith
by the Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent and shall be binding on the Rights
Agent and the holders of the Rights. Shares of Preferred Stock owned by or held
for the account of the Company shall not be deemed outstanding for the purpose
of any such computation. Such adjustment shall be made successively whenever
such a record date is fixed, and in the event that such rights, options or
warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not been
fixed.
(c) In case the Company shall fix a record date for a
distribution to all holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of indebtedness, cash (other than a regular
periodic cash dividend out of the earnings or retained earnings of the Company),
assets (other than a dividend payable in Preferred Stock, but including any
dividend payable in stock other than Preferred Stock) or subscription rights or
warrants (excluding those referred to in Section 11(b) hereof), the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the current market price (as
determined pursuant to Section 11(d) hereof) per share of Preferred Stock on
such record date, less the fair market value (as determined in good faith by the
Board of Directors of the Company, whose determination shall be described in a
statement filed with the Rights Agent and shall be binding on the Rights Agent
and the holders of the Rights) of the portion of the cash, assets or evidences
of indebtedness so to be distributed or of such subscription rights or warrants
applicable to a share of Preferred Stock and the denominator of which shall be
such current market price (as determined pursuant to Section 11(d) hereof) per
share of Preferred Stock. Such adjustments shall be made successively whenever
such a record date is fixed, and in the event that such distribution is not so
made, the Purchase Price shall be adjusted to be the Purchase Price which would
have been in effect if such record date had not been fixed.
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<PAGE> 22
(d) (i) For the purpose of any computation hereunder, other
than computations made pursuant to Section 11(a)(iii) hereof, the
"current market price" per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices per share of such
Common Stock for the thirty (30) consecutive Trading Days (as such term
is hereinafter defined) immediately prior to but not including such
date, and for purposes of computations made pursuant to Section
11(a)(iii) hereof, the "current market price" per share of Common Stock
on any date shall be deemed to be the average of the daily closing
prices per share of such Common Stock for the ten (10) consecutive
Trading Days immediately following but not including such date;
provided, however, that in the event that the current market price per
share of the Common Stock is determined during a period following the
announcement by the issuer of such Common Stock of (A) a dividend or
distribution on such Common Stock payable in shares of such Common
Stock or securities convertible into shares of such Common Stock (other
than the Rights), or (B) any subdivision, combination or
reclassification of such Common Stock, and the ex-dividend date for
such dividend or distribution, or the record date for such subdivision,
combination or reclassification shall not have occurred prior to the
commencement of the requisite thirty (30) Trading Day or ten (10)
Trading Day period, as set forth above, then, and in each such case,
the "current market price" shall be properly adjusted to take into
account any trading during the period prior to such ex-dividend date or
record date. The closing price for each day shall be the last sale
price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the
New York Stock Exchange or, if the shares of Common Stock are not
listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities
exchange on which the shares of Common Stock are listed or admitted to
trading or, if the shares of Common Stock are not listed or admitted to
trading on any national securities exchange, the last quoted price or,
if not so quoted, the average of the high bid and low asked prices in
the over-the-counter market, as reported by the National Association of
Securities Dealers, Inc. Automated Quotation System ("Nasdaq") or such
other quotation system then in use, or, if on any such date the shares
of Common Stock are not quoted by any such organization, the average of
the
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<PAGE> 23
closing bid and asked prices as furnished by a professional market
maker making a market in the Common Stock selected by the Board of
Directors of the Company. If on any such date no market maker is making
a market in the Common Stock, the fair value of such shares on such
date as determined in good faith by the Board of Directors of the
Company shall be used. The term "Trading Day" shall mean a day on which
the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading is open for the
transaction of business or, if the shares of Common Stock are not
listed or admitted to trading on any national securities exchange, a
Business Day. If the Common Stock is not publicly held or not so listed
or traded, "current market price" per share shall mean the fair value
per share as determined in good faith by the Board of Directors of the
Company, whose determination shall be described in a statement filed
with the Rights Agent and shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the
"current market price" per share of Preferred Stock shall be determined
in the same manner as set forth above for the Common Stock in clause
(i) of this Section 11(d) (other than the last sentence thereof). If
the current market price per share of Preferred Stock cannot be
determined in the manner provided above, or if the Preferred Stock is
not publicly held or listed or traded in a manner described in clause
(i) of this Section 11(d), the "current market price" per share of
Preferred Stock shall be conclusively deemed to be an amount equal to
100 (as such number may be appropriately adjusted for such events as
stock splits, stock dividends and recapitalizations with respect to the
Common Stock occurring after the date of this Agreement) multiplied by
the current market price per share of the Common Stock. If neither the
Common Stock nor the Preferred Stock is publicly held or so listed or
traded, "current market price" per share of the Preferred Stock shall
mean the fair value per share as determined in good faith by the Board
of Directors of the Company, whose determination shall be described in
a statement filed with the Rights Agent and shall be binding on the
Rights Agent and the holders of the Rights. For all purposes of this
Agreement, the "current market price" of one one-hundredth of a share
of Preferred Stock shall be equal to the "current market price" of one
share of Preferred Stock divided by 100.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such
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<PAGE> 24
adjustment would require an increase or decrease of at least one percent (1%) in
the Purchase Price; provided, however, that any adjustments which by reason of
this Section 11(e) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest one
ten-thousandth of a share of Common Stock or other share or one one-millionth of
a share of Preferred Stock, as the case may be. Notwithstanding the first
sentence of this Section 11(e), any adjustment required by this Section 11 shall
be made no later than the earlier of (i) three (3) years from the date of the
transaction which mandates such adjustment, or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to Section
11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter exercised
shall become entitled to receive any shares of capital stock other than
Preferred Stock, thereafter the number of such other shares so receivable upon
exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in
Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the
provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred
Stock shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to
any adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one one-hundredths of a
share of Preferred Stock purchasable from time to time hereunder upon exercise
of the Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one-hundredths of a share of Preferred Stock (calculated to the nearest
one-millionth) obtained by (i) multiplying (x) the number of one one-hundredths
of a share covered by a Right immediately prior to this adjustment, by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price, and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in lieu of any
adjustment in the number of one one-hundredths of a share of Preferred Stock
purchasable upon the exercise of a Right. Each of the Rights outstanding after
the adjustment in the number of Rights shall be exercisable for the number of
one
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<PAGE> 25
one-hundredths of a share of Preferred Stock for which a Right was exercisable
immediately prior to such adjustment. Each Right held of record prior to such
adjustment of the number of Rights shall become that number of Rights
(calculated to the nearest one-ten-thousandth) obtained by dividing the Purchase
Price in effect immediately prior to adjustment of the Purchase Price by the
Purchase Price in effect immediately after adjustment of the Purchase Price. The
Company shall make a public announcement (with prompt notice thereof to the
Rights Agent) of its election to adjust the number of Rights, indicating the
record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which the Purchase
Price is adjusted or any day thereafter, but, if the Rights Certificates have
been issued, shall be at least ten (10) days later than the date of the public
announcement. If Rights Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Rights Certificates evidencing, subject to
Section 14 hereof, the additional Rights to which such holders shall be entitled
as a result of such adjustment, or, at the option of the Company, shall cause to
be distributed to such holders of record in substitution and replacement for the
Rights Certificates held by such holders prior to the date of adjustment, and
upon surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase
Price or the number of one one-hundredths of a share of Preferred Stock issuable
upon the exercise of the Rights, the Rights Certificates theretofore and
thereafter issued may continue to express the Purchase Price per one
one-hundredth of a share and the number of one one-hundredths of a share which
were expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Purchase Price below the then stated value, if any, of the number
of one one-hundredths of a share of Preferred Stock issuable upon exercise of
the Rights, the Company shall take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Company may validly and
legally issue fully paid and nonassessable shares of Preferred Stock at such
adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of
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<PAGE> 26
a record date for a specified event, the Company may elect to defer until the
occurrence of such event the issuance to the holder of any Right exercised after
such record date the number of one one-hundredths of a share of Preferred Stock
and other capital stock or securities of the Company, if any, issuable upon such
exercise over and above the number of one one-hundredths of a share of Preferred
Stock and other capital stock or securities of the Company, if any, issuable
upon such exercise on the basis of the Purchase Price in effect prior to such
adjustment (and shall provide the Rights Agent prompt notice of such election);
provided, however, that the Company shall deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional shares (fractional or otherwise) or securities upon the occurrence of
the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that the Board of Directors of the Company, in
its good faith judgment, shall determine to be advisable in order that any (i)
consolidation or subdivision of the Preferred Stock, (ii) issuance wholly for
cash of any shares of Preferred Stock at less than the current market price,
(iii) issuance wholly for cash of shares of Preferred Stock or securities which
by their terms are convertible into or exchangeable for shares of Preferred
Stock, (iv) stock dividends or (v) issuance of rights, options or warrants
referred to in this Section 11, hereafter made by the Company to holders of its
Preferred Stock shall not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any
time after the Distribution Date, (i) consolidate with any other Person (other
than a Subsidiary of the Company in a transaction which complies with Section
11(o) hereof), (ii) merge with or into any other Person (other than a Subsidiary
of the Company in a transaction which complies with Section 11(o) hereof), or
(iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction, or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with Section 11(o) hereof), if (x) at the time of or immediately after
such consolidation, merger, sale or transfer there are any rights, warrants or
other instruments or securities outstanding or agreements in effect which would
substantially diminish or otherwise eliminate the benefits intended to be
afforded by the Rights or (y) prior to, simultaneously with or immediately after
such consolidation, merger, sale or transfer, the stockholders of the Person who
constitutes, or would constitute, the "Principal
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<PAGE> 27
Party" for purposes of Section 13(a) hereof shall have received a distribution
of Rights previously owned by such Person or any of its Affiliates and
Associates.
(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23, Section 24 or
Section 27 hereof, take (or permit any Subsidiary to take) any action if at the
time such action is taken it is reasonably foreseeable that such action will
diminish substantially or otherwise eliminate the benefits intended to be
afforded by the Rights.
(p) In the event that the Company shall at any time after the
Rights Dividend Declaration Date and prior to the Distribution Date (i) declare
a dividend on the outstanding shares of Common Stock payable in shares of Common
Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii) combine
the outstanding shares of Common Stock into a smaller number of shares, the
number of Rights associated with each share of Common Stock then outstanding, or
issued or delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted so that the number of Rights thereafter associated with
each share of Common Stock following any such event shall equal the result
obtained by multiplying the number of Rights associated with each share of
Common Stock immediately prior to such event by a fraction the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
following the occurrence of such event.
Section 12. Certificate of Adjusted Purchase Price or Number
of Shares. Whenever an adjustment is made as provided in Section 11 or Section
13 hereof, the Company shall (a) promptly prepare a certificate setting forth
such adjustment and a brief statement of the facts and computations accounting
for such adjustment, (b) promptly file with the Rights Agent, and with each
transfer agent for the Preferred Stock and the Common Stock, a copy of such
certificate, and (c) mail a brief summary thereof to each holder of a Rights
Certificate (or, if prior to the Distribution Date, to each holder of a
certificate representing shares of Common Stock) in accordance with Section 26
hereof. The Rights Agent shall be fully protected in relying on any such
certificate and on any adjustment therein contained and shall not be deemed to
have knowledge of such adjustment unless and until it shall have received such
certificate.
Section 13. Consolidation, Merger or Sale or Transfer of
Assets or Earning Power.
(a) In the event that, following the Stock Acquisition Date,
directly or indirectly, (x) the Company shall consolidate
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<PAGE> 28
with, or merge with and into, any other Person (other than a Subsidiary of the
Company in a transaction which complies with Section 11(o) hereof), and the
Company shall not be the continuing or surviving corporation of such
consolidation or merger, (y) any Person (other than a Subsidiary of the Company
in a transaction which complies with Section 11(o) hereof) shall consolidate
with, or merge with or into, the Company, and the Company shall be the
continuing or surviving corporation of such consolidation or merger and, in
connection with such consolidation or merger, all or part of the outstanding
shares of Common Stock shall be changed into or exchanged for stock or other
securities of any other Person or cash or any other property, or (z) the Company
shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell
or otherwise transfer), in one transaction or a series of related transactions,
assets or earning power aggregating more than 50% of the assets or earning power
of the Company and its Subsidiaries (taken as a whole) to any Person or Persons
(other than the Company or any Subsidiary of the Company in one or more
transactions each of which complies with Section 11(o) hereof) (any event
described in clauses (x), (y) or (z) of this Section 13(a) following the Stock
Acquisition Date, a "Section 13 Event"), then, and in each such case, proper
provision shall be made so that: (i) each holder of a Right, except as provided
in Section 7(e) hereof, shall thereafter have the right to receive upon the
exercise thereof at the then current Purchase Price in accordance with the terms
of this Agreement, in lieu of a number of one one-hundredths of a share of
Preferred Stock, such number of validly authorized and issued, fully paid,
nonassessable and freely tradeable shares of Common Stock of the Principal Party
(as such term is hereinafter defined), not subject to any liens, encumbrances,
rights of first refusal or other adverse claims, as shall be equal to the result
obtained by (l) multiplying the then current Purchase Price by the number of one
one-hundredths of a share of Preferred Stock for which a Right is exercisable
immediately prior to the first occurrence of a Section 13 Event (or, if a
Section 11(a)(ii) Event has occurred prior to the first occurrence of a Section
13 Event, multiplying the number of such one one-hundredths of a share of
Preferred Stock for which a Right was exercisable immediately prior to the first
occurrence of a Section 11(a)(ii) Event by the Purchase Price in effect
immediately prior to such first occurrence), and dividing that product (which,
following the first occurrence of a Section 13 Event, shall be referred to as
the "Purchase Price" for each Right and for all purposes of this Agreement) by
(2) 50% of the current market price (determined pursuant to Section 11(d)(i)
hereof) per share of the Common Stock of such Principal Party on the date of
consummation of such Section 13 Event; (ii) such Principal Party shall
thereafter be liable for, and shall assume, by virtue of such Section 13 Event,
all the obligations and duties of the Company pursuant to this Agreement; (iii)
the term "Company" shall thereafter be deemed to refer to such Principal Party,
it being specifically intended that the provisions of
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<PAGE> 29
Section 11 hereof shall apply only to such Principal Party following the first
occurrence of a Section 13 Event; (iv) such Principal Party shall take such
steps (including, but not limited to, the reservation of a sufficient number of
shares of its Common Stock) in connection with the consummation of any such
transaction as may be necessary to assure that the provisions hereof shall
thereafter be applicable, as nearly as reasonably may be, in relation to its
shares of Common Stock thereafter deliverable upon the exercise of the Rights;
and (v) the provisions of Section 11(a)(ii) hereof shall be of no effect
following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean:
(i) in the case of any transaction described in clause (x) or
(y) of the first sentence of Section 13(a), the Person that is the
issuer of any securities into which shares of Common Stock of the
Company are converted in such merger or consolidation, and if no
securities are so issued, the Person that is the other party to such
merger or consolidation; and
(ii) in the case of any transaction described in clause (z) of
the first sentence of Section 13(a), the Person that is the party
receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions;
provided, however, that in any such case, (1) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding twelve (12)
month period registered under Section 12 of the Exchange Act, and such Person is
a direct or indirect Subsidiary of another Person the Common Stock of which is
and has been so registered, "Principal Party" shall refer to such other Person;
and (2) in case such Person is a Subsidiary, directly or indirectly, of more
than one Person, the Common Stock of two or more of which are and have been so
registered, "Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Stock having the greatest aggregate market value.
(c) The Company shall not consummate any such consolidation,
merger, sale or transfer unless the Principal Party shall have a sufficient
number of authorized shares of its Common Stock which have not been issued or
reserved for issuance to permit the exercise in full of the Rights in accordance
with this Section 13 and unless prior thereto the Company and such Principal
Party shall have executed and delivered to the Rights Agent a supplemental
agreement providing for the terms set forth in paragraphs (a) and (b) of this
Section 13 and further providing that, as soon as practicable after the date of
any consolidation, merger, sale or transfer of assets mentioned in paragraph (a)
of this Section 13, the Principal Party will:
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(i) prepare and file a registration statement under the Act,
with respect to the Rights and the securities purchasable upon exercise
of the Rights on an appropriate form, and will use its best efforts to
cause such registration statement to (A) become effective as soon as
practicable after such filing and (B) remain effective (with a
prospectus at all times meeting the requirements of the Act) until the
Expiration Date; and
(ii) deliver to holders of the Rights historical financial
statements for the Principal Party and each of its Affiliates which
comply in all respects with the requirements for registration on Form
10 under the Exchange Act.
(d) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers. In the event
that a Section 13 Event shall occur at any time after the occurrence of a
Section 11(a)(ii) Event, the Rights which have not theretofore been exercised
shall thereafter become exercisable in the manner described in Section 13(a).
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of
Rights, except prior to the Distribution Date as provided in Section 11(p)
hereof, or to distribute Rights Certificates which evidence fractional Rights.
In lieu of such fractional Rights, there shall be paid to the registered holders
of the Rights Certificates with regard to which such fractional Rights would
otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For purposes of this Section 14(a), the
current market value of a whole Right shall be the closing price of the Rights
for the Trading Day immediately prior to the date on which such fractional
Rights would have been otherwise issuable. The closing price of the Rights for
any day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Rights are not listed or
admitted to trading on the New York Stock Exchange, as reported to the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Rights are listed or
admitted to trading, or if the Rights are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by Nasdaq or such other system then in use
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or, if on any such date the Rights are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Rights selected by the Board of Directors of
the Company. If on any such date no such market maker is making a market in the
Rights the fair value of the Rights on such date as determined in good faith by
the Board of Directors of the Company shall be used.
(b) The Company shall not be required to issue fractions of
shares of Preferred Stock (other than fractions which are integral multiples of
one one-hundredth of a share of Preferred Stock) upon exercise of the Rights or
to distribute certificates which evidence fractional shares of Preferred Stock
(other than fractions which are integral multiples of one one-hundredth of a
share of Preferred Stock). Fractions of shares of Preferred Stock in integral
multiples of one one-hundredth of a share may, at the election of the Company,
be evidenced by depositary receipts pursuant to an appropriate agreement between
the Company and a depositary selected by it; provided, however, that such
agreement shall provide that the holders of such depositary receipts shall have
all the rights, privileges and preferences to which they are entitled as
beneficial owners of the shares represented by such depositary receipts. In lieu
of fractional shares of Preferred Stock that are not integral multiples of one
one-hundredth of a share of Preferred Stock, the Company shall pay to the
registered holders of Rights Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market value of one one-hundredth of a share of Preferred Stock. For purposes of
this Section 14(b), the current market value of one one-hundredth of a share of
Preferred Stock shall be one one-hundredth of the closing price of a share of
Preferred Stock (as determined pursuant to Section 11(d)(ii) hereof) for the
Trading Day immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the
Company shall not be required to issue fractions of shares of Common Stock upon
exercise of the Rights or to distribute certificates which evidence fractional
shares of Common Stock. In lieu of fractional shares of Common Stock, the
Company shall pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of one share of Common Stock. For purposes
of this Section 14(c), the current market value of one share of Common Stock
shall be the closing price of one share of Common Stock (as determined pursuant
to Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
such exercise.
(d) The holder of a Right by the acceptance of the Rights
expressly waives such holder's right to receive any
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fractional Rights or any fractional shares upon exercise of a Right, except as
permitted by this Section 14.
(e) The Rights Agent shall have no duty or obligation with
respect to this Section 14 and Section 24(e) unless and until it has received
specific instructions (and sufficient cash, if required) from the Company with
respect to its duties and obligations under such Sections.
Section 15. Rights of Action. All rights of action in respect
of this Agreement, other than rights of action vested in the Rights Agent
pursuant to the terms of this Agreement, are vested in the respective registered
holders of the Rights Certificates (and, prior to the Distribution Date, the
registered holders of the Common Stock); and any registered holder of any Rights
Certificate (or, prior to the Distribution Date, of the Common Stock), without
the consent of the Rights Agent or of the holder of any other Rights Certificate
(or, prior to the Distribution Date, of the Common Stock), may, in such holder's
own behalf and for such holder's own benefit, enforce, and may institute and
maintain any suit, action or proceeding against the Company to enforce, or
otherwise act in respect of, such holder's right to exercise the Rights
evidenced by such Rights Certificate in the manner provided in such Rights
Certificate and in this Agreement. Without limiting the foregoing or any
remedies available to the holders of Rights, it is specifically acknowledged
that the holders of Rights would not have an adequate remedy at law for any
breach of this Agreement and shall be entitled to specific performance of the
obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a
Right by accepting the same consents and agrees with the Company and the Rights
Agent and with every holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if
surrendered at the principal office or offices of the Rights Agent
designated for such purposes, duly endorsed or accompanied by a proper
instrument of transfer and with the appropriate forms and certificates
fully executed;
(c) subject to Section 6(a), Section 7(e) and Section 7(f)
hereof, the Company and the Rights Agent may deem and treat the person
in whose name a Rights Certificate (or, prior to the Distribution Date,
the associated Common Stock certificate) is registered as the absolute
owner thereof and of the Rights evidenced thereby (notwithstanding any
notations of ownership or writing on the Rights Certificates or the
associated Common Stock certificates made by anyone other than the
Company or the Rights Agent) for all purposes
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whatsoever, and neither the Company nor the Rights Agent shall be
required to be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any
liability to any holder of a Right or other Person as a result of its
inability to perform any of its obligations under this Agreement by
reason of any preliminary or permanent injunction or other order,
decree, judgment or ruling issued by a court of competent jurisdiction
or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order
promulgated or enacted by any governmental authority, prohibiting or
otherwise restraining performance of such obligation; provided,
however, the Company must use reasonable efforts to have any such
order, decree, judgment or ruling lifted or otherwise overturned as
soon as possible.
Section 17. Rights Certificate Holder Not Deemed a
Stockholder. No holder, as such, of any Rights Certificate shall be entitled to
vote, receive dividends or be deemed for any purpose to be the holder of the
number of one one-hundredths of a share of Preferred Stock or any other
securities of the Company which may at any time be issuable upon the exercise of
the Rights represented thereby, nor shall anything contained herein or in any
Rights Certificate be construed to confer upon the holder of any Rights
Certificate, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Rights Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
disbursements and other disbursements incurred in the preparation, execution,
delivery and amendment of this Agreement and the exercise and performance of its
duties hereunder, provided, that the aggregate amount that the Company shall be
required to pay the Rights Agent in connection with the preparation, execution
and delivery of this Agreement shall not exceed $2,500. The Company also agrees
to indemnify the Rights Agent for, and to hold it harmless against,
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any loss, liability, damage, judgment, fine, penalty, claim, demand, settlement,
cost or expense incurred without gross negligence, bad faith or willful
misconduct (each as finally determined by a court of competent jurisdiction) on
the part of the Rights Agent for any action taken, suffered or omitted by the
Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability in the premises. Anything to the contrary notwithstanding, in no event
shall the Rights Agent be liable for special, indirect, punitive consequential
or incidental loss or damage of any kind whatsoever (including but not limited
to lost profits), even if the Rights Agent has been advised of the likelihood of
such loss or damage. Any liability of the Rights Agent under this Rights
Agreement will be limited to the amount of fees paid by the Company to the
Rights Agent.
(b) The Rights Agent shall be authorized and protected and
shall incur no liability for or in respect of any action taken, suffered or
omitted by it in connection with its acceptance and administration of this
Agreement in reliance upon any Rights Certificate or certificate for Common
Stock or for other securities of the Company, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter, notice, direction,
consent, certificate, statement, or other paper or document believed by it to be
genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper Person or Persons, or otherwise upon the advice of
counsel as set forth in Section 20.
Section 19. Merger or Consolidation or Change of Name of
Rights Agent.
(a) Any Person into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any Person
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any Person succeeding to the stock
transfer business of the Rights Agent or any successor Rights Agent, shall be
the successor to the Rights Agent under this Agreement without the execution or
filing of any paper or any further act on the part of any of the parties hereto;
provided, however, that such Person would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21 hereof. In case at the
time such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Rights Certificates shall have been countersigned but not
delivered, any such successor Rights Agent may adopt the countersignature of a
predecessor Rights Agent and deliver such Rights Certificates so countersigned;
and in case at the time any of the Rights Certificates shall not have been
countersigned, any successor Rights Agent may countersign such Rights
Certificates either in the name of the predecessor or in the name of the
successor Rights Agent; and in all such cases such Rights Certificates
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shall have the full force provided in the Rights Certificates and in this
Agreement.
(b) In case at any time the name of the Rights Agent shall be
changed, and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so countersigned; and in
case, at that time, any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent
undertakes only the duties and obligations expressly imposed by this Agreement
upon the following terms and conditions, by all of which the Company and the
holders of Rights Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the opinion of such counsel
shall be full and complete authorization and protection to the Rights
Agent and the Rights Agent shall incur no liability for or in respect
of any action taken, suffered or omitted by it in good faith and in
accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that
any fact or matter (including, without limitation, the identity of any
Acquiring Person and the determination of "current market price") be
proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect
thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by the
Chairman of the Board, the President, any Vice President, the
Treasurer, any Assistant Treasurer, the Secretary or any Assistant
Secretary of the Company and delivered to the Rights Agent; and such
certificate shall be full authorization and protection to the Rights
Agent, and the Rights Agent shall incur no liability for or in respect
of any action taken, suffered or omitted by it in good faith by it
under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder only for its
own gross negligence, bad faith or willful misconduct (each as finally
determined by a court of competent jurisdiction).
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(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement
or in the Rights Certificates or be required to verify the same (except
as to its countersignature on such Rights Certificates), but all such
statements and recitals are and shall be deemed to have been made by
the Company only.
(e) The Rights Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery
hereof (except the due execution hereof by the Rights Agent) or in
respect of the validity or execution of any Rights Certificate (except
its countersignature thereof); nor shall it be responsible for any
breach by the Company of any covenant or condition contained in this
Agreement or in any Rights Certificate; nor shall it be responsible for
any adjustment required under the provisions of Section 11, Section 13
or Section 24 hereof or responsible for the manner, method or amount of
any such adjustment or the ascertaining of the existence of facts that
would require any such adjustment (except with respect to the exercise
of Rights evidenced by Rights Certificates after actual notice of any
such adjustment); nor shall it by any act hereunder be deemed to make
any representation or warranty as to the authorization or reservation
of any shares of Common Stock or Preferred Stock to be issued pursuant
to this Agreement or any Rights Certificate or as to whether any shares
of Common Stock or Preferred Stock will, when so issued, be validly
authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed,
acknowledged and delivered all such further and other acts, instruments
and assurances as may reasonably be required by the Rights Agent for
the carrying out or performing by the Rights Agent of the provisions of
this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties
hereunder from the Chairman of the Board, the President, any Vice
President, the Secretary, any Assistant Secretary, the Treasurer or any
Assistant Treasurer of the Company, and to apply to such officers for
advice or instructions in connection with its duties, and it shall
incur no liability for or in respect of any action taken, suffered or
omitted by it in good faith in accordance with instructions of any such
officer.
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(h) The Rights Agent and any stockholder, director, Affiliate,
officer or employee of the Rights Agent may buy, sell or deal in any of
the Rights or other securities of the Company or become pecuniarily
interested in any transaction in which the Company may be interested,
or contract with or lend money to the Company or otherwise act as fully
and freely as though it were not Rights Agent under this Agreement.
Nothing herein shall preclude the Rights Agent from acting in any other
capacity for the Company or for any other Person.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder
either itself or by or through its attorneys or agents, and the Rights
Agent shall not be answerable or accountable for any act, default,
neglect or misconduct of any such attorneys or agents or for any loss
to the Company resulting from any such act, default, neglect or
misconduct; provided, however, that reasonable care was exercised in
the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights
Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder or in the
exercise of its rights if there shall be reasonable grounds for
believing that repayment of such funds or adequate indemnification
against such risk or liability is not reasonably assured to it.
(k) If, with respect to any Rights Certificate surrendered to
the Rights Agent for exercise or transfer, the certificate attached to
the form of assignment or form of election to purchase, as the case may
be, has either not been completed or indicates an affirmative response
to clause 1 and/or 2 thereof, the Rights Agent shall not take any
further action with respect to such requested exercise or transfer
without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon thirty (30) days' notice in writing mailed to the Company, and to
each transfer agent of the Common Stock and Preferred Stock, by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
thirty (30) days' notice in writing, mailed to the Rights Agent or successor
Rights Agent, as the case may be, and to each transfer agent of the Common Stock
and
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Preferred Stock, by registered or certified mail, and to the holders of the
Rights Certificates by first-class mail. If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after giving notice of such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Rights Certificate (who shall, with such notice, submit such holder's Rights
Certificate for inspection by the Company), then any registered holder of any
Rights Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether appointed
by the Company or by such a court, shall be (i) a Person organized and doing
business under the laws of the United States or of the State of Illinois or the
State of New York (or of any other state of the United States so long as such
Person is authorized to do business in the State of Illinois or the State of New
York), in good standing, having an office or agency in the State of Illinois or
the State of New York, which is authorized under such laws to exercise stock
transfer powers and is subject to supervision or examination by federal or state
authority and which has at the time of its appointment as Rights Agent a
combined capital and surplus of at least $50,000,000 or (ii) an Affiliate of
such Person. After appointment, the successor Rights Agent shall be vested with
the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without further act or deed; but the
predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further reasonable assurance, conveyance, act or deed necessary for the purpose.
Not later than the effective date of any such appointment, the Company shall
file notice thereof in writing with the predecessor Rights Agent and each
transfer agent of the Common Stock and the Preferred Stock, and mail a notice
thereof in writing to the registered holders of the Rights Certificates. Failure
to give any notice provided for in this Section 21 or any defect therein shall
not affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificates.
Notwithstanding any of the provisions of this Agreement or of the Rights to the
contrary, the Company may, at its option, issue new Rights Certificates
evidencing Rights in such form as may be approved by its Board of Directors to
reflect any adjustment or change in the Purchase Price and the number or kind or
class of shares or other securities or property purchasable under the Rights
Certificates made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance or sale of shares of Common Stock
following the Distribution Date and prior to the redemption or expiration of the
Rights, the
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Company (a) shall, with respect to shares of Common Stock so issued or sold
pursuant to the exercise of stock options or under any employee plan or
arrangement, granted or awarded prior to the Distribution Date, or upon the
exercise, conversion or exchange of securities hereinafter issued by the
Company, and (b) may, in any other case, if deemed necessary or appropriate by
the Board of Directors of the Company, issue Rights Certificates representing an
appropriate number of Rights in connection with such issuance or sale; provided,
however, that (i) no such Rights Certificate shall be issued if, and to the
extent that, the Company shall be advised by counsel that such issuance would
create a significant risk of material adverse tax consequences to the Company or
the Person to whom such Rights Certificate would be issued, and (ii) no such
Rights Certificate shall be issued if, and to the extent that, appropriate
adjustment shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption and Termination.
(a) The Board of Directors of the Company may, at its option,
at any time prior to the earlier of (i) the Close of Business on the tenth day
following the Stock Acquisition Date (or, if the Stock Acquisition Date shall
have occurred prior to the Record Date, the Close of Business on the tenth day
following the Record Date), or (ii) the Final Expiration Date, redeem all but
not less than all of the then outstanding Rights at a redemption price of $.01
per Right, as such amount may be appropriately adjusted to reflect any stock
split, stock dividend or similar transaction occurring after the date hereof
(such redemption price being hereinafter referred to as the "Redemption Price").
Notwithstanding anything contained in this Agreement to the contrary, the Rights
shall not be exercisable after the first occurrence of a Section 11(a)(ii) Event
until such time as the Company's right of redemption hereunder has expired. The
Company may, at its option, pay the Redemption Price in cash, shares of Common
Stock (based on the "current market price", as defined in Section 11(d)(i)
hereof, of the Common Stock at the time of redemption) or any other form of
consideration deemed appropriate by the Board of Directors. The redemption of
the Rights by the Board of Directors may be made effective at such time, on such
basis and with such conditions as the Board of Directors in its sole discretion
may establish.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the redemption of the Rights, evidence of which shall have
been filed with the Rights Agent and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price for
each Right so held. Promptly after the action of the Board of Directors ordering
the redemption of the Rights, the Company shall give notice of such redemption
to the Rights Agent and the holders of the then outstanding Rights by mailing
such notice to
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the Rights Agent and to all such holders at each holder's last address as it
appears upon the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the transfer agent for the Common
Stock. Any notice which is mailed in the manner herein provided shall be deemed
given, whether or not the holder receives the notice. Each such notice of
redemption will state the method by which the payment of the Redemption Price
will be made.
Section 24. Exchange.
(a) The Board of Directors of the Company may, at its option,
at any time after any Person becomes an Acquiring Person, exchange all or part
of the then outstanding and exercisable Rights (which shall not include Rights
that have become null and void pursuant to the provisions of Section 7(e)
hereof) for shares of Common Stock at an exchange ratio of one share of Common
Stock per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such exchange
ratio being hereinafter referred to as the "Exchange Ratio"). Notwithstanding
the foregoing, the Board of Directors of the Company shall not be empowered to
effect such exchange at any time after any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or of any
Subsidiary of the Company, or any Person organized, appointed or established by
the Company for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of fifty
percent (50%) or more of the Common Stock then outstanding.
(b) Immediately upon the action of the Board of Directors of
the Company ordering the exchange of any Rights pursuant to subsection (a) of
this Section 24 and without any further action and without any notice, the right
to exercise such Rights shall terminate and the only right thereafter of a
holder of any such Rights shall be to receive that number of shares of Common
Stock equal to the number of such Rights held by such holder multiplied by the
Exchange Ratio. The Company shall promptly give public notice (with prompt
notice thereof to the Rights Agent) of any exchange; provided, however, that the
failure to give, or any defect in, such notice shall not affect the validity of
such exchange. The Company promptly shall mail a notice of any such exchange to
all of the holders of such Rights at their last addresses as they appear upon
the registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the exchange
of the Common Stock for Rights will be effected and, in the event of any partial
exchange, the number of Rights which will be exchanged. Any partial exchange
will be effected pro rata based on the number of Rights (other than
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Rights which have become null and void pursuant to the provisions of Section
7(e) hereof) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company,
at its option, may substitute shares of Preferred Stock (or equivalent preferred
stock, as such term is defined in paragraph (b) of Section 11 hereof) for shares
of Common Stock exchangeable for Rights, at the initial rate of one
one-hundredth of a share of Preferred Stock (or equivalent preferred stock) for
each share of Common Stock, as appropriately adjusted to reflect adjustments in
the voting rights of the Preferred Stock pursuant to the terms thereof, so that
the fraction of a share of Preferred Stock delivered in lieu of each share of
Common Stock shall have the same voting rights as one share of Common Stock.
(d) In the event that there shall not be sufficient shares of
Common Stock issued but not outstanding or authorized but unissued to permit any
exchange of Rights as contemplated in accordance with this Section 24, the
Company shall take all such actions as may be necessary to authorize additional
shares of Common Stock for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of
shares of Common Stock or to distribute certificates which evidence fractional
shares of Common Stock. In lieu of such fractional shares of Common Stock, there
shall be paid to the registered holders of the Rights Certificates with regard
to which such fractional shares of Common Stock would otherwise be issuable, an
amount in cash equal to the same fraction of the current market value of a whole
share of Common Stock. For the purposes of this subsection (e), the current
market value of a whole share of Common Stock shall be the closing price of a
share of Common Stock (as determined pursuant to the second sentence of Section
11(d)(i) hereof) for the Trading Day immediately prior to the date of exchange
pursuant to this Section 24.
Section 25. Notice of Certain Events.
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Stock or to make any other distribution to the holders of
Preferred Stock (other than a regular periodic cash dividend out of earnings or
retained earnings of the Company), or (ii) to offer to the holders of Preferred
Stock rights or warrants to subscribe for or to purchase any additional shares
of Preferred Stock or shares of stock of any class or any other securities,
rights or options, or (iii) to effect any reclassification of its Preferred
Stock (other than a reclassification involving only the subdivision of
outstanding shares of Preferred Stock), or (iv) to effect any consolidation or
merger into or with any other Person (other than a Subsidiary of the Company in
a transaction which complies with
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Section 11(o) hereof), or to effect any sale or other transfer (or to permit one
or more of its Subsidiaries to effect any sale or other transfer), in one
transaction or a series of related transactions, of more than 50% of the assets
or earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person or Persons (other than the Company and/or any of its Subsidiaries
in one or more transactions each of which complies with Section 11(o) hereof),
or (v) to effect the liquidation, dissolution or winding up of the Company,
then, in each such case, the Company shall give to the Rights Agent and to each
holder of a Rights Certificate, to the extent feasible and in accordance with
Section 26 hereof, a notice of such proposed action, which shall specify the
record date for the purposes of such stock dividend, distribution of rights or
warrants, or the date on which such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution, or winding up is to take place and the
date of participation therein by the holders of the shares of Preferred Stock,
if any such date is to be fixed, and such notice shall be so given in the case
of any action covered by clause (i) or (ii) above at least twenty (20) days
prior to the record date for determining holders of the shares of Preferred
Stock for purposes of such action, and in the case of any such other action, at
least twenty (20) days prior to the date of the taking of such proposed action
or the date of participation therein by the holders of the shares of Preferred
Stock, whichever shall be the earlier.
(b) In case a Section 11(a)(ii) Event shall occur, then, in
any such case, (i) the Company shall as soon as practicable thereafter give to
each holder of a Rights Certificate, to the extent feasible and in accordance
with Section 26 hereof, a notice of the occurrence of such event, which shall
specify the event and the consequences of the event to holders of Rights under
Section 11(a)(ii) hereof, and (ii) all references in the preceding paragraph to
Preferred Stock shall be deemed thereafter to refer to Common Stock and/or, if
appropriate, other securities.
Section 26. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
eLoyalty Corporation
205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
Attention: President
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company
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<PAGE> 43
or by the holder of any Rights Certificate to or on the Rights Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Company) as
follows:
ChaseMellon Shareholder Services, L.L.C.
111 Founders Plaza, 11th Floor
East Hartford, Connecticut 06108
Attention: Relationship Manager
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
Section 27. Supplements and Amendments. The Company may from
time to time supplement or amend this Agreement without the approval of any
holders of Rights Certificates in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provision herein, or to make any other provisions with respect to
the Rights which the Company may deem necessary or desirable (including, without
limitation, a supplement or amendment that changes the Purchase Price), any such
supplement or amendment to be evidenced by a writing signed by the Company and
the Rights Agent; provided, however, that from and after such time as any Person
becomes an Acquiring Person, this Agreement shall not be amended in any manner
which would adversely affect the interests of the holders of Rights and further
provided that the Rights Agent shall not be obligated to enter into any such
supplement or amendment that would change or increase the duties, liabilities or
obligations of the Rights Agent hereunder. Prior to the Distribution Date, the
interest of the holders of Rights shall be deemed coincident with the interests
of the holders of Common Stock. Without limiting the foregoing, the Company may
at any time prior to such time as any Person becomes an Acquiring Person amend
this Agreement to lower the thresholds set forth in Sections 1(a) and 3(a) to a
percentage that (subject to exceptions for specified Persons or groups excepted
from the definition of "Acquiring Person") is not less than the greater of (i)
the sum of .001% and the largest percentage of the outstanding shares of Common
Stock then known by the Company to be beneficially owned by any Person (other
than the Company, any Subsidiary of the Company, any employee benefit plan of
the Company or of any Subsidiary of the Company, any Person organized, appointed
or established by the Company for or pursuant to the terms of any such plan or,
to the extent excepted from the definition of "Acquiring Person", other
specified Persons or groups) and (ii) 10.0%.
Section 28. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company
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<PAGE> 44
or the Rights Agent shall bind and inure to the benefit of their respective
successors and assigns hereunder.
Section 29. Determination and Actions by the Board of
Directors, etc. For all purposes of this Agreement, any calculation of the
number of shares of Common Stock outstanding at any particular time, including
for purposes of determining the particular percentage of such outstanding shares
of Common Stock of which any Person is the Beneficial Owner, shall be made in
accordance with the last sentence of Rule 13d-3(d)(l)(i) of the General Rules
and Regulations under the Exchange Act. The Board of Directors of the Company
shall have the exclusive power and authority to administer this Agreement and to
exercise all rights and powers specifically granted to the Board of Directors of
the Company or to the Company, or as may be necessary or advisable in the
administration of this Agreement, including, without limitation, the right and
power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including, but not limited to, a determination to redeem or not
redeem the Rights or to amend this Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing) which are done or made by the Board
of Directors of the Company in good faith shall (x) be final, conclusive and
binding on the Company, the Rights Agent, the holders of the Rights and all
other Persons, and (y) not subject the Board of Directors of the Company to any
liability to the holders of the Rights. The Rights Agent is entitled to always
assume that the Board of Directors of the Company acted in good faith and shall
be fully protected and incur no liability in reliance thereon.
Section 30. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any Person other than the Company, the
Rights Agent and the registered holders of the Rights Certificates (and, prior
to the Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company
-42-
<PAGE> 45
determines in its good faith judgment that severing the invalid language from
this Agreement would adversely affect the purpose or effect of this Agreement,
the right of redemption set forth in Section 23 hereof shall be reinstated and
shall not expire until the Close of Business on the tenth day following the date
of such determination by the Board of Directors of the Company.
Section 32. Governing Law. This Agreement, each Right and each
Rights Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts made
and to be performed entirely within such State.
Section 33. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
Attest: eLoyalty Corporation
By: _________________________________ By: _______________________________
Name: Name:
Title: Title:
Attest: ChaseMellon Shareholder
Services, L.L.C.
By: _________________________________ By: _______________________________
Name: Name:
Title: Title:
-43-
<PAGE> 46
Exhibit A
Certificate of Designations
of
Series A Junior Participating Preferred Stock
of
eLoyalty Corporation
- --------------------------------------------------------------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
- --------------------------------------------------------------------------------
The undersigned do hereby certify that the following resolution
was duly adopted by the Board of Directors of eLoyalty Corporation, a Delaware
corporation (the "Corporation"), on [
]:
RESOLVED, that pursuant to the authority vested in the board of
directors of the Corporation by the Certificate of Incorporation, as amended
(the "Charter"), the Board of Directors does hereby create, authorize and
provide for the issue of a series of Preferred Stock, par value $.01 per share,
of the Corporation, to be designated "Series A Junior Participating Preferred
Stock" (hereinafter referred to as the "Series A Preferred Stock"), initially
consisting of 1,000,000 shares, and to the extent that the designations, powers,
preferences and relative and other special rights and the qualifications,
limitations or restrictions of the Series A Preferred Stock are not stated and
expressed in the Charter, does hereby fix and herein state and express such
designations, powers, preferences and relative and other special rights and the
qualifications, limitations and restrictions thereof, as follows (all terms used
herein which are defined in the Charter shall be deemed to have the meanings
provided therein):
Section 1. Designation and Amount. The shares of such series
shall be designated as "Series A Junior Participating Preferred Stock" and the
number of shares constituting such series shall be 1,000,000.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of
any shares of any series of Preferred Stock ranking prior and superior to the
shares of Series A Preferred Stock with respect to dividends, the holders of
shares of Series A Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
<PAGE> 47
purpose, quarterly dividends payable in cash on the first business day of
January, April, July and October in each year (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $.01 or (b) subject to the provision
for adjustment hereinafter set forth, 100 times the aggregate per share amount
of all cash dividends, and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock,
par value $.01 per share, of the Corporation (the "Common Stock") since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Preferred Stock. In the event the Corporation
shall at any time after [ ] (the "Rights Declaration Date") (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each case the amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Corporation shall declare a dividend or distribution on
the Series A Preferred Stock as provided in paragraph (A) above immediately
after it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided, however, that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date, subject to the prior and superior
rights of the holders of any shares of any series of Preferred Stock ranking
prior to and superior to the shares of Series A Preferred Stock with respect to
dividends, a dividend of $.01 per share on the Series A Preferred Stock shall
nevertheless by payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Preferred Stock, unless the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend
<PAGE> 48
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall be no more
than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights.
The holders of shares of Series A Preferred Stock shall have the
following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder thereof
to 100 votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the number of votes per share to which holders of shares of Series A Preferred
Stock were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of
shares of Series A Preferred Stock and the holders of shares of Common Stock
shall vote collectively as one class on all matters submitted to a vote of
stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Preferred Stock
shall be in arrears in an amount equal to six (6) quarterly dividends
thereon, the occurrence of such contingency shall mark the beginning of
a period (herein called a "default period") which shall extend until
such time when all accrued and unpaid dividends for all previous
quarterly dividend periods and for the current quarterly dividend period
on all shares of Series A Preferred Stock then outstanding shall have
been declared and paid or set apart for payment. During each default
period, all holders of Preferred Stock (including holders
<PAGE> 49
of the Series A Preferred Stock) with dividends in arrears in an amount
equal to six (6) quarterly dividends thereon, voting as a class,
irrespective of series, shall have the right to elect two (2) Directors.
(ii) During any default period, such voting right of the holders
of Series A Preferred Stock may be exercised initially at a special
meeting called pursuant to subparagraph (iii) of this Section 3(C) or at
any annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that such voting right shall not be exercised
unless the holders of ten percent (10%) in number of shares of Preferred
Stock outstanding shall be present in person or by proxy. The absence of
a quorum of the holders of Common Stock shall not affect the exercise by
the holders of Preferred Stock of such voting rights. At any meeting at
which the holders of Preferred Stock shall exercise such voting right
initially during an existing default period, they shall have the right,
voting as a class, to elect Directors to fill such vacancies, if any, in
the Board of Directors as may then exist up to two (2) Directors or, if
such right is exercised at an annual meeting, to elect two (2)
Directors. If the number which may be so elected at any special meeting
does not amount to the required number, the holders of the Preferred
Stock shall have the right to make such increase in the number of
Directors as shall be necessary to permit the election by them of the
required number. After the holders of the Preferred Stock shall have
exercised their right to elect Directors in any default period and
during the continuance of such period, the number of Directors shall not
be increased or decreased except by vote of the holders of Preferred
Stock as herein provided or pursuant to the rights of any equity
securities ranking senior to or pari passu with the Series A Preferred
Stock.
(iii) Unless the holders of Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or
stockholders owning in the aggregate not less than ten percent (10%) of
the total number of shares of Preferred Stock outstanding, irrespective
of series, may request, the calling of special meeting of the holders of
Preferred Stock, which meeting shall thereupon be called by the Chairman
of the Board, the President, a Vice President or the Secretary of the
Corporation. Notice of such meeting and of any annual meeting at which
holders of Preferred Stock are entitled to vote pursuant to this
paragraph (C)(iii) shall be given to each holder of record of Preferred
Stock by mailing a copy of such notice to him or her at his or her last
address as the same appears on the books of the Corporation. Such
meeting shall be called for a time not earlier than 10 days and not
later than 50 days after such order or request, or in default of the
calling of such meeting within 50 days
<PAGE> 50
after such order or request, such meeting may be called on similar
notice by any stockholder or stockholders owning in the aggregate not
less than ten percent (10%) of the total number of shares of Preferred
Stock outstanding. Notwithstanding the provisions of this paragraph
(C)(iii), no such special meeting shall be called during the period
within 50 days immediately preceding the date fixed for the next annual
meeting of the stockholders.
(iv) In any default period, the holders of Common Stock, and, if
applicable, other classes of capital stock of the Corporation, shall
continue to be entitled to elect the whole number of Directors until the
holders of Preferred Stock shall have exercised their right to elect two
(2) Directors voting as a class, after the exercise of which right (x)
the Directors so elected by the holders of Preferred Stock shall
continue in office until their successors shall have been elected by
such holders or until the expiration of the default period, and (y) any
vacancy in the Board of Directors may (except as provided in paragraph
(C)(ii) of this Section 3) be filled by vote of a majority of the
remaining Directors theretofore elected by the holders of the class of
capital stock which elected the Director whose office shall have become
vacant. References in this paragraph (C) to Directors elected by the
holders of a particular class of stock shall include Directors appointed
by such Directors to fill vacancies as provided in clause (y) of the
foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Preferred Stock as a class to elect Directors
shall cease, (y) the term of any Directors elected by the holders of
Preferred Stock as a class shall terminate, and (z) the number of
Directors shall be such number as may be provided for in the certificate
of incorporation or by-laws irrespective of any increase made pursuant
to the provisions of paragraph (C)(ii) of this Section 3 (such number
being subject, however, to change thereafter in any manner provided by
law or in the certificate of incorporation or by-laws). Any vacancies in
the Board of Directors effected by the provisions of clauses (y) and (z)
in the preceding sentence may be filled by a majority of the remaining
Directors.
(D) Except as set forth herein, holders of Series A Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and
<PAGE> 51
unpaid dividends and distributions, whether or not declared, on shares of Series
A Preferred Stock outstanding shall have been paid in full, the Corporation
shall not:
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares
of capital stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A Preferred
Stock, except dividends paid ratably on the Series A Preferred Stock and
all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares
are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any capital stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such parity stock in
exchange for shares of any capital stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or
winding up) to the Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series A Preferred Stock, or any shares of capital stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as the
Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will result
in fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares.
<PAGE> 52
Any shares of Series A Preferred Stock purchased or otherwise
acquired by the Corporation in any manner whatsoever shall be retired and
cancelled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued shares of Preferred Stock and
may be reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors, subject to the conditions
and restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders of
shares of capital stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock unless,
prior thereto, the holders of shares of Series A Preferred Stock shall have
received $100 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment
(the "Series A Liquidation Preference"). Following the payment of the full
amount of the Series A Liquidation Preference, no additional distributions shall
be made to the holders of shares of Series A Preferred Stock unless, prior
thereto, the holders of shares of Common Stock shall have received an amount per
share (the "Common Adjustment") equal to the quotient obtained by dividing (i)
the Series A Liquidation Preference by (ii) 100 (as appropriately adjusted as
set forth in subparagraph (C) below to reflect such events as stock splits,
stock dividends and recapitalizations with respect to the Common Stock) (such
number in clause (ii), the "Adjustment Number"). Following the payment of the
full amount of the Series A Liquidation Preference and the Common Adjustment in
respect of all outstanding shares of Series A Preferred Stock and Common Stock,
respectively, and the payment of liquidation preferences of all other shares of
capital stock which rank prior to or on a parity with Series A Preferred Stock,
holders of Series A Preferred Stock and holders of shares of Common Stock shall
receive their ratable and proportionate share of the remaining assets to be
distributed in the ratio of the Adjustment Number to 1 with respect to such
Preferred Stock and Common Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series A Preferred Stock, then such remaining
assets shall be distributed ratably to the holders of such parity shares in
proportion to their respective liquidation preferences. In the event, however,
that there are not sufficient assets available to permit payment in full of the
Common Adjustment, then such remaining assets shall be distributed ratably to
the holders of Common Stock.
(C) In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on
<PAGE> 53
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, then in each such case the Adjustment Number in effect
immediately prior to such event shall be adjusted by multiplying such Adjustment
Number by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
Section 7. Consolidation, Merger, etc.
In case the Corporation shall enter into any consolidation,
merger, combination or other transaction in which the shares of Common Stock are
exchanged for or changed into other stock or securities, cash and/or any other
property, then in any such case the shares of Series A Preferred Stock shall at
the same time be similarly exchanged or changed into an amount per share
(subject to the provision for adjustment hereinafter set forth) equal to 100
times the aggregate amount of capital stock, securities, cash and/or any other
property (payable in kind), as the case may be, for which or into which each
share of Common Stock is exchanged or changed. In the event the Corporation
shall at any time after the Rights Declaration Date (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Series A Preferred
Stock shall be adjusted by multiplying such amount by a fraction the numerator
of which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
Section 8. No Redemption.
The shares of Series A Preferred Stock shall not be redeemable.
Section 9. Ranking.
The Series A Preferred Stock shall rank junior to all other
series of the Corporation's Preferred Stock as to the payment of dividends and
the distribution of assets, whether or not upon the dissolution, liquidation or
winding up of the Corporation, unless the terms of any such series shall provide
otherwise.
Section 10. Amendment.
The Charter shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Preferred Stock so as to affect
<PAGE> 54
them adversely without the affirmative vote of the holders of a majority of the
outstanding shares of Series A Preferred Stock, voting separately as a class.
Section 11. Fractional Shares.
Series A Preferred Stock may be issued in fractions of a share
which shall entitle the holder, in proportion to such holder's fractional
shares, to exercise voting rights, receive dividends, participate in
distributions and to have the benefit of all other rights of holders of Series A
Preferred Stock.
IN WITNESS WHEREOF, eLoyalty Corporation has caused its corporate
seal to be hereunto affixed and this certificate to be signed by , its , and the
same to be attested to by , its , this _______th day of ________, ____.
eLoyalty Corporation
By:_________________________________
Name:
Title:
(Corporate Seal)
Attest:
_________________
<PAGE> 55
Exhibit B
[Form of Rights Certificate]
Certificate No. R- __________ Rights
NOT EXERCISABLE AFTER [ ] OR EARLIER IF REDEEMED OR
EXCHANGED BY THE COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION,
AT THE OPTION OF THE COMPANY, AT $.01 PER RIGHT, AND TO EXCHANGE
ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN
CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON
(AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) AND ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE
RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE
BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING
PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS
SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY,
THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY
BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION
7(e) OF SUCH AGREEMENT.]*
- --------
* The portion of the legend in brackets shall be inserted only if
applicable and shall replace the preceding sentence.
<PAGE> 56
Rights Certificate
eLoyalty Corporation
This certifies that _______________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement, dated as of [ ], as the same may be amended from time to
time (the "Rights Agreement"), between eLoyalty Corporation, a Delaware
corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C., a New
Jersey limited liability company (the "Rights Agent"), to purchase from the
Company at any time prior to 5:00 P.M. (Chicago time) on [ ] at the office or
offices of the Rights Agent designated for such purpose, or its successors as
Rights Agent, one one-hundredth of a fully paid, nonassessable share of Series A
Junior Participating Preferred Stock, par value $.01 per share (the "Preferred
Stock"), of the Company, at a purchase price of $[ ] per one one-hundredth of a
share (the "Purchase Price"), upon presentation and surrender of this Rights
Certificate with the Form of Election to Purchase and related Certificate duly
executed. The number of Rights evidenced by this Rights Certificate (and the
number of shares which may be purchased upon exercise thereof) set forth above,
and the Purchase Price per share set forth above, are the number and Purchase
Price as of [ ], based on the Preferred Stock as constituted at such date. The
Company reserves the right to require prior to the occurrence of a Triggering
Event (as such term is defined in the Rights Agreement) that, upon any exercise
of Rights, a number of Rights be exercised so that only whole shares of
Preferred Stock will be issued.
Upon the occurrence of a Section 11(a)(ii) Event (as such term is
defined in the Rights Agreement), if the Rights evidenced by this Rights
Certificate are beneficially owned by (i) an Acquiring Person or an Affiliate or
Associate of any such Acquiring Person (as such terms are defined in the Rights
Agreement), (ii) a transferee of any such Acquiring Person, Associate or
Affiliate, or (iii) under certain circumstances specified in the Rights
Agreement, a transferee of a person who, after such transfer, became an
Acquiring Person or an Affiliate or Associate of such Person, such Rights shall
become null and void and no holder hereof shall have any right with respect to
such Rights from and after the occurrence of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the
number and kind of shares of Preferred Stock or other securities which may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain events,
including Triggering Events.
<PAGE> 57
This Rights Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description of
the rights, limitations of rights, obligations, duties and immunities hereunder
of the Rights Agent, the Company and the holders of the Rights Certificates,
which limitations of rights include the temporary suspension of the
exercisability of such Rights under the specific circumstances set forth in the
Rights Agreement. Copies of the Rights Agreement are on file at the
above-mentioned office of the Rights Agent and are also available upon written
request to the Rights Agent.
This Rights Certificate, with or without other Rights
Certificates, upon surrender at the principal office or offices of the Rights
Agent designated for such purpose, may be exchanged for another Rights
Certificate or Rights Certificates of like tenor and date evidencing Rights
entitling the holder to purchase a like aggregate number of one one-hundredths
of a share of Preferred Stock as the Rights evidenced by the Rights Certificates
surrendered shall have entitled such holder to purchase. If this Rights
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may, in each case at the option of the Company, be
(i) redeemed by the Company at its option at a redemption price of $.01 per
Right or (ii) exchanged in whole or in part for shares of Common Stock or other
securities of the Company. Immediately upon the action of the Board of Directors
of the Company authorizing redemption, the Rights will terminate and the only
right of the holders of Rights will be to receive the redemption price.
No fractional shares of Preferred Stock will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which are
integral multiples of one one-hundredth of a share of Preferred Stock, which
may, at the election of the Company, be evidenced by depositary receipts), but
in lieu thereof a cash payment will be made, as provided in the Rights
Agreement.
No holder of this Rights Certificate shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares of Preferred
Stock or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of
<PAGE> 58
meetings or other actions affecting stockholders (except as provided in the
Rights Agreement), or to receive dividends or subscription rights, or otherwise,
until the Right or Rights evidenced by this Rights Certificate shall have been
exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned manually or by facsimile
signature by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal.
Dated as of _______ __, ____
ATTEST: eLoyalty Corporation
_________________________ By:_________________________
Secretary Name:
Title:
Countersigned:
ChaseMellon Shareholder Services, L.L.C.
By:_________________________________
Authorized Signature
<PAGE> 59
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED ___________________________________________________________
hereby sells, assigns and transfers unto _____________________________________
______________________________________________________________________________
(Please print name and address of transferee) this Rights
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint __________ Attorney, to transfer the
within Rights Certificate on the books of the within-named Company, with full
power of substitution.
Dated: ___________________,______
_____________________________
Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold,
assigned and transferred by or on behalf of a Person who is or was an
Acquiring Person or an Affiliate or Associate of an Acquiring Person (as
such terms are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this
Rights Certificate from any Person who is, was or subsequently became an
Acquiring Person or an Affiliate or Associate of an Acquiring Person.
Dated: ___________________,______ ____________________________
Signature
Signature Guaranteed:
<PAGE> 60
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise Rights represented by the Rights
Certificate.)
TO: eLoyalty Corporation
The undersigned hereby irrevocably elects to exercise ______
Rights represented by this Rights Certificate to purchase the shares of
Preferred Stock issuable upon the exercise of the Rights (or such other
securities of the Company or of any other person which may be issuable upon the
exercise of the Rights) and requests that certificates for such shares (or other
securities) be issued in the name of and delivered to:
Please insert social security
or other identifying number: ______________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by
this Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number: ______________________
_________________________________________________________________
(Please print name and address)
_________________________________________________________________
Dated: ___________________,______
________________________________________
Signature
Signature Guaranteed:
<PAGE> 61
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ]
are not being exercised by or on behalf of a Person who is or was an
Acquiring Person or an Affiliate or Associate of an Acquiring Person (as
such terms are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this
Rights Certificate from any Person who is, was or became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person.
Dated: _________,___ __________________________________
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Election to Purchase and
Certificate must correspond to the name as written upon the face of this Rights
Certificate in every particular, without alteration or enlargement or any change
whatsoever.
<PAGE> 62
Exhibit C
SUMMARY OF RIGHTS TO PURCHASE PREFERRED STOCK
On [ ], the Board of Directors of eLoyalty Corporation adopted a
Stockholders Rights Plan (the "Rights Plan") and declared a dividend
distribution of one Right for each outstanding share of eLoyalty's common stock,
to stockholders of record at the close of business on [ ]. Each Right will
entitle its holder, under the circumstances described below, to purchase from
eLoyalty one one-hundredth of a share of its Series A Junior Participating
Preferred Stock, $.01 par value, (the "Series A Preferred Stock"), at an
exercise price of $[ ] per Right, subject to adjustment. The description and
terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement")
between eLoyalty and ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
Initially, the Rights will be associated with the common stock
and evidenced by the common stock certificates, which will contain a notation
incorporating the Rights Agreement by reference, and will be transferred with
and only with underlying shares of common stock. The Rights will become
exercisable and separately certificated only upon the "Distribution Date," which
will occur upon the earlier of:
- ten days following a public announcement that a person or group
(an "Acquiring Person") has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding
shares of common stock then outstanding (the date of the
announcement being the "Stock Acquisition Date"); or
- ten business days (or later if determined by eLoyalty's board of
directors prior to any person becoming an Acquiring Person)
following the commencement of a tender offer or exchange offer
that would result in a person or group becoming an Acquiring
Person.
Until the Distribution Date, the surrender for transfer of any
shares of common stock outstanding will also constitute the transfer of the
Rights associated with such shares.
As soon as practicable after the Distribution Date, separate
certificates or book-entry statements for the Rights will be mailed to holders
of record of common stock as of the close of business on the Distribution Date.
From and after the Distribution Date, the separate certificates or book-entry
statements alone will represent the Rights. Except as otherwise provided in the
Rights Agreement, only shares of common stock issued prior to the Distribution
Date will be issued with Rights.
<PAGE> 63
The Rights are not exercisable until the Distribution Date and
will expire at the close of business on [ ], unless earlier redeemed or
exchanged by eLoyalty as described below.
In the event (a "Flip-In Event") that a person or group becomes
an Acquiring Person, each holder of a Right (other than any Acquiring Person and
certain related parties, whose Rights will automatically become null and void)
will have the right to receive, upon exercise, common stock, or, in certain
circumstances, cash, property or other securities of eLoyalty, with a value
equal to two times the exercise price of the Right. The Rights may not be
exercised following a Flip-In Event while eLoyalty has the ability to cause the
Rights to be redeemed. eLoyalty's ability to redeem the Rights is described
below.
For example, at an exercise price of $100 per Right, each Right
not owned by an Acquiring Person (or by certain related parties) following a
Flip-In Event would entitle its holder to purchase $200 worth of common stock
(or other consideration, as noted above) for $100. Assuming that the common
stock had a per share value of $50 at that time, the holder of each valid Right
would be entitled to purchase 4 shares of common stock for $100.
In the event (a "Flip-Over Event") that, at any time following
the Stock Acquisition Date:
- eLoyalty is acquired in a merger or other business
combination in which it is not the surviving entity,
- eLoyalty is acquired in a merger or other business combination in
which it is the surviving entity and all or part of its common
stock is converted into or exchanged for securities of another
entity, cash or other property, or
- 50% or more of eLoyalty's assets or earning power is
sold or transferred,
then each holder of a Right (except Rights which previously have been voided as
set forth above) will have the right to receive, upon exercise, common stock of
the acquiring company having a value equal to two times the exercise price of
the Right. Flip-In Events and Flip-Over Events are collectively referred to as
"Triggering Events."
The exercise price payable, and the number of shares of Series A
Preferred Stock or other securities or property issuable, upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution:
<PAGE> 64
- in the event of a stock dividend on, or a subdivision,
combination or reclassification of, the Series A
Preferred Stock,
- if holders of the Series A Preferred Stock are granted certain
rights, options or warrants to subscribe for Series A Preferred
Stock or convertible securities at less than the current market
price of the Series A Preferred Stock, or
- upon the distribution to holders of the Preferred Stock of
evidences of indebtedness or assets (excluding regular periodic
cash dividends) or of subscription rights or warrants (other than
those referred to above).
With certain exceptions, no adjustment in the exercise price will
be required until cumulative adjustments amount to at least 1% of the then
current exercise price. No fractional shares of Series A Preferred Stock will be
issued and, in lieu thereof, an adjustment in cash will be made based on the
market price of the Series A Preferred Stock on the last trading day prior to
the date of exercise. eLoyalty may require prior to the occurrence of a
Triggering Event that, upon any exercise of Rights, a number of Rights be
exercised so that only whole shares of Series A Preferred Stock will be issued.
eLoyalty may redeem the Rights in whole, but not in part, at a
price of $.01 per Right (subject to adjustment and payable in cash, common stock
or other consideration deemed appropriate by eLoyalty's board of directors) at
any time until ten days following the Stock Acquisition Date. Immediately upon
the action of eLoyalty's board of directors authorizing any redemption, the
Rights will terminate and the only right of the holders of Rights will be to
receive the redemption price.
At any time after any person or group becomes an Acquiring Person
and prior to the acquisition by that person or group of 50% or more of the
outstanding shares of common stock, eLoyalty may exchange the Rights (other than
Rights owned by that person or group which will have become void), in whole or
in part, at an exchange ratio of one share of common stock, or one one-hundredth
of a share of Series A Preferred Stock (or of a share of a class or series of
our preferred stock having equivalent rights, preferences and privileges), per
Right (subject to adjustment).
Until a Right is exercised, its holder, as such, will have no
rights as a stockholder of eLoyalty, including, without limitation, the right to
vote or to receive dividends. While the distribution of the Rights will not
result in the recognition of taxable income by eLoyalty or its stockholders,
stockholders may, depending upon the circumstances, recognize taxable income
after a Triggering Event.
<PAGE> 65
The terms of the Rights may be amended by eLoyalty's board of
directors without the consent of the holders of the Rights. The board of
directors could, among other things, lower the thresholds described above to the
greater of 10% or .001% more than the largest percentage of the outstanding
shares of common stock then known to eLoyalty to be beneficially owned by any
person or group of affiliated or associated persons. Once a person or group has
become an Acquiring Person no amendment can adversely affect the interests of
the holders of the Rights.
A copy of the Rights Agreement is available free of charge from
the Rights Agent. This description of the Rights does not purport to be complete
and is qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.
<PAGE> 1
EXHIBIT 10.1
ELOYALTY CORPORATION
1999 STOCK INCENTIVE PLAN
I. INTRODUCTION
1.1 PURPOSES. The purposes of the 1999 Stock Incentive Plan (the "Plan") of
eLoyalty Corporation, a Delaware corporation (the "Company"), are to (i) align
the interests of the Company's stockholders and the recipients of awards under
this Plan by increasing the proprietary interest of such recipients in the
Company's growth and success, (ii) advance the interests of the Company by
attracting and retaining directors (including Non-Employee Directors), officers,
other key employees, consultants, independent contractors and agents and (iii)
motivate such persons to act in the long-term best interests of the Company's
stockholders.
1.2 CERTAIN DEFINITIONS.
"AGREEMENT" shall mean the written agreement evidencing an award
hereunder between the Company and the recipient of such award.
"BOARD" shall mean the Board of Directors of the Company.
"BONUS STOCK" shall mean shares of Common Stock which are not subject
to a Restriction Period or Performance Measures.
"BONUS STOCK AWARD" shall mean an award of Bonus Stock under this Plan.
"CHANGE IN CONTROL" shall have the meaning set forth in Section 6.8(b).
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMITTEE" shall mean (i) prior to the date that the Company shall
become a separate publicly held corporation for purposes of section 162(m) of
the Code, the Committee under the Technology Solutions Company 1996 Stock
Incentive Plan and (ii) on or after such date, the Committee designated by the
Board, consisting of two or more members of the Board, each of whom shall be a
"Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act
and an "outside director" within the meaning of Section 162(m) of the Code.
"COMMON STOCK" shall mean the common stock, $.01 par value, of the
Company.
"COMPANY" shall have the meaning set forth in Section 1.1.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
"FAIR MARKET VALUE" shall mean the closing transaction price of a share
of Common Stock as reported by The Nasdaq Stock Market or the principal national
securities exchange on
<PAGE> 2
which the Common Stock is then traded, on the date as of which such value is
being determined, or, if there shall be no reported transactions for such date,
on the next preceding date for which transactions were reported; provided,
however, that if (i) the determination date occurs prior to the initial date
that shares of Common Stock are traded on The Nasdaq Stock Market or a national
securities exchange or (ii) the Fair Market Value for any date cannot be so
determined, Fair Market Value shall be determined by the Committee by whatever
means or method as the Committee, in the good faith exercise of its discretion,
shall at such time deem appropriate.
"FREE-STANDING SAR" shall mean an SAR which is not issued in tandem
with, or by reference to, an option and which entitles the holder thereof to
receive, upon exercise, shares of Common Stock (which may be Restricted Stock),
cash or a combination thereof with an aggregate value equal to the excess of the
Fair Market Value of one share of Common Stock on the date of exercise over the
base price of such SAR, multiplied by the number of such SARs which are
exercised.
"INCENTIVE STOCK OPTION" shall mean an option to purchase shares of
Common Stock that meets the requirements of Section 422 of the Code, or any
successor provision, and which is designated as an Incentive Stock Option.
"INCUMBENT BOARD" shall have the meaning set forth in Section 6.8(b)(2)
hereof.
"MATURE SHARES" shall mean shares of Common Stock for which the holder
thereof has good title, free and clear of all liens and encumbrances and which
such holder has held for at least six months.
"NON-EMPLOYEE DIRECTOR" shall mean any director of the Company who is
not an officer or employee of the Company or any Subsidiary; provided, however,
that prior to the Reference Date, "Non-Employee Director" shall mean any
director of the Company who is not an officer or employee of the Company, TSC,
any subsidiary of TSC or any Subsidiary.
"NON-STATUTORY STOCK OPTION" shall mean a stock option which is not an
Incentive Stock Option.
"OUTSTANDING COMMON STOCK" shall have the meaning set forth in Section
6.8(b)(1) hereof.
"OUTSTANDING VOTING SECURITIES" shall have the meaning set forth in
Section 6.8(b)(1) hereof.
"PERFORMANCE MEASURES" shall mean the criteria and objectives,
established by the
-2-
<PAGE> 3
Committee, which shall be satisfied or met (i) as a condition to the
exercisability of all or a portion of an option or SAR, (ii) as a condition to
the grant of a Stock Award or (iii) during the applicable Restriction Period or
Performance Period as a condition to the holder's receipt, in the case of a
Restricted Stock Award, of the shares of Common Stock subject to such award, or,
in the case of a Performance Share Award, of the shares of Common Stock subject
to such award and/or of payment with respect to such award. In the sole
discretion of the Committee, the Committee may amend or adjust the Performance
Measures or other terms and conditions of an outstanding award in recognition of
unusual or nonrecurring events affecting the Company or its financial statements
or changes in law or accounting principles. Such criteria and objectives may
include one or more of the following: the attainment by a share of Common Stock
of a specified Fair Market Value for a specified period of time, earnings per
share, return to stockholders (including dividends), operating income, operating
income margin, return on equity, earnings of the Company, revenues, market
share, cash flow or cost reduction goals, or any combination of the foregoing.
If the Committee desires that compensation payable pursuant to any award subject
to Performance Measures be "qualified performance-based compensation" within the
meaning of Section 162(m) of the Code, the Performance Measures (i) shall be
established by the Committee no later than 90 days after the beginning of the
Performance Period or Restriction Period, as applicable (or such other time
designated by the Internal Revenue Service) and (ii) shall satisfy all other
applicable requirements imposed under Treasury Regulations promulgated under
Section 162(m) of the Code, including the requirement that such Performance
Measures be stated in terms of an objective formula or standard.
"PERFORMANCE PERIOD" shall mean any period designated by the Committee
during which the Performance Measures applicable to a Performance Share Award
shall be measured.
"PERFORMANCE SHARE" shall mean a right, contingent upon the attainment
of specified Performance Measures within a specified Performance Period, to
receive one share of Common Stock, which may be Restricted Stock, or in lieu of
all or a portion thereof, the Fair Market Value of such Performance Share in
cash.
"PERFORMANCE SHARE AWARD" shall mean an award of Performance Shares
under this Plan.
"PERMANENT AND TOTAL DISABILITY" shall have the meaning set forth in
Section 22(e)(3) of the Code or any successor thereto.
"REFERENCE DATE" shall mean the initial date that the Company shall be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act.
"RESTRICTED STOCK" shall mean shares of Common Stock which are subject
to a Restriction Period.
-3-
<PAGE> 4
"RESTRICTED STOCK AWARD" shall mean an award of Restricted Stock under
this Plan.
"RESTRICTION PERIOD" shall mean any period designated by the Committee
during which the Common Stock subject to a Restricted Stock Award may not be
sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or
disposed of, except as provided in this Plan or the Agreement relating to such
award.
"SAR" shall mean a stock appreciation right which may be a
Free-Standing SAR or a Tandem SAR.
"SPIN-OFF" shall mean a pro rata distribution by TSC to its
stockholders of all of the shares of Common Stock then owned by TSC.
"STOCK AWARD" shall mean a Restricted Stock Award or a Bonus Stock
Award.
"SUBSIDIARY" shall have the meaning set forth in Section 1.4.
"SUBSTITUTE OPTIONS" shall have the meaning set forth in Section 2.4.
"TANDEM SAR" shall mean an SAR which is granted in tandem with, or by
reference to, an option (including a Non-Statutory Stock Option granted prior to
the date of grant of the SAR), which entitles the holder thereof to receive,
upon exercise of such SAR and surrender for cancellation of all or a portion of
such option, shares of Common Stock (which may be Restricted Stock), cash or a
combination thereof with an aggregate value equal to the excess of the Fair
Market Value of one share of Common Stock on the date of exercise over the base
price of such SAR, multiplied by the number of shares of Common Stock subject to
such option, or portion thereof, which is surrendered.
"TAX DATE" shall have the meaning set forth in Section 6.5.
"TEN PERCENT HOLDER" shall have the meaning set forth in Section
2.1(a).
"TSC" shall mean Technology Solutions Company, a Delaware corporation,
and its successors.
"TSC OPTIONS" shall have the meaning set forth in Section 2.4.
1.3 ADMINISTRATION. This Plan shall be administered by the Committee. Any one or
a combination of the following awards may be made under this Plan to eligible
persons: (i) options to purchase shares of Common Stock in the form of Incentive
Stock Options or Non-Statutory
-4-
<PAGE> 5
Stock Options, (ii) SARs in the form of Tandem SARs or Free-Standing SARS, (iii)
Stock Awards in the form of Restricted Stock or Bonus Stock and (iv) Performance
Shares. The Committee shall, subject to the terms of this Plan, select eligible
persons for participation in this Plan and determine the form, amount and timing
of each award to such persons and, if applicable, the number of shares of Common
Stock, the number of SARs and the number of Performance Shares subject to such
an award, the exercise price or base price associated with the award, the time
and conditions of exercise or settlement of the award and all other terms and
conditions of the award, including, without limitation, the form of the
Agreement evidencing the award. The Committee may, in its sole discretion and
for any reason at any time, subject to the requirements imposed under Section
162(m) of the Code and regulations promulgated thereunder in the case of an
award intended to be qualified performance-based compensation, take action such
that (i) any or all outstanding options and SARs shall become exercisable in
part or in full, (ii) all or a portion of the Restriction Period applicable to
any outstanding Restricted Stock Award shall lapse, (iii) all or a portion of
the Performance Period applicable to any outstanding Performance Share Award
shall lapse and (iv) the Performance Measures applicable to any outstanding
Restricted Stock Award (if any) and to any outstanding Performance Share Award
shall be deemed to be satisfied at the maximum or any other level. The Committee
shall, subject to the terms of this Plan, interpret this Plan and the
application thereof, establish rules and regulations it deems necessary or
desirable for the administration of this Plan and may impose, incidental to the
grant of an award, conditions with respect to the award, such as limiting
competitive employment or other activities. All such interpretations, rules,
regulations and conditions shall be final, binding and conclusive.
The Committee may delegate some or all of its power and authority
hereunder to the President or other executive officer of the Company as the
Committee deems appropriate; provided, however, that the Committee may not
delegate its power and authority with regard to (i) the grant of an award to any
person who is a "covered employee" within the meaning of Section 162(m) of the
Code or who, in the Committee's judgment, is likely to be a covered employee at
any time during the period an award hereunder to such employee would be
outstanding or (ii) the selection for participation in this Plan of an officer
or other person subject to Section 16 of the Exchange Act or decisions
concerning the timing, pricing or amount of an award to such an officer or other
person.
-5-
<PAGE> 6
1.4 ELIGIBILITY. Participants in this Plan shall consist of such directors,
officers, other key employees, consultants, independent contractors and agents
of the Company and its subsidiaries (individually a "Subsidiary" and
collectively the "Subsidiaries") and, prior to the Spin-Off, directors, officers
and other key employees of TSC and its subsidiaries, as the Committee in its
sole discretion may select from time to time and such other persons receiving
Substitute Options. For purposes of this Plan, references to employment shall
also mean an agency or independent contractor relationship and references to
employment by the Company shall also mean employment by a Subsidiary.
Notwithstanding the preceding sentence, in the case of (i) options granted
hereunder prior to the Reference Date and (ii) Substitute Options, references to
employment with the Company shall include all employment with TSC or any of its
subsidiaries. The Committee's selection of a person to participate in this Plan
at any time shall not require the Committee to select such person to participate
in this Plan at any other time. Without limiting their eligibility for
discretionary awards under the Plan, as described above, Non-Employee Directors
of the Company shall be eligible to participate in this Plan in accordance with
Section V. Notwithstanding anything contained herein to the contrary, no person
other than an employee of the Company or a Subsidiary may be granted an
Incentive Stock Option hereunder.
1.5 SHARES AVAILABLE. Subject to adjustment as provided in Section 6.7, the
total number of shares of Common Stock initially available for all grants of
awards over the term of the Plan, other than Substitute Options, shall be
5,340,000. As of the first day of each fiscal year of the Company beginning on
or after January 1, 2000, the total number of shares of Common Stock available
for all grants under this Plan, other than Incentive Stock Options, shall
automatically increase by an amount equal to five percent (5%) of the number of
shares of Common Stock then outstanding. To the extent that shares of Common
Stock subject to an outstanding option granted hereunder (except to the extent
shares of Common Stock are issued or delivered by the Company in connection with
the exercise of a Tandem SAR), Free-Standing SAR Stock Award or Performance
Share are not issued or delivered by reason of the expiration, termination,
cancellation or forfeiture of such award or by reason of the delivery or
withholding of shares of Common Stock to pay all or a portion of the exercise
price of an award, if any, or to satisfy all or a portion of the tax withholding
obligations relating to an award, then such shares of Common Stock shall again
be available under this Plan.
Shares of Common Stock shall be made available from authorized and
unissued shares of Common Stock, or authorized and issued shares of Common Stock
reacquired and held as treasury shares or otherwise or a combination thereof.
To the extent required by Section 162(m) of the Code and the rules and
regulations thereunder, the maximum number of shares of Common Stock with
respect to which options or SARS, Stock Awards or Performance Share Awards or a
combination thereof may be granted to any person during (i) the 1999 fiscal year
shall be 750,000 and (ii) any other fiscal year of the
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Company shall be 300,000, subject to adjustment as provided in Section 6.7.
II. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
2.1 STOCK OPTIONS. The Committee may, in its discretion, grant options to
purchase shares of Common Stock to such eligible persons as may be selected by
the Committee. Each option, or portion thereof, that is granted to a person
other than an employee of the Company or a Subsidiary or that is otherwise not
an Incentive Stock Option, shall be a Non-Statutory Stock Option. Each Incentive
Stock Option shall be granted within ten years of the effective date of this
Plan. To the extent that the aggregate Fair Market Value (determined as of the
date of grant) of shares of Common Stock with respect to which options
designated as Incentive Stock Options are exercisable for the first time by a
participant during any calendar year (under this Plan or any other plan of the
Company, or any parent or subsidiary as defined in Section 424 of the Code)
exceeds the amount (currently $100,000) established by the Code, such options
shall constitute Non-Statutory Stock Options.
Options shall be subject to the following terms and conditions and
shall contain such additional terms and conditions, not inconsistent with the
terms of this Plan, as the Committee shall deem advisable:
(a) Number of Shares and Purchase Price. The number of shares of Common
Stock subject to an option and the purchase price per share of Common Stock
purchasable upon exercise of the option shall be determined by the Committee;
provided, however, that the purchase price per share of Common Stock purchasable
upon exercise of an Incentive Stock Option shall not be less than 100% of the
Fair Market Value of a share of Common Stock on the date of grant of such
option; provided further, that if an Incentive Stock Option shall be granted to
any person who, at the time such option is granted, owns capital stock
possessing more than ten percent of the total combined voting power of all
classes of capital stock of the Company (or of any parent or subsidiary) (a "Ten
Percent Holder"), the purchase price per share of Common Stock shall be the
price (currently 110% of Fair Market Value) required by the Code in order to
constitute an Incentive Stock Option.
(b) Option Period and Exercisability. The period during which an option
may be exercised shall be determined by the Committee; provided, however, that
no Incentive Stock Option shall be exercised later than ten years after its date
of grant; provided further, that if an Incentive Stock Option shall be granted
to a Ten Percent Holder, such option shall not be exercised later than five
years after its date of grant. The Committee may, in its discretion, establish
Performance Measures which shall be satisfied or met as a condition to the grant
of an option or to the exercisability of all or a portion of an option. The
Committee shall determine whether an option shall become exercisable in
cumulative or non-cumulative installments and in part or in full at any time. An
exercisable option, or portion thereof, may be exercised only with
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respect to whole shares of Common Stock.
(c) Method of Exercise. An option may be exercised (i) by giving
written notice to the Company specifying the number of whole shares of Common
Stock to be purchased and accompanied by payment therefor in full (or
arrangement made for such payment to the Company's satisfaction) either (A) in
cash, (B) by delivery of Mature Shares having an aggregate Fair Market Value,
determined as of the date of exercise, equal to the aggregate purchase price
payable by reason of such exercise, (C) in cash by a broker-dealer acceptable to
the Company to whom the optionee has submitted an irrevocable notice of exercise
or (D) a combination of (A) and (B), in each case to the extent set forth in the
Agreement relating to the option, (ii) if applicable, by surrendering to the
Company any Tandem SARs which are cancelled by reason of the exercise of the
option and (iii) by executing such documents as the Company may reasonably
request. The Company shall have sole discretion to disapprove of an election
pursuant to any of clauses (B)-(D) and in the case of an optionee who is subject
to Section 16 of the Exchange Act, the Company may require that the method of
making such payment be in compliance with Section 16 and the rules and
regulations thereunder. Any fraction of a share of Common Stock which would be
required to pay such purchase price shall be disregarded and the remaining
amount due shall be paid in cash by the optionee. No certificate representing
Common Stock shall be delivered until the full purchase price therefor has been
paid (or arrangement made for such payment to the Company's satisfaction).
2.2 STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant SARs
to such eligible persons as may be selected by the Committee. The Agreement
relating to an SAR shall specify whether the SAR is a Tandem SAR or a
Free-Standing SAR.
SARs shall be subject to the following terms and conditions and shall
contain such additional terms and conditions, not inconsistent with the terms of
this Plan, as the Committee shall deem advisable:
(a) Number of SARs and Base Price. The number of SARs subject to an
award shall be determined by the Committee. Any Tandem SAR related to an
Incentive Stock Option shall be granted at the same time that such Incentive
Stock Option is granted. The base price of a Tandem SAR shall be the purchase
price per share of Common Stock of the related option. The base price of a
Free-Standing SAR shall be determined by the Committee.
(b) Exercise Period and Exercisability. The Agreement relating to an
award of SARs shall specify whether such award may be settled in shares of
Common Stock (including shares of Restricted Stock) or cash or a combination
thereof. The period for the exercise of an SAR shall be determined by the
Committee; provided, however, that no Tandem SAR shall be exercised later than
the expiration, cancellation, forfeiture or other termination of the related
option. The Committee may, in its discretion, establish Performance Measures
which shall be satisfied or met
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as a condition to the grant of an SAR or to the exercisability of all or a
portion of an SAR. The Committee shall determine whether an SAR may be exercised
in cumulative or non-cumulative installments and in part or in full at any time.
An exercisable SAR, or portion thereof, may be exercised, in the case of a
Tandem SAR, only with respect to whole shares of Common Stock and, in the case
of a Free-Standing SAR, only with respect to a whole number of SARs. If an SAR
is exercised for shares of Restricted Stock, a certificate or certificates
representing such Restricted Stock shall be issued in accordance with Section
3.2(c) and the holder of such Restricted Stock shall have such rights of a
stockholder of the Company as determined pursuant to Section 3.2(d). Prior to
the exercise of an SAR for shares of Common Stock, including Restricted Stock,
the holder of such SAR shall have no rights as a stockholder of the Company with
respect to the shares of Common Stock subject to such SAR and shall have rights
as a stockholder of the Company in accordance with Section 6.10.
(c) Method of Exercise. A Tandem SAR may be exercised (i) by giving
written notice to the Company specifying the number of whole SARs which are
being exercised, (ii) by surrendering to the Company any options which are
cancelled by reason of the exercise of the Tandem SAR and (iii) by executing
such documents as the Company may reasonably request. A Free-Standing SAR may be
exercised (i) by giving written notice to the Company specifying the whole
number of SARs which are being exercised and (ii) by executing such documents as
the Company may reasonably request.
2.3 TERMINATION OF EMPLOYMENT OR SERVICE. Subject to Section 1.4, all of the
terms relating to the exercise, cancellation or other disposition of an option
or SAR upon a termination of employment with or service to the Company of the
holder of such option or SAR, as the case may be, whether by reason of
disability, retirement, death or other termination, shall be determined by the
Committee. Such determination shall be made at the time of the grant of such
option or SAR, as the case may be, and shall be specified in the Agreement
relating to such option or SAR.
2.4 SUBSTITUTE AWARDS. In the event of a Spin-Off, the Committee shall be
authorized to grant substitute options ("Substitute Options") to purchase Common
Stock, in accordance with the terms hereof, to holders of options to acquire
common stock of TSC ("TSC Options"). The aggregate number of shares of Common
Stock subject to Substitute Options shall not exceed the aggregate number of
shares of Common Stock that would be distributed in the Spin-Off with respect to
shares of TSC stock equal in number to the shares subject to TSC Options
immediately prior to the Spin-Off. The Committee shall determine the exercise
price and number of shares of Common Stock subject to each Substitute Option in
a manner that preserves the economic value of the TSC Option to which such
Substitute Option relates. The terms and conditions of each Substitute Option,
including, without limitation, the expiration date of the option, the time or
times when, and the manner in which, such Substitute Option shall be
exercisable, the duration of the exercise period, the method of exercise,
settlement and payment, and, subject to Section 1.4, the rules in the event of
termination of employment, shall be the same as those of the TSC Option
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to which the Substitute Option relates.
III. STOCK AWARDS
3.1 STOCK AWARDS. The Committee may, in its discretion, grant Stock Awards to
such eligible persons as may be selected by the Committee. The Agreement
relating to a Stock Award shall specify whether the Stock Award is a Restricted
Stock Award or Bonus Stock Award.
3.2 TERMS OF STOCK AWARDS. Stock Awards shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of this Plan, as the Committee shall deem advisable.
(a) Number of Shares and Other Terms. The number of shares of Common
Stock subject to a Restricted Stock Award or Bonus Stock Award and the
Performance Measures (if any) and Restriction Period applicable to a Restricted
Stock Award shall be determined by the Committee.
(b) Vesting and Forfeiture. The Agreement relating to a Restricted
Stock Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of this Plan, for the vesting of the
shares of Common Stock subject to such award (i) if specified Performance
Measures are satisfied or met during the specified Restriction Period or (ii) if
the holder of such award remains continuously in the employment of or service to
the Company during the specified Restriction Period and for the forfeiture of
the shares of Common Stock subject to such award (x) if specified Performance
Measures are not satisfied or met during the specified Restriction Period or (y)
if the holder of such award does not remain continuously in the employment of or
service to the Company during the specified Restriction Period.
Bonus Stock Awards shall not be subject to any Performance Measures or
Restriction Periods.
(c) Share Certificates. During the Restriction Period, a certificate or
certificates representing a Restricted Stock Award may be registered in the
holder's name and may bear a legend, in addition to any legend which may be
required pursuant to Section 6.6, indicating that the ownership of the shares of
Common Stock represented by such certificate is subject to the restrictions,
terms and conditions of this Plan and the Agreement relating to the Restricted
Stock Award. All such certificates shall be deposited with the Company, together
with stock powers or other instruments of assignment (including a power of
attorney), each endorsed in blank with a guarantee of signature if deemed
necessary or appropriate by the Company, which would permit transfer to the
Company of all or a portion of the shares of Common Stock subject to the
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Restricted Stock Award in the event such award is forfeited in whole or in part.
Upon termination of any applicable Restriction Period (and the satisfaction or
attainment of applicable Performance Measures), or upon the grant of a Bonus
Stock Award, in each case subject to the Company's right to require payment of
any taxes in accordance with Section 6.5, a certificate or certificates
evidencing ownership of the requisite number of shares of Common Stock shall be
delivered to the holder of such award.
(d) Rights with Respect to Restricted Stock Awards. Unless otherwise
set forth in the Agreement relating to a Restricted Stock Award, and subject to
the terms and conditions of a Restricted Stock Award, the holder of such award
shall have all rights as a stockholder of the Company, including, but not
limited to, voting rights, the right to receive dividends and the right to
participate in any capital adjustment applicable to all holders of Common Stock;
provided, however, that a distribution with respect to shares of Common Stock,
other than a regular cash dividend, shall be deposited with the Company and
shall be subject to the same restrictions as the shares of Common Stock with
respect to which such distribution was made.
(e) Awards to Certain Executive Officers. Notwithstanding any other
provision of this Article III, and only to the extent necessary to ensure the
deductibility of the award to the Company, the Fair Market Value of the number
of shares of Common Stock subject to a Stock Award granted to a "covered
employee" within the meaning of Section 162(m) of the Code shall not exceed
$250,000 (i) at the time of grant in the case of a Stock Award granted upon the
attainment of Performance Measures or (ii) in the case of a Restricted Stock
Award with Performance Measures which shall be satisfied or met as a condition
to the holder's receipt of the shares of Common Stock subject to such award, on
the earlier of (x) the date on which the Performance Measures are satisfied or
met and (y) the date the holder makes an election under Section 83(b) of the
Code.
3.3 TERMINATION OF EMPLOYMENT OR SERVICE. All of the terms relating to the
satisfaction of Performance Measures and the termination of the Restriction
Period relating to a Restricted Stock Award, or any cancellation or forfeiture
of such Restricted Stock Award upon a termination of employment with or service
to the Company of the holder of such Restricted Stock Award, whether by reason
of disability, retirement, death or other termination, shall be set forth in the
Agreement relating to such Restricted Stock Award.
IV. PERFORMANCE SHARE AWARDS
4.1 PERFORMANCE SHARE AWARDS. The Committee may, in its discretion, grant
Performance Share Awards to such eligible persons as may be selected by the
Committee.
4.2 TERMS OF PERFORMANCE SHARE AWARDS. Performance Share Awards shall be subject
to the
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following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of this Plan, as the Committee shall
deem advisable.
(a) Number of Performance Shares and Performance Measures. The number
of Performance Shares subject to any award and the Performance Measures and
Performance Period applicable to such award shall be determined by the
Committee.
(b) Vesting and Forfeiture. The Agreement relating to a Performance
Share Award shall provide, in the manner determined by the Committee, in its
discretion, and subject to the provisions of this Plan, for the vesting of such
award, if specified Performance Measures are satisfied or met during the
specified Performance Period, and for the forfeiture of such award, if specified
Performance Measures are not satisfied or met during the specified Performance
Period.
(c) Settlement of Vested Performance Share Awards. The Agreement
relating to a Performance Share Award (i) shall specify whether such award may
be settled in shares of Common Stock (including shares of Restricted Stock) or
cash or a combination thereof and (ii) may specify whether the holder thereof
shall be entitled to receive, on a current or deferred basis, dividend
equivalents, and, if determined by the Committee, interest on or the deemed
reinvestment of any deferred dividend equivalents, with respect to the number of
shares of Common Stock subject to such award. If a Performance Share Award is
settled in shares of Restricted Stock, a certificate or certificates
representing such Restricted Stock shall be issued in accordance with Section
3.2(c) and the holder of such Restricted Stock shall have such rights of a
stockholder of the Company as determined pursuant to Section 3.2(d). Prior to
the settlement of a Performance Share Award in shares of Common Stock, including
Restricted Stock, the holder of such award shall have no rights as a stockholder
of the Company with respect to the shares of Common Stock subject to such award
and shall have rights as a stockholder of the Company in accordance with Section
6.10.
4.3 TERMINATION OF EMPLOYMENT OR SERVICE. All of the terms relating to the
satisfaction of Performance Measures and the termination of the Performance
Period relating to a Performance Share Award, or any cancellation or forfeiture
of such Performance Share Award upon a termination of employment with the
Company of the holder of such Performance Share Award, whether by reason of
disability, retirement, death or other termination, shall be set forth in the
Agreement relating to such Performance Share Award.
V. PROVISIONS RELATING TO NON-EMPLOYEE DIRECTORS
5.1 ELIGIBILITY. Each Non-Employee Director shall be granted options to purchase
shares of Common Stock in accordance with this Article V. All options granted
under this Article V ("Automatic Non-Employee Director's Options") shall
constitute Non-Statutory Stock Options.
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5.2 GRANTS OF STOCK OPTIONS. Each Non-Employee Director shall be granted
Automatic Non- Employee Director's Options as follows:
(a) Automatic Initial Grant of Options. Each person who becomes a
Non-Employee Director shall be automatically awarded and issued on the date of
his or her first election to the Board, without further action of the Board or
the Committee, an Automatic Non-Employee Director's Option to purchase 25,000
shares of Common Stock. An option described in this Section 5.2(a) shall
hereinafter be referred to as an "Initial Grant."
(b) Automatic Annual Grant of Options. On the day immediately following
the date of each annual meeting of stockholders of the Company (the "Current
Annual Meeting"), beginning with the annual meeting that occurs in 2000, each
Non-Employee Director (other than a Non-Employee Director who received an
Initial Grant at the Current Annual Meeting) shall be automatically awarded and
issued on such date, without further action of the Board or the Committee, an
Automatic Non-Employee Director's Option to purchase 6,000 shares of Common
Stock (an "Annual Grant"); provided that in the case of an Annual Grant to a
Non-Employee Director who received an Initial Grant within the twelve-month
period ending on the date of the Current Annual Meeting, the number of shares
subject to such Annual Grant shall be 6,000 multiplied by a fraction, the
numerator of which is the number of days in the period beginning on the day
after the date of such Initial Grant and ending on the day of the Current Annual
Meeting, and the denominator of which is 365.
(c) Option Price. The purchase price per share of Common Stock subject
to each Automatic Non-Employee Director's Option shall be 100 percent of the
Fair Market Value of a share of Common Stock on the date such option is
automatically granted.
(d) Exercisability. Except as otherwise provided herein, each Automatic
Non-Employee Director's Option shall not be exercisable until the last day of
the calendar month following the calendar month in which such option is granted
(the "Initial Date of Exercisability"). Each Initial Grant shall become
exercisable incrementally on its Initial Date of Exercisability and on the last
day of each of the next 47 calendar months following the Initial Date of
Exercisability with respect to 1/48 of the shares of Common Stock subject to the
Initial Grant on the date of its grant. Each Annual Grant shall become
exercisable incrementally on its Initial Date of Exercisability and on the last
day of each of the next 11 calendar months following the Initial Date of
Exercisability with respect to one-twelfth of the shares of Common Stock subject
to such Annual Grant on the date of its grant. An exercisable option, or portion
thereof, may be exercised in whole or in part only with respect to whole shares
of Common Stock. Automatic Non-Employee Director's Options shall be exercisable
in accordance with Section 2.1(c).
(e) Options Granted Prior to Reference Date. Notwithstanding Section
5.2(d), no option granted prior to the Reference Date pursuant to this Article V
shall be exercisable until the
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Reference Date, at which time such option shall become exercisable for the same
number of shares for which such option would have been exercisable under Section
5.2(d) as of the Reference Date. Such option shall thereafter continue to become
exercisable in accordance with Section 5.2(d). The number of shares of Common
Stock subject to each such option, and the exercise price thereof, shall be
adjusted in accordance with the Agreement setting forth the terms of such
option.
5.3 OPTION PERIOD AND TERMINATION OF DIRECTORSHIP. (a) Term and Termination of
Option. The maximum term of each Automatic Non-Employee Director's Option shall
be the date which is 10 years after the date on which it was granted (the
"Expiration Date"). Each Automatic Non-Employee Director's Option shall
terminate, to the extent not exercised or earlier terminated pursuant to the
terms of this Article V, on its Expiration Date. In no event may an Automatic
Non-Employee Director's Option be exercised, in whole or in part, after it
terminates.
(b) Termination of Directorship Other than by Death,
Disability or Retirement. If the holder of an Automatic Non-Employee Director's
Option ceases to be a director of the Company for any reason other than death,
Disability, or Retirement, the option shall remain exercisable with respect to
the number of shares subject to such option that are exercisable upon the
effective date of such holder's ceasing to be a director and may thereafter be
exercised for a period of 90 days from the effective date of such holder's
ceasing to be a director or until the Expiration Date, whichever period is
shorter, after which the Automatic Non-Employee Director's Option shall
terminate in its entirety.
(c) Death. If the holder of an Automatic Non-Employee
Director's Option ceases to be a director of the Company by reason of death, the
option shall become exercisable as of the date of death with respect to any or
all of the shares subject to such option and may thereafter be exercised for a
period of one year from the date of death or until the Expiration Date,
whichever period is shorter, after which the Automatic Non-Employee Director's
Option shall terminate in its entirety.
(d) Disability. If the holder of an Automatic Non-Employee
Director's Option ceases to be a director of the Company by reason of
Disability, the option shall become exercisable as of the effective date of such
holder's ceasing to be a director with respect to any or all of the shares
subject to such option and may thereafter be exercised for a period of 90 days
from the effective date of such termination or until the Expiration Date,
whichever period is shorter, after which the Automatic Non-Employee Director's
Option shall terminate in its entirety. For purposes of this Article V,
"Disability" shall mean the inability of an individual to fully perform the
duties of a director of the Company for a continuous period in excess of 360
days, as determined by the Board in its sole discretion.
(e) Retirement. If the holder of an Automatic Non-Employee
Director's Option
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ceases to be a director of the Company by reason of retirement after such holder
has completed five years of service as a director of the Company and is at least
55 years of age ("Retirement"), the option shall remain exercisable with respect
to the number of shares subject to such option that are exercisable upon the
effective date of such Retirement, and may thereafter be exercised for a period
of two years from the effective date of such Retirement or until the Expiration
Date, whichever period is shorter, after which the Automatic Non-Employee
Director's Option shall terminate in its entirety.
(f) Death After Termination of Directorship. If the holder of
an Automatic Non-Employee Director's Option dies after he or she has ceased to
be a director of the Company, the option shall be exercisable only to the extent
that it is exercisable on the date of such holder's death and may thereafter be
exercised only for that period of time for which the option is exercisable
immediately prior to the holder's death pursuant to Sections 5.3(b) through (e).
VI. GENERAL
6.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan shall be submitted to the
stockholder of the Company for approval and shall become effective on the date
of such approval. This Plan shall terminate ten years after its effective date,
unless terminated earlier by the Board. Termination of this Plan shall not
affect the terms or conditions of any award granted prior to termination.
6.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable,
subject to any requirement of stockholder approval required by applicable law,
rule or regulation, including Section 162(m) and Section 422 of the Code;
provided, however, that no amendment shall be made without stockholder approval
if such amendment would (a) increase the maximum number of shares of Common
Stock available under this Plan (subject to Section 6.7), (b) effect any change
inconsistent with Section 422 of the Code or (c) extend the term of this Plan.
No amendment may impair the rights of a holder of an outstanding award without
the consent of such holder.
6.3 AGREEMENT. Each award under this Plan shall be evidenced by an Agreement
setting forth the terms and conditions applicable to such award. No award shall
be valid until an Agreement is executed by the Company and the recipient of such
award and, upon execution by each party and delivery of the Agreement to the
Company, such award shall be effective as of the effective date set forth in the
Agreement.
6.4 NON-TRANSFERABILITY OF AWARDS. Unless otherwise specified in the Agreement
relating to an award, no award shall be transferable other than by will, the
laws of descent and distribution or pursuant to beneficiary designation
procedures approved by the Company. Except to the extent permitted by the first
sentence of this Section 6.4, or the Agreement relating to an award, each
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award may be exercised or settled during the holder's lifetime only by the
holder or the holder's legal representative or similar person. Except to the
extent permitted by the first sentence of this Section 6.4 or the Agreement
relating to an award, no award may be sold, transferred, assigned, pledged,
hypothecated, encumbered or otherwise disposed of (whether by operation of law
or otherwise) or be subject to execution, attachment or similar process. Upon
any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or
otherwise dispose of any such award, other than as permitted by the first
sentence of this Section 6.4 or the Agreement relating to an award, such award
and all rights thereunder shall immediately become null and void.
6.5 TAX WITHHOLDING. The Company shall have the right to require, prior to the
issuance or delivery of any shares of Common Stock or the payment of any cash
pursuant to an award made hereunder, payment by the holder of such award of any
Federal, state, local or other taxes which may be required to be withheld or
paid in connection with such award. An Agreement may provide that (i) the
Company shall withhold whole shares of Common Stock which would otherwise be
delivered to a holder, having an aggregate Fair Market Value determined as of
the date the obligation to withhold or pay taxes arises in connection with an
award (the "Tax Date"), or withhold an amount of cash which would otherwise be
payable to a holder, in the minimum amount necessary to satisfy any such
obligation or (ii) the holder may satisfy any such obligation by any of the
following means: (A) a cash payment to the Company, (B) delivery to the Company
of Mature Shares having an aggregate Fair Market Value, determined as of the Tax
Date, equal to the amount necessary to satisfy any such obligation, (C)
authorizing the Company to withhold whole shares of Common Stock which would
otherwise be delivered having an aggregate Fair Market Value, determined as of
the Tax Date, or withhold an amount of cash which would otherwise be payable to
a holder, equal to the minimum amount necessary to satisfy any such obligation,
(D) in the case of the exercise of any option, a cash payment by a broker-dealer
acceptable to the Company to whom the optionee has submitted an irrevocable
notice of exercise or (E) any combination of (A), (B), and (C), in each case to
the extent set forth in the Agreement relating to the award; provided, however,
that the Company shall have sole discretion to disapprove of an election
pursuant to any of clauses (B)-(E) and that in the case of a holder who is
subject to Section 16 of the Exchange Act, the Company may require that the
method of satisfying such an obligation be in compliance with Section 16 and the
rules and regulations thereunder. Any fraction of a share of Common Stock which
would be required to satisfy such an obligation shall be disregarded and the
remaining amount due shall be paid in cash by the holder.
6.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be subject to the
requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to such
award upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the delivery of shares
thereunder, such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions not acceptable to the
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Company. The Company may require that certificates evidencing shares of Common
Stock delivered pursuant to any award made hereunder bear a legend indicating
that the sale, transfer or other disposition thereof by the holder is prohibited
except in compliance with the Securities Act of 1933, as amended, and the rules
and regulations thereunder.
6.7 ADJUSTMENT. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the number and class of securities available under this Plan, the
number and class of securities subject to each outstanding option and the
purchase price per security, the number of securities subject to each option to
be granted to Non-Employee Directors pursuant to Article V, the terms of each
outstanding SAR, the number and class of securities subject to each outstanding
Stock Award, and the terms of each outstanding Performance Share Award shall be
appropriately adjusted by the Committee. The decision of the Committee regarding
any such adjustment shall be final, binding and conclusive. If any such
adjustment would result in a fractional security being (a) available under this
Plan, such fractional security shall be disregarded, or (b) subject to an award
under this Plan, the Company shall pay the holder of such award, in connection
with the first vesting, exercise or settlement of such award in whole or in part
occurring after such adjustment, an amount in cash determined by multiplying (i)
the fraction of such security (rounded to the nearest hundredth) by (ii) the
excess, if any, of (A) the Fair Market Value on the vesting, exercise or
settlement date over (B) the exercise or base price, if any, of such award.
6.8 CHANGE IN CONTROL.
(a) (1) Notwithstanding any provision in this Plan or any Agreement, in
the event of a Change in Control, the Board may, but shall not be required to,
make such adjustments to outstanding awards hereunder as it deems appropriate,
including, without limitation, electing that each outstanding award shall be
surrendered to the Company by the holder thereof, and that each such award shall
immediately be cancelled by the Company, and that the holder shall receive,
within a specified period of time from the occurrence of the Change in Control,
a cash payment from the Company in an amount equal to:
(i) in the case of an option, the number of shares of Common
Stock then subject to such option, multiplied by the excess, if any, of the
greater of (A) the highest per share price offered to stockholders of the
Company in any transaction whereby the Change in Control takes place or (B) the
Fair Market Value of a share of Common Stock on the date of occurrence of the
Change in Control, over the purchase price per share of Common Stock subject to
the option,
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<PAGE> 18
(ii) in the case of a Free-Standing SAR, the number of shares
of Common Stock then subject to such SAR, multiplied by the excess, if any, of
the greater of (A) the highest per share price offered to stockholders of the
Company in any transaction whereby the Change in Control takes place or (B) the
Fair Market Value of a share of Common Stock on the date of occurrence of the
Change in Control, over the base price of the SAR, and
(iii) in the case of a Restricted Stock Award or Performance
Award, the number of shares of Common Stock or the number of Performance Shares,
as the case may be, then subject to such award, multiplied by the greater of (A)
the highest per share price offered to stockholders of the Company in any
transaction whereby the Change in the Control takes place or (B) the Fair Market
Value of a share of Common Stock on the date of occurrence of the Change in
Control.
In the event of a Change in Control in which options are cancelled,
each Tandem SAR related to a cancelled option shall be surrendered by the holder
thereof and shall be cancelled simultaneously with the cancellation of the
related option. The Company may, but is not required to, cooperate with any
person who is subject to Section 16 of the Exchange Act to assure that any cash
payment in accordance with the foregoing to such person is made in compliance
with Section 16 and the rules and regulations thereunder.
In the event of a Change in Control, the Board may, but shall not be
required to, substitute for each share of Common Stock available under this
Plan, whether or not then subject to an outstanding award, the number and class
of shares into which each outstanding share of Common Stock shall be converted
pursuant to such Change in Control. In the event of any such substitution, the
purchase price per share in the case of an option and the base price in the case
of an SAR shall be appropriately adjusted by the Committee.
(b) Prior to the consummation of a Spin-Off, "Change in Control" shall
mean any event, other than a Spin-Off, after which TSC is the beneficial owner
of less than a majority of the Outstanding Voting Securities. After the
consummation of a Spin-Off, "Change in Control" shall mean one or more of the
following events:
(1) the acquisition by any individual, entity or group (a "Person"),
including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act, of beneficial ownership within the meaning of Rule 13d-3
promulgated under the Exchange Act, of 25% or more of either (i) the then
outstanding shares of common stock of the Company (the "Outstanding Common
Stock") or (ii) the combined voting power of the then outstanding securities of
the Company entitled to vote generally in the election of directors (the
"Outstanding Voting Securities"); excluding, however, the following: (A) any
acquisition directly from the Company (excluding any acquisition resulting from
the exercise of an exercise, conversion or exchange privilege unless the
security being so exercised, converted or exchanged was acquired directly from
the Company),
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<PAGE> 19
(B) any acquisition by the Company, (C) any acquisition by an employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company or (D) any acquisition by a corporation
pursuant to a transaction which complies with clauses (i), (ii) and (iii) of
subsection (3) of this Section 6.8(b); provided further, that for purposes of
clause (B), if any Person (other than the Company or any employee benefit plan
(or related trust) sponsored or maintained by the Company or any corporation
controlled by the Company) shall become the beneficial owner of 25% or more of
the Outstanding Common Stock or 25% or more of the Outstanding Voting Securities
by reason of an acquisition by the Company, and such Person shall, after such
acquisition by the Company, become the beneficial owner of any additional shares
of the Outstanding Common Stock or any additional Outstanding Voting Securities
and such beneficial ownership is publicly announced, such additional beneficial
ownership shall constitute a Change in Control;
(2) individuals who, as of the date of the Spin-Off constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of such Board; provided that any individual who becomes a director of
the Company subsequent to the date of the Spin-Off whose election, or nomination
for election by the Company's stockholders, was approved by the vote of at least
a majority of the directors then comprising the Incumbent Board shall be deemed
a member of the Incumbent Board; and provided further, that any individual who
was initially elected as a director of the Company as a result of an actual or
threatened election contest, as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act, or any other actual or threatened
solicitation of proxies or consents by or on behalf of any Person other than the
Board shall not be deemed a member of the Incumbent Board;
(3) the consummation of a reorganization, merger or consolidation of
the Company or sale or other disposition of all or substantially all of the
assets of the Company (a "Corporate Transaction"); excluding, however, a
Corporate Transaction pursuant to which (i) all or substantially all of the
individuals or entities who are the beneficial owners, respectively, of the
Outstanding Common Stock and the Outstanding Voting Securities immediately prior
to such Corporate Transaction will beneficially own, directly or indirectly,
more than 60% of, respectively, the outstanding shares of common stock, and the
combined voting power of the outstanding securities of such corporation entitled
to vote generally in the election of directors, as the case may be, of the
corporation resulting from such Corporate Transaction (including, without
limitation, a corporation which as a result of such transaction owns the Company
or all or substantially all of the Company's assets either directly or
indirectly) in substantially the same proportions relative to each other as
their ownership, immediately prior to such Corporate Transaction, of the
Outstanding Common Stock and the Outstanding Voting Securities, as the case may
be, (ii) no Person (other than: the Company; any employee benefit plan (or
related trust) sponsored or maintained by the Company or any corporation
controlled by the Company; the corporation resulting from such Corporate
Transaction; and any Person which beneficially owned, immediately prior to such
Corporate Transaction, directly or indirectly, 25% or more of the
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<PAGE> 20
Outstanding Common Stock or the Outstanding Voting Securities, as the case may
be) will beneficially own, directly or indirectly, 25% or more of, respectively,
the outstanding shares of common stock of the corporation resulting from such
Corporate Transaction or the combined voting power of the outstanding securities
of such corporation entitled to vote generally in the election of directors and
(iii) individuals who were members of the Incumbent Board will constitute at
least a majority of the members of the board of directors of the corporation
resulting from such Corporate Transaction; or
(4) the consummation of a plan of complete liquidation or dissolution
of the Company.
(c) (1) With respect to any optionee who is subject to Section 16 of
the Exchange Act, notwithstanding the exercise period contained in any Agreement
to which such optionee is a party and notwithstanding the expiration date of the
term of such option (other than an Incentive Stock Option), in the event the
Company is involved in a business combination which is intended to be treated as
a pooling of interests for financial accounting purposes (a "Pooling
Transaction") or pursuant to which such optionee receives a substitute option to
purchase securities of any entity, including an entity directly or indirectly
acquiring the Company, then each option (or option in substitution thereof) held
by such optionee shall be exercisable to the extent set forth in the Agreement
evidencing such option until and including the latest of (x) the expiration date
of the term of the option, (y) the date which is six months and one day after
the consummation of such business combination and (z) the date which is ten
business days after the date of expiration of any period during which such
optionee may not dispose of a security issued in the Pooling Transaction in
order for the Pooling Transaction to be accounted for as a pooling of interests;
and
(2) With respect to any holder of an SAR (other than an SAR which may
be settled only for cash) who is subject to Section 16 of the Exchange Act,
notwithstanding the exercise periods set forth in any Agreement to which such
holder is a party, and notwithstanding the expiration date of the term of such
SAR (other than a Tandem SAR which is related to an Incentive Stock Option), in
the event the Company is involved in a Pooling Transaction or pursuant to which
such holder receives a substitute SAR relating to any entity, including an
entity directly or indirectly acquiring the Company, then each such SAR (or SAR
in substitution thereof) held by such holder shall be exercisable to the extent
set forth in the Agreement evidencing such SAR until and including the latest of
(x) the expiration date of the term of such SAR, (y) the date which is six
months and one day after the consummation of such business combination and (z)
the date which is ten business days after the date of expiration of any period
during which such holder many not dispose of a security issued in the Pooling
Transaction in order for the Pooling Transaction to be accounted for as a
pooling of interests.
6.9 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any right to
participate in this Plan. Neither this Plan nor any award made hereunder shall
confer upon any person any right to continued employment by the Company, TSC, or
any of their subsidiaries or affiliates or affect in any manner the right of the
Company, TSC, or any of their subsidiaries or affiliates to
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<PAGE> 21
terminate the employment of any person at any time without liability hereunder.
6.10 RIGHTS AS STOCKHOLDER. No person shall have any right as a stockholder of
the Company with respect to any shares of Common Stock or other equity security
of the Company which is subject to an award hereunder unless and until such
person becomes a stockholder of record with respect to such shares of Common
Stock or equity security.
6.11 GOVERNING LAW. This Plan, each award hereunder and the related Agreement,
and all determinations made and actions taken pursuant thereto, to the extent
not otherwise governed by the Code or the laws of the United States, shall be
governed by the laws of the State of Delaware and construed in accordance
therewith without giving effect to the principles of conflicts of laws.
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<PAGE> 22
AMENDMENT NUMBER ONE
TO THE
eLOYALTY CORPORATION
1999 STOCK INCENTIVE PLAN
WHEREAS, eLoyalty Corporation (the "Company") has heretofore
adopted and maintains the eLoyalty Corporation 1999 Stock Incentive Plan (the
"Plan"); and
WHEREAS, the Company desires to amend the Plan in certain
respects.
NOW, THEREFORE, pursuant to the power of amendment contained
in Section 6.2 of the Plan, the Plan is hereby amended as follows, subject to
approval by the stockholders of the Company pursuant to Section 6.2 of the Plan:
1. Effective as of the date hereof, Section 1.4 of the Plan is
hereby amended by deleting the second sentence thereof, and inserting the
following sentence in lieu thereof:
For purposes of this Plan, references to employment shall also mean
service as a director or pursuant to an agency or independent
contractor relationship, and references to employment by the Company
shall also mean employment by a Subsidiary or such other employer
designated in the Agreement evidencing the award.
2. Effective as of the date hereof, Section 2.4 of the Plan is
hereby amended by
<PAGE> 23
deleting the second and third sentences thereof, and inserting the following
sentences in lieu thereof:
Such Substitute Options shall not be subject to the limit on the
aggregate number of shares of Common Stock available for grants of
awards under the Plan set forth in Section 1.5. The number of shares of
Common Stock subject to Substitute Options shall be determined as
follows:
(a) eLoyalty Employees and Directors. A Substitute
Option shall be granted to each holder of a TSC Option who,
immediately after the Spin-Off, is an employee or director of
the Company (but who is not also a director of TSC). The
number of shares of Common Stock subject to such Substitute
Option shall be determined by multiplying the number of shares
subject to the TSC Option to which such Substitute Option
relates by a ratio, the numerator of which is the trading
price of a share of TSC common stock, traded "regular way,"
and the denominator of which is the trading price of a share
of Common Stock, traded on a "when-issued" basis, in each case
over a fixed period of time determined by the Committee on or
around the record date of the Spin-Off.
(b) Other TSC Option Holders. A Substitute Option
shall be granted to each holder of a nonqualified TSC Option
granted prior to June 22, 1999 who, immediately after the
Spin-Off, is either (i) an employee or director of TSC or (ii)
an employee or director of neither TSC nor the Company. The
number of shares of Common Stock subject to such Substitute
Option shall equal the number of shares of Common Stock that
would be distributed in the Spin-Off with respect to a number
of shares of TSC common stock equal to the number of shares
subject to the TSC Option to which such Substitute Option
relates immediately prior to the Spin-Off.
The Committee shall determine the exercise price of each Substitute
Option in a manner that preserves the economic value of the TSC Option
to which such Substitute Option relates.
3. Effective as of the date hereof, Section 5.1 of the Plan is
hereby amended by adding the following sentence at the end thereof:
Notwithstanding anything to the contrary herein, any Non-Employee
Director who was granted an option pursuant to Section 2.1 hereof on or
around July 1, 1999
<PAGE> 24
shall not be eligible to receive Automatic Non-Employee Director's
Options hereunder.
4. Effective as of the date hereof, Section 5.2 of the Plan is
hereby amended by deleting the first sentence thereof, and inserting the
following sentence in lieu thereof:
Except as provided otherwise in Section 5.1, each
Non-Employee Director shall be granted Automatic Non-Employee
Director's Options as follows:
IN WITNESS WHEREOF, the Company has caused this instrument to
be executed by its duly authorized officer on this 16th day of December, 1999.
eLOYALTY CORPORATION
By: /s/ Paul Peterson
-----------------------------
<PAGE> 1
EXHIBIT 10.2
eLOYALTY CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the eLoyalty Corporation 1999
Employee Stock Purchase Plan (the "Plan") is to provide employees of eLoyalty
Corporation, a Delaware corporation (the "Company"), and its Subsidiary
Companies (as defined in Section 15) added incentive to remain employed by such
companies and to encourage increased efforts to promote the best interests of
such companies by permitting eligible employees to purchase shares of the common
stock, par value $.01, of the Company ("Common Stock") at below-market prices.
The Plan is intended to qualify as an "employee stock purchase plan" under
section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The
Company and its Subsidiary Companies are sometimes hereinafter called
individually a "Participating Company" or collectively the "Participating
Companies."
2. Eligibility. Participation in the Plan shall be open to
each employee of the Participating Companies (a) who has been continuously
employed by the Participating Companies for at least three months, (b) whose
customary employment by the Participating Companies is greater than 20 hours per
week; and (c) whose customary employment by the Participating Companies is more
than five months in any calendar year (each an "Eligible Employee") or any of
its subsidiaries. For purposes of the preceding sentence, employment with
Technology Solutions Company ("TSC") or any of its subsidiaries immediately
prior to the Effective Date shall be treated as employment by a Participating
Company. No right to purchase Common Stock hereunder shall accrue under the Plan
in favor of any person who is not an Eligible Employee as of the first day of a
Purchase Period (as defined in Section 3). Notwithstanding anything contained in
the Plan to the contrary, no Eligible Employee shall acquire a right to purchase
Common Stock hereunder (i) if, immediately after receiving such right, such
employee would own
<PAGE> 2
5% or more of the total combined voting power or value of all classes of stock
of the Company or any Subsidiary Company (including any stock attributable to
such employee under section 424(d) of the Code), or (ii) if for a given calendar
year such right would permit such employee's aggregate rights to purchase stock
under all employee stock purchase plans of the Company and its Subsidiary
Companies or Parent Corporation (which aggregate rights are exercisable during
such calendar year) to accrue at a rate which exceeds $25,000 of fair market
value of such stock for such calendar year, all determined in the manner
provided by section 423(b)(8) of the Code and the rules and regulations
thereunder. In addition, the number of shares of Common Stock which may be
purchased by any Eligible Employee during any Purchase Period shall not exceed
[1,500], subject to adjustment pursuant to Section 14.
3. Effective Date of Plan. The Plan shall become effective one
day after the record date of the pro rata distribution by TSC to its
stockholders of all of the shares of Common Stock then owned by TSC (the
"Spin-off") or on such later date as may be specified by the Board of Directors
(the "Board") of the Company or the Committee (as defined in Section 12) (the
"Effective Date"). The Plan shall cease to be effective unless, within 12 months
before or after the date of its adoption by the Board, it has been approved by
the stockholders of the Company in accordance with the General Corporation Law
of the State of Delaware and section 423 of the Code.
4. Purchase Periods. The first "Purchase Period" shall be the
period beginning on the Effective Date and ending on the last business day of
the calendar quarter in which the Effective Date occurs (or the last business
day of the first calendar quarter beginning after the Effective Date, if so
determined by the Committee prior to the Effective Date in its sole discretion),
and shall be followed thereafter by successive three-month Purchase Periods,
each of which shall begin on the first business day of the following calendar
quarter and end on the last business day of such calendar quarter.
2
<PAGE> 3
5. Basis of Participation.
(a) Each Eligible Employee shall be entitled to enroll in the Plan as
of the first day of any Purchase Period which begins on or after such employee
becomes an Eligible Employee and shall be considered a Participant in the Plan
thereafter (a "Participant").
(i) To enroll in the Plan, an Eligible Employee shall execute
and deliver a payroll deduction authorization (the "Authorization") to
the Participating Company which is the employee's employer, or its
designated agent, in the time and manner specified by the Committee.
The Authorization shall become effective on the first day of the
Purchase Period commencing after the execution and delivery of such
Authorization. Each Authorization shall direct that payroll deductions
be made by the Participating Company which is the employee's employer
for each payroll period during which the employee is a Participant in
the Plan. The amount of each payroll deduction specified in an
Authorization for each such payroll period shall be a whole percentage
amount or a whole dollar amount, as determined by the Committee, in
either case not to exceed 15%, or such lesser percentage as may be
determined by the Committee, of the Participant's current regular wage
or salary (before withholding or other deductions) paid to him or her
by any of the Participating Companies.
(ii) Payroll deductions (and any other amount paid under the
Plan) shall be made for each Participant in accordance with his or her
or her Authorization until his or her or her participation in the Plan
terminates or the Plan terminates, all as hereinafter provided.
(iii) A Participant may change the amount of his or her
payroll deduction by filing a new Authorization with the Company or its
designated agent, which shall become effective on the first day of the
Purchase Period commencing after the execution and delivery of such
Authorization. No other changes shall be permitted, except that a
3
<PAGE> 4
Participant may elect to terminate his or her participation in the Plan
as provided in Section 8.
(iv) Payroll deductions shall be credited to a purchase
account established on the books of the Company on behalf of each
Participant (a "Purchase Account"). At the end of each Purchase Period,
the amount in each Participant's Purchase Account will be applied to
the purchase from the Company of the number of shares of Common Stock
determined by dividing such amount by the Purchase Price (as defined in
Section 6) for such Purchase Period. (b) The Committee may, in its
discretion, establish additional procedures whereby Eligible Employees
may participate in the Plan by means other than payroll deduction,
including, but not limited to, delivery of funds by Participants in a
lump sum or automatic charges to Participants' bank accounts. Such
other methods of participating shall be subject to such rules and
conditions as the Committee may establish. The Committee may at any
time amend, suspend to terminate any participation procedures
established pursuant to this paragraph without prior notice to any
Participant or Eligible Employee.
6. Purchase Price. The purchase price (the "Purchase Price")
per share of Common Stock hereunder for any Purchase Period shall be 85% of the
lesser of (i) the fair market value of a share of Common Stock on the first day
of such Purchase Period and (ii) the fair market value of a share of Common
Stock on the last day of such Purchase Period, unless, prior to the beginning of
such Purchase Period, the Committee shall determine otherwise (subject to the
limitations contained in clause (iii) of Section 9(c)). If such determination
results in a fraction of one cent, the Purchase Price shall be increased to the
next higher full cent. The fair market value of a share of Common Stock on a
given day shall be the average of the high and low transaction prices of a share
of Common Stock as reported on The Nasdaq Stock Market(SM) on the date as of
which such value is being determined or, if there shall be no reported
transactions on such date,
4
<PAGE> 5
on the next preceding date for which transactions were reported. In no event,
however, shall the Purchase Price be less than the par value of the Common
Stock.
7. Issuance of Shares.
(a) The Common Stock purchased by each Participant shall be considered
to be issued and outstanding to his or her credit as of the close of business on
the last day of each Purchase Period. The total number of shares of Common Stock
purchased by all Participants during each Purchase Period shall be issued, as of
the last day in such Purchase Period, to a nominee or agent for the benefit of
the Participants. A Participant will be issued a certificate for his or her
shares upon the request of the Participant in accordance with procedures
established by the Company.
(b) No interest shall accrue at any time for any amount credited to a
Purchase Account of a Participant. After the close of each Purchase Period, a
report will be sent to each Participant stating the entries made to his or her
Purchase Account, the number of shares of Common Stock purchased and the
applicable Purchase Price.
8. Termination of Participation.
(a) A Participant may elect at any time to terminate his or her
participation in the Plan, provided such termination is received by the Company
in writing prior to the last business day of the Purchase Period for which such
termination is to be effective. Upon any such termination, the Company shall
promptly deliver to such Participant cash in an amount equal to the balance to
his or her credit in his or her Purchase Account on the date of such
termination. At any time after such termination, the Participant may request the
delivery to such Participant of one or more certificates for the number of whole
shares of Common Stock held for his or her benefit, and the cash equivalent for
any fractional share so held. Such cash equivalent shall be determined by
multiplying the fractional share by the fair market value of a share of Common
Stock on the last day of the Purchase Period immediately preceding such
termination, determined as provided in Section 6.
5
<PAGE> 6
(b) If the Participant dies, terminates his or her employment with the
Participating Companies for any reason, or otherwise ceases to be an Eligible
Employee (including, without limitation, as a result of a Participating Company
ceasing to be a Subsidiary Company), his or her participation in the Plan shall
immediately terminate. Upon such terminating event, the Company shall promptly
deliver to such Participant or his or her legal representative, as the case may
be, cash in an amount equal to the balance to his or her credit in his or her
Purchase Account on the date of such termination.
9. Termination or Amendment of the Plan.
(a) The Company, by action of the Board or the Committee, may terminate
the Plan at any time. Notice of termination shall be given to all Participants,
but any failure to give such notice shall not impair the effectiveness of the
termination.
(b) Without any action being required, the Plan will terminate in any
event when the maximum number of shares of Common Stock to be sold under the
Plan (as provided in Section 13) has been purchased. Such termination shall not
impair any rights which under the Plan shall have vested on or prior to the date
of such termination. If at any time the number of shares remaining available for
purchase under the Plan are not sufficient to satisfy all then-outstanding
purchase rights, the Board may determine an equitable basis of apportioning
available shares among all Participants consistent with Section 423 of the Code.
6
<PAGE> 7
(c) The Board or the Committee may amend the Plan from time to time in
any respect for any reason; provided, however, no such amendment shall (i)
materially adversely affect any purchase rights outstanding under the Plan
during the Purchase Period in which such amendment is to be effected, (ii)
unless approved by the stockholders of the Company, increase the maximum number
of shares of Common Stock which may be purchased under the Plan, (iii) decrease
the Purchase Price of the shares of Common Stock for any Purchase Period below
the lesser of 85% of the fair market value thereof on the first day of such
Purchase Period and 85% of the fair market value thereof on the last day of such
Purchase Period, (iv) unless approved by the stockholders of the Company, change
the class of employees eligible to participate in the Plan or (v) adversely
affect the qualification of the Plan under section 423 of the Code.
(d) Upon termination of the Plan, the respective cash balance, if any,
to the credit of each Participant in his or her Purchase Account, one or more
certificates for the number of whole shares of Common Stock held for his or her
benefit, and the cash equivalent of any fractional share so held, determined as
provided in Section 8(a), shall be promptly distributed to such Participant.
10. Non-Transferability. Rights acquired under the Plan are
not transferable and may be exercised only by a Participant.
11. Stockholder's Rights. No Eligible Employee or Participant
shall by reason of the Plan have any rights of a stockholder of the Company
until and to the extent he or she shall acquire shares of Common Stock as herein
provided.
12. Administration of the Plan.
(a) The Plan shall be administered by the Compensation Committee of the
Board (the "Committee"), provided that the Board may otherwise appoint (i) the
entire Board or (ii) a committee consisting of two or more members of the Board,
to act as the Committee. In addition
7
<PAGE> 8
to the power to amend or terminate the Plan pursuant to Section 9, the Committee
shall have full power and authority to: (A) interpret and administer the Plan
and any instrument or agreement entered into under the Plan; (B) establish such
rules and regulations and appoint such agents as it shall deem appropriate for
the proper administration of the Plan; and (C) make any other determination and
take any other action that the Committee deems necessary or desirable for
administration of the Plan. Decisions of the Committee shall be final,
conclusive and binding upon all persons, including the Company, any Participant
and any other employee of the Company. A majority of the members of the
Committee may determine its actions and fix the time and place of its meetings.
(b) The Plan shall be administered so as to ensure all Participants
have the same rights and privileges as required by section 423(b)(5) of the
Code.
13. Maximum Number of Shares. The maximum number of shares of
Common Stock which may be purchased under the Plan is [500,000], subject,
however, to adjustment as hereinafter set forth. Shares of Common Stock sold
hereunder may be treasury shares, authorized and unissued shares, or a
combination thereof.
14. Adjustment. In the event of any stock split, stock
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a regular cash dividend, the maximum number and class of securities which
may purchased under this Plan, the maximum number and class of securities that
may be purchased by any Eligible Employee during any Purchase Period, and the
purchase price per security shall be appropriately adjusted by the Committee.
The decision of the Committee regarding any such adjustment shall be final,
binding and conclusive. If any such adjustment would result in a fractional
security being available under this Plan, such fractional security shall be
disregarded.
15. Miscellaneous.
8
<PAGE> 9
(a) Except as otherwise expressly provided herein, any Authorization,
election, notice or document under the Plan from an Eligible Employee or
Participant shall be delivered to the Company, the Participating Company that is
the employer of such Eligible Employee, or their designated agents and, subject
to any limitations specified in the Plan, shall be effective when so delivered.
(b) The term "business day" shall mean any day other than Saturday,
Sunday or a legal holiday recognized by the Participating Corporation for which
the Participant is employed.
(c) The term "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(d) The term "Parent Corporation" shall mean any corporation which is,
or becomes, after the Effective Date, a parent corporation of the Company
(within the meaning of Section 424(e) of the Code).
(e) The term "Subsidiary Companies" shall mean all corporations which
are, or become, after the Effective Date, subsidiary corporations (within the
meaning of Section 424(f) of the Code) and of which the Company is the common
parent.
(f) The Plan, and the Company's obligation to sell and deliver Common
Stock hereunder, shall be subject to all applicable federal, state and foreign
laws, rules and regulations, and to such approval by any regulatory or
governmental agency as may, in the opinion of counsel for the Company, be
required.
9
<PAGE> 10
16. Change in Control.
(a) In order to maintain the Participants' rights in the event of any
Change in Control of the Company, as hereinafter defined, upon such Change in
Control, the then current Purchase Period shall thereupon end, and all
Participants' Purchase Accounts shall be applied to purchase shares of Common
Stock pursuant to Section 6, and the Plan shall immediately thereafter
terminate.
(b) "Change in Control" for the purposes hereof means the occurrence of
any of the following events after the Effective Date:
(i) the acquisition by any individual, entity or group (a
"Person"), including any "person" within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership
within the meaning of Rule 13d-3 promulgated under the Exchange Act, of
35% or more of either (A) the then outstanding shares of common stock
of the Company (the "Outstanding Company Common Stock") or (B) the
combined voting power of the then outstanding securities of the Company
entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); excluding, however, the
following: (1) any acquisition directly from the Company (excluding any
acquisition resulting from the exercise of an exercise, conversion or
exchange privilege, unless the security being so exercised, converted
or exchanged was acquired directly from the Company); (2) any
acquisition by the Company; (3) any acquisition by an employee benefit
plan (or related trust) sponsored or maintained by the Company or any
Subsidiary Corporation; or (4) any acquisition by any corporation
pursuant to a transaction which complies with clauses (A), (B) and (C)
of subsection (iii) of this Section 16(b); provided further, that for
purposes of clause (2) above, if any Person (other than the Company or
any employee benefit plan (or related trust) sponsored or maintained by
the Company or any corporation controlled by the Company) shall become
the beneficial owner of 35% or more of the Outstanding Company Common
Stock or 35% or more of the Outstanding
10
<PAGE> 11
Company Voting Securities by reason of an acquisition by the Company,
and such Person shall, after such acquisition by the Company, become
the beneficial owner of any additional shares of the Outstanding
Company Common Stock or any additional Outstanding Company Voting
Securities and such beneficial ownership is publicly announced, such
additional beneficial ownership shall constitute a Change in Control;
(ii) individuals who, as of the date hereof, constitute the
Board of Directors (the "Incumbent Board") cease for any reason to
constitute at least a majority of such Board; provided that any
individual who becomes a director of the Company subsequent to the date
hereof whose election, or nomination for election by the Company's
stockholders, was approved by the vote of at least a majority of the
directors then comprising the Incumbent Board, shall be deemed a member
of the Incumbent Board; and provided further, that any individual who
was initially elected as a director of the Company as a result of an
actual or threatened election contest, as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act, or any
other actual or threatened solicitation of proxies or consents by or on
behalf of any Person other than the Board, shall not be deemed a member
of the Incumbent Board;
(iii) approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of
all or substantially all of the assets of the Company (a "Corporate
Transaction"); excluding, however, a Corporate Transaction pursuant to
which (A) all or substantially all of the individuals or entities who
are the beneficial owners, respectively, of the Outstanding Company
Common Stock and the Outstanding Company Voting Securities immediately
prior to such Corporate Transaction will beneficially own, directly or
indirectly, more than 60% of, respectively, the outstanding shares of
common stock and the combined voting power of the outstanding
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Corporate
Transaction (including, without limitation, a
11
<PAGE> 12
corporation which, as a result of such transaction, owns the Company or
all or substantially all of the Company's assets either directly or
indirectly) in substantially the same proportions relative to each
other as their ownership, immediately prior to such Corporate
Transaction, of the Outstanding Company Common Stock and the
Outstanding Company Voting Securities, as the case may be, (B) no
Person (other than the Company, any employee benefit plan (or related
trust) sponsored or maintained by the Company or a Subsidiary
Corporation, the corporation resulting from such Corporate Transaction,
and any Person who beneficially owned, immediately prior to such
Corporate Transaction, directly or indirectly, 35% or more of the
Outstanding Company Common Stock or the Outstanding Company Voting
Securities, as the case may be) will beneficially own, directly or
indirectly, 35% or more of, respectively, the outstanding shares of
common stock or the combined voting power of the outstanding securities
entitled to vote generally in the election of directors of the
corporation resulting from such Corporate Transaction and (C)
individuals who were members of the Incumbent Board will constitute at
least a majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction; or
(iv) approval by the stockholders of the Company of a plan of
complete liquidation or dissolution of the Company.
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<PAGE> 1
EXHIBIT 10.3
COMMON STOCK PURCHASE AND SALE AGREEMENT
THIS AGREEMENT is entered into as of the 13th day of August, 1999 by
and among Technology Solutions Company, a Delaware corporation ("TSC"), eLoyalty
Corporation, a Delaware corporation ("eLoyalty" and, together with TSC, the
"Sellers"), and those persons listed on the signature page as Purchasers (the
"Purchasers").
In consideration of the mutual promises, covenants and conditions
hereinafter set forth, the parties hereto agree as follows:
1. Purchase and Sale of the Shares.
1.1 TSC Shares. Concurrently with the execution and delivery of this
Agreement, TSC shall sell to the Purchasers, and Purchasers shall purchase from
TSC, at the Average TSC Share Price, an aggregate of 500,000 shares of the
common stock, par value $.01 per share, of TSC (the "TSC Shares"). The number of
TSC Shares to be purchased by each Purchaser shall be as set forth opposite each
such Purchaser's name on Exhibit A. The "Average TSC Share Price" means $9.0125,
the average of the last reported closing prices per share of the Common Stock of
TSC on the Nasdaq Stock Market ("NASDAQ") for the 10 consecutive trading days
ending on June 25, 1999.
1.2 eLoyalty Shares. Upon the terms and subject to the conditions of
this Agreement (including Section 8.4), on the Funding Date (as defined below),
eLoyalty shall sell to the Purchasers, and the Purchasers shall purchase from
eLoyalty, at a price of $3.50 per share, an aggregate of 2,400,000 shares of the
common stock, par value $.01 per share, of eLoyalty (the "eLoyalty Shares" and,
together with the TSC Shares, the "Shares"). The number of eLoyalty Shares to be
purchased by each Purchaser shall be as set forth opposite each such Purchaser's
name on Exhibit A.
1.3 Acknowledgment; Commercially Reasonable Efforts. (a) Purchasers
acknowledge that, as of the date hereof, eLoyalty has no business or operations.
Prior to the Funding Date, TSC intends to transfer the eLoyalty Business to
eLoyalty. As part of such transfer, TSC intends to transfer to eLoyalty certain
assets and liabilities related to the eLoyalty Business, to enter into certain
agreements with eLoyalty relating to the provision of certain services by either
TSC or eLoyalty to the other party and to the licensing of certain assets by TSC
or eLoyalty to the other, to transfer to eLoyalty certain TSC employees engaged
in the eLoyalty Business, and to establish employee benefits plans and other
compensation arrangements for the eLoyalty employees. Such transfer is referred
to as the "Business Transfer". The "eLoyalty Business" has the meaning specified
in Exhibit B-1.
(b) Following the receipt of the Revenue Ruling (as defined herein),
Sellers agree to use their commercially reasonable efforts to effect the
Business Transfer as expeditiously as is reasonably practicable. For purposes of
the foregoing, "commercially reasonable efforts" shall include expenditures
which are customary and reasonable in transactions of the kind and nature
contemplated by this Agreement.
<PAGE> 2
2. Funding; Deliveries.
2.1 Funding Date. The purchase and sale of the eLoyalty Shares shall be
consummated on a date and at a time agreed upon by the Purchasers and eLoyalty,
but in no event later than the third day after the conditions set forth in
Sections 6.1(b) and 6.2 have been satisfied, at the offices of Sidley & Austin,
Chicago, Illinois, or at such other place as shall be agreed upon by the
Purchasers and eLoyalty. The time and date on which the purchase and sale of the
eLoyalty Shares is actually held is referred to herein as the "Funding Date."
2.2 Deliveries.
(1) Concurrently with the execution and delivery of this Agreement:
(1) TSC shall issue and deliver to the Purchasers certificates for the
number of TSC Shares set forth opposite each Purchaser's name on Exhibit A.
(2) Each Purchaser shall pay TSC an amount equal to the product of (x)
the number of TSC Shares being acquired as set forth opposite each Purchaser's
name on Exhibit A and (y) the Average TSC Share Price, by wire transfer of
immediately available funds to the bank account specified by TSC.
(2) Subject to the terms and conditions of this Agreement (including
Section 8.4), on the Funding Date:
(1) eLoyalty shall issue and deliver to the Purchasers certificates for
the number of eLoyalty Shares set forth opposite each Purchaser's name on
Exhibit A.
(2) Each Purchaser shall pay eLoyalty an amount equal to the product of
(x) the number of eLoyalty Shares being acquired as set forth opposite each
Purchaser's name on Exhibit A and (y) $3.50, by wire transfer of
immediately available funds to the bank account specified by eLoyalty.
3. Representations and Warranties of Sellers. Sellers represent and
warrant to and agree with the Purchasers as set forth in this Section 3.
Sellers' representations and warranties to the Purchasers shall be subject to
the exceptions set forth in the disclosure letter from Sellers to Purchasers
dated as of the date hereof and relating to this Agreement (the "Disclosure
Letter"). Absent fraud, the aggregate liability of Sellers for the breach of any
representation or warranty of Sellers in this Section 3 and any certificate
delivered on behalf of eLoyalty pursuant to this Agreement shall be limited to
the gross sales price of the eLoyalty Shares sold to the Purchasers by eLoyalty.
Notwithstanding anything contained herein to the contrary, on and after the
Funding Date, TSC shall have no liability whatsoever for the breach of any
representation and warranty contained in this Section 3 or in connection with
any other claim arising out of this Section 3 (collectively, "Section 3
Claims"), and, on and after the Funding Date, any rights of Purchasers in
connection with or arising out of a Section 3 Claim shall be brought solely and
exclusively against eLoyalty.
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<PAGE> 3
3.1 Organization and Standing; Certificate and By-Laws. eLoyalty is a
corporation duly organized and validly existing under, and by virtue of, the
laws of the State of Delaware and is in good standing under such laws. eLoyalty
has the requisite corporate power to own and operate and to carry on the
eLoyalty Business as presently conducted. On the Funding Date, eLoyalty will be
qualified, licensed or domesticated as a foreign corporation in all
jurisdictions where the nature of its activities or of its properties owned or
leased makes such qualification, licensing or domestication necessary, other
than those jurisdictions in which the failure to do so would not reasonably be
expected to have a material adverse effect on the eLoyalty Business. eLoyalty
has furnished the Purchasers or their counsel with copies of eLoyalty's
Certificate of Incorporation and By-Laws, including all amendments thereto. Said
copies are true, correct and complete and contain all amendments through the
date of this Agreement.
3.2 Corporate Power. eLoyalty has all requisite corporate power to
enter into this Agreement and to carry out and perform its obligations under the
terms of this Agreement.
3.3 Subsidiaries. eLoyalty does not, and after the Business Transfer
will not, own or control, directly or indirectly, any equity interest in any
other corporation, association or business entity.
3.4 Capitalization. The authorized capital stock of eLoyalty consists
of 100,000,000 shares of Common Stock, $0.01 par value, and 10,000,000 shares of
Preferred Stock, $.01 par value. As of the date hereof, there are issued and
outstanding 100 shares of Common Stock and no shares of Preferred Stock. All
such shares are owned beneficially and of record by TSC and are validly issued,
fully paid and nonassessable. Except as otherwise described in this Agreement
and except for the transactions and issuances described in Section 7.5(e), as of
the date hereof, there are no outstanding rights, plans, options, warrants,
conversion rights, preemptive rights or agreements for the purchase or
acquisition from eLoyalty of any shares of its capital stock or any of its other
securities. The total number of shares of Common Stock of eLoyalty initially
available for all grants of awards over the term of the eLoyalty 1999 Stock
Incentive Plan (the "Plan"), other than Substitute Options (as defined in the
Plan), is 5,340,000, subject to adjustment as provided in the Plan. As of the
date hereof, there are 4,899,000 shares of Common Stock of eLoyalty reserved for
issuance upon the exercise of outstanding options issued pursuant to the Plan.
eLoyalty has delivered to Purchasers a copy of the form of Stock Option
Agreement which awards options under the Plan.
3.5 Authorization.
(1) All corporate action on the part of eLoyalty, its officers,
directors and stockholders necessary for the execution, performance and delivery
by eLoyalty of this Agreement have been taken or will be taken prior to the
Funding Date. This Agreement is a valid and binding obligation of eLoyalty
enforceable against it in accordance with its terms except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and rules or laws concerning equitable remedies.
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<PAGE> 4
(2) The eLoyalty Shares to be sold on the Funding Date will be validly
issued, fully paid and nonassessable and free of any liens, encumbrances and/or
rights of first refusal imposed by or otherwise operating in favor of eLoyalty
or its affiliates; provided, however, that such eLoyalty Shares will be subject
to the restrictions set forth in this Agreement.
3.6 Financial Statements. eLoyalty has delivered to each Purchaser
unaudited consolidated financial statements (balance sheet and statement of
income) of eLoyalty at December 31, 1998 and for the transition period then
ended and its unaudited consolidated statement of income for the three-month
period ended March 31, 1999 (the "Financial Statements"). Except as set forth
therein, the Financial Statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods indicated and with each other, except that the Financial
Statements do not contain footnotes. The Financial Statements fairly present in
all material respects the financial condition and operating results of the
eLoyalty Business as of the dates, and for the periods, indicated therein,
subject in the case of the interim Financial Statements to normal year-end audit
adjustments. Except as set forth in the Financial Statements, eLoyalty has no
liabilities, contingent or otherwise, required under generally accepted
accounting principles to be reflected in the Financial Statements, other than
(i) liabilities incurred in the ordinary course of business subsequent to
December 31, 1998 and (ii) liabilities which would not reasonably be expected to
have a material adverse effect on the financial condition or results of
operations of the eLoyalty Business. eLoyalty maintains and will continue to
maintain a standard system of accounting established and administered in
accordance with generally accepted accounting principles.
3.7 Absence of Changes. Since March 31, 1999: (a) except in connection
with the transactions contemplated by the Business Transfer, neither Seller has
entered into any transaction with any third party material to the eLoyalty
Business which was not in the ordinary course of business; (b) there has been no
materially adverse change in the financial condition or results of operations of
the eLoyalty Business; (c) there has been no damage to, destruction of or loss
of physical property of the eLoyalty Business (whether or not covered by
insurance) materially adversely affecting the eLoyalty Business; (d) neither
Seller has received notice that there has been a cancellation of an order for
services provided by the eLoyalty Business or a loss of a customer of the
eLoyalty Business, the cancellation or loss of which would reasonably be
expected to materially adversely affect the financial condition or results of
operations of the eLoyalty Business; (e) there has been no labor dispute
involving the eLoyalty Business or its employees, and none is pending or, to
eLoyalty's knowledge, threatened, in each case which would reasonably be
expected to materially adversely affect the financial condition or results of
operations of the eLoyalty Business; and (f) there have been no loans made or
bonuses awarded by the Sellers to employees, officers or directors engaged in
the eLoyalty Business, other than travel advances and other advances made in the
ordinary course of business and bonuses awarded in the ordinary course of
business.
3.8 Tax Returns. The Sellers have, in respect of the eLoyalty Business,
filed all federal and all material state and other tax returns which are
required to be filed by them and have paid all taxes shown on such returns to be
due and payable. Neither Seller has, in respect of the eLoyalty Business, been
advised that any of its returns, whether federal, state or other, have been or
are being audited as of the date hereof.
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<PAGE> 5
3.9 Title to Properties and Assets; Liens, etc. TSC has, and on the
Funding Date eLoyalty will have, good and marketable title to the properties and
assets reflected in the Financial Statements (except properties and assets
disposed of since the date of the Financial Statements at fair market value in
the ordinary course of business) as being owned by such party and, with respect
to the eLoyalty Business, good title to all its leasehold estates, in each case
subject to no mortgage, pledge, lien, encumbrance or charge, other than or
resulting from taxes which have not yet become delinquent and minor liens and
encumbrances which do not in any case or in the aggregate materially detract
from the value of the property of the eLoyalty Business taken as a whole or
materially impair the operations of the eLoyalty Business and which have not
arisen otherwise than in the ordinary course of business. On the Funding Date,
eLoyalty will have sufficient title and ownership to, or sufficient rights to
use, all of the material assets necessary to conduct the eLoyalty Business
substantially as conducted as of the date hereof.
3.10 Outstanding Indebtedness. Except as disclosed in the Financial
Statements, neither Seller has, in respect of the eLoyalty Business,
indebtedness to any third party for borrowed money which either Seller has
directly or indirectly created, incurred, assumed or guaranteed, or with respect
to which eLoyalty has otherwise become directly or indirectly liable.
3.11 Patents, Trademarks, etc. TSC has, and on the Funding Date
eLoyalty will have, sufficient title and ownership of or valid licenses to all
patents, trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights and processes necessary for the eLoyalty
Business as now conducted, and neither Seller is aware of any conflict with or
infringement of the rights of others. Neither Seller has received any
communications alleging, and neither Seller is aware, that the eLoyalty Business
has violated or, by conducting the eLoyalty Business as proposed, would violate,
any of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity.
3.12 Compliance with Other Instruments. eLoyalty is not in violation of
any term of its Certificate of Incorporation or By-Laws as heretofore amended.
Neither Seller is, in respect of the eLoyalty Business, in violation in any
material respect of any mortgage, indenture, contract, agreement, instrument,
judgment, decree, order, statute, rule or regulation applicable to it or by
which it is bound or to which its properties are subject (collectively, "Seller
Legal Requirements"), which violation or violations, individually or in the
aggregate, would reasonably be expected to have a material adverse effect on the
financial condition or results of operations of the eLoyalty Business. The
execution, delivery and performance of and compliance with this Agreement and
the transactions contemplated hereby will not result in any violation of, will
not be in conflict with, will not constitute an event that, with the lapse of
time or action by a third party, will result in a default under, any of the
Seller Legal Requirements, and will not result in the creation of any lien or
encumbrance upon any of the properties or assets of the eLoyalty Business,
except in connection with the transactions contemplated by the Business Transfer
and except for such violations, conflicts, events, liens or encumbrances which,
individually or in the aggregate, would not reasonably be expected to have a
material adverse effect on the financial condition or the results of operations
of the eLoyalty Business.
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<PAGE> 6
3.13 Employees. To eLoyalty's knowledge, none of the officers or
employees engaged primarily in the eLoyalty Business is obligated under any
contract or commitment of any nature or subject to any judgment, decree, order
or claim of any court, administrative agency, person or entity which would
conflict with any obligation of any such officer or employee to use his or her
best efforts to promote the interests of the eLoyalty Business. To eLoyalty's
knowledge, conducting the eLoyalty business as currently contemplated will not
conflict with or result in a breach of the terms, conditions or provisions of or
constitute a default under any material contract, covenant or instrument under
which any of such officers or employees is now obligated or any legal obligation
applicable to them.
3.14 Litigation, etc.. There are no actions, proceedings or
investigations pending or, to eLoyalty's knowledge, threatened against the
Sellers in respect of the eLoyalty Business which, either in any case or in the
aggregate, would reasonably be expected to result in any material adverse change
in the financial condition or results of operations of the eLoyalty Business or
in any material impairment of the right or ability of the Sellers to carry on
the eLoyalty Business as now conducted or as proposed to be conducted, and none
which questions the validity of this Agreement or any action taken or to be
taken in connection herewith. Neither Seller, in respect of the eLoyalty
Business, is a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality.
3.15 Material Contracts and Commitments. The Disclosure Letter sets
forth as of the date hereof a true and complete list, in respect of the eLoyalty
Business, of all (i) written or oral contracts to which either Seller is a party
or otherwise bound requiring future annual expenditures by either Seller to
vendors of more than Two Hundred Fifty Thousand Dollars ($250,000), (ii)
employment, consulting or agency contracts not terminable without penalty upon
notice of ninety (90) days or less and (iii) bonus, deferred compensation,
profit sharing, pension, retirement, stock option, stock purchase or other
similar plans or arrangements (the "Material Contracts"). eLoyalty has delivered
to counsel for the Purchasers true and complete copies of all of the written
Material Contracts set forth in the Disclosure Letter requested in writing by
counsel for the Purchasers. All of the Material Contracts are valid, binding and
in full force and effect in all material respects. Neither Seller is in material
default under any of such Material Contracts. To eLoyalty's knowledge, no other
party to any of the Material Contracts is in material default thereunder.
3.16 Governmental Consent, etc. No consent, approval or authorization
of, or designation, declaration or filing with, any governmental authority on
the part of the Sellers is required in connection with the valid execution and
delivery of this Agreement or the performance of the Sellers' obligations
hereunder.
3.17 Insurance. In the reasonable judgment of eLoyalty, TSC maintains,
and on the Funding Date eLoyalty will maintain, (a) insurance on all assets and
activities of the eLoyalty Business covering property damage and loss of income
by fire or other casualty that is adequate in light of the business and risks of
the eLoyalty Business, (b) insurance protection against all other claims and
risks that is reasonable in light of the business and risks of the eLoyalty
Business and (c) directors' and officers' insurance that is reasonable in light
of the business and risks of the eLoyalty Business.
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<PAGE> 7
3.18 Certain Transactions. Neither Seller, in respect of the eLoyalty
Business, is indebted, either directly or indirectly, to any of its officers,
directors or stockholders or to their respective spouses or children
(collectively "Affiliated Parties"), in any amount in excess of $100,000 other
than for payment of salary for services rendered and reasonable expenses; and
none of such Affiliated Parties are indebted to either Seller in an amount in
excess of $100,000. No Affiliated Party has any direct or indirect ownership
interest in any firm or corporation with which either Seller has a business
relationship which is material to the eLoyalty Business or, to the knowledge of
eLoyalty, any firm or corporation which competes with the eLoyalty Business. To
eLoyalty's knowledge, no Affiliated Party is, directly or indirectly, interested
in any third-party contract with either Seller which is material to the eLoyalty
Business.
3.19 Offering. Subject in part to the truth and accuracy of each
Purchaser's representations set forth in Section 5 of this Agreement, the offer,
sale and issuance of the eLoyalty Shares as contemplated by this Agreement are
exempt from the registration requirements of any applicable state and federal
securities laws, and neither eLoyalty nor any authorized agent acting on its
behalf will take any action hereafter that would cause the loss of such
exemption.
3.20 Information. Sellers have provided each Purchaser with all the
information that such Purchaser has requested in writing for deciding whether to
purchase the eLoyalty Shares.
3.21 Registration Rights. eLoyalty has not granted or agreed to grant
any registration rights, including piggyback rights, to any person or entity.
3.22 Minute Books. The minute books of eLoyalty contain a complete
summary of all meetings of directors and stockholders since the time of
incorporation and reflect all transactions referred to in such minutes
accurately in all material respects. eLoyalty has delivered a true and complete
copy of the minute books to counsel for the Purchasers to the extent requested
in writing.
3.23 Labor Agreements and Actions. Neither Seller in respect of the
eLoyalty Business is bound by or subject to (and none of its assets or
properties is bound by or subject to) any written or oral, express or implied,
contract, commitment or arrangement with any labor union, and no labor union has
requested or, to Sellers' knowledge, has sought to represent any of the
employees, representatives or agents of Sellers engaged primarily in the
eLoyalty Business. There is no strike or other labor dispute involving the
eLoyalty Business pending, or to Sellers' knowledge, threatened that would
reasonably be expected to have a material adverse effect on the financial
condition or results of operations of the eLoyalty Business, nor is either
Seller aware of any labor organization activity involving its employees engaged
primarily in the eLoyalty Business.
3.24 Proprietary Information Agreements. To Sellers' knowledge, each
employee at TSC's facility in Austin, Texas has executed a Proprietary
Information Agreement, substantially in the form previously delivered to
Purchasers.
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<PAGE> 8
3.25 Disclosure. As of the date hereof, no representation or warranty
by eLoyalty in this Agreement, after giving effect to the disclosures set forth
in the Disclosure Letter, contains any untrue statement of a material fact or
omits to state a material fact required to be stated herein or therein or
necessary to make such representation or warranty not materially misleading.
3.26 Employee Relations. As of the date hereof, none of the individuals
set forth in the Disclosure Letter shall have resigned.
3.27 Employee Benefit Plans. As of the date hereof, eLoyalty does not
have any "Employee Benefit Plan," as defined in the Employee Retirement Income
Security Act of 1974, as amended, to which employees engaged primarily in the
eLoyalty Business are entitled to receive benefits.
4. Representations and Warranties of TSC. TSC represents and warrants to
and agrees with the Purchasers as set forth in this Section 4. The
representations and warranties of TSC shall be subject to the Disclosure Letter.
The aggregate liability of TSC for the breach of any representation or warranty
of TSC in this Section 4 shall be limited to the gross sales price of the TSC
Shares sold to the Purchasers by TSC.
4.1 Authority.
(1) TSC has all requisite corporate power to enter into this Agreement
and the TSC Registration Rights Agreement and to carry out and perform its
obligations under the terms of this Agreement and the TSC Registration Rights
Agreement.
(2) Each of this Agreement and the TSC Registration Rights Agreement
has been duly and validly authorized by TSC and duly executed and delivered by
TSC and constitutes a valid and binding obligation of TSC enforceable in
accordance with its terms, except in each case as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting enforcement of creditors' rights and rules
or laws concerning equitable remedies and except, in the case of the TSC
Registration Rights Agreement, as limited by principles of public policy.
(3) The TSC Shares to be sold on the date hereof will be validly
issued, fully paid and nonassessable and free of any liens, encumbrances and/or
rights of first refusal imposed by or otherwise operating in favor of TSC or its
affiliates; provided, however, that such TSC Shares will be subject to the
restrictions set forth in this Agreement.
4.2 Conflicts. TSC's compliance with its obligations hereunder and
under the TSC Registration Rights Agreement will not violate, conflict with or
constitute a breach of any agreement, arrangement, commitment or understanding
to which it is a party or by which it is bound.
4.3 Consents. No consent, approval or authorization of, or designation,
declaration or filing with, any governmental authority or agency is required on
the part of TSC in connection with the valid execution and delivery of this
Agreement or the TSC Registration Rights
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<PAGE> 9
Agreement or the offer and sale of the TSC Shares by it, except such consents,
approvals or authorizations as have already been obtained or made.
4.4 SEC Documents and Other Reports. TSC has filed all required
documents with the Securities and Exchange Commission (the "SEC") since January
1, 1998 (the "SEC Documents"). As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Securities Act of
1933, as amended (the "Securities Act"), or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as the case may be, and, at the respective
times they were filed, none of the SEC Documents contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements (including, in each case, any notes thereto) of TSC
included in the SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, were prepared in accordance with generally
accepted accounting principles (except, in the case of the unaudited statements,
as permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated therein or in the notes thereto)
and fairly presented in all material respects the consolidated financial
position of TSC and its consolidated subsidiaries as at the respective dates
thereof and the consolidated results of their operations and their consolidated
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments and to any other adjustments
described therein).
4.5 Absence of Certain Changes or Events. Except as disclosed in SEC
Documents filed with the SEC prior to the date of this Agreement, since December
31, 1998, (A) TSC and its subsidiaries have not incurred any liability or
obligation (indirect, direct or contingent) that would reasonably be expected to
result in a material adverse effect on the financial condition or results of
operations of TSC and its subsidiaries taken as a whole, (B) TSC and its
subsidiaries have not sustained any loss or interference with their business or
properties from fire, flood, windstorm, accident or other calamity (whether or
not covered by insurance) that has had a material adverse effect on the
financial condition or results of operations of TSC and its subsidiaries taken
as a whole and (C) there has been no material adverse change with respect to the
financial condition or results of operations of TSC and its subsidiaries taken
as a whole.
4.6 Litigation. There are no actions, proceedings or investigations
pending or, to TSC's knowledge, threatened against TSC which, either in any case
or in the aggregate, would reasonably be expected to result in any material
adverse change in the financial condition or results of operations of TSC and
its subsidiaries taken as a whole.
4.7 Disclosure. As of the date hereof, no representation or warranty by
TSC in this Agreement, after giving effect to the disclosures set forth in the
Disclosure Letter and the SEC Documents, contains any untrue statement of a
material fact or omits to state a material fact required to be stated herein or
therein or necessary to make such representation or warranty not materially
misleading.
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4.8 Options. As of the distribution to stockholders of TSC of the
Common Stock of eLoyalty held by TSC (the "Spin-Off"), the number of shares of
TSC Common Stock subject to options which will be converted into options to
purchase shares of eLoyalty Common Stock will not exceed 8,400,145, subject to
adjustment for any stock split, stock dividend, recapitalization,
reorganization, merger, consolidation, combination, exchange of shares,
liquidation, spin-off or other similar change in capitalization or event
involving TSC Common Stock, or any distribution to holders of TSC Common Stock
other than a regular cash dividend.
5. Representations and Warranties of the Purchasers and Restrictions on
Transfer Imposed by the Securities Act of 1933.
5.1 Representations and Warranties by Each Purchaser. Each Purchaser
understands that the Shares have not been and, except pursuant to the TSC
Registration Rights Agreement (as defined below), will not be registered under
the Securities Act, or the securities laws of any state, and that they are being
sold to the Purchasers pursuant to an exemption from registration or
qualification, as applicable, contained in the Securities Act or said state
securities laws, based in part upon the representations of the Purchasers
contained herein. Each Purchaser hereby severally represents and warrants to and
agrees with the Sellers as follows:
(1) Such Purchaser has received a copy of the Financial Statements and
the SEC Documents and has carefully reviewed the Financial Statements, the SEC
Documents and this Agreement. All matters relating to the Financial Statements,
the SEC Documents and this Agreement have been discussed with such Purchaser and
explained to such Purchaser's satisfaction by the Sellers, the management of the
Sellers or persons acting on their behalf. Such Purchaser understands that this
investment involves substantial risks and has independently examined and
investigated the Sellers in making its decision to acquire the Shares. Such
Purchaser or its representative has made inquiry deemed by it to be satisfactory
concerning each Seller, its business and services, its officers and its
personnel. The officers, directors, stockholders, employees and agents of each
Seller have made available to such Purchaser or its representative any and all
requested written information.
(2) Such Purchaser is able to bear the economic risk of the investment
contemplated by this Agreement. Such Purchaser understands that the Purchaser
must bear the economic risk of this investment indefinitely unless the Shares
are registered pursuant to the Securities Act, or an exemption from such
registration is available. Such Purchaser is acquiring the Shares for such
Purchaser's own account for investment and not with a view toward the
distribution thereof.
(3) Such Purchaser is duly organized, validly existing and in good
standing, if applicable, under the laws of the jurisdiction of its formation.
Such Purchaser has all requisite power to execute and deliver this Agreement and
to perform its obligations under this Agreement. This Agreement has been duly
and validly authorized by such Purchaser, duly executed and delivered by the
Purchaser or an authorized representative of such Purchaser and constitutes a
valid, legal and binding obligation of such Purchaser, enforceable in accordance
with its terms, except as such enforceability is limited by applicable
insolvency and other laws affecting creditors' rights generally, and by the
availability of equitable remedies. The execution and delivery of this Agreement
by such
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Purchaser, the performance by such Purchaser of its obligations under this
Agreement and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms or provisions of the charter
or bylaws, as amended, of the Purchaser or other documents, as amended, pursuant
to which it was formed, as the case may be, or any statute, rule, regulation or
order of any court or governmental agency or body having jurisdiction over such
Purchaser or any of its property, or in any material respect, any mortgage,
indenture, contract, agreement or instrument to which such Purchaser is a party
or to which the Purchaser is otherwise subject.
(4) Such Purchaser is an "accredited investor" as such term is defined
in Rule 501(a) of Regulation D promulgated under the Securities Act and/or is a
partnership composed solely of partners of such Purchaser, each of whom: (i) is
an accredited investor and/or (ii) has responsibility for evaluating the
investment in the Shares by such Purchaser, with an adequate net worth and means
of providing for his current needs and possible personal contingencies to
sustain a complete loss of the partnership's investment in the Shares.
(5) Such Purchaser was not organized for the specific purpose of
acquiring the TSC Shares or the eLoyalty Shares.
(f) In the case of each Purchaser (other than Sutter Hill Ventures),
such Purchaser's sole general partner is Technology Crossover Management III,
L.L.C.
5.2 Legends. (a) Each certificate representing the Shares may be
endorsed with legends in substantially the following forms:
(1) THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND ARE
"RESTRICTED SECURITIES" AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT.
THE SECURITIES MAY NOT BE DISPOSED OF, WHETHER BY SALE, ASSIGNMENT,
TRANSFER, MORTGAGE, PLEDGE, ENCUMBRANCE OR OTHERWISE, UNLESS SUCH
DISPOSITION IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SHARES UNDER THE ACT OR ANY APPLICABLE STATE "BLUE SKY" OR SECURITIES LAWS,
OR PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY IN FORM AND SUBSTANCE TO
COUNSEL FOR THE CORPORATION THAT SUCH DISPOSITION DOES NOT REQUIRE
REGISTRATION UNDER THE ACT OR APPLICABLE BLUE SKY OR SECURITIES LAWS OR
UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT.
(2) Any other legends required by applicable state securities laws.
(b) Neither Seller need register a transfer of any Shares, and may also
instruct its transfer agent not to register the transfer of the Shares, unless
the applicable conditions for transfer are satisfied.
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5.3 Removal of Legend and Transfer Restrictions. Any legend endorsed on
a certificate pursuant to Section 5.2(a)(i) and the stop transfer instructions
with respect to such Shares shall be removed, and the applicable Seller shall
issue a certificate without such legend to the holder thereof, if such Shares
are registered under the Securities Act and a prospectus meeting the
requirements of Section 10 of the Securities Act is available, or if such legend
may be properly removed under the terms of Rule 144 promulgated under the
Securities Act, or if such holder provides the applicable Seller with an opinion
of counsel for such holder reasonably satisfactory to legal counsel for the
applicable Seller, to the effect that such Shares may be sold, transferred or
assigned without registration.
6. Conditions.
6.1 Conditions to the Obligations of the Purchasers. (a) Each
Purchaser's obligation to purchase TSC Shares is subject to the fulfillment on
or prior to the date hereof of the conditions set forth in this Section 6.1(a).
(1) The representations and warranties made by TSC in Section 4, when
read together with the Disclosure Letter, shall be true and correct in all
material respects when made.
(2) The TSC Shares shall have been approved for listing on NASDAQ.
(3) TSC shall have entered into a Registration Rights Agreement,
substantially in the form of Exhibit C (the "TSC Registration Rights
Agreement").
(4) Purchasers shall have received an opinion of Sidley & Austin
substantially in the form attached to Exhibit D-1.
(v) Purchasers shall have received a copy of TSC's Restated Certificate
of Incorporation certified as of a recent date by the Secretary of State of
the State of Delaware.
(vi) Purchasers shall have received a certificate of good standing
issued as of a recent date by the Secretary of State of the State of
Delaware and the Secretary of State of the State of Illinois.
(vii) Purchasers shall have received a certificate of the secretary of
TSC, dated as of a recent date, as to (i) no amendments to the Restated
Certificate of Incorporation of TSC since a specified date, (ii) the By-laws
of TSC, (iii) the resolutions adopted by the Board of Directors of TSC
authorizing the execution and performance of this Agreement and the
transactions contemplated hereby and (iv) incumbency and signatures of the
officers of TSC executing this Agreement and any ancillary agreement.
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Notwithstanding the failure of any one or more of the
foregoing conditions, each Purchaser may proceed with the purchase of the TSC
Shares without satisfaction, in whole or in part, of any one or more of such
conditions and without written waiver. To the extent that on or prior to the
execution of this Agreement TSC delivers to Purchasers a written notice
specifying in reasonable detail the failure of any of such conditions or the
breach by TSC of any of the representations or warranties of TSC herein, and
nevertheless such Purchaser proceeds with the purchase of the TSC Shares, such
Purchaser shall be deemed to have waived for all purposes any rights or remedies
it may have against the Sellers by reason of the failure of any such conditions
or the breach of any such representations or warranties to the extent described
in such notice.
(b) Each Purchaser's obligation to purchase eLoyalty Shares is
subject to the fulfillment on or prior to the Funding Date of the conditions set
forth in this Section 6.1(b), any of which may be waived by such Purchaser.
(i) Each of the representations and warranties of the Sellers
contained in Section 3 that is qualified by materiality, when read
together with the Disclosure Letter as of the date hereof, shall be
true and correct on and as of the Funding Date as if made on and as of
such date (other than representations and warranties which address
matters only as of a certain date which shall be true and correct as of
such certain date), and each of the representations and warranties that
is not so qualified, when read together with the Disclosure Letter as
of the date hereof, shall be true and correct in all material respects
on and as of the Funding Date as if made on and as of such date (other
than representations and warranties which address matters only as of a
certain date which shall be true and correct in all material respects
as of such certain date), in each case except as contemplated or
permitted by this Agreement.
(ii) eLoyalty shall have performed in all material respects
all obligations and conditions herein required to be performed or
observed by it on or prior to the Funding Date.
(iii) TSC shall have received a ruling (the "Revenue Ruling")
from the Internal Revenue Service that the Spin-Off qualifies as a
tax-free distribution under Section 355 of the Internal Revenue Code of
1986, as amended.
(iv) eLoyalty shall have sufficient title and ownership to, or
sufficient rights to use, all of the material assets necessary to
conduct the eLoyalty Business substantially as conducted as of the date
hereof and as of the Funding Date.
(v) TSC shall have completed the Business Transfer, including,
without limitation, the transfer to eLoyalty of the assets described in
Exhibit B-2.
(vi) eLoyalty shall have obtained any and all consents
(including all governmental or regulatory consents, approvals or
authorizations required in connection with the valid execution and
delivery of this Agreement), permits and waivers necessary for
consummation of the transactions contemplated by this
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Agreement, except for such consents, permits and waivers which the
failure to obtain would not reasonably be expected to have a material
adverse effect on the financial condition or results of operation of the
eLoyalty Business.
(vii) No injunction or restraining order shall have been issued by any
court of competent jurisdiction and be in effect which restrains or
prohibits any material transaction contemplated hereby.
(viii) eLoyalty shall have delivered to the Purchasers a certificate,
executed by the President or any Vice President of eLoyalty, dated the
Funding Date, certifying to the fulfillment by eLoyalty of the conditions
specified in subsections (i), (ii) and (iv) of this Section 6.1(b).
(ix) Notwithstanding any other provision of this Agreement, including,
without limitation, Exhibit B-2, between the date hereof and the Funding
Date, there shall not have been any material adverse change (including,
without limitation, taking into account the terms of the Business Transfer)
in the financial condition, results of operations or prospects of the
eLoyalty Business.
(x) Purchasers shall have received opinions of Sidley & Austin and
counsel to TSC in substantially the forms attached as Exhibit D-2.
(xi) Purchasers shall have received a copy of the audited consolidated
financial statements of eLoyalty as of December 31, 1998 and for the period
then ended, and there shall not have been any material adverse change from
the Financial Statements delivered by eLoyalty pursuant to Section 3.6.
(xii) Purchasers shall have received a copy of eLoyalty's Certificate
of Incorporation, as amended, certified as of a recent date by the
Secretary of State of the State of Delaware.
(xiii) Purchasers shall have received a certificate of good standing
issued as of a recent date by the Secretary of State of the State of
Delaware.
(xiv) Purchasers shall have received a certificate of the secretary of
eLoyalty, dated as of a recent date, as to (i) no amendments to the
Certificate of Incorporation of eLoyalty since a specified date, (ii) the
By-laws of eLoyalty, (iii) the resolutions adopted by the Board of
Directors of eLoyalty authorizing the execution and performance of this
Agreement and the transactions contemplated hereby and (iv) incumbency and
signatures of the officers of eLoyalty executing this Agreement and any
ancillary agreement.
(xv) Purchasers shall have received a schedule of assets owned by or to
be contributed to eLoyalty in substantially final form at least 2 business
days prior to the Funding Date.
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(xvi) Kelly D. Conway shall not have resigned from eLoyalty.
Notwithstanding the failure of any one or more of the foregoing
conditions, each Purchaser may proceed with the purchase of the eLoyalty Shares
without satisfaction, in whole or in part, of any one or more of such conditions
and without written waiver. To the extent that on or prior to the Funding Date
eLoyalty delivers to Purchasers a written notice specifying in reasonable detail
the failure of any of such conditions or the breach by eLoyalty of any of the
representations or warranties of eLoyalty herein, and nevertheless such
Purchaser proceeds with the purchase of the eLoyalty Shares, such Purchaser
shall be deemed to have waived for all purposes any rights or remedies it may
have against the Sellers by reason of the failure of any such conditions or the
breach of any such representations or warranties to the extent described in such
notice.
6.2 Conditions to the Obligations of eLoyalty. The obligation of
eLoyalty to sell the eLoyalty Shares and the obligations of eLoyalty to comply
with the other covenants and agreements set forth herein are subject to the
fulfillment on or prior to the Funding Date of the following conditions, any of
which may be waived by eLoyalty.
(1) The representations and warranties made by each Purchaser shall be
true and correct in all material respects on the Funding Date with the same
force and effect as if they had been made on and as of said date; and each such
Purchaser shall have performed or observed in all material respects all
obligations and conditions herein required to be performed or observed by it on
or prior to the Funding Date.
(b) TSC shall have received the Revenue Ruling.
(c) The conditions set forth in subsections (vi) and (vii) of Section
6.1(b) shall have been fulfilled.
Notwithstanding the failure of any one or more of the foregoing
conditions, eLoyalty may proceed with the sale of the eLoyalty Shares without
satisfaction, in whole or in part, of any one or more of such conditions and
without written waiver. To the extent that on or prior to the Funding Date a
Purchaser delivers to eLoyalty a written notice specifying in reasonable detail
the failure of any of such conditions or the breach by such Purchaser of any of
the representations or warranties of such Purchaser herein, and nevertheless
eLoyalty proceeds with the sale of the eLoyalty Shares, eLoyalty shall be deemed
to have waived for all purposes any rights or remedies it may have against such
Purchaser by reason of the failure of any such conditions or the breach of any
such representations or warranties to the extent described in such notice.
7. Affirmative Covenants of eLoyalty. eLoyalty hereby covenants and
agrees as follows:
7.1 Basic Financial Information. From and after the Funding Date,
eLoyalty will furnish to each Purchaser, as soon as practicable after the end of
each fiscal year, and in any event within ninety (90) days thereafter,
consolidated balance sheets of eLoyalty and its subsidiaries, if any, as at the
end of such fiscal year and consolidated statements of income and surplus and
consolidated statements of cash flows of eLoyalty and its subsidiaries, if any,
for such year, prepared in accordance
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with generally accepted accounting principles and setting forth in each case in
comparative form the figures for the previous fiscal year, all in reasonable
detail, and certified by independent public accountants of recognized national
standing selected by eLoyalty.
7.2 Additional Financial and Other Information. From and after the
Funding Date, eLoyalty will deliver the financial and other information
hereafter described in this Section 7.2 to each Purchaser.
(1) As soon as available and in any event within forty-five (45) days
after the close of each fiscal quarter (other than at the end of a fiscal year),
quarterly unaudited financial statements of eLoyalty, including a balance sheet,
profit and loss statement, cash flow analysis, and comparison to year earlier
results and to projected results.
(2) As soon as practicable after the adoption or approval by eLoyalty's
Board of Directors, an annual plan for each fiscal year which shall include
monthly capital and operating expense budgets, cash flow statements, projected
balance sheets and profit and loss projections for each such month and for the
end of the year, itemized in such detail as the Board of Directors may
reasonably determine.
7.3 Board of Directors. From and after the Funding Date (and, in any
event, prior to the earlier to occur of eLoyalty's sale of Common Stock pursuant
to a firm commitment underwritten offering upon an effective registration
statement under the Securities Act (an "IPO") or the Spin-Off), eLoyalty shall
exert its best efforts to cause a nominee of each of Technology Crossover
Ventures and Sutter Hill Ventures to be nominated, elected and maintained as a
member of eLoyalty's Board of Directors. TSC agrees to vote its shares of Common
Stock of eLoyalty in favor of such nominees.
7.4 Employee Stock Issuances. eLoyalty shall issue shares of its
capital stock or grant options to purchase shares of its capital stock pursuant
to the Plan providing for the issuance of stock in the manner and subject to the
terms and conditions outlined in Exhibit E or upon issuance of options which are
substituted for options to purchase shares of TSC Common Stock. eLoyalty agrees
not to amend Sections 1.5 or 2.4 of the Plan to increase the number of shares of
Common Stock of eLoyalty available for issuance under the Plan.
7.5 Preemptive Rights.
(1) If, at any time after the Funding Date and prior to the termination
of these preemptive rights pursuant to Section 7.9, eLoyalty should enter into
an agreement to issue, in a transaction not registered under the Securities Act
in reliance upon a claimed exemption thereunder, any Equity Securities (as
hereinafter defined), it shall give each Purchaser the right to purchase a pro
rata portion of such privately offered Equity Securities on the same terms as
eLoyalty is willing to sell such Equity Securities to any other person. A
Purchaser's pro rata share, for purposes of this Section 7.5, is the number of
whole shares obtained by multiplying the proposed number of new Equity
Securities by a fraction, the numerator of which is the number of shares of
Common Stock of eLoyalty held by such Purchaser, and the denominator of which is
the total number of issued and
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outstanding shares of Common Stock of eLoyalty as of the date of the written
notice pursuant to subsection (b) below (assuming full exercise of all
outstanding options and conversion of all outstanding Preferred Stock). The
intention of this Section 7.5 is to provide Purchasers with an opportunity to
purchase their pro rata share of any proposed issuance of Equity Securities so
as to avoid dilution and maintain each Purchaser's respective percentage
ownership interest in eLoyalty.
(2) Prior to any sale or issuance by eLoyalty of any Equity Securities
subject to preemptive rights as described in this Section 7.5, eLoyalty shall
notify the Purchasers in writing of its intention to sell and issue such
securities, setting forth the terms under which it proposes to make such sale.
Within twenty (20) business days after receipt of such notice, each Purchaser
shall notify eLoyalty whether the Purchaser desires to exercise the option to
purchase all or any part of such Purchaser's pro rata share of the Equity
Securities so offered. If a Purchaser elects not to purchase its pro rata share,
such amount may be purchased by those Purchasers electing to purchase their pro
rata share of the Equity Securities.
(3) After termination of the twenty (20) day period specified in
subsection (b) above, eLoyalty may, during a period of ninety (90) days
following the end of such twenty (20) day period, sell and issue (or enter into
an agreement to sell and issue) such Equity Securities as to which the
Purchasers do not exercise their option to purchase, to another person upon the
same terms and conditions as those set forth in the notice to the Purchasers. In
the event eLoyalty has not sold the Equity Securities within said ninety (90)
day period, eLoyalty shall not thereafter issue or sell any Equity Securities
without again offering such securities to the Purchasers in the manner provided
above.
(4) If any Purchaser exercises its option to purchase any of the Equity
Securities offered by eLoyalty, payment for the Equity Securities shall be by
wire transfer, against delivery of the Equity Securities at the executive
offices of eLoyalty at the closing of such transaction. eLoyalty and such
Purchasers shall take all such reasonable actions as may be required by any
regulatory authority in connection with the exercise by the Purchasers of the
right to purchase Equity Securities as set forth in this Section 7.5.
(5) For purposes of this Agreement, the term "Equity Securities" shall
mean (i) Common Stock, rights, options or warrants to purchase Common Stock,
(ii) any security other than Common Stock having voting rights in the election
of the Board of Directors, not contingent upon a failure to pay dividends, (iii)
any security convertible into or exchangeable for any of the foregoing, or (iv)
any agreement or commitment to issue any of the foregoing, other than (1) the
issuance of shares of Common Stock in an IPO, (2) options to purchase shares of
Common Stock granted pursuant to the Plan and any issuance of shares of Common
Stock pursuant to such options, (3) options to purchase shares of Common Stock
which are substituted for options to purchase shares of TSC Common Stock and any
issuances of Common Stock pursuant to such options and (4) preferred stock
purchase rights in connection with a stockholders rights plan.
7.6 Confidentiality of Information. Each Purchaser agrees that all
information obtained by such Purchaser pursuant to Sections 7.1 and 7.2 shall be
deemed proprietary and confidential to eLoyalty and will not be disclosed to any
person or entity, or used other than in
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connection with the evaluation of its investment in eLoyalty, without the prior
written consent of eLoyalty; provided, however, that notwithstanding the
foregoing, each Purchaser may disclose such information without the prior
written consent of eLoyalty to its partners, associates or employees to the
extent required in order to evaluate this investment and as may be necessary to
continue to evaluate eLoyalty, it being understood that each Purchaser shall be
responsible for any breach of this Section 7.6 by its partners, associates and
employees. Each Purchaser further agrees that it will require any transferee of
its eLoyalty Shares to agree to become subject to the confidentiality
obligations of the transferring Purchaser hereunder. At the request of eLoyalty,
any Purchaser or any transferee of a Purchaser who receives information with
respect to the terms and conditions of any proposed offering pursuant to Section
7.5 or Section 7.8 or in any negotiations with eLoyalty of any private placement
shall maintain the confidentiality of such information and shall not disclose
such information to any party with whom eLoyalty is negotiating the proposed
offering or any other offering of its securities or with whom eLoyalty may
negotiate any other offering of its securities.
7.7 Management Rights Agreement. eLoyalty shall execute a management
rights letter with TCV III (Q), L.P. ("TCV"), the form of which is attached
hereto as Exhibit F, pursuant to which a TCV representative shall have the right
to attend all meetings of the eLoyalty Board of Directors in a non-voting
advisory capacity, shall be entitled to consult with and advise management of
eLoyalty on significant business issues and shall have the right to examine
eLoyalty company records.
7.8 Issuance of Equity Securities. eLoyalty covenants that, from and
after the date hereof (except as otherwise provided herein or unless Purchasers
have given their prior written consent, which consent shall not be unreasonably
withheld and which consent shall be deemed granted if Purchasers have not
delivered a written notice of objection to eLoyalty within ten (10) business
days of Purchasers' receipt of written notice of a proposed issuance of Equity
Securities), it shall not issue Equity Securities to any person, other than the
issuance of shares of eLoyalty Common Stock to TSC on or prior to the Funding
Date.
7.9 Termination of Covenants. Notwithstanding anything contained herein
to the contrary, the covenants set forth in Sections 7.1, 7.2, 7.3, 7.4, 7.5,
7.7 and 7.8 shall terminate and be of no further force and effect upon the
earlier to occur of (i) the closing of the IPO and (ii) the closing of the
Spin-Off.
8. Additional Agreements.
8.1 Indemnification; Reimbursement. Prior to the Funding Date, eLoyalty
will enter into indemnification agreements in customary form with its directors
and will amend its Certificate of Incorporation to provide for indemnification
of directors to the maximum extent permitted by law. eLoyalty will reimburse all
non-employee directors for their reasonable expenses to attend Board meetings.
8.2 IPO Lockup; Cooperation. In connection with the IPO, the Purchasers
agree to enter into a lockup agreement with the underwriters containing
customary terms and conditions and restricting sales of Common Stock of eLoyalty
for a period of up to 180 days following the IPO
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(provided (i) directors and officers of eLoyalty agree to the same lockup and
(ii) such agreement shall provide that any discretionary waiver or termination
of the restrictions of such agreements by eLoyalty or representatives of the
underwriters shall apply to all persons subject to such agreements pro rata
based on the number of shares subject to such agreements). Notwithstanding the
foregoing, shares of Common Stock of eLoyalty purchased by a Purchaser in or
following the IPO are specifically excluded from the lockup restrictions
contained in this Section 8.2. In addition, the Purchasers agree to cooperate
with the Sellers and to take such actions as may be reasonably requested by the
Sellers (including furnishing any necessary information) in order to facilitate
the IPO and the Spin-Off. eLoyalty agrees to provide Purchasers with five days
advance written notice prior to its initial filing of a Registration Statement
on Form S-1 with respect to an IPO.
8.3 Put Right. (a) If, prior to the first anniversary of the date of
this Agreement, eLoyalty has not closed an IPO or the Spin-Off, each Purchaser
may, by written notice to eLoyalty (the "Put Notice"), elect to sell all of its
eLoyalty Shares to eLoyalty at a date specified in the Put Notice, which date
shall be not less than 30 nor more than 60 days after the date the Put Notice is
delivered to eLoyalty. Upon delivery of the Put Notice, eLoyalty shall be
obligated to purchase from such Purchaser, and such Purchaser shall be obligated
to sell to eLoyalty, such eLoyalty Shares on such date at a purchase price of $4
per eLoyalty Share as adjusted pursuant to Section 8.4(b) below (the "Put
Price"). Following the closing of the purchase of such Purchaser's eLoyalty
Shares, the Sellers shall have no further liability or obligation whatsoever to
such Purchaser under this Agreement or in connection with the sale of Shares or
otherwise.
(b) If at any time after the Funding Date and prior to the earlier to
occur of the closing of the IPO or the Spin-Off, TSC ceases to own a majority of
the outstanding eLoyalty shares on a fully diluted basis or eLoyalty enters into
an agreement to sell all or substantially all of its assets, each Purchaser may
deliver a Put Notice to eLoyalty. Upon delivery of the Put Notice, eLoyalty
shall be obligated to purchase from such Purchaser, and such Purchaser shall be
obligated to sell to eLoyalty, all of its eLoyalty Shares on the date specified
in the Put Notice at the Put Price (which shall in no event be earlier than the
closing of the proposed transaction). Following the closing of the purchase of
such Purchaser's eLoyalty Shares, the Sellers shall have no further liability or
obligation whatsoever to such Purchaser under this Agreement or in connection
with the sale of Shares or otherwise.
8.4 Adjustment of Number of eLoyalty Shares and Put Right. (a) The
Purchasers acknowledge that the number of eLoyalty Shares being sold pursuant to
this Agreement was calculated based upon the assumption that the aggregate
number of shares of Common Stock of eLoyalty to be owned by TSC on the Funding
Date will be 41,400,000. The number of eLoyalty Shares being sold pursuant to
this Agreement (i.e., initially 2,400,000) and the per share purchase price
(i.e., initially $3.50) shall be adjusted on the Funding Date as follows. The
number of eLoyalty Shares being sold pursuant to this Agreement shall be
adjusted to equal the number of eLoyalty Shares subject to this Agreement
immediately prior to the Funding Date multiplied by the Adjustment Ratio (as
hereinafter defined). The per share purchase price applicable hereto shall be
adjusted to equal the per share price applicable hereto immediately prior to the
Funding Date divided by the Adjustment Ratio and then rounded up to the nearest
cent. Any adjustment that would otherwise result in the purchase of a fraction
of an eLoyalty Share shall be rounded to the nearest whole
-19-
<PAGE> 20
number. As used herein, the term "Adjustment Ratio" shall mean that number,
equal to a fraction, rounded down to the nearest one-millionth, the numerator of
which shall be equal to the number of shares of Common Stock of eLoyalty owned
by TSC on the Funding Date and the denominator of which is 41,400,000.
Notwithstanding the foregoing adjustment to the number of eLoyalty Shares being
sold pursuant to this Agreement, in no event shall the aggregate number of
eLoyalty Shares available for purchase by the Purchasers on the Funding Date
equal less than 4.171% of the Fully Diluted Capitalization of eLoyalty. For
purposes of this Section 8.4, "Fully Diluted Capitalization" means the number of
shares of eLoyalty Common Stock equal to the sum of the following: (i) the
number of shares of eLoyalty Common Stock held by TSC (i.e., assumed to be
41,400,000 shares as of the date hereof); (ii) the number of shares of eLoyalty
Common Stock subject to options that are contemplated to be granted in
connection with the Spin-Off in substitution for options to acquire shares of
TSC Common Stock (i.e., assumed to be 8,400,145 shares as of the date hereof);
(iii) the number of shares of eLoyalty Common Stock (other than those described
in clause (ii)) that are reserved for issuance pursuant to the Plan as of the
date hereof (i.e., assumed to be 5,340,000 shares); and (iv) the number of
shares of eLoyalty Common Stock acquired by the Purchasers pursuant to this
Agreement. For purposes of determining the calculation in clause (ii) above, it
is agreed that the number of shares of TSC Common Stock subject to options which
may be converted into eLoyalty options shall be multiplied by the Adjustment
Ratio in order to obtain the relevant number of shares of eLoyalty Common Stock
subject to options. No adjustment shall be made after the Funding Date if the
actual number of eLoyalty shares under clause (ii) as of the Spin-Off varies
from the assumed number for purposes of this calculation.
(b) In the event of any adjustment pursuant to Section 8.4(a), the
parties agree that the Put Price shall be adjusted to equal $4 divided by the
Adjustment Ratio and then rounded up to the nearest cent.
8.5 Termination. (a) Anything contained in this Agreement to the
contrary notwithstanding, the purchase and sale of the eLoyalty Shares may be
terminated at any time prior to the Funding Date:
(1) by the mutual written consent of the Purchasers and eLoyalty;
(2) by the Purchasers or eLoyalty if TSC shall not have received the
Revenue Ruling on or before December 31, 1999;
(3) by Purchasers or eLoyalty if the Funding Date shall not have
occurred on or before the first anniversary of the date of this Agreement (or
such later date as may be agreed to in writing by Purchasers and eLoyalty); or
(4) by Purchasers in the event of any material breach of Section 1.3(b)
by Sellers and the failure of Sellers to cure such breach within 30 days after
receipt of written notice from Purchasers that such breach be cured.
-20-
<PAGE> 21
(b) Any party desiring to terminate the purchase and sale of
the eLoyalty Shares pursuant to Sections 8.5(a)(ii), 8.5(a)(iii) or 8.5(a)(iv)
shall give written notice of such termination of the other parties to this
Agreement.
(c) In the event that the purchase and sale of the eLoyalty
Shares shall be terminated pursuant to Section 8.5(a), all further obligations
of the parties under this Agreement (other than Section 9.9) shall be terminated
without further liability of any party to the others; provided, however, that if
the purchase and sale of the eLoyalty Shares is terminated pursuant to Section
8.5(a)(iv), TSC shall pay each Purchaser an amount equal to the product of (x)
the number of eLoyalty Shares set forth opposite each Purchaser's name on
Exhibit A and (y) $.50, as liquidated damages (such payment being referred to
herein as the "Termination Fee"). Except for the Termination Fee, Purchasers
will have no other remedy, whether at law or in equity, for any breach by
Sellers of Section 1.3(b). THE PARTIES EXPRESSLY AGREE AND ACKNOWLEDGE THAT
DETERMINING ACTUAL DAMAGES IN THE EVENT OF A BREACH BY SELLERS OF SECTION 1.3(b)
WOULD BE EXTREMELY DIFFICULT OR IMPRACTICABLE TO ASCERTAIN AND THAT THE AMOUNT
SET FORTH ABOVE REPRESENTS THE PARTIES' REASONABLE ESTIMATE OF SUCH DAMAGES. THE
PAYMENT OF THE AMOUNT SET FORTH ABOVE IS NOT INTENDED AS A FORFEITURE OR PENALTY
BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO PURCHASERS.
9. Miscellaneous.
9.1 Waivers and Amendments. With the written consent of the party or
parties entitled to the benefit thereof, any obligation under this Agreement may
be waived (either generally or in a particular instance, either retroactively or
prospectively and either for a specified period of time or indefinitely). In
addition, the Purchasers and eLoyalty may enter into a supplementary agreement
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Agreement relating solely to eLoyalty.
Except as otherwise provided herein, neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated orally, but only by a
statement in writing signed by the party against whom enforcement of the change,
waiver, discharge or termination is sought, except to the extent provided in
this Section 9.1.
9.2 Governing Law. This Agreement shall be governed in all respects by
the laws of the State of Illinois as such laws are applied to agreements between
Illinois residents entered into and to be performed entirely within Illinois.
9.3 Survival. The representations, warranties, covenants and agreements
made herein shall survive the execution of this Agreement and the closing of the
transactions contemplated hereby. Any liability arising out of (i) the
representations and warranties of eLoyalty, TSC and the Purchasers made in
Sections 3, 4 and 5 hereof, respectively, or (ii) any certificate delivered on
behalf of eLoyalty, TSC or the Purchasers pursuant to this Agreement shall
terminate and be extinguished upon the completion of the audits of TSC and
eLoyalty for the period ending December 31, 2001. No party shall have any
liability for any inaccuracy in or breach of any representation or warranty by
such party or for any certificate delivered on behalf of such party pursuant to
this Agreement if such party can demonstrate that the other party or any of its
officers, employees, counsel or other
-21-
<PAGE> 22
representatives had actual knowledge in writing (including without limitation,
by means of electronic transmission) on or before the Funding Date of the facts
as a result of which such representation or warranty was inaccurate or breached.
9.4 Successors and Assigns. The rights and obligations of the parties
hereto may not be assigned or transferred, other than by operation of law,
without the express written consent of eLoyalty, TSC and the Purchasers. Subject
to the foregoing, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors and permitted assigns of the parties hereto.
9.5 Entire Agreement. This Agreement, the exhibits to this Agreement,
the Disclosure Letter and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and thereof.
9.6 Notices, etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be sent by overnight courier
or mailed by certified or registered mail, postage prepaid, return receipt
requested, addressed (a) if to TSC, at 205 North Michigan Avenue, 15th Floor,
Chicago, Illinois 60601, or at such other address as TSC shall have furnished to
the other parties hereto in writing, (b) if to eLoyalty, at 205 North Michigan
Avenue, 15th Floor, Chicago, Illinois 60601, or at such other address as
eLoyalty shall have furnished to the other parties hereto in writing, and (c) if
to a Purchaser, at the address of the Purchaser as set forth in the signature
pages hereto, or at such other address as such Purchaser shall have furnished to
the other parties hereto in writing. Notice shall be effective as of the time
received by the addressee.
9.7 Separability. In case any provision of this Agreement shall be
declared invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
9.8 Finder's Fees.
(1) Each of the Sellers (i) represents and warrants that it has
retained no finder or broker in connection with the transactions contemplated by
this Agreement and (ii) hereby agrees to indemnify and to hold the Purchasers
harmless of and from any liability for any commission or compensation in the
nature of a finder's fee to any broker or other person or firm (and the costs
and expenses of defending against such liability or asserted liability) for
which it, or any of its employees or representatives, are responsible.
(2) Each Purchaser (i) represents and warrants that it has retained no
finder or broker in connection with the transactions contemplated by this
Agreement and (ii) hereby agrees to indemnify and to hold the Sellers harmless
of and from any liability for any commission or compensation in the nature of a
finder's fee to any broker or other person or firm (and the costs and expenses
of defending against such liability or asserted liability) for which it, or any
of its employees or representatives, are responsible.
-22-
<PAGE> 23
9.9 Expenses. TSC, eLoyalty and the Purchasers shall bear their
respective expenses and legal fees incurred with respect to this Agreement and
the transactions contemplated hereby.
9.10 Interpretation. Articles, titles and headings to sections herein
are inserted for convenience of reference only and are not intended to be a part
of or to affect the meaning or interpretation of this Agreement. The Exhibits
and the Disclosure Letter referred to herein shall be construed with and as an
integral part of this Agreement to the same extent as if they were set forth
verbatim herein. Disclosure of any fact or item in the Disclosure Letter
referenced by a particular section in this Agreement shall be deemed to have
been disclosed with respect to every other section in this Agreement. Neither
the specification of any dollar amount in any representation or warranty
contained in this Agreement nor the inclusion of any specific item in the
Disclosure Letter is intended to imply that such amount, or higher or lower
amounts, or the item so included or other items, are or are not material, and no
party shall use the fact of the setting forth of any such amount or the
inclusion of any such item in any dispute or controversy between the parties as
to whether any obligation, item or matter not described herein or included in
the Disclosure Letter is or is not material for purposes of this Agreement.
Unless this Agreement specifically provides otherwise, neither the specification
of any item or matter in any representation or warranty contained in this
Agreement nor the inclusion of any specific item in the Disclosure Letter is
intended to imply that such item or matter, or other items or matters, are or
are not in the ordinary course of business, and no party shall use the fact of
the setting forth or the inclusion of any such item or matter in any dispute or
controversy between the parties as to whether any obligation, item or matter not
described herein or included in the Disclosure Letter is or is not in the
ordinary course of business for purposes of this Agreement. eLoyalty may, from
time to time prior to or on the Funding Date, by notice in accordance with the
terms of this Agreement, supplement or amend the Disclosure Letter, in order to
add information or correct previously supplied information. No such amendment
shall be evidence, in and of itself, that the representations and warranties in
the corresponding section are no longer true and correct in all material
respects. It is specifically agreed that the Disclosure Letter may be amended to
add immaterial, as well as material, items thereto. No such supplement or
amendment shall be deemed to cure any breach for purposes of Section 6.1(b). If,
however, the purchase and sale of the eLoyalty Shares occurs, any such
supplement, amendment or addition will be effective to cure and correct for all
other purposes any breach of any representation, warranty or covenant which
would have existed if eLoyalty had not made such supplement, amendment or
addition, and all references to the Disclosure Letter which is supplemented or
amended as provided in this Section 9.10 shall for all purposes after the
purchase and sale of the eLoyalty Shares be deemed to be a reference to such
Disclosure Letter as so supplemented or amended.
9.11 No Public Announcement. Neither Purchasers, as a party on the one
hand, nor the Sellers, as a party on the other hand, shall, without the approval
of the other, make any press release or other public announcement concerning the
transactions contemplated by this Agreement, except as and to the extent that
any such party shall be so obligated by law, in which case the other party shall
be advised and the parties shall use their reasonable efforts to cause a
mutually agreeable release or announcement to be issued; provided, however, that
the foregoing shall not preclude communications or disclosures necessary to
implement the provisions of this Agreement or to comply with the accounting and
SEC disclosure obligations or the rules of any stock exchange.
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<PAGE> 24
9.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
9.13 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to the Purchasers, upon any breach
or default of the Sellers under this Agreement, shall impair any such right,
power or remedy, nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. It is further agreed that any waiver, permit, consent or approval of
any kind or character on the Purchasers' part of any breach or default under
this Agreement, or any waiver on the Purchasers' part of any provisions or
conditions of this Agreement must be in writing and shall be effective only to
the extent specifically set forth in such writing and that all remedies, either
under this Agreement or by law or otherwise afforded to the Purchasers, shall be
cumulative and not alternative.
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<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
TECHNOLOGY SOLUTIONS COMPANY
a Delaware corporation
By: /s/ William H. Waltrip
---------------------------------
Name: William H. Waltrip
Title: Chairman of the Board
eLOYALTY CORPORATION
a Delaware corporation
By: /s/ Kelly D. Conway
---------------------------------
Name: Kelly D. Conway
Title: President and Chief
Executive Officer
<PAGE> 26
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
INVESTORS:
TCV III (GP)
a Delaware General Partnership
By: Technology Crossover
Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III, L.P.
a Delaware Limited Partnership
By: Technology Crossover
Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III (Q), L.P.
a Delaware Limited Partnership
By: Technology Crossover
Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
<PAGE> 27
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
INVESTORS:
TCV III STRATEGIC PARTNERS, L.P.
a Delaware Limited Partnership
By: Technology Crossover
Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
Mailing Address:
Technology Crossover Ventures
56 Main Street, Suite 210
Millburn, NJ 07041
Attention: Robert C Bensky
Phone: (973) 467-5320
Fax: (973) 467-5323
with a copy to:
Technology Crossover Ventures
575 High Street, Suite 400
Palo Alto, CA 94301
Attention: Jay C. Hoag
Phone: (650) 614-8210
Fax: (650) 614-8222
<PAGE> 28
IN WITNESS WHEREOF, the Issuer and the Investors have caused this
Agreement to be duly executed as of the day and year first above written.
INVESTORS:
SUTTER HILL VENTURES
a California Limited Partnership
By:
Its:
By: /s/ Tench Coxe
------------------------------
Name: Tench Coxe
Title: Managing Director
Mailing Address:
Sutter Hill Ventures
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304
Attention:
Phone: (650) 493-5600
Fax: (650) 858-1854
<PAGE> 29
EXHIBIT A
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NUMBER OF TSC SHARES NUMBER OF ELOYALTY
NAME OF PURCHASER BEING PURCHASED SHARES BEING PURCHASED*
----------------- --------------- -----------------------
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TCV III Strategic Partners, L.P. 10,379 49,817
- --------------------------------------------------------------------------------------------------------------
TCV III (GP) 1,815 8,714
- --------------------------------------------------------------------------------------------------------------
TCV III, L.P. 8,623 41,389
- --------------------------------------------------------------------------------------------------------------
TCV III (Q), L.P. 229,183 1,100,080
- --------------------------------------------------------------------------------------------------------------
Sutter Hill Ventures 250,000 1,200,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Subject to Section 8.4
<PAGE> 1
EXHIBIT 10.4
REGISTRATION RIGHTS AGREEMENT
dated as of August 13, 1999
among
TECHNOLOGY SOLUTIONS COMPANY
and
THE HOLDERS OF REGISTRABLE SECURITIES REFERRED TO HEREIN
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of August 13, 1999 among
Technology Solutions Company, a Delaware corporation (the "Issuer"), and the
Investors (as defined herein).
WHEREAS, pursuant to that certain Common Stock Purchase and Sale
Agreement dated August 13, 1999 by and among the Issuer and the Investors (the
"Stock Purchase Agreement"), the Investors purchased shares of Common Stock (as
defined herein) from the Issuer and the Issuer agreed to provide certain rights
to the Holders (as defined herein) to cause the shares so purchased to be
registered pursuant to the Securities Act (as defined herein); and
WHEREAS, the parties hereto desire to set forth the Holders' rights
and the Issuer's obligations to cause the registration of the Registrable
Securities (as defined herein) pursuant to the Securities Act;
NOW, THEREFORE, in consideration of the purchase by the Investors of
the shares of Common Stock pursuant to the Stock Purchase Agreement and the
mutual promises, representations, warranties, covenants and agreements contained
herein, the parties hereto, intending to be legally bound hereby, agree as
follows:
ARTICLE 1
DEFINITIONS
Section 1.1. Definitions. Terms used herein and not defined shall have
the meaning given to such terms in the Stock Purchase Agreement. In addition,
the following terms, as used herein, shall have the following respective
meanings:
"Commission" means the Securities and Exchange Commission or any
successor governmental body or agency.
"Common Stock" means (i) the common stock, par value $.01 per share,
of the Issuer and (ii) shares of capital stock of the Issuer issued by the
Issuer in respect of or in exchange for shares of such common stock in
connection with any stock dividend or distribution, stock split-up,
recapitalization, recombination or exchange by the Issuer generally of shares of
such common stock.
"Demand Registration" has the meaning ascribed thereto in Section
2.1(a).
"Demand Request" has the meaning ascribed thereto in Section 2.1(a).
"Disadvantageous Condition" has the meaning ascribed thereto in
Section 2.3.
<PAGE> 3
"Holder" means a person who owns Registrable Securities and is an
Investor.
"Investors" means the parties listed as "Investors" on the signature
pages hereto.
"Majority Selling Holders" means those Selling Holders whose
Registrable Securities included in such registration represent a majority of the
Registrable Securities of all Selling Holders included therein.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, limited liability company, trust,
unincorporated organization or government or other agency or political
subdivision thereof.
"Registrable Securities" means Common Stock acquired by the Holders
pursuant to the Stock Purchase Agreement and any shares of stock or other
securities into which or for which such Common Stock may hereafter be changed,
converted or exchanged upon any reclassification, share combination, share
subdivision, share dividend or similar transaction or event. As to any
particular Registrable Securities, such Registrable Securities shall cease to be
Registrable Securities as soon as (i) such Registrable Securities have been sold
or otherwise disposed of pursuant to a registration statement that was filed
with the Commission in accordance with this Agreement and declared effective
under the Securities Act, (ii) they shall have been otherwise sold, transferred
or disposed of by a Holder to any Person that is not a Holder, or (iii) they
shall have ceased to be outstanding.
"Registration Expenses" means any and all expenses incident to
performance of or compliance with any registration of securities pursuant to
Article 2, including (i) the fees, disbursements and expenses of the Issuer's
counsel and accountants (including in connection with the delivery of opinions
and/or comfort letters) in connection with this Agreement and the performance of
the Issuer's obligations hereunder; (ii) all expenses, including filing fees, in
connection with the preparation, printing and filing of one or more registration
statements hereunder; (iii) the cost of printing or producing any agreements
among underwriters, underwriting agreements, and blue sky or legal investment
memoranda; (iv) the filing fees incident to securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
securities to be disposed of; (v) transfer agents' and registrars' fees and
expenses in connection with such offering; (vi) all security engraving and
security printing expenses; (vii) all fees and expenses payable in connection
with the listing of the Registrable Securities on any securities exchange or
automated interdealer quotation system on which the Common Stock is then listed;
and (viii) all reasonable fees and expenses of one legal counsel for the Holders
in connection with the Demand Registration, which legal counsel shall be
selected by the Majority Selling Holders; provided, that Registration Expenses
shall exclude (x) all underwriting discounts and commissions, selling or
placement agent or broker fees and commissions, and transfer taxes, if any, in
connection with the sale of any securities, and (y) the fees and expenses of
counsel for any Holder (other than pursuant to clause (viii)); provided,
however, that the Issuer shall not be required to pay for any expenses of any
registration
-2-
<PAGE> 4
proceeding begun pursuant to Section 2.1 if the registration is subsequently
withdrawn at the request of the Majority Selling Holders (in which case all
Selling Holders shall bear such expense); provided, however, that if at the time
of such withdrawal, the Majority Selling Holders have learned of a material
adverse change in the condition, business or prospects of the Issuer at the time
of their request and have withdrawn the request with reasonable promptness
following disclosure by the Issuer of such material adverse change, then the
Majority Selling Holders shall not be required to pay any of such expenses and
shall retain their rights pursuant to Section 2.1.
"Rule 144" means Rule 144 (or any successor rule to similar effect)
promulgated under the Securities Act.
"Rule 145" means Rule 145 (or any successor rule to similar effect)
promulgated under the Securities Act.
"Rule 415 Offering" means an offering on a delayed or continuous basis
pursuant to Rule 415 (or any successor rule to similar effect) promulgated under
the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Holder" means any Holder who sells Registrable Securities
pursuant to a public offering registered hereunder.
Section 1.2. Usage.
(i) References to a Person are also references to its assigns
and successors in interest (by means of merger, consolidation or sale
of all or substantially all the assets of such Person or otherwise, as
the case may be).
(ii) References to Registrable Securities "owned" by a Holder
shall include Registrable Securities beneficially owned by such Person
but which are held of record in the name of a nominee, trustee,
custodian, or other agent, but shall exclude shares of Common Stock
held by a Holder in a fiduciary capacity for customers of such Person.
(iii) References to a document are to it as amended, waived
and otherwise modified from time to time and references to a statute or
other governmental rule are to it as amended and otherwise modified
from time to time (and references to any provision thereof shall
include references to any successor provision).
(iv) References to Sections or to Schedules or Exhibits are to
sections hereof or schedules or exhibits hereto, unless the context
otherwise requires.
(v) The definitions set forth herein are equally applicable
both to the
-3-
<PAGE> 5
singular and plural forms and the feminine, masculine and neuter forms
of the terms defined.
(vi) The term "including" and correlative terms shall be
deemed to be followed by "without limitation" whether or not followed
by such words or words of like import.
(vii) The term "hereof" and similar terms refer to this
Agreement as a whole.
(viii) The "date of" any notice or request given pursuant to
this Agreement shall be determined in accordance with Section 3.4.
ARTICLE 2
REGISTRATION RIGHTS
Section 2.1. Demand Registration. (a) At any time on or after the date
ninety (90) days from the date of the Stock Purchase Agreement, upon written
notice to the Issuer from a Holder or Holders holding a majority in interest of
the Registrable Securities (the "Demand Request"), which notice requests,
pursuant to this Section 2.1, that the Issuer effect the registration under the
Securities Act of all of the Registrable Securities held by such requesting
Holders, which notice shall specify the intended method or methods of
disposition of such Registrable Securities, the Issuer shall prepare as soon as
practicable and, within 20 days after such request, file with the Commission a
registration statement with respect to such Registrable Securities and
thereafter use all reasonable efforts to cause such registration statement to be
declared effective under the Securities Act for purposes of dispositions in
accordance with the intended method or methods of disposition stated in such
request. Notwithstanding any other provision of this Agreement to the contrary:
(i) the Holders may collectively exercise their rights to
request registration under this Section 2.1(a) on not more than one
occasion (such registration being referred to herein as the "Demand
Registration");
(ii) the method of disposition requested by Holders in
connection with any Demand Registrations may not, without the Issuer's
written consent, be a Rule 415 Offering;
(iii) the Issuer shall not be required to effect a Demand
Registration hereunder if all securities that were Registrable
Securities on the date hereof have ceased to be Registrable Securities;
and
-4-
<PAGE> 6
(iv) the Issuer shall not be required to effect a Demand
Registration hereunder, or to maintain any registration statement filed
pursuant hereto effective after the date on which the Holders have met
the holding period requirements pursuant to Rule 144.
(b) Notwithstanding any other provision of this Agreement to
the contrary, a Demand Registration requested by Holders pursuant to this
Section 2.1 shall not be deemed to have been effected and, therefore, not
requested and the rights of each Holder shall be deemed not to have been
exercised for purposes of paragraph (a) above, (i) if such Demand Registration
has not become effective under the Securities Act or (ii) if such Demand
Registration, after it became effective under the Securities Act, was not
maintained effective under the Securities Act (other than as a result of any
stop order, injunction or other order or requirement of the Commission or other
government agency or court solely on the account of a material misrepresentation
or omission of a Holder) for at least 30 days (or such shorter period ending
when all the Registrable Securities covered thereby have been disposed of
pursuant thereto) (provided that such 30-day period shall be extended for such
number of days that equals the number of days elapsing from (A) the date the
written notice contemplated by Section 2.5(e) is given by the Issuer to (B) the
date on which the Issuer delivers to the Holders of Registrable Securities the
amendment contemplated by Section 2.5(e)), as a result thereof, the Registrable
Securities requested to be registered cannot be distributed in accordance with
the plan of distribution set forth in the related registration statement. The
Holders shall not lose their right to a Demand Registration under Section 2.1 if
the Demand Registration related to such Demand Request is delayed or not
effected in the circumstances set forth in this Section 2.1(b).
(c) The Issuer shall have the right to cause the registration
of additional equity securities for sale for the account of the Issuer in the
registration of Registrable Securities requested by the Holders pursuant to
Section 2.1(a), provided that if such Holders are advised in writing (with a
copy to the Issuer) by the lead or managing underwriter referred to in Section
2.2 that, in such underwriter's good faith view, all or a part of such
Registrable Securities and additional equity securities cannot be sold and the
inclusion of such Registrable Securities and additional equity securities in
such registration would be likely to have an adverse effect on the price, timing
or distribution of the offering and sale of the Registrable Securities and
additional equity securities then contemplated, then the number of securities
that can, in the good faith view of such underwriter, be sold in such offering
without so adversely affecting such offering shall be allocated first, to the
Registrable Securities proposed to be included in the Demand Registration by the
Holders and second, to the securities of the Issuer proposed to be included in
such registration by the Issuer for sale for its own account. The Holders of the
Registrable Securities to be offered pursuant to paragraph (a) above may require
that any such additional equity securities be included by the Issuer in the
offering proposed by such Holders on the same conditions as the Registrable
Securities that are included therein.
(d) Within seven days after delivery of a Demand Request by a
Holder, the Issuer shall provide a written notice to each Holder, advising such
Holder of its right to include all of the Registrable Securities held by such
Holder for sale pursuant to the Demand Registration
-5-
<PAGE> 7
and advising such Holder of procedures to enable such Holder to elect to so
include Registrable Securities for sale in such Demand Registration. Any Holder
may, within twenty days of delivery to such Holder of a notice pursuant to this
Section 2.2(d), elect to so include Registrable Securities in such Demand
Registration by written notice to such effect to the Issuer specifying the
number of Registrable Securities desired to be so included by such Holder.
Section 2.2. Other Matters In Connection With Registrations. In the
event that any public offering pursuant to Section 2.1 shall involve, in whole
or in part, an underwritten offering, the Issuer shall have the right to
designate an underwriter or underwriters as the lead or managing underwriters of
such underwritten offering; provided, however, that each Person so selected
shall be reasonably acceptable the Holders owning a majority of the Registrable
Securities proposed to be sold therein.
Section 2.3. Certain Delay Rights. Notwithstanding anything else
contained in this Agreement, with respect to any registration statement filed,
or to be filed, pursuant to Section 2.1, if the Issuer provides written notice
to each Holder that in the Issuer's good faith and reasonable judgment it would
be materially disadvantageous to the Issuer (because the sale of Registrable
Securities covered by such registration statement or the disclosure of
information therein or in any related prospectus or prospectus supplement would
materially interfere with any acquisition, financing or other material event or
transaction in connection with which a distribution of securities for the
account of the Issuer or eLoyalty is then intended or the public disclosure of
which at the time would be materially prejudicial to the Issuer (a
"Disadvantageous Condition")) for such a registration statement to be maintained
effective, or to be filed and become effective, and setting forth the general
reasons for such judgment, the Issuer shall be entitled to cause such
registration statement to be withdrawn or the effectiveness of such registration
statement terminated, or, in the event no registration statement has yet been
filed, shall be entitled not to file any such registration statement, until such
Disadvantageous Condition no longer exists (notice of which the Issuer shall
promptly deliver to each Holder); provided, however, that in no event shall such
registration pursuant to Section 2.1 be delayed in excess of 90 days, and such
right to delay may be exercised by the Issuer only once in any twelve month
period. With respect to each Holder, upon the receipt by such Holder of any such
notice of a Disadvantageous Condition, if so directed by the Issuer by notice as
aforesaid, such Holder will deliver to the Issuer all copies, other than
permanent filed copies then in such Holder's possession, of the prospectus and
prospectus supplements then covering such Registrable Securities at the time of
receipt of such notice as aforesaid.
Section 2.4. Expenses. Except as provided herein, the Issuer shall pay
all Registration Expenses with respect to each registration hereunder.
Notwithstanding the foregoing, (i) each Holder and the Issuer shall be
responsible for its own internal administrative and similar costs, which shall
not constitute Registration Expenses, (ii) each Holder shall be responsible for
the legal fees and expenses of its own counsel (except as provided in clause
(viii) of the definition of Registration Expenses), and (iii) each Holder shall
be responsible for all
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<PAGE> 8
underwriting discounts and commissions, selling or placement agent or broker
fees and commissions, and transfer taxes, if any, in connection with the sale of
securities by such Holder.
Section 2.5. Registration and Qualification. If and whenever the
Issuer is required to effect the registration of any Registrable Securities
under the Securities Act as provided in Section 2.1, the Issuer shall use its
reasonable efforts to:
(a) prepare, file and cause to become effective a registration
statement and such amendments and supplements thereto under the Securities Act
relating to the Registrable Securities to be offered in accordance with the
Holders' intended methods of disposition thereof;
(b) prepare and file with the Commission such amendments to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective and to comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Securities until the earlier of (i) such time as all Registrable
Securities proposed to be sold therein have been disposed of in accordance with
the intended methods of disposition set forth in such registration statement;
(ii) the expiration of 30 days after such registration statement becomes
effective, provided, that such 30-day period shall be extended for such number
of days that equals the number of days elapsing from (A) the date the written
notice contemplated by paragraph (e) below is given by the Issuer to (B) the
date on which the Issuer delivers to the Holders of Registrable Securities the
amendment contemplated by paragraph (e) below and (iii) the date on which the
Issuer is no longer required to effect a Demand Registration pursuant to Section
2.1(a)(iv);
(c) furnish to the Holders of Registrable Securities and to any
underwriter of such Registrable Securities such number of conformed copies of
such registration statement and of each such amendment and supplement thereto
(in each case including all exhibits), such number of copies of the prospectus
included in such registration statement (including each preliminary prospectus),
in conformity with the requirements of the Securities Act, and such documents
incorporated by reference in such registration statement or prospectus, as the
Holders of Registrable Securities or such underwriter may reasonably request;
(d) use its reasonable efforts to furnish to any underwriter of such
Registrable Securities an opinion of counsel for the Issuer and a "cold comfort"
letter signed by the independent public accountants who have audited the
financial statements of the Issuer included in the applicable registration
statement, in each such case covering substantially such matters with respect to
such registration statement (and the prospectus included therein) and the
related offering as are customarily covered in opinions of issuer's counsel with
respect thereto and in accountants' letters delivered to underwriters in
underwritten public offerings of securities and such other matters as such
underwriters may reasonably request; provided, however, that delivery of any
such opinion or comfort letter shall be subject to the recipient furnishing such
written representations or acknowledgments as are customarily provided by
selling stockholders who receive such comfort letters or opinions;
-7-
<PAGE> 9
(e) promptly notify the Selling Holders in writing (i) at any time
when a prospectus relating to a registration pursuant to Section 2.1 is required
to be delivered under the Securities Act of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, and (ii) of any request by the Commission or any other regulatory
body or other body having jurisdiction for any amendment to any registration
statement or other document relating to such offering, and in either such case,
at the request of the Selling Holders prepare and furnish to the Selling Holders
a reasonable number of copies of an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
are made, not misleading;
(f) use its reasonable efforts to list all such Registrable Securities
covered by such registration on each securities exchange and automated
interdealer quotation system on which the Common Stock is then listed;
(g) furnish for delivery in connection with the closing of any
offering of Registrable Securities pursuant to a registration effected pursuant
to Section 2.1 unlegended certificates representing ownership of the Registrable
Securities being sold in such denominations as shall be requested by the Selling
Holders or the underwriters; and
(h) register and qualify the securities covered by such registration
statement under such other securities or Blue Sky laws of such jurisdictions as
shall be reasonably requested by the Selling Holders; provided that the Issuer
shall not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions.
Section 2.6. Underwriting; Due Diligence. (a) If requested by the
underwriters for any underwritten offering of Registrable Securities pursuant to
a registration requested under this Article 2, the Issuer shall enter into an
underwriting agreement with such underwriters for such offering, which agreement
will contain such representations and warranties by the Issuer and such other
terms and provisions as are customarily contained in underwriting agreements
with respect to secondary distributions, including, without limitation,
indemnification and contribution provisions substantially to the effect and to
the extent provided in Section 2.7, and agreements as to the provision of
opinions of counsel and accountants' letters to the effect and to the extent
provided in Section 2.5(d). Such underwriting agreement shall also contain such
representations and warranties by such Selling Holders and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including, without limitation, indemnification and
contribution provisions substantially to the effect and to the extent provided
in Section 2.7.
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<PAGE> 10
(b) In connection with the preparation and filing of each registration
statement registering Registrable Securities under the Securities Act pursuant
to this Article 2, the Issuer shall give the Holders of such Registrable
Securities and the underwriters, if any, and their respective counsel and
accountants (the identity and number of whom shall be reasonably acceptable to
the Issuer), such reasonable and customary access to its books, records and
properties and such opportunities to discuss the business and affairs of the
Issuer with its officers and the independent public accounts who have certified
the financial statements of the Issuer as shall be necessary, in the opinion of
such Holders and such underwriters or their respective counsel, to conduct a
reasonable investigation within the meaning of the Securities Act.
Section 2.7. Indemnification and Contribution. (a) To the extent
permitted by applicable law, the Issuer agrees to indemnify and hold harmless
each Selling Holder and each person, if any, who controls each Selling Holder
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act from and against any and all losses, claims, damages and
liabilities as incurred (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or any amendment thereof, any
preliminary prospectus or prospectus (as amended if the Issuer shall have
furnished any amendments thereto) relating to the Registrable Securities, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any such untrue statement or omission or alleged untrue statement or
omission based upon information furnished to the Issuer in writing by a Selling
Holder expressly for use therein. The Issuer also agrees to indemnify any
underwriter of the Registrable Securities so offered and each person, if any,
who controls such underwriter on substantially the same basis as that of the
indemnification by the Issuer of the Selling Holder provided in this Section
2.7(a).
(b) To the extent permitted by applicable law each Selling Holder
agrees to indemnify and hold harmless the Issuer, its directors, the officers
who sign the registration statement and each person, if any, who controls the
Issuer within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act, from and against any and all loses, claims, damages,
liabilities as incurred (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement of a material fact
contained in any registration statement or any amendment thereof, any
preliminary prospectus or prospectus (as amended if the Issuer shall have
furnished any amendments thereto) relating to the Registrable Securities, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but only with reference to information furnished in writing by such
Selling Holder (or any representative thereof) expressly for use in a
registration statement, any preliminary prospectus, prospectus or any amendments
thereto. Each Selling Holder also agrees to indemnify any underwriter of the
Registrable Securities so offered and each
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<PAGE> 11
person, if any, who controls such underwriter on substantially the same basis as
that of the indemnification by such Selling Holder of the Issuer provided in
this Section 2.7(b); provided, however, that the indemnity agreement contained
in this Section 2.7(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder (which consent shall not be unreasonably withheld);
and provided, further, that in no event shall any indemnity under this Section
2.7(b) exceed the gross proceeds from the offering received by such Holder.
(c) Each party indemnified under paragraph (a) or (b) above shall,
promptly after receipt of notice of a claim or action against such indemnified
party in respect of which indemnity may be sought hereunder, notify the
indemnifying party in writing of the claim or action; provided that the failure
to notify the indemnifying party shall not relieve it from any liability that it
may have to an indemnified party on account of the indemnity agreement contained
in paragraph (a) or (b) above except to the extent that the indemnifying party
was actually prejudiced by such failure, and in no event shall such failure
relieve the indemnifying party from any other liability that it may have to such
indemnified party. If any such claim or action shall be brought against an
indemnified party, and it shall have notified the indemnifying party thereof,
unless based on the written advice of counsel to such indemnified party a
conflict of interest between such indemnified party and indemnifying parties may
exist in respect of such claim, the indemnifying party shall be entitled to
participate therein, and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof. After
notice from the indemnifying party to the indemnified party of its election to
assume the defense of such claim or action, the indemnifying party shall not be
liable to the indemnified party under this Section 2.7 for any legal or other
expenses subsequently incurred by the indemnified party in connection with the
defense thereof. Any indemnifying party against whom indemnity may be sought
under this Section 2.7 shall not be liable to indemnify an indemnified party if
such indemnified party settles such claim or action without the consent of the
indemnifying party. The indemnifying party may not agree to any settlement of
any such claim or action, other than solely for monetary damages for which the
indemnifying party shall be responsible hereunder, the result of which any
remedy or relief shall be applied to or against the indemnified party, without
the prior written consent of the indemnified party, which consent shall not be
unreasonably withheld. In any action hereunder as to which the indemnifying
party has assumed the defense thereof, the indemnified party shall continue to
be entitled to participate in the defense thereof, with counsel of its own
choice, but the indemnifying party shall not be obligated hereunder to reimburse
the indemnified party for the costs thereof.
(d) If the indemnification provided for in this Section 2.7 shall for
any reason be unavailable (other than in accordance with its terms) to an
indemnified party in respect of any loss, liability, cost, claim or damage
referred to therein, then each indemnifying party shall, in lieu of indemnifying
such indemnified party, contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, cost, claim or damage in
such proportion as is appropriate to reflect the relative fault of the
indemnifying party or parties on the one hand and of the indemnified party or
parties on the other hand in connection with the statements or omissions
-10-
<PAGE> 12
that resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative fault of the Issuer on the
one hand and the Selling Holders on the other hand shall be determined by
reference to, among other things, the parties' relative knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by an indemnified party as a result of the loss,
cost, claim, damage or liability, or action in respect thereof, referred to
above in this Section 2.7(d) shall be deemed to include, for purposes of this
Section 2.7(d), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. The Issuer and the Selling Holders agree that it would not be just and
equitable if contribution pursuant to this Section 2.7 were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in this paragraph. Notwithstanding
any other provision of this Section 2.7, no Selling Holder shall be required to
contribute any amount in excess of the gross proceeds from the offering received
by such Selling Holder.
(e) The obligations of the parties under this Section 2.7 shall be in
addition to any liability which any party may otherwise have to any other party.
ARTICLE 3
MISCELLANEOUS
Section 3.1. Entire Agreement. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof.
Section 3.2. Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their successors and assigns.
Section 3.3. Amendments, Waivers, Etc. This Agreement may not be
amended, changed, supplemented, waived or otherwise modified or terminated,
except upon the execution and delivery of a written agreement executed by the
Issuer and Holders representing a majority of the Registrable Securities then
held by all Holders.
Section 3.4. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if given) by hand delivery or telecopy, or by
any courier service, such as Federal Express, providing proof of delivery. All
communications hereunder shall be delivered to the respective parties at the
address or telecopy number set forth on the signature pages hereto or such other
address as any party shall give the other parties hereto notice of in writing.
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<PAGE> 13
Section 3.5. Severability. Whenever possible, each provision or
portion of any provision of this Agreement will be interpreted in such manner as
to be effective and valid under applicable law but if any provision or portion
of any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or portion of any provision in such jurisdiction, and this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision or portion of any provision had
never been contained herein.
Section 3.6. No Waiver. The failure of any party hereto to exercise
any right, power or remedy provided under this Agreement or otherwise available
in respect hereof at law or in equity, or to insist upon compliance by any other
party hereto with its obligations hereunder, and any custom or practice of the
parties at variance with the terms hereof, shall not constitute a waiver by such
party of its right to exercise any such or other right, power or remedy or to
demand such compliance.
Section 3.7. No Third Party Beneficiaries. This Agreement is not
intended to be for the benefit of, and shall not be enforceable by, any Person
who or which is not a party hereto.
Section 3.8. Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Illinois, without giving
effect to the principles of conflicts of law thereof.
Section 3.9. Descriptive Headings. The descriptive headings used
herein are inserted for convenience of reference only and are not intended to be
part of or to affect the meaning or interpretation of this Agreement.
Section 3.10. Counterparts. This Agreement may be executed in
counterpart, each of which shall be deemed to be an original, but all of which,
taken together, shall constitute one and the same Agreement.
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<PAGE> 14
IN WITNESS WHEREOF, the Issuer and the Investors have caused this
Agreement to be duly executed as of the day and year first above written.
TECHNOLOGY SOLUTIONS COMPANY
a Delaware corporation
By: /s/ William H. Waltrip
-----------------------------
Name: William H. Waltrip
Title: Chairman of the Board
<PAGE> 15
IN WITNESS WHEREOF, the Issuer and the Investors have caused this
Agreement to be duly executed as of the day and year first above written.
INVESTORS:
TCV III STRATEGIC PARTNERS, L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
---------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
Mailing Address:
Technology Crossover Ventures
56 Main Street, Suite 210
Millburn, NJ 07041
Attention: Robert C. Bensky
Phone: (973) 467-5320
Fax: (973) 467-5323
with a copy to:
Technology Crossover Ventures
575 High Street, Suite 400
Palo Alto, CA 94301
Attention: Jay C. Hoag
Phone: (650) 614-8210
Fax: (650) 614-8222
<PAGE> 16
IN WITNESS WHEREOF, the Issuer and the Investors have caused this
Agreement to be duly executed as of the day and year first above written.
INVESTORS:
TCV III (GP)
a Delaware General Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
-------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III, L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
----------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
TCV III (Q), L.P.
a Delaware Limited Partnership
By: Technology Crossover Management III, L.L.C.,
Its: General Partner
By: /s/ Robert C. Bensky
----------------------------------
Name: Robert C. Bensky
Title: Chief Financial Officer
<PAGE> 17
IN WITNESS WHEREOF, the Issuer and the Investors have caused this
Agreement to be duly executed as of the day and year first above written.
INVESTORS:
SUTTER HILL VENTURES
a California Limited Partnership
By: /s/ Tench Coxe
------------------------------------
Name: Tench Coxe
Title: Managing Director of the General Partner
Mailing Address:
Sutter Hill Ventures
755 Page Mill Road, Suite A-200
Palo Alto, CA 94304-1005
Attention: Tench Coxe
Phone: (650) 493-5600
Fax: (650) 858-1854
<PAGE> 1
Exhibit 10.5
SHARED SERVICES AGREEMENT
by and between
TECHNOLOGY SOLUTIONS COMPANY
and
ELOYALTY CORPORATION
Dated as of [ ], 2000
<PAGE> 2
TABLE OF CONTENTS
PAGE
----
Section 1. Definitions; Rules of Construction.............................. 1
1.1 Definitions................................................... 1
1.2 Other Terms................................................... 3
1.3 Rules of Construction......................................... 3
Section 2. Term............................................................ 5
Section 3. Performance of Services by TSC ................................. 5
3.1 General....................................................... 5
3.2 Standard of Care.............................................. 5
3.3 Service Modifications......................................... 6
3.4 Compliance with Law ........................................... 6
3.5 Audit.......................................................... 7
Section 4. Provision of eLoyalty Information.................................7
Section 5. Fees............................................................. 7
5.1 General........................................................ 7
5.2 Sales Taxes.................................................... 8
5.3 License Fees................................................... 8
5.4 Cap on Fees.................................................... 8
5.5 Unamortized Hardware and Software...............................8
Section 6. Invoicing and Payment............................................ 8
Section 7. Independence..................................................... 9
Section 8. Nonexclusivity................................................... 9
Section 9. Confidentiality................................................. 10
9.1 TSC Information............................................... 10
9.2 eLoyalty Information.......................................... 10
9.3 Security...................................................... 10
9.4 General....................................................... 10
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<PAGE> 3
PAGE
----
Section 10. Termination.................................................... 11
10.1 Grounds for Termination...................................... 11
10.2 Procedures on Termination.................................... 12
10.3 Termination Costs............................................ 12
Section 11. Limitation of Liability and Remedy............................. 12
11.1 Damages...................................................... 12
11.2 eLoyalty's Exclusive Remedies................................ 13
11.3 TSC's Exclusive Remedies..................................... 13
11.4 Affiliates................................................... 14
Section 12. Force Majeure.................................................. 14
Section 13. Assignment......................................................14
13.1 Assignment with Consent.......................................14
13.2 Assignment in Event of Acquisition........................... 14
Section 14. Indemnification and Insurance.................................. 15
14.1 TSC's Obligation............................................. 15
14.2 eLoyalty's Obligation........................................ 15
14.3 Third-Party Claims........................................... 15
(a) Control of Proceedings.............................. 16
(b) Settlement of Third-Party Claims
By the Indemnified Person..................... 17
14.4 Insurance.................................................... 18
Section 15. Disputes....................................................... 18
15.1 Agreement to Arbitrate....................................... 18
15.2 Escalation and Mediation..................................... 18
15.3 Procedures for Arbitration................................... 19
15.4 Selection of Arbitrator.......................................20
15.5 Hearings......................................................20
15.6 Discovery and Certain Other Matters...........................21
15.7 Certain Additional Matters....................................22
15.8 Law Governing Arbitration Procedures..........................23
15.9 Choice of Forum.............................................. 23
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<PAGE> 4
PAGE
----
Section 16. Miscellaneous Provisions....................................... 23
16.1 Notice....................................................... 23
16.2 Entire Agreement............................................. 23
16.3 Choice of Law................................................ 24
16.4 Amendment; Waiver............................................ 24
16.5 Severability................................................. 24
16.6 Relationship of the Parties.................................. 24
16.7 Survival..................................................... 24
16.8 Counterparts................................................. 24
16.9 Records Retention............................................ 24
16.10 Beneficiaries............................................... 25
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<PAGE> 5
SHARED SERVICES AGREEMENT
This Agreement is made as of [ ], 2000 (the "Effective
Date") by Technology Solutions Company, a Delaware corporation ("TSC"), and
eLoyalty Corporation, a Delaware corporation ("eLoyalty").
RECITALS
TSC is planning to spin-off certain businesses by transferring
those businesses to eLoyalty (or its subsidiaries) and distributing all of the
stock of eLoyalty to the stockholders of TSC as a dividend. As a result of the
distribution of that dividend, TSC and eLoyalty, and their respective
subsidiaries, will be separate and independent corporations.
As a consequence of the foregoing contemplated actions, eLoyalty will
acquire business operations that have traditionally been supported by
administrative functions that will remain with TSC after the spin-off. TSC and
eLoyalty agree that it is advisable for eLoyalty to continue to receive
administrative services from TSC.
AGREEMENT
In consideration of the mutual undertakings contained herein,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, TSC and eLoyalty agree as follows:
SECTION 1. DEFINITIONS; RULES OF CONSTRUCTION.
1.1 Definitions. As used in this Agreement (including the Schedules
hereto):
(i) "Action" shall mean any action, claim, suit, arbitration,
inquiry, subpoena, discovery request, proceeding or investigation by or before
any court or grand jury, any governmental or other regulatory or administrative
entity, agency or commission or any arbitration tribunal.
(ii) "Affiliate" shall mean any Person controlling, controlled
by, or under direct or indirect common control with a Party. For the purpose of
this definition, the term "control" means the power to direct the management of
an entity, directly or indirectly, whether solely through the ownership of
voting securities (as in the case of a subsidiary), by contract, or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing. eLoyalty and TSC shall not be deemed to be Affiliates of each other.
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<PAGE> 6
(iii) "Agreement" means this Shared Services Agreement dated
as of [________], 2000 including all Schedules attached hereto.
(iv) "Arbitration Act" shall mean the United States
Arbitration Act, 9 U.S.C. ss.ss. 1-14, as the same may be amended from time to
time.
(v) "Change in Control" shall mean the acquisition by any
individual, entity, group or Person (as such term is defined in Section 13(d)(3)
of the Exchange Act), other than by a subsidiary or affiliated corporation of
the relevant Party or any employee benefit plan (including a trust forming part
of such a plan) maintained by the relevant Party or a subsidiary or affiliate
thereof of ownership of [50%] or more of either (i) the then outstanding shares
of common stock of the relevant Party or (ii) the combined voting power of the
then outstanding voting securities of the relevant Party entitled to vote
generally in the election of directors.
(vi) "Cost" whether used alone or as part of another defined
term shall mean cost as determined by TSC in a manner substantially the same as
the manner in which TSC determined such cost in the one-year period ending
[_________], 1999.
(vii) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(viii) "Fully Burdened Cost" shall mean all direct and
indirect Costs including allocable overhead (but excluding corporate overhead
and return on equity investment) allocable to the provision of any Service
without regard to whether the Service is provided to eLoyalty or to TSC. The
Fully Burdened Cost associated with the provision of any Service shall include
any Stay Bonus or Severance Pay paid to any employee who, as of the Effective
Date, was employed by TSC in the provision of that Service. As regards any
individual employee, "Fully Burdened Cost" shall include all direct Costs
relating to that individual (including their salary and accruals for incentive
compensation, vacation, holiday, insurance (medical, dental, vision, life,
legal, short-term and long-term disability, employee assistance program),
workers compensation and 401k match and FUI, SUI, OASDI and Medicare) and any
Stay Bonus or Severance Pay paid as well as that individual's proportionate
share of all indirect Costs incurred in the provision of the relevant Service,
such individual's proportionate share to be determined by dividing the total
indirect Costs relating to the provision of the relevant Service by the number
of full-time equivalent employees employed by the TSC department providing the
relevant Service.
(ix) "Governmental Authority" shall mean any foreign, federal,
state, local or other government, statutory or
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administrative authority, regulatory body or commission or any court, tribunal
or judicial or arbitral body.
(x) "Notice" shall mean notice given in accordance with
Section 16.1.
(xi) "Party" shall mean either TSC or eLoyalty.
(xii) "Person" shall mean an individual, corporation,
partnership, limited liability company, unincorporated syndicate, unincorporated
organization, trust, trustee, executor, adminis trator or other legal
representative, governmental authority or agency, or any group of Persons acting
in concert.
(xiii) "SEC" shall mean the Securities and Exchange
Commission.
(xiv) "Service" shall mean each service generally described in
Schedule 2, performed in substantially the same manner and containing the same
elements as when such Service was provided to TSC or Affiliates of TSC prior to
the Effective Date, except as otherwise permitted under Section 3.
(xv) "Term" shall mean the period of time provided in Section
2, including any and all extensions thereof.
(xvi) "Transfer" shall mean any assignment, transfer, sale or
other disposition to a Person that is not an Affiliate of the Transferor,
including any Transfer by way of merger or consolidation or otherwise by
operation of law.
1.2 Other Terms. Terms defined in other Sections of this
Agreement will have the meanings therein provided.
1.3 Rules of Construction.
(a) In this Agreement, unless a clear contrary intention
appears:
(i) the singular number includes the plural
number and vice versa;
(ii) reference to any Person includes such Person's
successors and assigns but, if applicable, only if such successors and
assigns are permitted by this Agreement;
(iii) reference to any gender includes the other
gender;
(iv) reference to any Section or Schedule
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means such Section of this Agreement or such Schedule to this
Agreement, as the case may be, and references in any Section or
definition to any clause means such clause of such Section or
definition;
(v) "herein", "hereunder", "hereof", "hereto," and
words of similar import shall be deemed references to this Agreement as
a whole and not to any particular Section or other provision hereof or
thereof;
(vi) "including" (and with correlative meaning
"include") means including without limiting the generality of any
description preceding such term;
(vii) relative to the determination of any period of
time, "from" means "from and including", "to" means "to but excluding"
and "through" means "through and including";
(viii) reference to any law (including statutes and
ordinances) means such law as amended, modified, codified or reenacted,
in whole or in part, and in effect from time to time, including rules
and regulations promulgated thereunder;
(ix) accounting terms used herein shall have the
meanings historically attributed to them by TSC and its subsidiaries
based upon TSC's internal financial policies and procedures in effect
prior to the spin-off described in the recitals above;
(x) in the event of any conflict between the
provisions of the body of this Agreement and the Schedules hereto, the
provisions of the body of this Agreement shall control; and
(xi) the headings contained in this Agreement have
been inserted for convenience of reference only, and are not to be used
in construing this Agreement.
(b) This Agreement was drafted and negotiated by the Parties
with the benefit of legal representation, and any rule of construction or
interpretation otherwise requiring this Agreement to be construed or interpreted
against either Party shall not apply to any construction or interpretation
hereof.
SECTION 2. TERM.
The initial Term of this Agreement shall begin on the
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Effective Date and, except as otherwise provided in this Agreement, end at the
end of the day on June 30, 2000. The Term may be extended for successive
additional periods, subject to the Parties agreeing upon the terms and
conditions of such an extension. Any such agreement to extend the term of this
Agreement must be entered into at least 90 days in advance of the date on which
this Agreement would otherwise naturally terminate. Each Party may in its
absolute discretion determine whether or not the terms of any such proposed
extension are acceptable and may refuse to agree to any such extension for any
reason whatsoever. Notwithstanding the above, eLoyalty shall have access to
TSC's systems, reports, databases and other records, which access shall not be
unreasonably requested by eLoyalty or denied by TSC, for 45 days after the date
of the termination of this Agreement. Such access shall be provided in order to
allow eLoyalty to complete its financial accounting and otherwise maintain its
records for the period when this Agreement shall have been in force.
SECTION 3. PERFORMANCE OF SERVICES BY TSC.
3.1 General. From time to time, beginning on the Effective Date, TSC
will, subject to Section 3.2(c), provide Services to eLoyalty (and to those
Persons who were, as of the Effective Date, eLoyalty Affiliates) on an "as
needed" basis (as determined by eLoyalty or its covered Affiliates). Services
may be provided by TSC itself or TSC may outsource the provision of the
Services.
3.2 Standard of Care.
(a) TSC will use (and will cause its Affiliates to use)
commercially reasonable efforts in the performance of its obligations hereunder
and will do so with the same degree of care, skill and prudence customarily
exercised when engaged in similar activities for itself and its Affiliates. TSC
will have no liability with respect to the provision of services to eLoyalty
hereunder in the absence of gross negligence or willful misconduct. To the
extent that any error or omission in any Service is not caused by failure of
eLoyalty or its Affiliates to conform to eLoyalty's obligations under Section 4
or is not otherwise excused under Section 12 and correction thereof by
reperformance or otherwise is practical, TSC will make such correction.
(b) TSC makes no representations or warranties whatsoever,
either express or implied, to eLoyalty or any other Person that the Services
provided hereunder are or will be adequate and sufficient (as to quantity,
quality or type) to meet the needs (including any specifically identified needs)
or any objectives of eLoyalty or any such Person with respect to the conduct of
the business of eLoyalty or such Person.
(c) The proportionate share of each Service to which eLoyalty
will be entitled will be approximately equal to the proportionate share of that
Service that was,
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prior to the Effective Date, devoted to the businesses that
TSC is planning to spin-off to eLoyalty. To the extent that TSC's capacity to
perform a Service is diminished, be it by system failure, departure of personnel
or any other factor outside of the control of TSC, the Services to which
eLoyalty will be entitled will be decreased proportionately.
(d) In performing its responsibilities hereunder, TSC will
accord eLoyalty and its Affiliates the same priority under comparable
circumstances as it provides itself and its Affil iates. Without limiting the
generality of the foregoing, in the provision of Services under comparable
circumstances TSC and its Affiliates will not discriminate against eLoyalty or
any of its Affiliates solely because eLoyalty or one of its Affiliates is the
recipient of such Services.
(e) TSC will use all reasonable efforts to provide Services at
the same levels of quality and efficiency as they have been provided to TSC and
its affiliates prior to the Effective Date. TSC shall give due consideration to
any suggestion by eLoyalty to improve performance but shall have no obligation
to accept or implement any such suggestion that it shall not, in its sole
discretion, deem advisable and in the best interests of TSC.
3.3 Service Modifications.
(a) TSC may reasonably supplement, modify, substitute or
otherwise alter a Service from time to time in a manner consistent with
supplements, modifications, substitutions or alterations made with respect to
similar services provided or otherwise made available by TSC to itself or its
Affiliates; provided that no change which, in the good faith judgment of TSC,
adversely affects the quality or availability of a Service or increases
eLoyalty's cost of using the Service (including any product thereof) in any
material respect, shall be made without the consent of eLoyalty. TSC will give
eLoyalty not less than 90 days Notice, prior to the implementation of any change
in a Service that, in the good faith judgment of TSC, may adversely affect the
quality or availability of a Service or increase the cost of using the Service
in any material respect.
(b) Without limiting the generality of the provisions of the
preceding subsection (a), TSC will not make any changes in any Service which
would require eLoyalty to modify any bridge or other interface between eLoyalty
facilities and the point at which data is transmitted to such facilities, except
when the costs of such modification is less than $10,000, unless eLoyalty
consents thereto. Conversely, TSC will not be obligated to make any change in a
Service because of changes eLoyalty makes in its facilities.
3.4 Compliance with Law.
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In performing Services, TSC will comply in all material
respects with all laws, rules and regulations that apply to the performance of
the Services.
3.5 Audit. (a) Each of TSC and eLoyalty may audit the other with
respect to (i) the performance of Services to ensure that adequate internal and
administrative controls and procedures are being employed, (ii) any Cost used to
determine any amounts payable hereunder, and (iii) any other matters reasonably
required to verify compliance with the terms of this Agreement. The Party
requesting the audit may use independent auditors, who may participate fully in
such audit.
(b) In the event that an audit is proposed with respect to
information which the Party to be audited wishes not to disclose to the other
Party ("Restricted Information"), then on the written demand of the Party to be
audited the individuals conducting the audit with respect to Restricted
Information will be limited to the independent auditors of the Party requesting
the audit. In such event, the Party to be audited shall pay the costs of the
independent auditors conducting such audit, but only with respect to that
portion of the audit relating to Restricted Information. Such independent
auditors shall enter into an agreement with the Parties hereto, on terms that
are agreeable to both Parties hereto, under which such independent auditors
shall agree to maintain the confidentiality of the information obtained during
the course of such audit and establishing what information such auditors will be
permitted to disclose to report the results of any audit of Restricted
Information to the Party requesting the audit.
(c) Any such audit shall be conducted during regular business
hours, in a manner that does not interfere unreasonably with the operations of
the Party being audited. Such audits shall be conducted not more than once in
any calendar quarter. Subject to the foregoing limitations, any such audit shall
be conducted when requested by Notice given not less than 30 days prior to the
commencement of the audit.
SECTION 4. PROVISION OF ELOYALTY INFORMATION.
To enable TSC to provide the Services, eLoyalty will provide
information, furnish access to data and take such other action as is reasonably
requested by TSC.
SECTION 5. FEES.
5.1 General. The aggregate Fully Burdened Costs for the Services set
forth in Schedule 2 will be allocated on a Service- by-Service basis as between
the Parties according to the procedures set forth in Schedule 3.
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5.2 Sales Taxes. eLoyalty shall pay, or reimburse TSC for, the gross
amount of any present or future sales, use, excise, occupation, privilege,
value-added, gross-receipts or other similar tax (excluding any tax on net
income, corporate franchise tax or fee or any similar tax or fee) applicable to
the fee, sale or furnishing of any Service or to its use by eLoyalty.
5.3 License Fees. If TSC reasonably concludes that it requires consent
to permit it to use any intellectual property for the provision of Services
hereunder that was not obtained prior to the Effective Date, TSC will use
reasonable efforts to obtain such consent and the amounts paid to the licensor
shall be equitably allocated between the Parties. If any consent required to
permit TSC to use any intellectual property for the provision of Services
hereunder (irrespective of when obtained) requires periodic payments to the
licensor, the amount thereof shall be equitably allocated between the Parties.
Allocations pursuant to this Section 5.3 shall be based upon the amount of each
Party's use of the intellectual property for which the payment is made. If the
Parties are unable to agree to the allocation, the question shall be resolved in
accordance with Section 15.
5.4. Cap on Fees. Notwithstanding any other provision of this
Agreement, fees charged to eLoyalty under this Agreement shall not exceed 60% of
the aggregate Fully Burdened Cost of all of the Services.
SECTION 6. INVOICING AND PAYMENT.
TSC will each month submit to eLoyalty for payment a statement of
amounts due under this Agreement. The statement will specify the charge for each
of the Services provided during the relevant month. Statements submitted other
than after the close of a fiscal quarter will be based on reasonable estimates
of the amounts due, and TSC will perform a true-up at the end of the fiscal
quarter. Each statement will specify the nature of the Services provided and
will contain or be followed by such other supporting detail as eLoyalty may from
time to time reasonably request.
eLoyalty will pay or cause its Affiliates receiving the Services to pay
all amounts due pursuant to this Agreement within 30 days after the date of each
such statement hereunder.
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If any amounts due hereunder have not been received by the due date,
such overdue amounts shall bear interest from the due date at the rate of 1% per
month, or portion thereof, until received.
Either Party shall have the right to withhold any disputed amounts due
hereunder if such Party in good faith disputes the amount claimed by the other
Party to be due hereunder and such Party notifies the other Party of such
dispute within 30 days after the date of the statement containing the disputed
amount. The foregoing right to withhold payment of disputed amounts shall be
limited to amounts disputed in good faith, and interest will accrue and be
payable on the net amount determined to be payable.
Neither payments made by eLoyalty nor the acceptance of payments by TSC
in the amount or less than the amount shown on TSC's statements shall be
construed as an acceptance or agreement with the amount so stated or the amount
received, respectively. Except as otherwise provided, either eLoyalty or TSC may
recover from the other the amount of any overpayment or underpayment. Without
limiting the generality of the foregoing, TSC may supplement any statement it
renders for less than the full amount to which it is entitled hereunder;
provided that such supplement is made within a reasonable time after the
statement being supplemented.
In addition to any other rights available to it at law or in equity,
upon ten days Notice to eLoyalty, TSC may suspend the provision of any Services
for which an undisputed statement for provision of Services hereunder from TSC
has not been satisfied within 20 days of its due date until such statement has
been satisfied.
SECTION 7. INDEPENDENCE.
All employees and representatives of TSC providing Services to eLoyalty
will be deemed for purposes of all compensation and employee benefits to be
employees or representatives of TSC (or its subcontractors) and not employees or
representatives of eLoyalty. In performing such services, such employees and
representatives will be under the direction, control and supervision of TSC (or
its subcontractors) (and not of eLoyalty) and TSC (or its subcontractors) will
have the sole right to exercise all authority with respect to the employment
(including termination of employment), assignment and compensation of such
employees and representatives.
SECTION 8. NONEXCLUSIVITY.
Nothing in this Agreement shall prevent TSC from providing any Service
to any other Person. Nothing in this Agreement shall
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prevent eLoyalty from obtaining all or any part of the Services from its own
employees and facilities or from providers other than TSC.
SECTION 9. CONFIDENTIALITY.
9.1 TSC Information. eLoyalty agrees to hold, and to use reasonable
efforts to cause its employees and representatives to hold, in confidence in a
manner consistent with eLoyalty's treatment of its own confidential information,
all information concerning TSC reasonably understood to be confidential (i)
contained in any of the Schedules to this Agreement or otherwise received by
eLoyalty from TSC after the Effective Date relating to the determination of the
fees and charges payable hereunder, (ii) obtained from TSC by the use of any
access to TSC data afforded by any connection between eLoyalty's systems and
TSC's systems maintained in connection with the provision of Services hereunder,
(iii) obtained from TSC in the course of an audit pursuant to Section 3.5 or
(iv) furnished to or obtained by eLoyalty after the Effective Date in the course
of its receipt of Services hereunder. Except as may otherwise be provided in
another agreement between the Parties, eLoyalty shall not use such information
for any purpose other than as contemplated under this Agreement or verifying
compliance with this Agreement, without TSC's prior written consent.
9.2 eLoyalty Information. TSC agrees to hold, and to use its reasonable
efforts to cause its employees and representatives to hold, in confidence in a
manner consistent with TSC's treatment of its own confidential information all
information reasonably understood to be confidential concerning eLoyalty,
furnished to or obtained by TSC after the Effective Date in the course of
providing Services under this Agreement. Except as may otherwise be provided in
another agreement between the Parties, TSC shall not use such information for
any purpose other than as contemplated under this Agreement or verifying
compliance with this Agreement, without eLoyalty's prior written consent.
9.3 Security. Each Party shall be responsible for preventing
unauthorized remote access by such Party's own agents and employees to data
transferred or otherwise made available to the other Party under this Agreement.
9.4 General. The obligations of confidentiality and non-disclosure
imposed under this Section 9 shall not apply to data and information that the
recipient can demonstrate:
(i) is published or is or otherwise becomes available to the
general public as part of the public domain without breach of this
Agreement;
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(ii) has been furnished or made known to the recipient without
any obligation to keep it confiden tial by a third party under
circumstances which are not known to the recipient to involve a breach
of the third party's obligations to a Party hereto;
(iii) was developed independently of information furnished to
the recipient under this Agreement; or
(iv) was known to the recipient at the time of receipt thereof
from the other Party, is not otherwise subject to [(a) the
confidentiality restrictions contained in the Reorganization Agreement
dated as of [ ], 2000 between eLoyalty and TSC] or (b) any other
obligation to keep it confidential and was not obtained from a third
party under circumstances which were known to the recipient to involve
a breach of the third party's obligations to a Party hereto.
Each Party (the "first party") acknowledges that the other Party would
not have an adequate remedy at law for the breach by the first party of any one
or more of the covenants contained in this Section 9 and agrees that, in the
event of such breach, the other Party may, in addition to the other remedies
which may be available to it, apply to a court for an injunction to prevent
breaches of this Section 9 and to enforce specifically the terms and provisions
of this Section.
The provisions of this Section 9 shall not preclude disclo sures
required by law; provided, however, that each Party will use reasonable efforts
to notify the other, prior to making any such disclosure, and permit the other
to take such steps as it deems appropriate, including obtaining a protective
order, consistent with applicable law, to minimize any loss of confidentiality.
SECTION 10. TERMINATION.
10.1 Grounds for Termination. Each Party shall have the right to
terminate this Agreement effective upon delivery of Notice to the other Party if
the other Party: (a) makes an assignment for the benefit of creditors, or
becomes bankrupt or insolvent, or is petitioned into bankruptcy, or takes
advantage of any state, federal or foreign bankruptcy or insolvency act, or if a
receiver or receiver/manager is appointed for all or any substantial part of
its property and business and such receiver or receiver/manager remains
undischarged for a period of 30 days, (b) has its corporate existence
terminated by voluntary or involuntary dissolution,(c) materially defaults
in the performance of any of its covenants or obligations contained in
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this Agreement and such default is not remedied to the nondefaulting Party's
reasonable satisfaction within 30 days after Notice to the defaulting Party of
such default, or if such default is not capable of rectification within 30 days,
if the defaulting Party has not promptly commenced to rectify the default within
such 30 day period and is not proceeding diligently to rectify the default, (d)
effects a Transfer of its rights and obligations under this Agreement pursuant
to Section 13.2, or (e) undergoes a Change in Control. Except as provided above,
neither this Agreement nor any of the Services may be terminated prior to June
30, 2000, except with the mutual agreement of the Parties.
10.2 Procedures on Termination. On any termination of this Agreement,
TSC will cooperate with eLoyalty as reasonably necessary to avoid disruption of
the ordinary course of eLoyalty's business, and such termination shall not
affect TSC's rights to payment for Services provided.
Except as otherwise required pursuant to Section 16.9 each Party shall
destroy or return to the other Party all records made or obtained in the course
of performance hereunder containing information regarding the other Party or its
customers that is protected from disclosure under Section 9. In the event that
any Party shall elect to destroy any records as permitted above, such Party
shall provide the other Party with written confirmation of any such destruction.
10.3 Termination Costs. If eLoyalty elects to terminate any Service
pursuant to Section 10.1 and such termination results in TSC's becoming liable
for termination charges imposed by a Person that is not an Affiliate of TSC,
eLoyalty will reimburse TSC therefor. If the amount of any such charges is
subject to negotiation between TSC and such Person, TSC will allow eLoyalty to
participate therein and will not agree to the amount thereof without eLoyalty's
consent, which will not be unreasonably withheld. Any amounts payable under this
Section 10.3 shall be in addition to, and separate from, any amounts payable
under Sections 5.5-5.7.
SECTION 11. LIMITATION OF LIABILITY AND REMEDY.
11.1 Damages. In no event, whether based on contract, indemnity,
warranty, tort (including willful and wanton misconduct or negligence), strict
liability or otherwise, shall either Party or any of its directors, officers,
employees or agents, be liable for any lost profits or any special, exemplary,
punitive, incidental, indirect or consequential damages. The foregoing
limitation and disclaimer shall apply irrespective of whether the
possibility of such lost profits or any special, exemplary, punitive,
incidental, indirect or consequential
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damages had been disclosed in advance or could have reasonably been foreseen.
The amounts due from one Party to the other based upon the Parties' respective
obligations to indemnify each other pursuant to this Agreement shall not be
deemed to be damages that would be excluded by this paragraph.
The limitations and disclaimers of obligations and liabili ties
contained in this Section 11 are intended to apply to the fullest extent
permitted by law; provided that such limitations and disclaimers shall not limit
amounts payable with respect to any express indemnity provided for in this
Agreement.
11.2 eLoyalty's Exclusive Remedies. eLoyalty's exclusive remedies
against TSC for any breach of, or other act or omission arising out of or
relating to, this Agreement shall be:
(i) the right to receive refunds of the amount of any payment
in excess of amounts owed under this Agreement;
(ii) the right to require reperformance of any Service to the
extent required pursuant to Section 3.2;
(iii) the right to indemnification as provided in Section 14;
(iv) the right to injunction, specific perform ance or other
equitable non-monetary relief when available under applicable law;
(v) the right to terminate this Agreement for material breach
as set forth in Section 10; and
(vi) the right to actual damages, any such damages to be
limited to the amount of fees paid.
11.3 TSC's Exclusive Remedies. TSC's exclusive remedies against
eLoyalty for any breach of, or other act or omission arising out of or relating
to, this Agreement shall be:
(i) the right to receive payment for Services and
any other amounts due under this Agreement;
(ii) the right to suspend performance as provided
in Section 6;
(iii) the right to indemnification as provided in Section 14;
(iv) the right to injunction, specific performance or other
equitable non-monetary relief when
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available under applicable law; and
(v) the right to terminate this Agreement for material breach
as set forth in Section 10.
11.4 Affiliates. The provisions of Sections 11.1 through 11.3 apply to
a Party's Affiliates providing any part of any Service or performing any other
function hereunder or receiving any part of any Service hereunder.
SECTION 12. FORCE MAJEURE.
The obligations of either Party to perform under this Agreement shall
be excused during each period of delay caused by matters (not including lack of
funds or other financial causes) such as strikes, supplier delays, shortages of
raw materials, government orders or acts of God, which are reasonably beyond the
control of the Party obligated to perform; provided that nothing contained in
this Agreement shall affect either Party's ability or discretion with respect to
any strike or other employee dispute or disturbance and all such strikes,
disputes or dis turbances shall be deemed to be beyond the control of such
Party. A condition of force majeure shall be deemed to continue only so long as
the affected Party shall be taking all reasonable actions necessary to overcome
such condition. In the event that either Party hereto shall be affected by a
condition of force majeure, such Party shall give the other Party prompt Notice
thereof, which Notice shall contain the affected Party's estimate of the
duration of such condition and a description of the steps being taken or
proposed to be taken to overcome such condition of force majeure. Any delay
occasioned by any such cause shall not constitute a default under this
Agreement, and the obligations of the Parties shall be suspended during the
period of delay so occasioned. During any period of force majeure, the Party
that is not directly affected by such condition of force majeure shall be
entitled to take any reasonable action necessary to mitigate the effects of such
condition of force majeure.
SECTION 13. ASSIGNMENT.
13.1 Assignment with Consent. This Agreement shall be binding upon and
inure to the benefit of the Parties hereto and their respective successors and
permitted assigns, provided, however, that, except as provided below, neither
Party may Transfer its interest in the Agreement, including Transfers by
operation of law such as by way of merger or consolidation, without the prior
written consent of the other Party, which consent may not be unreasonably
withheld.
13.2 Assignment in Event of Acquisition. Notwithstanding
the foregoing provisions of this Section 13, either Party may
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Transfer its rights and obligations under this Agreement to any corporation or
other entity that shall acquire all or substantially all of such Party's
business and assets and assume in writing all of such Party's obligations
hereunder and deliver a signed copy of such assumption instrument to the other
Party; and, upon the other Party's receipt of such assumption instrument, the
assigning Party shall be fully released and discharged from its obligations
under this Agreement. In the event of such a Transfer, the Non-Affected Party
shall have the right to terminate this Agreement as provided in Section 10.
SECTION 14. INDEMNIFICATION AND INSURANCE.
14.1 TSC's Obligation. TSC agrees to indemnify and hold eLoyalty and
the eLoyalty Indemnified Parties (as hereinafter defined) harmless from and
against, and in respect of, any and all damages, claims, losses, demands, suits,
fines, penalties and liabilities asserted against or incurred, and all expenses
(including all reasonable fees and expenses of counsel, travel costs and other
out-of-pocket costs) incurred in connection with pending or threatened
litigation or other proceedings ("Expenses") which arise out of or relate to any
claim, action or proceeding asserted by a third party to the extent exclusively
and solely arising out of any matter or thing constituting a breach by TSC
hereunder or any gross negligence or willful misconduct by TSC (or its employees
or agents) in its performance of this Agreement. The eLoyalty Indemnified
Parties shall mean and include: (x) eLoyalty's Affiliates; and (y) the
respective directors, officers, agents and employees of eLoyalty and its
Affiliates. Expenses shall be reimbursed or advanced when and as incurred
promptly upon submission by eLoyalty or any eLoyalty Indemnified Party of
statements to TSC.
14.2 eLoyalty's Obligation. eLoyalty agrees to indemnify and hold TSC
and the TSC Indemnified Parties (as hereinafter defined) harmless from and
against, and in respect of, any and all damages, claims, losses, demands, suits,
fines, penalties and liabilities asserted against or incurred, and all expenses
(including all reasonable fees and expenses of counsel, travel costs and other
out-of-pocket costs) incurred in connection with pending or threatened
litigation or other proceedings ("Expenses") which arise out of or relate to any
claim, action or proceeding asserted by a third party to the extent exclusively
and solely arising out of any matter or thing constituting a breach by eLoyalty
hereunder or any gross negligence or willful misconduct by eLoyalty (or its
employees or agents) in its performance of this Agreement. The TSC Indemnified
Parties shall mean and include: (x) TSC's Affiliates; and (y) the respective
directors, officers, agents and employees of TSC and its Affiliates. Expenses
shall be reimbursed or advanced when and as
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incurred promptly upon submission by TSC or any TSC Indemnified Party of
statements to eLoyalty.
14.3 Third-Party Claims. If any third party shall make any claim or
commence any arbitration proceeding or suit against any one or more of the TSC
Indemnified Parties or the eLoyalty Indemnified Parties (hereafter "Indemnified
Persons") with respect to which an Indemnified Person intends to make any claim
for indemnification against TSC under Section 14.1 or against eLoyalty under
Section 14.2 (as the case may be, the "Indemnifying Party"), such Indemnified
Persons shall promptly give written notice to the Indemnifying Party of such
third party claim, arbitration proceeding or suit and the following provisions
shall apply.
(a) Control of Proceedings.
1. In the event that some portion of the claim, arbitration
proceeding or suit brought against the Indemnified Person is for matters for
which the Indemnified Person will not seek indemnification from the Indemnifying
Party, the Parties shall negotiate in good faith as to which party shall have
control over the proceedings.
2. In all other instances, the Indemnifying Party shall have
20 business days after receipt of the notice referred to above in this Section
14.3 to notify the Indemnified Party that it elects to conduct and control the
defense of such claim, proceeding or suit. If the Indemnifying Party does not
give the foregoing notice, the Indemnified Party shall have the right to defend,
contest, settle or compromise such claim, proceeding or suit in the exercise of
its exclusive discretion subject to the provisions of Section 14.3(b), and the
Indemnifying Party shall, upon request from any of the Indemnified Persons,
promptly pay to such Indemnified Persons in accordance with the other terms of
this Section 14 the amount of any third party claim resulting from their
liability to the third party claimant and all related Expense.
3. If the Indemnifying Party gives the foregoing notice, the
Indemnifying Party shall have the right to undertake, conduct and control,
through counsel reasonably acceptable to the Indemnified Party, and at its sole
expense, the conduct and settlement of such claim, proceeding or suit, and the
Indemnified Party shall cooperate with the Indemnifying Party in connection
therewith, provided that (i) the Indemnifying Party shall not thereby permit any
lien, encumbrance or other adverse charge to thereafter attach to any asset of
any Indemnified Person; (ii) the Indemnifying Party shall not thereby permit any
injunction against any Indemnified Person; (iii) the Indemnifying Party shall
permit the Indemnified Person and counsel chosen by the Indemnified Person and
reasonably acceptable to the Indemnifying
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<PAGE> 21
Party to monitor such conduct or settlement and shall provide the Indemnified
Person and such counsel with such information regarding such claim, proceeding
or suit as either of them may reasonably request (which request may be general
or specific), but the fees and expenses of such counsel shall be borne by the
Indemnified Person unless (1) the Indemnifying Party and the Indemnified Person
shall have mutually agreed to the retention of such counsel or (2) the named
parties to any such claim, proceed ing or suit include the Indemnified Person
and the Indemnifying Party and in the reasonable opinion of counsel to the
Indemnified Person representation of both parties by the same counsel would be
inappropriate due to actual or likely conflicts of interest between them, in
either of which cases the reasonable fees and disbursements of counsel for such
Indemnified Person shall be reimbursed by the Indemnifying Party to the
Indemnified Person; and (iv) the Indemnifying Party shall agree promptly to
reimburse to the extent required under this Section 14 the Indemnified Person
for the full amount of any third party claim resulting from such claim,
proceeding or suit and all related Expense incurred by the Indemnified Person.
4. In no event shall the Indemnifying Party
without the prior written consent of the Indemnified Person, settle or comprise
any claim or consent to the entry of any judgment that does not include as an
unconditional term thereof the giving by the claimant or the plaintiff to the
Indemnified Person a release from all liability in respect of such claim.
5. If the Indemnifying Party shall not have
undertaken the conduct and control of the defense of any claim, suit or
proceeding as provided above, the Indemnifying Party shall nevertheless be
entitled through counsel chosen by the Indemnifying Party and reasonably
acceptable to the Indemnified Person to monitor the conduct or settlement of
such claim by the Indemnified Person, and the Indemnified Person shall provide
the Indemnifying Party and such counsel with such information regarding such
action or suit as either of them may reasonably request (which request may be
general or specific), but all costs and expenses incurred in connection with
such monitoring shall be borne by the Indemnifying Party.
(b) Settlement of Third-Party Claims By the Indemni fied
Person. So long as the Indemnifying Party is contesting any such claim,
proceeding or suit in good faith, the Indemnified Person shall not pay or settle
any such claim, proceeding or suit. Notwithstanding the foregoing, the
Indemnified Person shall have the right to pay or settle any such claim,
proceeding or suit, provided that in such event the Indemnified Person shall
waive any right to indemnity therefor by the Indemnifying Party, and no amount
in respect thereof shall be claimed as Loss or Expense under this Section 14.
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<PAGE> 22
If the Indemnifying Party shall not have undertaken the conduct and
control of the defense of any claim, proceeding or suit as provided above, the
Indemnified Person, on not less than 30 days' prior written Notice to the
Indemnifying Party, may make settlement (including payment in full) of such
claim and such settlement shall be binding upon the Parties hereto for the
purposes hereof, unless within said 30-day period the Indemnifying Party shall
have requested the Indemnified Person to contest such claim at the expense of
the Indemnifying Party. In such event, the Indemnified Person shall promptly
comply with such request and the Indemnifying Party shall have the right to
direct the defense of such claim or any litigation based thereon subject to all
of the conditions of this Section 14. Anything in this Section 14 to the
contrary notwithstanding, if the Indemnified Person advises the Indemnifying
Party that it has determined to make settlement of a claim, the Indemnified
Person shall have the right to do so at its own cost and expense, without any
requirement to contest such claim at the request of the Indemnifying Party, but
without any right under the provisions of this Section 14 for indemnification by
the Indemnifying Party.
14.4 Insurance. Each Party is responsible for carrying any insurance
desired by it in its sole discretion, including comprehensive general liability
insurance, insurance to cover its facilities, products liability insurance and
business interruption insurance. The indemnification provided for in Sections
14.1 and 14.2 shall not apply to the extent the Indemnified Party is compensated
by any insurance.
SECTION 15. DISPUTES.
15.1 Agreement to Arbitrate. The procedures for discussion, negotiation
and arbitration set forth in this Section 15 shall apply to all disputes,
controversies or claims (whether sounding in contract, tort or otherwise) that
may arise out of or relate to, or arise under or in connection with, this
Agreement. Each Party agrees on behalf of itself and its respective Affiliates
that the procedures set forth in this Section 15 shall be the sole and exclusive
remedy in connection with any dispute, controversy or claim relating to any of
the foregoing matters and irrevocably waives any right to commence any Action in
or before any Governmental Authority, except as expressly provided in Section
15.7(b) and except to the extent provided under the Arbitration Act in the case
of judicial review of arbitration results or awards. Each Party on behalf of
itself and its respective Affiliates irrevocably waives any right to any trial
by jury with respect to any claim, controversy or dispute set forth in the first
sentence of this Section 15.1
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15.2 Escalation and Mediation. (a) Each Party agrees to use its
respective reasonable efforts to resolve expeditiously any dispute, controversy
or claim between them with respect to the matters covered hereby that may arise
from time to time on a mutually acceptable negotiated basis. In furtherance of
the foregoing, any Party involved in a dispute, controversy or claim may deliver
a notice (an "Escalation Notice") demanding an in-person meeting involving
representatives of the Parties at a senior level of management of the Parties
(or if the Parties agree, of the appropriate strategic business unit or division
within such entity). A copy of any such Escalation Notice shall be given to the
General Counsel, or like officer or official, of each Party involved in the
dispute, controversy or claim (which copy shall state that it is an Escalation
Notice pursuant to this Agreement). Any agenda, location or procedures for such
discussions or negotiations between the Parties may be established by the
Parties from time to time; provided, however, that the Parties shall use their
reasonable efforts to meet within 10 days of the Escalation Notice.
(b) The Parties must retain a mediator to aid the Parties in
their discussions and negotiations by informally providing advice to the
Parties. Any opinion expressed by the mediator shall be strictly advisory and
shall not be binding on the Parties, nor shall any opinion expressed by the
mediator be admissible in any arbitration proceeding. The mediator shall be
selected by the Party that did not deliver the applicable Escalation Notice from
the list of individuals set forth on Exhibit A, the names of which individuals
were supplied to the Parties by JAMS/Endispute. Costs of the mediation shall be
borne equally by the Parties involved in the matter, except that each Party
shall be responsible for its own expenses. Mediation is a prerequisite to a
demand for arbitration under Section 15.3.
15.3 Procedures for Arbitration. (a) At any time after the completion
of the mediation required by Section 15.2(b), any Party involved in the dispute,
controversy or claim (regardless of whether such Party delivered the Escalation
Notice) may, unless the Applicable Deadline (as hereinafter defined) has
occurred, make a written demand (the "Arbitration Demand Notice") that the
dispute be resolved by binding arbitration, which Arbitration Demand Notice
shall be given to the Parties to the dispute, controversy or claim in the manner
set forth in Section 16.1. In the event that any Party shall deliver an
Arbitration Demand Notice to another Party, such other Party may itself deliver
an Arbitration Demand Notice to such first Party with respect to any related
dispute, controversy or claim with respect to which the Applicable Deadline has
not passed without the requirement of delivering an Escalation Notice. No Party
may assert that the failure to resolve any matter during any discussions or
negotiations, the course of conduct during the
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<PAGE> 24
discussions or negotiations or the failure to agree on a mutually acceptable
time, agenda, location or procedures for the meeting, in each case, as
contemplated by Section 15.2, is a prerequisite to a demand for arbitration
under this Section 15.3. In the event that any Party delivers an Arbitration
Demand Notice with respect to any dispute, controversy or claim that is the
subject of any then pending arbitration proceeding or of a previously delivered
Arbitration Demand Notice, all such disputes, controversies and claims shall be
resolved in the arbitration proceeding for which an Arbitration Demand Notice
was first delivered unless the arbitrator in his or her sole discretion
determines that it is impracticable or otherwise inadvisable to do so.
(b) Any Arbitration Demand Notice may be given until one year
and 45 days after the later of (i) the occurrence of the act or event giving
rise to the underlying claim or (ii) the date on which such act or event was, or
should have been, in the exercise of reasonable due diligence, discovered by the
Party asserting the claim (as applicable and as it may in a particular case be
specifically extended by the Parties in writing, the "Applicable Deadline"). Any
discussions, negotiations or mediations between the Parties pursuant to this
Agreement or otherwise will not toll the Applicable Deadline unless expressly
agreed in writing by the Parties. Each Party agrees on behalf of itself and its
respective Affiliates that if an Arbitration Demand Notice with respect to a
dispute, controversy or claim is not given prior to the expiration of the
Applicable Deadline, such dispute, controversy or claim will be barred. Subject
to Section 15.7(d), upon delivery of an Arbitration Demand Notice pursuant to
Section 15.3(a) prior to the Applicable Deadline, the dispute, controversy or
claim shall be decided by a sole arbitrator in accordance with the rules set
forth in this Section 15.
15.4 Arbitrator. (a) If the amount in dispute is less than $500,000,
the mediator selected by the provisions set forth in Section 15.2(b) above shall
also serve as the sole arbitrator. If the amount in dispute equals or exceeds
$500,000, the mediator selected by the provisions set forth in Section 15.2(b)
above shall select a sole arbitrator from a list provided by JAMS/Endispute.
After selection of such sole arbitrator, the mediator shall have no further role
with respect to the dispute. Any arbitrator selected pursuant to this paragraph
(a) shall be disinterested with respect to any of the Parties and the matter and
shall be reasonably competent in the applicable subject matter.
(b) The sole arbitrator selected pursuant to paragraph (a)
above will set a time for the hearing of the matter which will commence no later
than 90 days after the date of the
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appointment of the sole arbitrator pursuant to paragraph (a) above, and such
hearing will be no longer than 30 days (unless in the judgment of the sole
arbitrator the matter is unusually complex and sophisticated and thereby
requires a longer time, in which event such hearing shall be no longer than 90
days). The final decision of such arbitrator will be rendered in writing to the
Parties not later than 60 days after the last hearing date, unless otherwise
agreed by the Parties in writing.
15.5 Hearings. Within the time period specified in Section 15.4(b), the
matter shall be presented to the arbitrator at a hearing by means of written
submissions of memoranda and verified witness statements, filed simultaneously,
and responses, if necessary in the judgment of the arbitrator or both of the
Parties. If the arbitrator deems it to be essential to a fair resolution of the
dispute, live cross-examination or direct examination may be permitted, but is
not generally contemplated to be necessary. The arbitrator shall actively manage
the arbitration with a view to achieving a just, speedy and cost-effective
resolution of the dispute, claim or controversy. The arbitrator may, in his or
her sole discretion, set time and other limits on the presentation of each
Party's case, its memoranda or other submissions, and refuse to receive any
proffered evidence that the arbitrator, in his or her sole discretion, finds to
be cumulative, unnecessary, irrelevant or of low probative nature. Except as
otherwise set forth herein, any arbitration hereunder will be conducted in
accordance with the JAMS/Endispute Streamlined Rules for Commercial, Real Estate
and Construction Cases then prevailing. The decision of the arbitrator will be
final and binding on the Parties, and judgment thereon may be had and will be
enforceable in any court having jurisdiction over the Parties. Arbitration
awards will bear interest at an annual rate of the Prime Rate plus 2% per annum.
To the extent that the provisions of this Agreement and the prevailing rules of
JAMS/Endispute conflict, the provisions of this Agreement shall govern.
15.6 Discovery and Certain Other Matters. (a) Any Party involved in the
applicable dispute may request limited document production from the other Party
of specific and expressly relevant documents, with the reasonable expenses of
the producing Party incurred in such production paid by the requesting Party.
Any such discovery (which rights to documents shall be substantially less than
document discovery rights prevailing under the Federal Rules of Civil Procedure)
shall be conducted expeditiously and shall not cause the hearing provided for in
Section 15.5 to be adjourned except upon consent of all of the Parties or upon
an extraordinary showing of cause demonstrating that such adjournment is
necessary to permit discovery essential to a Party to the proceeding.
Depositions, interrogatories or other forms of discovery (other than the
document production set
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forth above) shall not occur except by consent of all of the Parties. Disputes
concerning the scope of document production and enforcement of the document
production requests will be determined by written agreement of the Parties or,
failing such agreement, will be referred to the arbitrator for resolution. All
discovery requests will be subject to the Parties' rights to claim any
applicable privilege. The arbitrator will adopt procedures to protect the
proprietary rights of the Parties and to maintain the confidential treatment of
the arbitration proceedings (except as may be required by law). Subject to the
foregoing, the arbitrator shall have the power to issue subpoenas to compel the
production of documents relevant to the dispute, controversy or claim.
(b) The arbitrator shall have full power and authority to
determine issues of arbitrability but shall otherwise be limited to interpreting
or construing the applicable provisions of this Agreement, and will have no
authority or power to limit, expand, alter, amend, modify, revoke or suspend any
condition or provision of this Agreement; it being understood, however, that the
arbitrator will have full authority to implement the provisions of this
Agreement and to fashion appropriate remedies for breaches of this Agreement;
provided, however, that the arbitrator shall not have (i) any authority in
excess of the authority a court having jurisdiction over the Parties and the
controversy or dispute would have absent these arbitration provisions,(ii) any
right or power to award punitive or multiplicative damages or (iii) any power to
impose remedies other than those set forth in Section 11.2 and 11.3. It is the
intention of the Parties that in rendering a decision the arbitrator give effect
to the applicable provisions of this Agreement and follow applicable law (it
being understood and agreed that this sentence shall not give rise to a right of
judicial review of the arbitrator's award).
(c) If a Party fails or refuses to appear at and participate
in an arbitration hearing after due notice, the arbitrator may hear and
determine the controversy upon evidence produced by the appearing Party.
(d) Arbitration costs will be borne equally by each Party
involved in the matter, except that each Party will be responsible for its own
attorney's fees and other costs and expenses, including the costs of witnesses
selected by such Party.
15.7 Certain Additional Matters. (a) Any arbitration award shall be a
bare award limited to a holding for or against a Party and shall be without
findings as to facts, issues or conclusions of law (including with respect to
any matters relating to the validity or infringement of patents or patent
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<PAGE> 27
applications) and shall be without a statement of the reasoning on which the
award rests, but must be in adequate form so that a judgment of a court may be
entered thereupon. Judgment upon any arbitration award hereunder may be entered
in any court having jurisdiction thereof.
(b) Prior to the commencement of an arbitration hearing
pursuant to Section 15.5, any Party may seek one or more temporary restraining
orders in a court of competent jurisdiction if necessary in order to preserve
and protect the status quo. Neither the request for, nor the grant or denial of,
any such temporary restraining order shall be deemed a waiver of the obligation
to arbitrate as set forth herein, and the arbitrator may dissolve, continue or
modify any such order. Any such temporary restraining order shall remain in
effect until the first to occur of the expiration of the order in accordance
with its terms or the dissolution thereof by the arbitrator.
(c) Except as required by law, the Parties shall hold, and
shall cause their respective officers, directors, employees, agents and other
representatives to hold, the existence, content and result of mediation or
arbitration in confidence in accordance with the provisions of Section 9 of this
Agreement and except as may be required in order to enforce any award. Each of
the Parties shall request that any mediator or arbitrator comply with such
confidentiality requirement.
(d) In the event that at any time the sole arbitrator shall
fail to serve as an arbitrator for any reason, the Parties shall select a new
arbitrator who shall be disinterested as to the Parties and the matter in
accordance with the procedure set forth herein for the selection of the initial
arbitrator. The extent, if any, to which testimony previously given shall be
repeated or as to which the replacement arbitrator elects to rely on the
stenographic record (if there is one) of such testimony shall be determined by
the replacement arbitrator.
15.8 Law Governing Arbitration Procedures. The interpretation of the
provisions of this Article 15, only insofar as they relate to the agreement to
arbitrate and any procedures pursuant thereto, shall be governed by the
Arbitration Act and other applicable federal law. In all other respects, the
interpretation of this Agreement shall be governed as set forth in Section 16.3.
15.9 Choice of Forum. Any arbitration hereunder shall take place in
Chicago, Illinois, unless otherwise agreed in writing by the Parties.
SECTION 16. MISCELLANEOUS PROVISIONS.
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16.1 Notices. All notices, requests, claims, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed given or delivered (i) when delivered personally, (ii) if transmitted by
facsimile when confirmation of transmission is received, (iii) if sent by
registered or certified mail, postage prepaid, return receipt requested, on the
third business day after mailing or (iv) if sent by private courier when
received; and shall be addressed as follows:
If to TSC, to:
Technology Solutions Company
205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
Attention: General Counsel
Telephone: (312) 228-4500
Facsimile: (312) 228-4501
If to eLoyalty, to:
eLoyalty Corporation
205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
Attention: Chief Financial Officer
Telephone: (312) 228-4500
Facsimile: (312) 228-4501
or to such other address as such Party may indicate by a notice delivered to the
other Party.
16.2 Entire Agreement. This Agreement is the entire agreement between
the Parties hereto with respect to the subject matter hereof, there being no
prior written or oral promises or representations not incorporated herein.
16.3 Choice of Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Illinois and the
federal laws of the United States of America applicable therein, as though all
acts and omissions related hereto occurred in Illinois. Any lawsuit arising from
or related to this Agreement shall only be brought in the United States District
Court for the Northern District of Illinois or the Circuit Court of Cook County,
Illinois. To the extent permissible by law, the Parties hereby consent to the
juris diction and venue of such courts. Each Party hereby waives, releases and
agrees not to assert, and agrees to cause its Affiliates to waive, release and
not assert, any rights such Party or its Affiliates may have under any foreign
law or regulation that would be inconsistent with the terms of this Agreement as
governed by Illinois law.
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16.4 Amendment; Waiver. No amendment or modification of the terms of
this Agreement shall be binding on either Party unless reduced to writing and
signed by an authorized representative of the Party to be bound. The waiver by
either Party of any particular default by the other Party shall not affect or
impair the rights of the Party so waiving with respect to any subsequent default
of the same or a different kind; nor shall any delay or omission by either Party
to exercise any right arising from any default by the other affect or impair any
rights which the nondefaulting Party may have with respect to the same or any
future default.
16.5 Severability. Any provision of this Agreement which is prohibited
or unenforceable in any jurisdiction shall be ineffective in such jurisdiction
to the extent of such prohibition or unenforceability without affecting,
impairing or invalidating the remaining provisions or the enforceability of this
Agreement.
16.6 Relationship of the Parties. By virtue of this Agreement, neither
Party constitutes the other as its agent, partner, joint venturer, or legal
representative and neither Party has express or implied authority to bind the
other in any manner whatsoever.
16.7 Survival. The rights and obligations of the Parties under Sections
3.5, 6, 9, 11, 14, 15 and 16.9, shall survive any termination of this Agreement.
16.8 Counterparts. For convenience of the Parties hereto, this
Agreement may be executed in one or more counterparts, each of which shall be
deemed an original for all purposes.
16.9 Records Retention. Each Party will retain all information obtained
or created in the course of performance hereunder in accordance with the records
retention guidelines of the other Party existing from time to time. Each Party
has advised the other of its respective guidelines as in effect on the Effective
Date and will advise the other Party of any subsequent changes therein.
16.10 Beneficiaries. Except for the provisions of Section 14 hereof,
which are also for the benefit of the other Persons indemnified, this Agreement
is solely for the benefit of the Parties hereto and their respective Affiliates,
successors and permitted assigns and shall not confer upon any other Person any
remedy, claim, liability, reimbursement or other right in excess of those
existing without reference to this Agreement.
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IN WITNESS WHEREOF, the Parties have caused this Agreement to
be signed by their authorized representatives as of the Effective Date.
TECHNOLOGY SOLUTIONS COMPANY eLOYALTY CORPORATION
By:___________________________ By:___________________________
Jack Hayden Kelly D. Conway
President and Chief
Title: _______________________ Executive Officer
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<PAGE> 1
EXHIBIT 10.6
TAX SHARING AND DISAFFILIATION AGREEMENT
Dated as of [ ], 2000
by and between
TECHNOLOGY SOLUTIONS COMPANY
and
eLOYALTY CORPORATION
<PAGE> 2
TAX SHARING AND DISAFFILIATION AGREEMENT
TAX SHARING AND DISAFFILIATION AGREEMENT dated as of _______, by and between
TECHNOLOGY SOLUTIONS COMPANY, a Delaware corporation ("TSC"), and eLOYALTY
CORPORATION, a Delaware corporation ("eLoyalty").
RECITALS
WHEREAS, eLoyalty is a first tier Subsidiary of TSC;
WHEREAS, TSC is the common parent of an affiliated group of
corporations within the meaning of Section 1504(a) of the Code, which currently
files consolidated federal income Tax Returns;
WHEREAS, pursuant to the Reorganization Agreement dated as of
__________________, 1999 by and between TSC and eLoyalty (the "Reorganization
Agreement"), TSC has contributed to eLoyalty the Transferred Assets, and
eLoyalty has assumed the Assumed Liabilities (as more fully described in the
Reorganization Agreement, the "Contribution"), and TSC will distribute to the
holders of TSC Common Stock all of the outstanding shares of eLoyalty Common
Stock owned by TSC, with cash distributed in lieu of fractional shares of
eLoyalty Common Stock (as described more fully in the Reorganization Agreement,
the "Distribution");
WHEREAS, TSC and eLoyalty intend that the Contribution will
qualify as a reorganization within the meaning of Section 368(a)(1)(D) of the
Code, and the Distribution will qualify as a distribution described in Section
355 of the Code and will not result in the recognition of any taxable gain or
income to TSC or any shareholder of TSC (except to the extent of cash received
in lieu of any fractional shares of eLoyalty Common Stock);
WHEREAS, after the Distribution Date, eLoyalty will cease to
be a member of the TSC Affiliated Group for federal income Tax purposes;
<PAGE> 3
WHEREAS, members of the eLoyalty Group and members of the TSC
Group desire on behalf of themselves and their successors to set forth their
rights and obligations with respect to Taxes due for periods before, on and
after the Distribution Date; and
WHEREAS, capitalized terms used but not defined herein have
the meanings set forth in the Reorganization Agreement.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS
1.01 For the purposes of this Agreement:
"AGREEMENT" shall mean this Tax Sharing and Disaffiliation
Agreement as the same may be amended from time to time.
"APPLICABLE FEDERAL RATE" shall have the meaning set forth in
Section 1274(d) of the Code, compounded quarterly.
"CHANGE IN FEDERAL TAX LAW" shall mean any of the following
occurring after the Distribution Date: any amendment to, or change in, the
Internal Revenue Code of 1986, as amended (or any Treasury Regulations
thereunder); the issuance of any revenue ruling, revenue procedure, notice, or
other pronouncement of general application by the Internal Revenue Service or
any successor administrative agency; or the receipt of a binding private letter
ruling addressed to TSC, in each such case to the effect that no income or gain
will be recognized for federal income tax purposes by the TSC Affiliated Group
upon the exercise by employees of any member of such group of options with
respect to eLoyalty stock.
"CLAIM" shall have the meaning set forth in Section 5.03(a) of
this Agreement.
"CONTRIBUTION" shall have the same meaning set forth in the
third recital.
"CONTROLLING PARTY" shall have the meaning set forth in
Section 5.01 of this Agreement.
"DISTRIBUTION" shall have the meaning set forth in the third
recital.
2
<PAGE> 4
"eLOYALTY" shall have the meaning set forth in the preamble to
this Agreement.
"eLOYALTY GROUP" shall mean, for any period, (i) eLoyalty,
(ii) the eLoyalty Business, to the extent operated as a division of an entity
other than eLoyalty and (iii) an affiliate of either of the foregoing or of TSC,
excluding any entity that is principally engaged in the Retained Business. For
purposes of the foregoing, "affiliate" shall mean any Person that directly or
indirectly controls, or is under common control with, eLoyalty or the eLoyalty
Business (as described in (i) or (ii) in the preceding sentence). For purposes
of this definition, the term "control" means the power to direct management,
directly or indirectly, whether through the ownership of voting securities, by
contract, or otherwise; and the term "controlled" has the meaning correlative to
the foregoing. Notwithstanding the foregoing, for any period, (x) eLoyalty and
TSC shall not be deemed to be under common control for purposes hereof due
solely to the fact that eLoyalty and TSC indirectly or directly have common
stockholders, (y) the eLoyalty Business to the extent operated as a division of
an entity other than eLoyalty and eLoyalty shall neither be treated as a member
of the TSC Group nor be deemed to be controlled by TSC and (z) any Person
controlled by both eLoyalty and TSC shall be treated as controlled solely by
eLoyalty. A "member" of the eLoyalty Group shall include, without limitation,
the eLoyalty Business, to the extent operated as a division of an entity other
than eLoyalty.
"eLOYALTY TAINTING ACT" shall mean:
(a) any inaccuracy or breach of any representation, warranty,
or covenant that is made by eLoyalty pursuant to Section 2.01 of this
Agreement;
(b) any action (or failure to take any reasonably available
action) by any member of the eLoyalty Group; or
(c) any acquisition or other transaction involving the capital
stock of eLoyalty (other than the Contribution or Distribution).
"eLOYALTY TAXES" shall mean any Taxes (excluding Restructuring
Taxes) that are attributable to the eLoyalty Business. For purposes of the
foregoing, Taxes shall be deemed attributable to the eLoyalty Business to the
extent such Taxes are imposed as a result of (i) Tax Items of each foreign
member of the TSC Group or the eLoyalty Group but, in the case of such a member
organized under the laws of France or the United Kingdom, only to the extent not
directly related to the Retained Business, (ii) Tax Items of each U.S. member of
the TSC Group or the eLoyalty Group directly related to the eLoyalty Business,
or (iii) the portion of Tax Items of U.S. members not directly related to either
the eLoyalty Business or the Retained Business corresponding to the proportion
of the aggregate revenues of the U.S. members attributable to the eLoyalty
Business relative to the aggregate revenues of the U.S. members attributable to
either the eLoyalty Business or the Retained Business for the fiscal
(accounting) year of TSC in which, or with which, ends the taxable year with
respect to which the relevant Tax is imposed. For
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purposes hereof, a "U.S. member" shall mean a member organized under the laws of
the United States or a State or a jurisdiction thereof or therein, and a
"foreign" member shall mean a member that is not a U.S. member. For purposes of
the foregoing, in the case of any entity or group having Tax Items attributable
to the eLoyalty Business, incremental Tax Benefits shall be attributed to
foreign, but not U.S. members of the eLoyalty Group or the TSC Group.
"FILING PARTY" shall have the meaning set forth in Section
4.01 of this Agreement.
"FINAL DETERMINATION" shall mean with respect to any issue (i)
a decision, judgment, decree or other order by any court of competent
jurisdiction, which decision, judgment, decree or other order has become final
and not subject to further appeal, (ii) a closing agreement (whether or not
entered into under Section 7121 of the Code) or any other binding settlement
agreement (whether or not with the IRS) entered into in connection with or in
contemplation of an administrative or judicial proceeding, or (iii) the
completion of the highest level of administrative proceedings if a judicial
contest is not or is no longer available.
"INDEMNITOR" shall have the meaning set forth in Section 5.02
of this Agreement.
"LIABLE PARTY" shall have the meaning set forth in Section
4.01 of this Agreement.
"NET OPTION DEDUCTION" shall mean, for any taxable year of the
TSC Affiliated Group, the excess for such group of (i) the aggregate net
deduction or loss recognized by such group for federal income tax purposes upon
the exercise by employees of any member of such group of options with respect to
eLoyalty stock over (ii) any aggregate net income or gain recognized for federal
income tax purposes by such group upon the exercise by employees of any member
of such group of options with respect to eLoyalty stock.
"POST-DISTRIBUTION PERIOD" shall mean any taxable year or
other taxable period beginning after the Distribution Date and, in the case of
any taxable year or other taxable period that begins before and ends after the
Distribution Date, that part of the taxable year or other taxable period that
begins at the beginning of the day after the Distribution Date.
"PRE-DISTRIBUTION PERIOD" shall mean any taxable year or other
taxable period that ends on or before the Distribution Date and, in the case of
any taxable year or other taxable period that begins before and ends after the
Distribution Date, that part of the taxable year or other taxable period through
the close of the Distribution Date.
"REORGANIZATION AGREEMENT" shall have the meaning set forth in
the third recital.
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"REPRESENTATION LETTERS" shall mean the representation letters
and any other materials (including, without limitation, the ruling request and
the supplemental submissions to the IRS) delivered or deliverable by TSC and
others in connection with the issuance by the IRS of the Tax Rulings.
"RESTRUCTURING TAXES" shall mean any Taxes (and other
liabilities, including, without limitation, liability to stockholders and the
costs of defending against the imposition of such Taxes and other liabilities)
imposed as a result of a Final Determination that (i) the Contribution failed to
qualify as a reorganization within the meaning of Section 368(a)(1)(D) of the
Code, (ii) the Distribution failed to qualify as a distribution described in
Section 355 of the Code, or (iii) any stock or securities of eLoyalty failed to
qualify as "qualified property" within the meaning of Section 355(c)(2) of the
Code because of the application of Section 355(d) or Section 355(e) of the Code
to the Distribution.
"RETAINED BUSINESS" shall have the meaning set forth in the
Reorganization Agreement.
"TAX" (and with correlative meaning, "Taxes" and "Taxable")
means any federal, state, local or foreign net income, gross income, gross
receipts, windfall profit, severance, property, production, sales, use, license,
excise, franchise, employment, payroll, withholding, alternative or add-on
minimum, ad valorum, value-added, transfer, stamp, or environmental tax, or any
other tax, custom, duty, governmental fee or other like assessment or charge of
any kind whatsoever, together with any interest or penalty, addition to tax or
additional amount imposed by any Governmental Authority.
"TAX BENEFITS" means benefits taken into account in computing
the tax liability of a member of either the eLoyalty Group or the TSC Group,
including the benefit of the graduated tax rates of Section 11 of the Code, as
well as any similar or corresponding benefits under state or local tax law.
"TAX ITEM" means any item of income, gain, loss, deduction,
credit, provisions for reserves, recapture of credit, receipt, proceeds or any
other item or event that increases or decreases Taxes paid or payable, including
an adjustment under Section 481 of the Code resulting from a change in
accounting method.
"TAX RETURN" shall mean any return, report or similar
statement required to be filed with respect to any Tax (including any attached
schedules), including, without limitation, any information return, claim for
refund, amended return or declaration of estimated Tax.
"TAX RULINGS" shall mean the rulings by the IRS deliverable to
TSC in connection with the Contribution and the Distribution.
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"TRANSACTION TAXES" shall have the meaning set forth in
Section 3.04(d) of this Agreement.
"TSC" shall have the meaning set forth in the preamble to this
Agreement.
"TSC AFFILIATED GROUP" shall mean the corporations included in
the affiliated group, as defined in Section 1504 of the Code, of which TSC is
the common parent, and any successor group.
"TSC GROUP" shall mean, for any period, TSC or an affiliate of
TSC engaged principally in the Retained Business. For the purposes of the
foregoing, "affiliate" shall mean any Person that directly or indirectly
controls, or is under common control with, TSC. For the purposes of this
definition, the term "control" means the power to direct the management of an
entity, directly or indirectly, whether through the ownership of voting
securities, by contract, or otherwise; and the term "controlled" has the meaning
correlative to the foregoing. Notwithstanding the foregoing, for any period, (x)
eLoyalty and TSC shall not be deemed to be under common control for purposes
hereof solely due to the fact that eLoyalty and TSC indirectly or directly have
common stockholders, (y) the eLoyalty Business to the extent operated as a
division of an entity other than eLoyalty and eLoyalty shall neither be treated
as a member of the TSC Group nor be deemed to be controlled by TSC and (z) any
person controlled by both eLoyalty and TSC shall be treated as controlled solely
by eLoyalty.
"TSC TAINTING ACT" shall mean:
(a) any inaccuracy or breach of any representation, warranty,
or covenant that is made by TSC pursuant to Section 2.02 of this
Agreement;
(b) any action (or failure to take any reasonably available
action) by any member of the TSC Group;
(c) any acquisition or other transaction involving the capital
stock of TSC (other than the distribution of the capital stock of TSC
in the spin-off).
"TSC TAXES" shall mean any Taxes (excluding Restructuring
Taxes) that are attributable to the Retained Business. For purposes of the
foregoing, Taxes shall be deemed attributable to the Retained Business to the
extent such Taxes are imposed as a result of (i) Tax Items of each foreign
member organized under the laws of France or the United Kingdom to the extent
directly related to the Retained Business, (ii) Tax Items of each U.S. member of
the TSC Group or the eLoyalty Group directly related to the Retained Business,
or (iii) the portion of Tax Items of U.S. members not directly related to either
the eLoyalty Business or the Retained Business corresponding to the proportion
of the aggregate revenues of the U.S. members attributable to the Retained
Business relative to the aggregate revenues of the U.S. members attributable to
either the eLoyalty Business or the Retained Business for the fiscal
(accounting)
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year of TSC in which, or with which, ends the taxable year with respect to which
the relevant Tax is imposed. For purposes hereof, a "U.S. member" shall mean a
member organized under the laws of the U.S. or a State or a jurisdiction thereof
or therein, and a "foreign" member shall mean a member that is not a U.S.
member. For purposes of the foregoing, in the case of any entity or group having
Tax Items attributable to the Retained Business, incremental Tax Benefits shall
be attributable to U.S., but not foreign, members of the eLoyalty or TSC Group.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.01 eLOYALTY. eLoyalty hereby represents and warrants that:
(i) it has examined the Tax Rulings and the Representation Letters, and (ii) the
facts set forth therein, and the representations made therein, to the extent
descriptive of the eLoyalty Group or the eLoyalty Business (including, without
limitation, the facts and representations in the Representation Letters and the
Tax Rulings to the extent that they relate to the eLoyalty Group or the eLoyalty
Business, and the plans, proposals, intentions and policies of the eLoyalty
Group and the eLoyalty Business) were true, correct and complete in all material
respects when the Tax Rulings were issued, and will be true, correct and
complete in all material respects on the Distribution Date.
2.02 TSC. TSC hereby represents and warrants that (i) it has
examined the Tax Rulings and the Representation Letters, and (ii) the facts set
forth therein, and the representations made therein, to the extent descriptive
of the TSC Group or the Retained Business and not descriptive of the eLoyalty
Group or the eLoyalty Business (including, without limitation, the facts and
representations in the Representation Letters and the Tax Rulings to the extent
that they relate to the TSC Group or the Retained Business and do not relate to
the eLoyalty Group or the eLoyalty Business, and the plans, proposals,
intentions and policies of the TSC Group and the Retained Business, and not of
the eLoyalty Group or the eLoyalty Business) were true, correct and complete in
all material respects when the Tax Rulings were issued, and will be true,
correct and complete in all material respects on the Distribution Date.
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ARTICLE III
TAX RETURNS, TAX PAYMENTS AND TAX SHARING OBLIGATIONS
3.01 OBLIGATIONS TO FILE TAX RETURNS. (a) TSC shall timely
file or cause to be filed all Tax Returns with respect to the eLoyalty Group
that (i) are due on or before the Distribution Date or (ii) are for any
Pre-Distribution Period and are filed on a consolidated, combined or unitary
basis and include any member of the eLoyalty Group, on one hand, and any member
of the TSC Group, on the other hand, (except, in all cases, with respect to any
member of the eLoyalty Group for which TSC would not have filed or cause to be
filed a Tax Return in accordance with past practice). eLoyalty shall timely file
or cause to be timely filed any other Tax Return with respect to the eLoyalty
Group.
(b) TSC shall timely file or cause to be timely filed all Tax
Returns with respect to the TSC Group.
3.02 OBLIGATION TO REMIT TAXES. TSC and eLoyalty shall each
remit or cause to be remitted any Taxes due in respect of any Tax Return it is
required to file or cause to be filed pursuant to Section 3.01, and shall be
entitled to reimbursement for such payments to the extent provided in Section
3.03.
3.03 TAX SHARING OBLIGATIONS AND PRIOR AGREEMENTS. (a)
eLoyalty shall be liable for and pay, and pursuant to Article XII of the
Reorganization Agreement shall indemnify, defend, and hold harmless TSC and the
TSC Indemnified Parties from and against, any and all Losses and Expenses
incurred or suffered by TSC or one or more of the TSC Indemnified Parties in
connection with, relating to, arising out of or due to, directly or indirectly
(i) any eLoyalty Taxes and (ii) any amount determined to be eLoyalty's liability
under Section 3.04. eLoyalty shall be entitled to any refund of or credit for
Taxes for which eLoyalty is responsible under this Section 3.03(a).
(b) TSC shall be liable for and pay, and pursuant to Article
XII of the Reorganization Agreement shall indemnify, defend, and hold harmless
eLoyalty and the eLoyalty Indemnified Parties from and against, any and all
Losses and Expenses incurred or suffered by eLoyalty or one or more of the
eLoyalty Indemnified Parties in connection with, relating to, arising out of, or
due to, directly or indirectly (i) any TSC Taxes and (ii) any amount determined
to be TSC's liability under Section 3.04. TSC shall be entitled to any refund of
or credit for Taxes for which TSC is responsible under this Section 3.03(b).
(c) Except as set forth in this Agreement, the Reorganization
Agreement or any other Operating Agreement and in consideration of the mutual
indemnities and other obligations of this Agreement, any and all prior Tax
sharing agreements or practices between any member of the TSC Group and any
member of the eLoyalty Group shall be terminated with respect to the eLoyalty
Group as of the Distribution Date.
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3.04 RESTRUCTURING TAXES; OTHER TAXES RELATING TO THE
CONTRIBUTION OR DISTRIBUTION.
(a) eLoyalty and TSC shall each be liable for 50% of
Restructuring Taxes that are imposed as a result of neither an eLoyalty Tainting
Act nor a TSC Tainting Act. In the case of the imposition of a Restructuring Tax
where there is both an eLoyalty Tainting Act and a TSC Tainting Act, and each of
the eLoyalty Tainting Act and the TSC Tainting Act would alone be sufficient to
result in the imposition of such Restructuring Tax, eLoyalty and TSC shall each
be liable for 50% of such Restructuring Tax. In the case of a Restructuring Tax
that would not have been imposed but for the existence of both an eLoyalty
Tainting Act and a TSC Tainting Act, eLoyalty and TSC shall be liable for such
Restructuring Tax to the extent the eLoyalty Tainting Act and the TSC Tainting
Act, respectively, contributed to the imposition of such Restructuring Tax.
(b) Except as described in Section 3.04(a), eLoyalty shall be
liable for Restructuring Taxes imposed as a result of an eLoyalty Tainting Act.
(c) Except as described in Section 3.04(a), TSC shall be
liable for Restructuring Taxes imposed as a result of a TSC Tainting Act.
(d) TSC will determine the amount of sales, transfer, V.A.T.
or other similar taxes or fees (including, without limitation, all real estate,
patent, copyright and trademark transfer taxes and real estate recording fees
but not patent, copyright, and trademark recording fees, but excluding
Restructuring Taxes) payable in connection with the transactions contemplated by
the Reorganization Agreement (the "Transaction Taxes"). TSC and eLoyalty shall
each file promptly and timely the Tax Returns for such Transaction Taxes with
the appropriate taxing authorities and remit payment of the Transaction Taxes.
Transaction Taxes shall be the liability of the Person who or which is primarily
liable therefor under applicable Tax law.
3.05 PERIOD THAT INCLUDES THE DATE OF DISTRIBUTION. (a) To the
extent permitted by law or administrative practice, the taxable year of the
eLoyalty Group shall be treated as closing at the close of the Distribution
Date.
(b) If it is necessary for purposes of this Agreement to
determine the eLoyalty Taxes or TSC Taxes for a taxable year that begins on or
before and ends after the Distribution Date and is not treated under Section
3.05(a) as closing at the close of the Distribution Date, the determination
shall be made by assuming that such taxable year ended on a "closing of the
books" basis at the close of the Distribution Date, except that exemptions,
allowances or deductions that are calculated on an annual basis shall be
apportioned on a time basis.
3.06 PAYMENTS IN RESPECT OF NET OPTION DEDUCTIONS. IF,
following the Distribution Date, eLoyalty provides to TSC an unqualified opinion
of independent tax counsel of national standing selected by eLoyalty and
reasonably acceptable to TSC
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concluding (in form and substance reasonably acceptable to TSC) that, based on a
Change in Federal Tax Law, a Net Option Deduction will be available to the TSC
Affiliated Group with respect to eLoyalty stock options exercised by employees
of any member of the TSC Affiliated Group after the date of such tax opinion,
THEN for each taxable year of the TSC Affiliated Group ending after the date of
such opinion (and taking into account only those eLoyalty options exercised
after the date of such opinion) TSC shall remit to eLoyalty for each such
taxable year (A) the excess, if any, of (i) the aggregate amount of federal
income taxes that would have been payable by the TSC Affiliated Group with
respect to such taxable year if the Net Option Deduction had been zero over (ii)
the aggregate amount of federal income taxes actually payable by the TSC
Affiliated Group with respect to such taxable year minus (B) any tax or penalty
other than federal income tax (including, but not limited to, FICA, FUTA, and
other similar taxes) borne by any member of the TSC Affiliated Group with
respect to such taxable year as a result of the exercise, after the date of such
opinion, of eLoyalty stock options by employees of any member of the TSC
Affiliated Group. At the election of TSC, TSC's remittance with respect to a
taxable year shall be conditioned upon confirmation from independent tax counsel
that no change in law or other circumstance has occurred that would render the
conclusion reached in the original tax opinion to be no longer correct. TSC
shall remit amounts to eLoyalty required by this Section 3.06 with respect to a
taxable year as promptly as practicable following the date the final income tax
return for such taxable year is filed by TSC. If any Net Option Deduction for
which payment has been made by TSC pursuant to this Section 3.06 is subsequently
reduced, eliminated or deferred, eLoyalty shall promptly indemnify TSC for all
Losses and Expenses arising as a result of such reduction, elimination or
deferral.
ARTICLE IV
PAYMENTS
4.01 GENERAL TAX PAYMENTS. With respect to any Taxes for which
one party (the "Liable Party") is liable under Section 3.03 and that are to be
remitted in connection with Tax Returns to be filed by the other party (the
"Filing Party") after the Distribution Date pursuant to Sections 3.01 and 3.02,
(i) upon the request of the Filing Party, the Liable Party shall promptly
provide to the Filing Party all information necessary to enable the Filing Party
to file such Tax Returns and (ii) assuming compliance by the Liable Party with
the Liable Party's obligations under clause (i) (or written waiver by the Filing
Party of such compliance), the Filing Party shall, not later than ten (10) days
prior to the due date for remitting such Taxes (or, if the due date is within
forty-five (45) days after the Distribution Date, as promptly following the
Distribution Date as possible) provide the Liable Party with a written request
showing in reasonable detail the calculation of the amount of such Liable
Party's Taxes (and any other amounts) owing by the Liable Party to the Filing
Party pursuant to this Agreement. The Liable Party shall have the right to
object in writing to such calculation on or before sixty (60) days after the
date on which such request is provided to the Liable Party, on the grounds that
there is substantial authority that such calculation is incorrect; provided that
if the Liable Party so objects, (i) the Filing Party and the Liable Party shall
promptly submit the dispute to an independent
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accounting or law firm acceptable to both the Filing Party and the Liable Party
for prompt resolution, whose decision shall be final and binding on the Filing
Party and the Liable Party, and (ii) the party that such accounting or law firm
determines has lost the dispute shall pay all of the fees and expenses incurred
in connection with submitting such dispute. The Liable Party shall pay to the
Filing Party any amount not in dispute on or before the thirtieth (30th) day
following the receipt of such request by the Liable Party, with additional
amounts to be paid by the Liable Party (together with interest at the Applicable
Federal Rate accruing from the date on which such Return is filed) promptly upon
resolution of any objection.
4.02 OTHER PAYMENTS. Other payments due to a party under
Section 3.03 shall be due not later than twenty (20) days after the receipt or
crediting of a refund or the receipt of notice of a Final Determination to the
effect that the indemnified party is liable for an indemnified cost, together
with interest at a rate equal to the Applicable Federal Rate from the date on
which the indemnifying party receives such receipt, credit or notice.
4.03 NOTICE. TSC and eLoyalty shall give each other prompt
written notice of any payment that may be due under this Agreement.
ARTICLE V
TAX AUDITS
5.01 GENERAL. Except as otherwise provided in this Agreement,
each of eLoyalty and TSC (as the case may be, the "Controlling Party") shall
have sole responsibility for all audits or other proceedings with respect to Tax
Returns that it is required to file under Section 3.01. Except as provided in
Section 5.03, the Controlling Party shall have the sole right to contest the
audit or proceeding and to employ advisors of its choice.
5.02 INDEMNIFIED CLAIMS IN GENERAL. TSC or eLoyalty shall
promptly notify the other in writing upon the receipt of an actual notice of
assessment by the relevant Taxing authority of any proposed adjustment to a Tax
Return that may result in liability of the other party (the "Indemnitor") under
this Agreement. If the Indemnitor is not also the Controlling Party, the
Controlling Party shall provide the Indemnitor with information about the nature
and amounts of the proposed adjustments and, subject to additional rights of the
Indemnitor in certain circumstances under Section 5.03 of this Agreement, shall
permit the Indemnitor to participate in the proceeding at the Indemnitor's own
expense; provided, however, that the Controlling Party shall not be required to
indemnify the Indemnitor if the Controlling Party fails to notify or provide
such information to the Indemnitor, unless the Indemnitor is materially
prejudiced thereby. The Indemnitor shall pay all (or, in the case of
Restructuring Taxes for which liability is shared under Section 3.04(a) of this
Agreement, a portion based on the Indemnitor's share of such Restructuring
Taxes) reasonable expenses (including, but not limited to, legal and accounting
fees) incurred by the Controlling Party in connection with the assessment or
adjustment within seven (7) days after a written request by the Controlling
Party.
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5.03 CERTAIN FEDERAL INCOME TAX CLAIMS. (a) Any issues (other
than issues relating to Restructuring Taxes for which liability is shared under
Section 3.04(a), which shall be excluded from the provisions of this Section
5.03) raised by the IRS in any Tax inquiry, audit, examination, investigation,
dispute, litigation or other proceeding that would result in liability to the
Indemnitor under this Agreement that in the aggregate would equal or exceed
$250,000 with respect to any taxable year are defined as a Claim (a "Claim").
Except as provided in Section 5.03(d) and notwithstanding any other provision of
this Agreement that may be construed to the contrary, the Controlling Party
agrees to contest any Claim and not to settle any Claim without prior written
consent of the Indemnitor, provided that (i) the Controlling Party shall provide
notice to Indemnitor pursuant to Section 5.02 of any Claim, (ii) within thirty
(30) days after such notice is received by the Indemnitor, the Indemnitor shall
request in writing that such Claim be contested and the Indemnitor shall provide
an opinion of independent tax counsel, selected by the Indemnitor and reasonably
acceptable to the Controlling Party, to the effect that it is more likely than
not that a Final Determination will be substantially consistent with the
Indemnitor's position relating to such Claim, (iii) the Indemnitor shall agree
to pay (and shall pay) on demand all out-of-pocket costs, losses and expenses
(including, but not limited to, legal and accounting fees) paid or incurred by
the Controlling Party in connection with contesting such Claim, and (iv) the
Controlling Party, after reasonable consultation with the Indemnitor, shall
determine in the Controlling Party's sole discretion the nature of all actions
to be taken to contest such Claim, including (x) whether any action to contest
such Claim shall initially be by way of judicial or administrative proceeding,
or both, (y) whether any such Claim shall be contested by resisting payment
thereof or by paying the same and seeking a refund thereof, and (z) the court or
other judicial body before which judicial action, if any, shall be commenced. To
the extent the Indemnitor is not participating, the Controlling Party shall keep
the Indemnitor (and, upon request by the Indemnitor, its counsel) informed as to
the progress of the contest.
(b) If the Indemnitor requests that the Controlling Party
accept a settlement of a Claim offered by the IRS and if such Claim may, in the
reasonable discretion of the Controlling Party, be settled without prejudicing
any claims the IRS may have with respect to matters unrelated to the Claim, the
Controlling Party shall either accept such settlement offer or agree with the
Indemnitor that the Indemnitor's liability with respect to such Claim shall be
limited to the lesser of (i) an amount calculated on the basis of such
settlement offer plus interest owed to the IRS on the date of eventual payment
or (ii) the amount calculated on the basis of a Final Determination.
(c) If the Controlling Party shall elect to pay the Tax
claimed and seek a refund, the Indemnitor shall lend sufficient funds on an
interest-free basis to the Controlling Party (with no net after-tax cost to the
Controlling Party), to cover any applicable indemnity obligations of the
Indemnitor. To the extent such refund claim is ultimately disallowed, the loan
or portion thereof equal to the amount of the refund claim so disallowed shall
be applied against the Indemnitor's obligation to make indemnity payments
pursuant to this Agreement. To the extent such refund claim is allowed, the
Controlling Party shall pay to the Indemnitor all amounts
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advanced to the Controlling Party with respect to the indemnity obligation
within ten (10) days of the receipt of such refund (or if the Controlling Party
would have received such refund but for the existence of a counterclaim or other
claim not indemnified by the Indemnitor under this Agreement, within ten (10)
days of the final resolution of the contest), plus an amount equal to any
interest received (or that would have been received) from the IRS that is
properly attributable to such amount.
(d) Except as provided below, the Controlling Party shall not
settle a Claim that the Indemnitor is entitled to require the Controlling Party
to contest under Section 5.03(a) without the prior written consent of the
Indemnitor. At any time, whether before or after commencing to take any action
pursuant to this Section 5.03 with respect to any Claim, the Controlling Party
may decline to take action with respect to such Claim and may settle such Claim
without the prior written consent of the Indemnitor by notifying the Indemnitor
in writing that the Indemnitor is released from its obligations to indemnify the
Controlling Party with respect to such Claim (which notification shall release
the Indemnitor from such obligations except to the extent the Indemnitor has
agreed in writing that it would be willing to have its liability calculated on
the basis of a settlement offer, as provided in Section 5.03(b), at that point
in the contest) and with respect to any Claim related to such Claim or based on
the outcome of such Claim. If the Controlling Party settles any Claim or
otherwise takes or declines to take any action pursuant to this paragraph, the
Controlling Party shall pay to the Indemnitor any amounts paid or advanced by
the Indemnitor with respect to such Claim (other than amounts payable by the
Indemnitor in connection with a settlement offer pursuant to Section 5.03(b)),
plus interest attributable to such amounts.
ARTICLE VI
COOPERATION
6.01 GENERAL. TSC and eLoyalty shall cooperate with each other
in the filing of any Tax Returns and the conduct of any audit or other
proceeding and each shall execute and deliver such powers of attorney and make
available such other documents as are reasonably necessary to carry out the
intent of this Agreement. Each party agrees to notify the other party in writing
of any audit adjustments that do not result in Tax liability but can be
reasonably expected to affect Tax Returns of the other party, or any of its
Subsidiaries, for a Post-Distribution Period. Each party agrees to treat the
Contribution and Distribution for all income Tax purposes as not causing the
recognition of any income, gain or loss (except with respect to the payment of
cash in lieu of fractional shares).
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6.02 COOPERATION WITH RESPECT TO TAX RETURN FILINGS,
EXAMINATIONS AND TAX RELATED CONTROVERSIES. (a) In addition to any obligations
imposed pursuant to the Reorganization Agreement, each member of the TSC Group
shall fully cooperate with eLoyalty and its representatives, in a prompt and
timely manner, in connection with (i) the preparation and filing of and (ii) any
inquiry, audit, examination, investigation, dispute, or litigation involving,
any Tax Return required to be filed by eLoyalty pursuant to this Agreement, by
or for any member of the eLoyalty Group.
(b) eLoyalty shall fully cooperate with TSC and its
representatives, in a prompt and timely manner, in connection with (i) the
preparation and filing of and (ii) any inquiry, audit, examination,
investigation, dispute, or litigation involving, any Tax Return required to be
filed by TSC pursuant to this Agreement. Such cooperation shall include, but not
be limited to, (x) the execution and delivery to TSC by eLoyalty of any power of
attorney required to allow TSC and its counsel to participate in or control any
inquiry, audit or other administrative proceeding and to assume the defense or
prosecution, as the case may be, of any suit, action or proceeding pursuant to
the terms of and subject to the conditions set forth in Article V of this
Agreement, and (y) making available to TSC, during normal business hours, and
within fifteen (15) days of any written request therefor, all books, records and
information, and the assistance of all officers and employees, necessary or
useful in connection with any Tax inquiry, audit, examination, investigation,
dispute, litigation or any other matter.
ARTICLE VII
RETENTION OF RECORDS; ACCESS
The TSC Group and the eLoyalty Group shall:
(a) retain (for a minimum of five (5) years) records,
documents, accounting data and other information (including computer data)
necessary for the preparation and filing of all Tax Returns in respect of Taxes
of the TSC Group or the eLoyalty Group or for the audit of such Tax Returns; and
(b) give to the other reasonable access to such records,
documents, accounting data and other information (including computer data) and
to its personnel (insuring their cooperation) and premises, for the purpose of
the current or potential review or audit of such Tax Returns to the extent
relevant to an obligation or liability of a party under this Agreement or
applicable law. At any time after the Distribution Date that the eLoyalty Group
proposes to destroy such records, documents, accounting data or other
information, the eLoyalty Group shall first notify TSC in writing and TSC shall
be entitled to receive such records, documents, accounting data or other
information proposed to be destroyed.
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ARTICLE VIII
DISPUTES
If TSC and eLoyalty cannot agree on any calculation of any
liabilities under this Agreement, such calculation shall be made by any
independent public accounting firm acceptable to both TSC and eLoyalty. The
decision of such firm shall be final and binding. The fees and expenses incurred
in connection with such calculation shall be borne by the party that such
independent public accounting firm determines has lost the dispute.
ARTICLE IX
TERMINATION OF LIABILITIES
Notwithstanding any other provision in this Agreement, any
liabilities determined under this Agreement shall survive indefinitely.
ARTICLE X
MISCELLANEOUS PROVISIONS
It is acknowledged that, as set forth more fully in the
Reorganization Agreement, (i) Transferred Assets include any right, title or
interest in any tax refund, credit or benefit to which eLoyalty is entitled in
accordance with the terms of this Agreement, (ii) Assumed Liabilities include
all liabilities for which eLoyalty is liable in accordance with the terms of
this Agreement, (iii) Retained Assets include any right, title or interest of
TSC in any tax refund, credit or benefit to which TSC is entitled in accordance
with the terms of this Agreement, and (iv) Retained Liabilities include all
liabilities for which TSC is liable in accordance with the terms of this
Agreement. It is further acknowledged that rights, obligations and
indemnification with respect thereto are set forth in the Reorganization
Agreement.
Accordingly, it is further acknowledged that Articles XII,
XIII, XIV and XV of the Reorganization Agreement shall govern, as relevant, this
Agreement as if the Reorganization Agreement and this Agreement were a single
agreement; provided, that to the extent of any inconsistency between the
provisions of this Agreement and such provisions of the Reorganization
Agreement, the provisions of this Agreement shall apply in applying this
Agreement.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
TECHNOLOGY SOLUTIONS
COMPANY
By _________________________________
Name: ______________________________
Title: _____________________________
eLOYALTY CORPORATION
By _________________________________
Name: ______________________________
Title: _____________________________
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EXHIBIT 10.7
LICENSE AGREEMENT
(TSC as Licensor)
This LICENSE AGREEMENT is entered into and is effective as of
_____________ day of _________________, 1999 by and between Technology Solutions
Company, a Delaware corporation, having its principal place of business in
Chicago, Illinois ("TSC" or "Licensor"), and eLoyalty Corporation, a Delaware
corporation, having its principal place of business in Chicago, Illinois
("eLoyalty" or "Licensee").
RECITALS
WHEREAS, TSC provides, inter alia, information technology consulting
and strategic business consulting services that help clients improve operations,
transform customer relationships and build and enhance customer loyalty (as more
fully described in Exhibit A to the Reorganization Agreement defined below, the
"eLoyalty Business");
WHEREAS, pursuant to a Reorganization Agreement dated _____________
(the "Reorganization Agreement"), TSC has agreed to transfer and assign, or
cause to be transferred and assigned, to eLoyalty substantially all of the
assets and properties of the eLoyalty Business held by TSC and/or one or more of
its Subsidiaries, and eLoyalty has agreed to assume, or cause to be assumed by
one or more of its Subsidiaries, certain liabilities and obligations arising out
of or relating to the eLoyalty Business;
WHEREAS, pursuant to the transactions described above, TSC has
transferred to eLoyalty certain software, interfaces, methodologies, copyrights,
inventions, technology, trade secrets, know-how and related rights which are
primarily utilized in or related to the eLoyalty Business.
WHEREAS, TSC has retained those software, interfaces, methodologies,
copyrights, inventions, technology, trade secrets, know-how and related rights
which are used primarily in its retained business.
WHEREAS, Licensor desires to grant, and Licensee desires to accept, a
nonexclusive, royalty free, worldwide, perpetual license to use, manufacture,
make, have made, sell, sublicense, copy, create derivative works based upon,
modify, and otherwise exploit the above software, interfaces, methodologies,
copyrights, inventions, technology, trade secrets, know-how and related rights,
according to the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Licensee and Licensor
agree as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
Unless otherwise defined herein, each capitalized term used
herein that is defined in the Reorganization Agreement shall have the meaning
specified for such term in the Reorganization Agreement.
SECTION 1.01. "Agreement" shall mean this License Agreement and any
attached Exhibits.
SECTION 1.02. "Copyrights" shall mean all copyrights, both registered
and unregistered, which are proprietary to Licensor and which were used in the
eLoyalty Business immediately prior to the Effective Date.
SECTION 1.03. "Effective Date" shall mean the date of this Agreement.
SECTION 1.04. "Indemnified Party" shall mean a party that is entitled
to indemnification pursuant to ARTICLE VIII of this Agreement.
SECTION 1.05. "Indemnifying Party" shall mean a party that obligated to
indemnify an Indemnified Party pursuant to ARTICLE VIII of this Agreement.
SECTION 1.06. "Intellectual Property Rights" shall mean all Software,
Methodologies, Interfaces, Copyrights, and all business and technical
information, nonpatented inventions, discoveries, processes, formulations, trade
secrets, know-how, technical data and other intellectual property rights and all
related rights proprietary to Licensor used in the eLoyalty Business immediately
prior to the Effective Date which have not otherwise been transferred to
Licensee, including, without limitation, the interfaces described in Exhibit 1,
attached hereto and incorporated herein.
SECTION 1.07. "Interfaces" shall mean the software programs that are
proprietary to Licensor which create interfaces between the Software and third
party software programs used in the eLoyalty Business immediately prior to the
Effective Date, including, without limitation, the interfaces described in
Exhibit 1, attached hereto and incorporated herein.
SECTION 1.08. "Methodologies" shall mean the methodologies,
architectures, processes, algorithms that are proprietary to Licensor,
including, without limitation all related trade secrets and know-how, used in
the eLoyalty Business immediately prior to the Effective Date, including,
without limitation, the methodologies described in Exhibit 1, attached hereto
and incorporated herein.
SECTION 1.09. "Software" shall mean the computer software programs that
are proprietary to Licensor, in source code and object code form, including,
without limitation, all
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related source diagrams, flow charts, specifications, documentation and all
other materials and documentation necessary to allow a reasonably skilled third
party programmer or technician to maintain, support or enhance the Software,
used in the eLoyalty Business immediately prior to the Effective Date,
including, without limitation, the computer software programs described in
Exhibit 1 attached hereto and incorporated herein.
ARTICLE II
LICENSE
SECTION 2.01. Grant of License. Subject to the terms of SECTION 10.02
herein, Licensor hereby grants, and Licensee hereby accepts, a nonexclusive,
royalty-free, worldwide, perpetual license to use, manufacture, make, have made,
sell, sublicense, copy, create derivative works based upon, modify, and
otherwise exploit the Intellectual Property Rights. The foregoing
notwithstanding, Licensee may only use the Intellectual Property Rights
designated in Exhibit 1 as "Nontransferable" for Licensee's internal business
purposes.
SECTION 2.02. Improvements. The license granted herein does not include
any improvements, enhancements, new versions, new releases, or other
modifications (collectively, "Improvements") to the Intellectual Property Rights
created or developed by Licensor subsequent to the Effective Date. Neither party
shall have an obligation to provide or otherwise disclose Improvements created
or developed by that party subsequent to the Effective Date to the other party.
SECTION 2.03. DISCLAIMER OF WARRANTY. ALL INTELLECTUAL PROPERTY RIGHTS
ARE BEING LICENSED ON AN "AS IS, WHERE IS" BASIS WITHOUT ANY REPRESENTATION OR
WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, MARKETABILITY,
TITLE, VALUE, FREEDOM FROM ENCUMBRANCE OR ANY OTHER REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, AND LICENSEE SHALL BEAR THE ECONOMIC AND LEGAL RISKS THAT
ANY GRANT OF LICENSE OF SUCH INTELLECTUAL PROPERTY RIGHTS SHALL PROVE TO BE
INSUFFICIENT OR THAT LICENSOR'S TITLE TO ANY SUCH INTELLECTUAL PROPERTY RIGHTS
SHALL BE OTHER THAN GOOD AND MARKETABLE AND FREE OF ENCUMBRANCES.
ARTICLE III
TRAINING AND ASSISTANCE
SECTION 3.01. Provision of Assistance. If Licensee requires the
reasonable assistance of Licensor's personnel with respect to the rights granted
to Licensee in the Intellectual Property Rights, whether by means of training,
consultation or otherwise, upon receiving a written request from Licensee,
Licensor will provide to Licensee personnel in reasonable numbers and with
sufficient expertise to meet Licensee's reasonable requirements. Licensor's
obligations under this SECTION 3.01 to provide assistance will expire on June
30, 2000.
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SECTION 3.02. Payment for Services. Licensee will pay for the services
of the above personnel at a rate to be mutually agreed upon, but in no event at
any higher rate than Licensor's standard rate for such personnel, and shall
reimburse Licensor for reasonable out of pocket expenses incurred in providing
such services.
ARTICLE IV
DISCLOSURE
SECTION 4.01. To the extent not already done, Licensor will, on the
Effective Date and thereafter on receiving a request from Licensee, provide to
Licensee any and all materials, documents, data, lists, drawings, schematics,
formulae and other information (whether in written, electronic or other format)
which were created on or before the Effective Date as Licensee may reasonably
require with respect to the rights granted to Licensee in the Intellectual
Property Rights.
ARTICLE V
TERM AND TERMINATION
SECTION 5.01. Term of License. The license granted in ARTICLE II of
this Agreement shall continue in full force and effect until terminated in
accordance with the terms of this Agreement.
SECTION 5.02. Termination of License. This Agreement may be terminated
upon 45 days written notice by either party if the other party is in breach of a
material term of this Agreement provided that, in the case of a breach which is
capable of remedy, such breach has not been remedied within 45 days of receipt
of that written notice.
SECTION 5.03. Survival of Obligations. In the event of termination of
this Agreement, ARTICLE I, ARTICLE VII, ARTICLE IX, and ARTICLE X will survive
and remain in force.
ARTICLE VI
OWNERSHIP
SECTION 6.01. Licensor's Rights. Licensee acknowledges that Licensor is
the sole and exclusive owner of all right, title and interest in and to the
Intellectual Property Rights. Nothing contained herein shall create, nor shall
be construed as, an assignment of any right, title or interest in or to such
Intellectual Property Rights other than as granted in ARTICLE II; it being
acknowledged that all other right, title and interest in and to such
Intellectual Property Rights, is expressly reserved by Licensor. Licensee agrees
that it will do nothing inconsistent with Licensor's ownership of, or rights in
such Intellectual Property Rights, and that all use of such Intellectual
Property Rights, shall inure to the benefit of, and be on behalf of, the
Licensor.
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Subject to the provisions of ARTICLE VII, Licensor, at its expense, agrees to
take all steps reasonably necessary to protect, enforce or otherwise maintain in
full force and effect such Intellectual Property Rights, as applicable,
including, without limitation, the filing of any required renewals and the
payment of any required fees, taxes or other payments that may become due.
Licensee shall cooperate with Licensor in connection with such steps at
Licensor's reasonable request and at Licensor's expense. Licensor shall not
allow any registration or application for any such Intellectual Property Rights
to lapse without prior written notice to Licensee. If Licensor so notifies
Licensee, (a) Licensee has the right, but not the obligation to take such steps,
at Licensee's expense and in Licensor's name, if necessary, to protect or
maintain such Intellectual Property Rights, and (b) Licensor shall cooperate
with Licensee at Licensee's reasonable request and at Licensee's expense.
SECTION 6.02. Markings. Licensee agrees that any products or processes
manufactured, made, offered, sold or otherwise distributed by it pursuant to the
license(s) granted hereunder shall bear a legal notice in such form as may be
prescribed by law or otherwise as reasonably prescribed by the Licensor from
time to time.
ARTICLE VII
INFRINGEMENT
SECTION 7.01. Notice of Infringement. Each party will notify the other
of any claim, action, threat or situation in which it believes that the
Intellectual Property Rights are or may be infringed by a third party. Licensor
shall have a reasonable amount of time to investigate the situation and shall
inform Licensee in writing whether it intends to enforce its rights against such
third party.
SECTION 7.02. Enforcement by Licensor. If Licensor decides to enforce
its rights, it shall do so at its expense and Licensee shall cooperate with
Licensor at Licensor's reasonable request and expense. Licensee shall have the
right to participate in such enforcement with counsel of its choice, but such
participation shall be at its expense unless requested by Licensor.
SECTION 7.03. Enforcement by Licensee. If Licensor decides not to
enforce its rights, Licensee may choose to do so at its own expense. In such a
situation, Licensor shall cooperate with Licensee at Licensee's reasonable
request and expense and Licensee shall have the right to bring any actions in
Licensor's name, if necessary. Licensor shall have the right to participate in
such enforcement with counsel of its choice, but such participation shall be at
its expense unless requested by Licensee.
SECTION 7.04. Infringement of Third Party Rights. If either party
becomes aware of any allegation, claim, actions or threats brought by any third
party on the grounds that any of the Intellectual Property Rights infringe a
third party's rights they shall notify the other immediately. If a final
injunction is obtained against Licensee's use of the Intellectual Property
Rights by reason of such infringement, or if in Licensor's reasonable opinion
the Intellectual
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Property Rights are likely to become the subject of a claim for such
infringement, then either party may terminate this Agreement upon 15 days
written notice with respect to the Intellectual Property Right that is the
subject of such infringement claim.
ARTICLE VIII
INDEMNITY
SECTION 8.01. By Licensee. Licensee shall indemnify, defend and hold
harmless Licensor and each of its Affiliates, directors, officers, employees and
agents, and each of the heirs, executors, successors and assigns of any of the
foregoing (collectively, the "Licensor Indemnified Parties"), from and against
any and all expenses incurred in connection with investigating, defending or
asserting any claim, action, suit or proceeding incident to any matter
indemnified against hereunder (including court filing fees, court costs,
arbitration fees or costs, witness fees, and reasonable fees and disbursements
of legal counsel, investigators, expert witnesses, consultants, accountants and
other professionals) (hereinafter, "Expenses") and any and all losses, costs,
obligations, liabilities, settlement payments, awards, judgments, fines,
penalties, damages, fees, expenses, deficiencies, claims or other charges,
absolute or contingent, matured or unmatured, liquidated or unliquidated,
accrued or unaccrued, known or unknown (including, without limitation, the costs
and expenses of any and all such actions, threatened actions, demands,
assessments, judgments, settlements and compromises relating thereto and
attorneys' fees and any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any such actions or threatened
actions) ("hereinafter, "Losses") incurred or suffered by Licensor (and/or one
or more of the Licensor Indemnified Parties), in connection with, relating to,
arising out of or due to, directly or indirectly, claims, causes of actions and
demands based upon the use by Licensee of the Intellectual Property Rights.
SECTION 8.02. By Licensor. Licensor shall indemnify, defend and hold
harmless Licensee and each of its Affiliates, directors, officers, employees and
agents, and each of the heirs, executors, successors and assigns of any of the
foregoing (collectively, the "Licensee Indemnified Parties"), from and against
any and all Expenses and any and all Losses incurred or suffered by Licensee
(and/or one or more of the Licensee Indemnified Parties), in connection with,
relating to, arising out of or due to, directly or indirectly, claims, causes of
actions and demands based upon the use by Licensor of the Intellectual Property
Rights.
SECTION 8.03. Procedures for Indemnification of Third Party Claims.
(a) If any third party shall make any claim or commence any arbitration
proceeding or suit (collectively, a "Third Party Claim") against any one or more
of the Indemnified Parties with respect to which an Indemnified Party intends to
make any claim for indemnification against Licensor under SECTION 8.01 or
against Licensee under SECTION 8.02, such Indemnified Party shall promptly give
written notice to the Indemnifying Party describing such Third Party Claim in
reasonable detail, and the following provisions shall apply. Notwithstanding the
foregoing, the failure of any Indemnified Party to provide notice in accordance
with this
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subsection (a) shall not relieve the related Indemnifying Party of its
obligations under this ARTICLE VIII, except to the extent that such Indemnifying
Party is actually prejudiced by such failure to provide notice.
(b) The Indemnifying Party shall have 20 business days after receipt of
the notice referred to in subsection (a) above to notify the Indemnified Party
that it elects to conduct and control the defense of such Third Party Claim. If
the Indemnifying Party does not give the foregoing notice, the Indemnified Party
shall have the right to defend, contest, settle or compromise such Third Party
Claim in the exercise of its exclusive discretion subject to the provisions of
subsection (c) below, and the Indemnifying Party shall, upon request from any of
the Indemnified Parties, promptly pay to such Indemnified Parties in accordance
with the other terms of this subsection (b) the amount of any Expense or Loss
resulting from their liability to the third party claimant. If the Indemnifying
Party gives the foregoing notice, the Indemnifying Party shall have the right to
undertake, conduct and control, through counsel reasonably acceptable to the
Indemnified Party, and at its sole expense, the conduct and settlement of such
Third Party Claim, and the Indemnified Party shall cooperate with the
Indemnifying Party in connection therewith, provided that (i) the Indemnifying
Party shall not thereby permit any lien, encumbrance or other adverse charge to
thereafter attach to any asset of any Indemnified Party; (ii) the Indemnifying
Party shall not thereby permit any injunction against any Indemnified Party;
(iii) the Indemnifying Party shall permit the Indemnified Party and counsel
chosen by the Indemnified Party and reasonably acceptable to the Indemnifying
Party to monitor such conduct or settlement and shall provide the Indemnified
Party and such counsel with such information regarding such Third Party Claim as
either of them may reasonably request (which request may be general or
specific), but the fees and expenses of such counsel (including allocated costs
of in-house counsel and other personnel) shall be borne by the Indemnified Party
unless (1) the Indemnifying Party and the Indemnified Party shall have mutually
agreed to the retention of such counsel or (2) the named parties to any such
Third Party Claim include the Indemnified Party and the Indemnifying Party and
in the reasonable opinion of counsel to the Indemnified Party representation of
both parties by the same counsel would be inappropriate due to actual or likely
conflicts of interest between them, in either of which cases the reasonable fees
and disbursements of counsel for such Indemnified Party (including allocated
costs of in-house counsel and other personnel) shall be reimbursed by the
Indemnifying Party to the Indemnified Party; and (iv) the Indemnifying Party
shall agree promptly to reimburse to the extent required under this ARTICLE VIII
the Indemnified Party for the full amount of any Expense or Loss resulting from
such Third Party Claim and all related expenses incurred by the Indemnified
Party. In no event shall the Indemnifying Party, without the prior written
consent of the Indemnified Party, settle or compromise any claim or consent to
the entry of any judgment that does not include as an unconditional term thereof
the giving by the claimant or the plaintiff to the Indemnified Party a release
from all liability in respect of such claim.
If the Indemnifying Party shall not have undertaken the
conduct and control of the defense of any Third Party Claim as provided above,
the Indemnifying Party shall nevertheless be entitled through counsel chosen by
the Indemnifying Party and reasonably acceptable to the Indemnified Party to
monitor the conduct or settlement of such claim by the Indemnified Party,
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and the Indemnified Party shall provide the Indemnifying Party and such counsel
with such information regarding such Third Party Claim as either of them may
reasonably request (which request may be general or specific), but all costs and
expenses incurred in connection with such monitoring shall be borne by the
Indemnifying Party.
(c) So long as the Indemnifying Party is contesting any such Third
Party Claim in good faith, the Indemnified Party shall not pay or settle any
such Third Party Claim. Notwithstanding the foregoing, the Indemnified Party
shall have the right to pay or settle any such Third Party Claim, provided that
in such event the Indemnified Party shall waive any right to indemnity therefor
by the Indemnifying Party, and no amount in respect thereof shall be claimed as
an Expense or a Loss under this subsection (c).
If the Indemnifying Party shall have undertaken the conduct
and control of the defense of any Third Party Claim as provided above, the
Indemnified Party, on not less than 30 days prior written notice to the
Indemnifying Party, may make settlement (including payment in full) of such
Third Party Claim, and such settlement shall be binding upon the Parties for the
purposes hereof, unless within said 30-day period the Indemnifying Party shall
have requested the Indemnified Party to contest such Third Party Claim at the
expense of the Indemnifying Party. In such event, the Indemnified Party shall
promptly comply with such request and the Indemnifying Party shall have the
right to direct the defense of such claim or any litigation based thereon
subject to all of the conditions of subsection (b) above. Notwithstanding
anything in this subsection (c) to the contrary, if the Indemnified Party, in
the belief that a claim may materially and adversely affect it other than as a
result of money damages or other money payments, advises the Indemnifying Party
that it has determined to settle a claim, the Indemnified Party shall have the
right to do so at its own cost and expense, without any requirement to contest
such claim at the request of the Indemnifying Party, but without any right under
the provisions of this subsection (c) for indemnification by the Indemnifying
Party.
SECTION 8.04. Procedures for Indemnification of Direct Claims. Any
claim for indemnification on account of an Expense or a Loss made directly by
the Indemnified Party against the Indemnifying Party and that does not result
from a third party claim shall be asserted by written notice from the
Indemnified Party to the Indemnifying Party specifically claiming
indemnification hereunder. Such Indemnifying Party shall have a period of 30
business days after the receipt of such notice within which to respond thereto.
If such Indemnifying Party does not respond within such 30 business-day period,
such Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such claim.
If such Indemnifying Party does respond within such 30 business-day period and
rejects such claim in whole or in part, such Indemnified Party shall be free to
pursue resolution as provided in SECTION 10.09.
ARTICLE IX
CONFIDENTIALITY AND NONDISCLOSURE
Licensee and Licensor acknowledge that the terms of this Agreement and
the Intellectual Property Rights licensed hereunder constitute confidential and
proprietary information
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(collectively "Confidential Information"), the disclosure of which to, or use
by, third parties will be damaging. Each party agrees to hold, and have its
employees and agents hold, any and all such Confidential Information belonging
to the other in the same manner as it protects its own confidential information
of like kind, but in no event shall it exercise less than due diligence and
care, and to use the Confidential Information only for purposes consistent with
this Agreement. The parties agree that irreparable harm can be occasioned to the
other party by disclosure of the Confidential Information in violation of the
requirements of this Article and therefore either party may seek to enjoin any
actual or threatened use, disclosure or compromise by the other party in
contravention of this ARTICLE IX. The foregoing shall not prohibit or limit
Licensee's use of information, including, but not limited to, ideas, concepts,
know-how, techniques and methodologies: (i) independently developed by Licensee
after the Effective Date without reference to the other party's Confidential
Information; (ii) acquired by Licensee from a third party without continuing
restriction on use; or (iii) which is or becomes, publicly available through no
breach by Licensee of this Agreement. In addition, Licensee may disclose the
Confidential Information to the extent that its disclosure is required by law,
valid subpoena, or court or government order, provided, however, that Licensee
provides prompt notice of such required disclosure to Licensor and Licensee
shall have made a reasonable effort to obtain a protective order or other
reliable assurance affording it confidential treatment and limiting its use
solely for the purpose for which the law or order requires.
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ARTICLE X
MISCELLANEOUS
SECTION 10.01. Entire Agreement. This Agreement and the Reorganization
Agreement, including the Schedules and Exhibits referred to herein and therein
and the documents delivered pursuant hereto and thereto, constitute the entire
agreement between the parties with respect to the subject matter contained
herein, and supersede all prior agreements, negotiations, discussions,
understandings, writings and commitments between the parties with respect to
such subject matter.
SECTION 10.02. Successors and Assigns
(a) Subject to the terms of (b) below, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and thereto, respectively,
and their successors and permitted assigns, and the rights granted or duties or
obligations undertaken hereunder may be assigned, sold, sublicensed,
subcontracted or otherwise transferred by either party, provided that if a party
assigns, sells or otherwise transfers all or substantially all of its rights,
duties or obligations hereunder, it shall provide prior written notification
thereof to the other party.
(b) The rights granted to Licensee hereunder in the Intellectual
Property Rights designated in Exhibit 1 as "Nontransferable" may not be
assigned, sold, sublicensed, subcontracted or otherwise transferred by Licensee
without Licensor's prior written consent, except to an Affiliate of Licensee.
SECTION 10.03. Waiver. Any term or provision of this Agreement may be
waived, or the time for its performance may be extended, by the party or parties
entitled to the benefit thereof. Any such waiver shall be validly and
sufficiently given for the purposes of this Agreement if, as to any party, it is
in writing signed by an authorized representative of such party. The failure of
any party to enforce at any time any provision of this Agreement shall not be
construed to be a waiver of such provision, or in any way to affect the validity
of this Agreement or any part hereof or the right of any party thereafter to
enforce each and every such provision. No waiver of any breach of this Agreement
shall be held to constitute a waiver of any other or subsequent breach.
SECTION 10.04. Notices. All notices, requests, claims, demands and
other communications required or permitted hereunder shall be in writing and
shall be deemed given or delivered (i) when delivered personally, (ii) if
transmitted by facsimile when confirmation of transmission is received, (iii) if
sent by registered or certified mail, postage prepaid, return receipt requested,
on the third business day after mailing or (iv) if sent by private courier when
received; and shall be addressed as follows:
If to TSC, to:
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Technology Solutions Company
205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
Attention:
Telecopy:
Facsimile: _____________
If to eLoyalty, to:
eLoyalty Corporation
[205 North Michigan Avenue]
[Suite 1500]
Chicago, Illinois 60601
Attention:
Telecopy:
Facsimile: ______________
or to such other address as such Party may indicate by a notice delivered to the
other Party.
SECTION 10.05. Partial Invalidity. If any term or provisions of this
Agreement shall be found to be illegal or unenforceable, then notwithstanding
such illegality or unenforceability, this Agreement shall remain in full force
and effect and such term or provisions shall be deemed to be deleted.
SECTION 10.06. Amendment. This Agreement shall not be amended, modified
or supplemented except by a written instrument signed by an authorized
representative of each of the parties.
SECTION 10.07. Execution in Counterparts. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an original
instrument, but all of which shall be considered one and the same agreement, and
shall become binding when one or more counterparts have been signed by and
delivered to each of the parties.
SECTION 10.08. Choice of Law and Forum. This Agreement shall be
governed by and construed and enforced in accordance with the substantive laws
(except for any otherwise applicable conflicts of law provisions) of the State
of Illinois and the federal laws of the United States of America applicable
therein, as though all acts and omissions related hereto occurred in Illinois.
Any lawsuit arising from or related to this Agreement shall be brought only in
the United States District for the Northern District of Illinois or the Circuit
Court of Cook County, Illinois. To the extent permissible by law, the parties
hereby consent to the jurisdiction and venue of such courts. Each party hereby
waives, releases and agrees not to assert, and agrees to cause its Affiliates to
waive, release and not to assert, any rights such party or its Affiliates may
have under
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any foreign law or regulation that would be inconsistent with the terms of this
Agreement as governed by Illinois law.
SECTION 10.09. Dispute Resolution. Any and all disputes, controversies
or claims (whether sounding in contract, tort or otherwise) that may arise out
of or relate to, or arise under or in connection with, this Agreement, or the
transactions contemplated hereby (including all actions taken in furtherance of
the transactions contemplated hereby on or prior to the date hereof), shall be
subject to the dispute resolution procedures set forth in the Reorganization
Agreement.
SECTION 10.10. Relationship Of Parties. Nothing contained in this
agreement shall be construed to imply a joint venture, partnership, or
principal-agent relationship between the parties; and, except as provided
otherwise herein, neither party by virtue of this Agreement shall have any
right, power or authority, express or implied, to act on behalf of or enter into
undertaking binding the other party. This Agreement shall not be construed to
create rights, express or implied, on behalf of, or for the use of, any parties,
aside from Licensee and Licensor, and Licensee and Licensor shall not be
obligated, separately or jointly, to any third parties or any third party
beneficiaries by virtue of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed by their authorized representatives as of the date first above
written.
TECHNOLOGY SOLUTIONS COMPANY
By: _______________________________
[Name]
[Title]
ELOYALTY CORPORATION
By: _______________________________
[Name]
[Title]
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<PAGE> 1
EXHIBIT 10.8
LICENSE AGREEMENT
(eLoyalty as Licensor)
This LICENSE AGREEMENT is entered into and is effective as of
_____________ day of _________________, 1999 by and between eLoyalty
Corporation, a Delaware corporation, having its principal place of business in
Chicago, Illinois ("eLoyalty" or "Licensor"), and Technology Solutions Company,
a Delaware corporation, having its principal place of business in Chicago,
Illinois ("TSC" or "Licensee").
RECITALS
WHEREAS, TSC provides, inter alia, information technology consulting
and strategic business consulting services that help clients improve operations,
transform customer relationships and build and enhance customer loyalty (as more
fully described in Exhibit A to the Reorganization Agreement defined below, the
"eLoyalty Business");
WHEREAS, pursuant to a Reorganization Agreement dated _____________
(the "Reorganization Agreement"), TSC has agreed to transfer and assign, or
cause to be transferred and assigned, to eLoyalty substantially all of the
assets and properties of the eLoyalty Business held by TSC and/or one or more of
its Subsidiaries, and eLoyalty has agreed to assume, or cause to be assumed by
one or more of its Subsidiaries, certain liabilities and obligations arising out
of or relating to the eLoyalty Business;
WHEREAS, pursuant to the transactions described above, TSC has
transferred to eLoyalty certain software, interfaces, methodologies, copyrights,
inventions, technology, trade secrets, know-how and related rights which are
primarily utilized in or related to the eLoyalty Business.
WHEREAS, TSC has retained those software, interfaces, methodologies,
copyrights, inventions, technology, trade secrets, know-how and related rights
which are used primarily in its retained business.
WHEREAS, Licensor desires to grant, and Licensee desires to accept, a
nonexclusive, royalty free, worldwide, perpetual license to use, manufacture,
make, have made, sell, sublicense, copy, create derivative works based upon,
modify, and otherwise exploit the above software, interfaces, methodologies,
copyrights, inventions, technology, trade secrets, know-how and related rights,
according to the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Licensee and Licensor
agree as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
Unless otherwise defined herein, each capitalized term used
herein that is defined in the Reorganization Agreement shall have the meaning
specified for such term in the Reorganization Agreement.
SECTION 1.01. "Agreement" shall mean this License Agreement and any
attached Exhibits.
SECTION 1.02. "Copyrights" shall mean all copyrights, both registered
and unregistered, which were assigned to Licensor pursuant to the Reorganization
Agreement and which were used in the Retained Business immediately prior to the
Effective Date.
SECTION 1.03. "Effective Date" shall mean the date of this Agreement.
SECTION 1.04. "Indemnified Party" shall mean a party that is entitled
to indemnification pursuant to ARTICLE VIII of this Agreement.
SECTION 1.05. "Indemnifying Party" shall mean a party that obligated to
indemnify an Indemnified Party pursuant to ARTICLE VIII of this Agreement.
SECTION 1.06. "Intellectual Property Rights" shall mean all Software,
Methodologies, Interfaces, Copyrights, and all business and technical
information, nonpatented inventions, discoveries, processes, formulations, trade
secrets, know-how, technical data and other intellectual property rights and all
related rights which were assigned to Licensor pursuant to the Reorganization
Agreement and which were used in the Retained Business immediately prior to the
Effective Date, including, without limitation, the interfaces described in
Exhibit 1, attached hereto and incorporated herein.
SECTION 1.07. "Interfaces" shall mean the software programs which
create interfaces between the Software and third party software programs which
were assigned to Licensor pursuant to the Reorganization Agreement and which
were used in the Retained Business immediately prior to the Effective Date,
including, without limitation, the interfaces described in Exhibit 1, attached
hereto and incorporated herein.
SECTION 1.08. "Methodologies" shall mean the methodologies,
architectures, processes, algorithms, including, without limitation all related
trade secrets and know-how, which were assigned to Licensor pursuant to the
Reorganization Agreement and which were used in the Retained Business
immediately prior to the Effective Date, including, without limitation, the
methodologies described in Exhibit 1, attached hereto and incorporated herein.
SECTION 1.09. "Retained Business" means those portions of the business
of TSC
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<PAGE> 3
and its Subsidiaries as of the date of the Reorganization Agreement that are not
part of the eLoyalty Business.
SECTION 1.10. "Software" shall mean the computer software programs, in
source code and object code form, including, without limitation, all related
source diagrams, flow charts, specifications, documentation and all other
materials and documentation necessary to allow a reasonably skilled third party
programmer or technician to maintain, support or enhance the Software, which
were assigned to Licensor pursuant to the Reorganization Agreement and which
were used in the Retained Business immediately prior to the Effective Date,
including, without limitation, the computer software programs described in
Exhibit 1 attached hereto and incorporated herein.
ARTICLE II
LICENSE
SECTION 2.01. Grant of License. Subject to the terms of SECTION 10.02
herein, Licensor hereby grants, and Licensee hereby accepts, a nonexclusive,
royalty-free, worldwide, perpetual license to use, manufacture, make, have made,
sell, sublicense, copy, create derivative works based upon, modify, and
otherwise exploit the Intellectual Property Rights. The foregoing
notwithstanding, Licensee may only use the Intellectual Property Rights
designated in Exhibit 1 as "Nontransferable" for Licensee's internal business
purposes.
SECTION 2.02. Improvements. The license granted herein does not include
any improvements, enhancements, new versions, new releases, or other
modifications (collectively, "Improvements") to the Intellectual Property Rights
created or developed by Licensor subsequent to the Effective Date. Neither party
shall have an obligation to provide or otherwise disclose Improvements created
or developed by that party subsequent to the Effective Date to the other party.
SECTION 2.03. DISCLAIMER OF WARRANTY. ALL INTELLECTUAL PROPERTY RIGHTS
ARE BEING LICENSED ON AN "AS IS, WHERE IS" BASIS WITHOUT ANY REPRESENTATION OR
WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, MARKETABILITY,
TITLE, VALUE, FREEDOM FROM ENCUMBRANCE OR ANY OTHER REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, AND LICENSEE SHALL BEAR THE ECONOMIC AND LEGAL RISKS THAT
ANY GRANT OF LICENSE OF SUCH INTELLECTUAL PROPERTY RIGHTS SHALL PROVE TO BE
INSUFFICIENT OR THAT LICENSOR'S TITLE TO ANY SUCH INTELLECTUAL PROPERTY RIGHTS
SHALL BE OTHER THAN GOOD AND MARKETABLE AND FREE OF ENCUMBRANCES.
ARTICLE III
TRAINING AND ASSISTANCE
SECTION 3.01. Provision of Assistance. If Licensee requires the
reasonable
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<PAGE> 4
assistance of Licensor's personnel with respect to the rights granted to
Licensee in the Intellectual Property Rights, whether by means of training,
consultation or otherwise, upon receiving a written request from Licensee,
Licensor will provide to Licensee personnel in reasonable numbers and with
sufficient expertise to meet Licensee's reasonable requirements. Licensor's
obligations under this SECTION 3.01 to provide assistance will expire on June
30, 2000.
SECTION 3.02. Payment for Services. Licensee will pay for the services
of the above personnel at a rate to be mutually agreed upon, but in no event at
any higher rate than Licensor's standard rate for such personnel, and shall
reimburse Licensor for reasonable out of pocket expenses incurred in providing
such services.
ARTICLE IV
DISCLOSURE
SECTION 4.01. To the extent not already done, Licensor will, on the
Effective Date and thereafter on receiving a request from Licensee, provide to
Licensee any and all materials, documents, data, lists, drawings, schematics,
formulae and other information (whether in written, electronic or other format)
which were created on or before the Effective Date as Licensee may reasonably
require with respect to the rights granted to Licensee in the Intellectual
Property Rights.
ARTICLE V
TERM AND TERMINATION
SECTION 5.01. Term of License. The license granted in ARTICLE II of
this Agreement shall continue in full force and effect until terminated in
accordance with the terms of this Agreement.
SECTION 5.02. Termination of License. This Agreement may be terminated
upon 45 days written notice by either party if the other party is in breach of a
material term of this Agreement provided that, in the case of a breach which is
capable of remedy, such breach has not been remedied within 45 days of receipt
of that written notice.
SECTION 5.03. Survival of Obligations. In the event of termination of
this Agreement, ARTICLE I, ARTICLE VII, ARTICLE IX, and ARTICLE X will survive
and remain in force.
ARTICLE VI
OWNERSHIP
SECTION 6.01. Licensor's Rights. Licensee acknowledges that Licensor is
the sole and exclusive owner of all right, title and interest in and to the
Intellectual Property Rights.
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<PAGE> 5
Nothing contained herein shall create, nor shall be construed as, an assignment
of any right, title or interest in or to such Intellectual Property Rights other
than as granted in ARTICLE II; it being acknowledged that all other right, title
and interest in and to such Intellectual Property Rights, is expressly reserved
by Licensor. Licensee agrees that it will do nothing inconsistent with
Licensor's ownership of, or rights in such Intellectual Property Rights, and
that all use of such Intellectual Property Rights, shall inure to the benefit
of, and be on behalf of, the Licensor. Subject to the provisions of ARTICLE VII,
Licensor, at its expense, agrees to take all steps reasonably necessary to
protect, enforce or otherwise maintain in full force and effect such
Intellectual Property Rights, as applicable, including, without limitation, the
filing of any required renewals and the payment of any required fees, taxes or
other payments that may become due. Licensee shall cooperate with Licensor in
connection with such steps at Licensor's reasonable request and at Licensor's
expense. Licensor shall not allow any registration or application for any such
Intellectual Property Rights to lapse without prior written notice to Licensee.
If Licensor so notifies Licensee, (a) Licensee has the right, but not the
obligation to take such steps, at Licensee's expense and in Licensor's name, if
necessary, to protect or maintain such Intellectual Property Rights, and (b)
Licensor shall cooperate with Licensee at Licensee's reasonable request and at
Licensee's expense.
SECTION 6.02. Markings. Licensee agrees that any products or processes
manufactured, made, offered, sold or otherwise distributed by it pursuant to the
license(s) granted hereunder shall bear a legal notice in such form as may be
prescribed by law or otherwise as reasonably prescribed by the Licensor from
time to time.
ARTICLE VII
INFRINGEMENT
SECTION 7.01. Notice of Infringement. Each party will notify the other
of any claim, action, threat or situation in which it believes that the
Intellectual Property Rights are or may be infringed by a third party. Licensor
shall have a reasonable amount of time to investigate the situation and shall
inform Licensee in writing whether it intends to enforce its rights against such
third party.
SECTION 7.02. Enforcement by Licensor. If Licensor decides to enforce
its rights, it shall do so at its expense and Licensee shall cooperate with
Licensor at Licensor's reasonable request and expense. Licensee shall have the
right to participate in such enforcement with counsel of its choice, but such
participation shall be at its expense unless requested by Licensor.
SECTION 7.03. Enforcement by Licensee. If Licensor decides not to
enforce its rights, Licensee may choose to do so at its own expense. In such a
situation, Licensor shall cooperate with Licensee at Licensee's reasonable
request and expense and Licensee shall have the right to bring any actions in
Licensor's name, if necessary. Licensor shall have the right to participate in
such enforcement with counsel of its choice, but such participation shall be at
its expense unless requested by Licensee.
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<PAGE> 6
SECTION 7.04. Infringement of Third Party Rights. If either party
becomes aware of any allegation, claim, actions or threats brought by any third
party on the grounds that any of the Intellectual Property Rights infringe a
third party's rights they shall notify the other immediately. If a final
injunction is obtained against Licensee's use of the Intellectual Property
Rights by reason of such infringement, or if in Licensor's reasonable opinion
the Intellectual Property Rights are likely to become the subject of a claim for
such infringement, then either party may terminate this Agreement upon 15 days
written notice with respect to the Intellectual Property Right that is the
subject of such infringement claim.
ARTICLE VIII
INDEMNITY
SECTION 8.01. By Licensee. Licensee shall indemnify, defend and hold
harmless Licensor and each of its Affiliates, directors, officers, employees and
agents, and each of the heirs, executors, successors and assigns of any of the
foregoing (collectively, the "Licensor Indemnified Parties"), from and against
any and all expenses incurred in connection with investigating, defending or
asserting any claim, action, suit or proceeding incident to any matter
indemnified against hereunder (including court filing fees, court costs,
arbitration fees or costs, witness fees, and reasonable fees and disbursements
of legal counsel, investigators, expert witnesses, consultants, accountants and
other professionals) (hereinafter, "Expenses") and any and all losses, costs,
obligations, liabilities, settlement payments, awards, judgments, fines,
penalties, damages, fees, expenses, deficiencies, claims or other charges,
absolute or contingent, matured or unmatured, liquidated or unliquidated,
accrued or unaccrued, known or unknown (including, without limitation, the costs
and expenses of any and all such actions, threatened actions, demands,
assessments, judgments, settlements and compromises relating thereto and
attorneys' fees and any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any such actions or threatened
actions) ("hereinafter, "Losses") incurred or suffered by Licensor (and/or one
or more of the Licensor Indemnified Parties), in connection with, relating to,
arising out of or due to, directly or indirectly, claims, causes of actions and
demands based upon the use by Licensee of the Intellectual Property Rights.
SECTION 8.02. By Licensor. Licensor shall indemnify, defend and hold
harmless Licensee and each of its Affiliates, directors, officers, employees and
agents, and each of the heirs, executors, successors and assigns of any of the
foregoing (collectively, the "Licensee Indemnified Parties"), from and against
any and all Expenses and any and all Losses incurred or suffered by Licensee
(and/or one or more of the Licensee Indemnified Parties), in connection with,
relating to, arising out of or due to, directly or indirectly, claims, causes of
actions and demands based upon the use by Licensor of the Intellectual Property
Rights.
SECTION 8.03. Procedures for Indemnification of Third Party Claims.
(a) If any third party shall make any claim or commence any arbitration
proceeding or suit (collectively, a "Third Party Claim") against any one or more
of the Indemnified Parties with
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<PAGE> 7
respect to which an Indemnified Party intends to make any claim for
indemnification against Licensor under SECTION 8.01 or against Licensee under
SECTION 8.02, such Indemnified Party shall promptly give written notice to the
Indemnifying Party describing such Third Party Claim in reasonable detail, and
the following provisions shall apply. Notwithstanding the foregoing, the failure
of any Indemnified Party to provide notice in accordance with this subsection
(a) shall not relieve the related Indemnifying Party of its obligations under
this ARTICLE VIII, except to the extent that such Indemnifying Party is actually
prejudiced by such failure to provide notice.
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<PAGE> 8
(b) The Indemnifying Party shall have 20 business days after receipt of
the notice referred to in subsection (a) above to notify the Indemnified Party
that it elects to conduct and control the defense of such Third Party Claim. If
the Indemnifying Party does not give the foregoing notice, the Indemnified Party
shall have the right to defend, contest, settle or compromise such Third Party
Claim in the exercise of its exclusive discretion subject to the provisions of
subsection (c) below, and the Indemnifying Party shall, upon request from any of
the Indemnified Parties, promptly pay to such Indemnified Parties in accordance
with the other terms of this subsection (b) the amount of any Expense or Loss
resulting from their liability to the third party claimant. If the Indemnifying
Party gives the foregoing notice, the Indemnifying Party shall have the right to
undertake, conduct and control, through counsel reasonably acceptable to the
Indemnified Party, and at its sole expense, the conduct and settlement of such
Third Party Claim, and the Indemnified Party shall cooperate with the
Indemnifying Party in connection therewith, provided that (i) the Indemnifying
Party shall not thereby permit any lien, encumbrance or other adverse charge to
thereafter attach to any asset of any Indemnified Party; (ii) the Indemnifying
Party shall not thereby permit any injunction against any Indemnified Party;
(iii) the Indemnifying Party shall permit the Indemnified Party and counsel
chosen by the Indemnified Party and reasonably acceptable to the Indemnifying
Party to monitor such conduct or settlement and shall provide the Indemnified
Party and such counsel with such information regarding such Third Party Claim as
either of them may reasonably request (which request may be general or
specific), but the fees and expenses of such counsel (including allocated costs
of in-house counsel and other personnel) shall be borne by the Indemnified Party
unless (1) the Indemnifying Party and the Indemnified Party shall have mutually
agreed to the retention of such counsel or (2) the named parties to any such
Third Party Claim include the Indemnified Party and the Indemnifying Party and
in the reasonable opinion of counsel to the Indemnified Party representation of
both parties by the same counsel would be inappropriate due to actual or likely
conflicts of interest between them, in either of which cases the reasonable fees
and disbursements of counsel for such Indemnified Party (including allocated
costs of in-house counsel and other personnel) shall be reimbursed by the
Indemnifying Party to the Indemnified Party; and (iv) the Indemnifying Party
shall agree promptly to reimburse to the extent required under this ARTICLE VIII
the Indemnified Party for the full amount of any Expense or Loss resulting from
such Third Party Claim and all related expenses incurred by the Indemnified
Party. In no event shall the Indemnifying Party, without the prior written
consent of the Indemnified Party, settle or compromise any claim or consent to
the entry of any judgment that does not include as an unconditional term thereof
the giving by the claimant or the plaintiff to the Indemnified Party a release
from all liability in respect of such claim.
If the Indemnifying Party shall not have undertaken the
conduct and control of the defense of any Third Party Claim as provided above,
the Indemnifying Party shall nevertheless be entitled through counsel chosen by
the Indemnifying Party and reasonably acceptable to the Indemnified Party to
monitor the conduct or settlement of such claim by the Indemnified Party, and
the Indemnified Party shall provide the Indemnifying Party and such counsel with
such information regarding such Third Party Claim as either of them may
reasonably request (which
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<PAGE> 9
request may be general or specific), but all costs and expenses incurred in
connection with such monitoring shall be borne by the Indemnifying Party.
(c) So long as the Indemnifying Party is contesting any such Third
Party Claim in good faith, the Indemnified Party shall not pay or settle any
such Third Party Claim. Notwithstanding the foregoing, the Indemnified Party
shall have the right to pay or settle any such Third Party Claim, provided that
in such event the Indemnified Party shall waive any right to indemnity therefor
by the Indemnifying Party, and no amount in respect thereof shall be claimed as
an Expense or a Loss under this subsection (c).
If the Indemnifying Party shall have undertaken the conduct
and control of the defense of any Third Party Claim as provided above, the
Indemnified Party, on not less than 30 days prior written notice to the
Indemnifying Party, may make settlement (including payment in full) of such
Third Party Claim, and such settlement shall be binding upon the Parties for the
purposes hereof, unless within said 30-day period the Indemnifying Party shall
have requested the Indemnified Party to contest such Third Party Claim at the
expense of the Indemnifying Party. In such event, the Indemnified Party shall
promptly comply with such request and the Indemnifying Party shall have the
right to direct the defense of such claim or any litigation based thereon
subject to all of the conditions of subsection (b) above. Notwithstanding
anything in this subsection (c) to the contrary, if the Indemnified Party, in
the belief that a claim may materially and adversely affect it other than as a
result of money damages or other money payments, advises the Indemnifying Party
that it has determined to settle a claim, the Indemnified Party shall have the
right to do so at its own cost and expense, without any requirement to contest
such claim at the request of the Indemnifying Party, but without any right under
the provisions of this subsection (c) for indemnification by the Indemnifying
Party.
SECTION 8.04. Procedures for Indemnification of Direct Claims. Any
claim for indemnification on account of an Expense or a Loss made directly by
the Indemnified Party against the Indemnifying Party and that does not result
from a third party claim shall be asserted by written notice from the
Indemnified Party to the Indemnifying Party specifically claiming
indemnification hereunder. Such Indemnifying Party shall have a period of 30
business days after the receipt of such notice within which to respond thereto.
If such Indemnifying Party does not respond within such 30 business-day period,
such Indemnifying Party shall be deemed to have accepted responsibility to make
payment and shall have no further right to contest the validity of such claim.
If such Indemnifying Party does respond within such 30 business-day period and
rejects such claim in whole or in part, such Indemnified Party shall be free to
pursue resolution as provided in SECTION 10.09.
ARTICLE IX
CONFIDENTIALITY AND NONDISCLOSURE
Licensee and Licensor acknowledge that the terms of this Agreement and
the Intellectual Property Rights licensed hereunder constitute confidential and
proprietary information (collectively "Confidential Information"), the
disclosure of which to, or use by, third parties will
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be damaging. Each party agrees to hold, and have its employees and agents hold,
any and all such Confidential Information belonging to the other in the same
manner as it protects its own confidential information of like kind, but in no
event shall it exercise less than due diligence and care, and to use the
Confidential Information only for purposes consistent with this Agreement. The
parties agree that irreparable harm can be occasioned to the other party by
disclosure of the Confidential Information in violation of the requirements of
this Article and therefore either party may seek to enjoin any actual or
threatened use, disclosure or compromise by the other party in contravention of
this ARTICLE IX. The foregoing shall not prohibit or limit Licensee's use of
information, including, but not limited to, ideas, concepts, know-how,
techniques and methodologies: (i) independently developed by Licensee after the
Effective Date without reference to the other party's Confidential Information;
(ii) acquired by Licensee from a third party without continuing restriction on
use; or (iii) which is or becomes, publicly available through no breach by
Licensee of this Agreement. In addition, Licensee may disclose the Confidential
Information to the extent that its disclosure is required by law, valid
subpoena, or court or government order, provided, however, that Licensee
provides prompt notice of such required disclosure to Licensor and Licensee
shall have made a reasonable effort to obtain a protective order or other
reliable assurance affording it confidential treatment and limiting its use
solely for the purpose for which the law or order requires.
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ARTICLE X
MISCELLANEOUS
SECTION 10.01. Entire Agreement. This Agreement and the Reorganization
Agreement, including the Schedules and Exhibits referred to herein and therein
and the documents delivered pursuant hereto and thereto, constitute the entire
agreement between the parties with respect to the subject matter contained
herein, and supersede all prior agreements, negotiations, discussions,
understandings, writings and commitments between the parties with respect to
such subject matter.
SECTION 10.02. Successors and Assigns.
(a) Subject to the terms of (b) below, this Agreement shall be binding
upon and inure to the benefit of the parties hereto and thereto, respectively,
and their successors and permitted assigns, and the rights granted or duties or
obligations undertaken hereunder may be assigned, sold, sublicensed,
subcontracted or otherwise transferred by either party, provided that if a party
assigns, sells or otherwise transfers all or substantially all of its rights,
duties or obligations hereunder, it shall provide prior written notification
thereof to the other party.
(b) The rights granted to Licensee hereunder in the Intellectual
Property Rights designated in Exhibit 1 as "Nontransferable" may not be
assigned, sold, sublicensed, subcontracted or otherwise transferred by Licensee
without Licensor's prior written consent, except to an Affiliate of Licensee.
SECTION 10.03. Waiver. Any term or provision of this Agreement may be
waived, or the time for its performance may be extended, by the party or parties
entitled to the benefit thereof. Any such waiver shall be validly and
sufficiently given for the purposes of this Agreement if, as to any party, it is
in writing signed by an authorized representative of such party. The failure of
any party to enforce at any time any provision of this Agreement shall not be
construed to be a waiver of such provision, or in any way to affect the validity
of this Agreement or any part hereof or the right of any party thereafter to
enforce each and every such provision. No waiver of any breach of this Agreement
shall be held to constitute a waiver of any other or subsequent breach.
SECTION 10.04. Notices. All notices, requests, claims, demands and
other communications required or permitted hereunder shall be in writing and
shall be deemed given or delivered (i) when delivered personally, (ii) if
transmitted by facsimile when confirmation of transmission is received, (iii) if
sent by registered or certified mail, postage prepaid, return receipt requested,
on the third business day after mailing or (iv) if sent by private courier when
received; and shall be addressed as follows:
If to TSC, to:
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Technology Solutions Company
205 North Michigan Avenue
Suite 1500
Chicago, Illinois 60601
Attention: ______________
Telecopy: _______________
Facsimile: _____________
If to eLoyalty, to:
eLoyalty Corporation
[205 North Michigan Avenue]
[Suite 1500]
Chicago, Illinois 60601
Attention: _______________
Telecopy: ______________
Facsimile: ______________
or to such other address as such Party may indicate by a notice delivered to the
other Party.
SECTION 10.05. Partial Invalidity. If any term or provisions of this
Agreement shall be found to be illegal or unenforceable, then notwithstanding
such illegality or unenforceability, this Agreement shall remain in full force
and effect and such term or provisions shall be deemed to be deleted.
SECTION 10.06. Amendment. This Agreement shall not be amended, modified
or supplemented except by a written instrument signed by an authorized
representative of each of the parties.
SECTION 10.07. Execution in Counterparts. This Agreement may be
executed in one or more counterparts, each of which shall be deemed an original
instrument, but all of which shall be considered one and the same agreement, and
shall become binding when one or more counterparts have been signed by and
delivered to each of the parties.
SECTION 10.08. Choice of Law and Forum. This Agreement shall be
governed by and construed and enforced in accordance with the substantive laws
(except for any otherwise applicable conflicts of law provisions) of the State
of Illinois and the federal laws of the United States of America applicable
therein, as though all acts and omissions related hereto occurred in Illinois.
Any lawsuit arising from or related to this Agreement shall be brought only in
the United States District for the Northern District of Illinois or the Circuit
Court of Cook County, Illinois. To the extent permissible by law, the parties
hereby consent to the jurisdiction and venue of such
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courts. Each party hereby waives, releases and agrees not to assert, and agrees
to cause its Affiliates to waive, release and not to assert, any rights such
party or its Affiliates may have under any foreign law or regulation that would
be inconsistent with the terms of this Agreement as governed by Illinois law.
SECTION 10.09. Dispute Resolution. Any and all disputes, controversies
or claims (whether sounding in contract, tort or otherwise) that may arise out
of or relate to, or arise under or in connection with, this Agreement, or the
transactions contemplated hereby (including all actions taken in furtherance of
the transactions contemplated hereby on or prior to the date hereof), shall be
subject to the dispute resolution procedures set forth in the Reorganization
Agreement.
SECTION 10.10. Relationship Of Parties. Nothing contained in this
agreement shall be construed to imply a joint venture, partnership, or
principal-agent relationship between the parties; and, except as provided
otherwise herein, neither party by virtue of this Agreement shall have any
right, power or authority, express or implied, to act on behalf of or enter into
undertaking binding the other party. This Agreement shall not be construed to
create rights, express or implied, on behalf of, or for the use of, any parties,
aside from Licensee and Licensor, and Licensee and Licensor shall not be
obligated, separately or jointly, to any third parties or any third party
beneficiaries by virtue of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed by their authorized representatives as of the date first above
written.
TECHNOLOGY SOLUTIONS COMPANY
By: ________________________________
[Name]
[Title]
ELOYALTY CORPORATION
By: ________________________________
[Name]
[Title]
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EXHIBIT 10.12
PROMISSORY NOTE
U.S. $1,200,000.00 November 12, 1998
FOR VALUE RECEIVED, the undersigned, KELLY D. CONWAY, of [Home
Address] ("Borrower"), hereby unconditionally promises to pay to the order of
TECHNOLOGY SOLUTIONS COMPANY, a Delaware Corporation ("Lender"), having its
principal office at 205 North Michigan Avenue, Chicago, Illinois 60601, in
lawful money of the United States of America and in immediately available funds,
the principal sum of ONE MILLION TWO HUNDRED THOUSAND DOLLARS AND NO CENTS
($1,200,000.00), together with interest on the principal and accrued interest
balance from time to time outstanding at the rate of FOUR AND FIFTY-ONE
HUNDREDTHS percent (4.51%) per annum from the date hereof until payment in full
on November 12, 2003 (the "Payment Date") in accordance with this Promissory
Note; provided, however, that:
(i) if Borrower has been employed by Lender, or any parent or
subsidiary company of Lender, from the date hereof through and including
November 12, 1999 (the "First Anniversary Date"), then the amount of three
hundred thousand dollars ($300,000.00) of outstanding principal indebtedness,
plus interest accrued on such amount, shall be discharged and forgiven by Lender
and shall no longer be due and, accordingly, Borrower shall have no further
obligation to Lender hereunder; and
(ii) if Borrower has been employed by Lender, or any parent or
subsidiary company of Lender, from the date hereof through and including the
twelfth day of each calendar month following the First Anniversary Date, then on
each such twelfth day of each calendar month following the First Anniversary
Date, up to November 12, 2000 (the "Second Anniversary Date"), the amount of
twenty five thousand dollars ($25,000.00) of outstanding principal indebtedness,
plus interest accrued on such amount, shall be discharged and forgiven by Lender
and shall no longer be due and, accordingly, Borrower shall have no further
obligation to Lender hereunder; and
(iii) if Borrower has been employed by Lender, or any parent or
subsidiary company of Lender, from the date hereof through and including the
twelfth day of each calendar month following the Second Anniversary Date, then
on each such twelfth day of each calendar month following the Second Anniversary
Date, up to November 12, 2001 (the "Third Anniversary Date"), the amount of
twenty thousand dollars ($20,000.00) of outstanding principal indebtedness, plus
interest accrued on such amount, shall be discharged and forgiven by Lender and
shall no longer be due and, accordingly, Borrower shall have no further
obligation to Lender hereunder; and
(iv) if Borrower has been employed by Lender, or any parent or
subsidiary company of Lender, from the date hereof through and including the
twelfth day of each calendar month following the Third Anniversary Date, then on
each such twelfth day of
<PAGE> 2
each calendar month following the Third Anniversary Date, up to November 12,
2002 (the "Fourth Anniversary Date"), the amount of twenty thousand dollars
($20,000.00) of outstanding principal indebtedness, plus interest accrued on
such amount, shall be discharged and forgiven by Lender and shall no longer be
due and, accordingly, Borrower shall have no further obligation to Lender
hereunder; and
(v) if Borrower has been employed by Lender, or any parent or
subsidiary company of Lender, from the date hereof through and including the
twelfth day of each calendar month following the Fourth Anniversary Date, then
on each such twelfth day of each calendar month following the Fourth Anniversary
Date, up to the Payment Date, the amount of ten thousand dollars ($10,000.00) of
outstanding principal indebtedness, plus interest accrued on such amount, shall
be discharged and forgiven by Lender and shall no longer be due and,
accordingly, Borrower shall have no further obligation to Lender hereunder.
(vi) if Borrower has been employed by Lender, or any parent or
subsidiary company of Lender, from the date hereof through and including the
Payment Date, then any and all amounts of remaining outstanding interest accrued
hereunder shall be discharged and forgiven by Lender and shall no longer be due
and, accordingly, Borrower shall have no further obligation to Lender hereunder.
Borrower, however, shall be responsible for income tax on the
principal plus interest, if and when they are recognized as income, which shall
be withheld by Lender from any amounts owed by Lender to Borrower, including
payroll.
Borrower reserves the right to prepay this Note, in whole or in
part, at any time without penalty. In the event of such prepayment, the amount
so prepaid will be applied to principal due and interest will be adjusted
accordingly.
All payments of principal and interest under this Note shall be
made by Borrower to Lender, at Lender's principal place of business as set forth
above, or at such other place as Lender may from time to time designate in
writing.
The occurrence or existence of one or more of the following events
shall constitute an event of default ("Default") under this Note: (i) the
failure of Borrower to pay when due any principal or interest due hereunder; or
(ii) (a) Borrower shall become generally unable to pay his debts as they become
due, or (b) Borrower shall make an assignment for the benefit of creditors, or
(c) Borrower shall call a meeting of creditors for the composition of debts, or
(d) a proceeding under any bankruptcy, reorganization, arrangement of debt,
insolvency, readjustment of debt or receivership law or statute is filed by or
against Borrower, or a custodian, receiver or agent is appointed or authorized
to take charge of any of Borrower's properties, or Borrower takes any action to
authorize any of the foregoing; or (iii) Borrower shall no longer remain, for
any reason, an employee of Lender, or a parent or subsidiary company of Lender,
or (v) there shall be entered against Borrower any judgment or judgments in an
aggregate amount in excess of
-2-
<PAGE> 3
$100,000, unless the amounts of such judgment or judgments are covered by
insurance and liability under such insurance has been admitted by the issuer
thereof.
In an event of Default, Lender may, by notice to Borrower, declare
all the indebtedness evidenced by this Note to be, and thereupon such
indebtedness shall become, immediately due and payable, without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived by Borrower; provided, however, that if the Default specified in clause
(ii) (d) in the paragraph two paragraphs above occurs, the indebtedness
evidenced by this Note shall automatically become due and payable, without
presentment, demand, protest or any notice of any kind, all of which are hereby
expressly waived by Borrower.
If payment hereunder becomes due and payable on a day which is not
a "Business Day" (as defined below), the due date thereof shall be extended to
the next succeeding Business Day, and interest shall be payable thereon during
such extension at the rate specified above. "Business Day" shall mean a day on
which banks in Chicago, Illinois are open for the transaction of banking
business. In no case or event whatsoever shall interest charged hereunder,
however such interest may be characterized or computed, exceed the highest rate
permissible under any law which a court of competent jurisdiction shall, in a
final determination, deem applicable hereto. In the event that such a court
determines that Lender has received interest hereunder in excess of the highest
rate applicable hereto, Lender shall (i) apply such excess to any unpaid
principal balance due and payable by Borrower hereunder to Lender; and (ii) if
the amount of such excess exceeds the unpaid principal and other liabilities due
and payable by Borrower hereunder, Lender shall remit such excess to Borrower.
Any notice hereunder shall be sufficiently given if in writing and
delivered in person or mailed by first class mail addressed as follows:
IF TO BORROWER:
Kelly D. Conway
[Home Address]
IF TO LENDER:
Technology Solutions Company
205 North Michigan Avenue, Suite 1500
Chicago, Illinois 60601
Attention: Senior Vice President and Chief Financial Officer
Borrower and Lender may each designate additional or different
addresses by notice to the other party as provided herein.
-3-
<PAGE> 4
Lender shall be under no obligation to marshal any assets in favor
of Borrower in payment of any or all of Borrower's liabilities hereunder. To the
extent that Borrower makes a payment or payments to Lender, and such payment or
payments or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside or required to be repaid to a trustee,
receiver or any other party under any bankruptcy law, provincial, state or
federal law, common law or equitable cause, then to the extent of such recovery,
the obligation or part hereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
Any dispute between Lender and Borrower arising out of, connected
with, related to, or incidental to the relationship established between them in
connection with this Note, and whether arising in contract, tort, equity, or
otherwise, shall be resolved in accordance with the internal laws and not the
conflicts of law provisions of the State of Illinois.
Except as provided in the immediately succeeding paragraph, Lender
and Borrower each agree that all disputes between them arising out of, connected
with, related to, or incidental to the relationship established between them in
connection with this Note and whether arising in contract, tort, equity, or
otherwise, shall be resolved only by state or federal courts located in Cook
County, Illinois, but Lender and Borrower acknowledge that any appeals from
those courts may have to be heard by a court located outside of Cook County,
Illinois. Borrower waives any and all objections that he may have to the
location of the court considering the dispute.
Borrower agrees that Lender shall have the right to proceed
against Borrower or his property in a court in any location to enable Lender to
enforce a judgment or other court order entered in favor of Lender. Borrower
agrees that he will not assert any permissive counterclaims in any proceeding
brought by Lender to enforce a judgment or other court order in favor of Lender.
Borrower waives any objection that he may have to the location of the court in
which Lender has commenced a proceeding described in this paragraph.
Borrower waives personal service of any process upon him and
consents that all such service of process be made by registered mail directed to
Borrower at the address stated herein.
Borrower waives the posting of any bond otherwise required of
Lender to enforce any judgment or other court order entered in favor of Lender,
or to enforce this note by specific performance, temporary restraining order,
preliminary or permanent injunction.
Whenever possible, each provision of this Note shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Note shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such
-4-
<PAGE> 5
provision or the remaining provisions of this Note. Whenever in this Note
reference is made to Lender or Borrower, such reference shall be deemed to
include, as applicable, a reference to their respective successors and assigns,
and the provisions of this Note shall be binding upon and shall inure to the
benefit of said successors and assigns. Borrower's successors and assigns shall
include, without limitation, a receiver, receiver and manager, trustee or
debtor-in-possession of or for Borrower.
By: /s/ KELLY D. CONWAY
--------------------------------
Kelly D. Conway
Borrower
-5-
<PAGE> 1
EXHIBIT 21
JURISDICTION OF
SUBSIDIARIES OF REGISTRANT INCORPORATION/ORGANIZATION
eLoyalty Europe Holding Corporation Delaware
eLoyalty International Holding, Inc. Illinois
Geising International Ltd. New York
eLoyalty (UK) Limited United Kingdom
eLoyalty Deutschland GmbH Germany
eLoyalty (Switzerland) Ltd. Switzerland
TSC Europe GmbH Switzerland
eLoyalty (France) SARL France
eLoyalty Corporation (Australia) Pty. Ltd. Australia
eLoyalty (Canada) Corporation Canada
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated September 10, 1999 relating to the financial statements and
financial statement schedule of eLoyalty Corporation and our report dated
December 21, 1999 relating to the financial statements of The Bentley Group,
Inc., which appear in such Registration Statement. We also consent to the
reference to us under the headings "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 7, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated December 20, 1999 relating to the financial statements of NexCen
Technologies, Inc., which appears in such Registration Statement. We also
consent to the reference to us under the headings "Experts" in such Registration
Statement.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 7, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 7-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JUN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 4,411 10,654
<SECURITIES> 4,486 6,714
<RECEIVABLES> 28,081 46,027
<ALLOWANCES> 2,638 2,369
<INVENTORY> 0 0
<CURRENT-ASSETS> 42,247 73,435
<PP&E> 3,242 4,879
<DEPRECIATION> 1,661 2,844
<TOTAL-ASSETS> 63,904 97,792
<CURRENT-LIABILITIES> 16,016 21,503
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 47,888 71,289
<TOTAL-LIABILITY-AND-EQUITY> 63,904 97,792
<SALES> 0 0
<TOTAL-REVENUES> 64,415 107,652
<CGS> 0 0
<TOTAL-COSTS> 61,993 98,509
<OTHER-EXPENSES> (116) (83)
<LOSS-PROVISION> 2,652 1,395
<INTEREST-EXPENSE> 31 55
<INCOME-PRETAX> (145) 7,776
<INCOME-TAX> 398 3,690
<INCOME-CONTINUING> (543) 4,086
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (543) 4,086
<EPS-BASIC> (0.01) 0.10
<EPS-DILUTED> (0.01) 0.08
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