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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
Commission file number 0 - 19433
[LOGO]
Technology Solutions Company
Incorporated in the State of Delaware
Employer Identification No. 36-3584201
205 North Michigan Avenue, Suite 1500, Chicago, Illinois 60601
(312) 228-4500
Securities Registered Pursuant To
Section 12(G) Of The Act:
Common Stock, $.01 par value per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the registrant's voting stock held by
nonaffiliates of the registrant (based upon the per share closing price of
$9.0625 on March 10, 2000, and, for the purpose of this calculation only, the
assumption that all of registrant's directors and executive officers are
affiliates) was approximately $394 million.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value per share, as of March 10, 2000 was 43,930,018.
Documents Incorporated by Reference:
Information required by Part III (Items 10, 11, 12 and 13) of this document is
incorporated by reference to certain portions of registrant's definitive Proxy
Statement distributed in connection with its 2000 Annual Meeting of
Stockholders.
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Technology Solutions Company
PART I.
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ITEM 1. BUSINESS
General
Technology Solutions Company (TSC or the Company) offers end-to-end eBusiness
solutions to major corporations as well as mid-size firms and eBusiness start-
ups. These solutions encompass electronic commerce, electronic procurement,
electronic learning and knowledge management, supply chain management, web-
enabled Enterprise Resource Planning (ERP), core ERP and extended application
service provider services (ASP+). These services help clients in the
manufacturing, technology, health care, telecommunications, financial services,
and other industries transform their businesses, their internal business
processes and their relationships with customers, suppliers, distributors and
employees and help these organizations realize the full benefits of information
technology throughout the enterprise. As used herein, the terms "TSC" or the
"Company," unless the context otherwise clearly requires, refer to Technology
Solutions Company and its subsidiaries. This report discusses the twelve months
ended December 31, 1999.
On February 15, 2000 TSC successfully completed the spin-off of its eLoyalty
division into a separate publicly traded company, eLoyalty Corporation. Prior to
the spin-off TSC was organized into two business segments which each had its own
business focus and service offering - Enterprise Solutions (E-Solutions) and
eLoyalty. eLoyalty is a global information technology services company focused
on providing enterprise-wide solutions across all customer access channels,
including the Internet. eLoyalty Corporation trades on the Nasdaq Stock
Market(R) under the symbol "ELOY". In recognition of the spin-off, this report
discusses the continuing operations of TSC: the E-Solutions business. For
discussion of certain forward-looking statements, refer to Assumptions
Underlying Certain Forward-Looking Statements and Factors That May Affect Future
Results.
TSC services span a wide range of eBusiness consulting and systems integration
services. TSC provides a full spectrum of eBusiness services, either in an end-
to-end integrated solution that cross functional boundaries in the client's
organization or as a point solution addressing a single functional area. These
services involve a full assessment of clients' eBusiness strategy and relevant
integrated needs. The Company will perform feasibility studies, value analysis,
business process redesign and reengineering, benchmarking and best practices,
project management, architecture, logical and physical systems design, hardware
and software selection, programming, package software implementation, systems
integration, change management, education, training, and support services.
Enterprise business processes that are automated with core ERP solutions provide
the foundation that allow companies to integrate their front-end web sites with
their core business processes
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(e.g., order entry, order fulfillment, and delivery), allowing them to increase
the benefits of eBusiness. TSC provides system integration services for core ERP
solutions from SAP, Oracle, PeopleSoft/Vantive and Baan. Historically, core ERP
solutions have been TSC's main offerings and currently represent over 75 percent
of the business by revenue.
Since January 1999, TSC has performed project work for over 250 corporations,
including 15 of the Fortune 50 companies and 25 of the Fortune 100 companies.
TSC is a corporation formed under the laws of the state of Delaware. Its
principal executive offices are located in Chicago, Illinois. In addition to its
Chicago office, the Company maintains domestic offices in Atlanta, Georgia;
Dallas, Texas; New York, New York; and San Francisco, Soquel and Irvine,
California. International offices are located in Bogota, Colombia; London,
England; and Mexico City, Mexico.
Strategy
TSC's business strategy is to use core ERP systems as a "backbone" to develop
and integrate end-to-end eBusiness solutions that connect all phases of a
customer's business, from supplier order processing to customer delivery. The
Company will deliver all or part of an eBusiness solution to a client, but
emphasizes the advantage of a seamlessly integrated system with no manual or
paper processes to act as bottlenecks or opportunities to lose or inaccurately
enter data. The Company's goal is to anticipate market needs and apply proven
but leading-edge information technologies to deliver these eBusiness solutions.
TSC's clients are typically firms that range in size from $500 million to $5
billion in annual revenue. TSC also performs work at larger firms, often at
larger divisions or subsidiaries that fall into this market segment.
TSC's eBusiness solutions projects often begin with one or more eBusiness
assessments, basically a high-end consulting project. Examples of TSC's high-end
consulting work include: the development of an eProcurement strategy for a
client; the review of the client's current IT strategy and its consistency with
the business strategy of the firm; the assessment of the client's Internet
strategy; and the assessment of the client's computer network, computer
architecture and operations management capabilities.
Subsequent to the assessment stage, TSC typically develops an eBusiness strategy
with the client, assists in the selection of the appropriate platform and
architecture, plans the phases of the project and then moves into the
implementation stage. The implementation stage generally involves integrating
eBusiness infrastructure, web site content, business-to-business (B2B)
applications, business-to-consumer (B2C) applications, back office systems,
supply chain management systems and customer support systems. Post-
implementation, TSC can provide ongoing hosting and support for systems and
applications through its ASP+ services.
An increasing number of TSC's projects have an eBusiness component that extends
the enterprise beyond core ERP. TSC is placing significant emphasis on growing
these offerings and expects them to contribute an increasing percentage of total
Company revenue.
TSC's strategy is to focus on developing and maintaining relationships with its
customers within the client organization. With high-level sponsorship of its
projects, TSC believes that there is a
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higher level of commitment to complete the project and an increased opportunity
to expand the working relationship with the client to more extensive eBusiness
projects.
Business
TSC provides eBusiness services on a client-specific basis and is primarily
organized along geographically based regional lines. This organization allows
the Company to focus on each client's needs as well as to offer superior
application and industry expertise in high-growth markets such as financial
services and telecom and in high-growth application areas such as Supply Chain
Management, ASP+, and Knowledge Management. TSC concentrates on large corporate
projects because it believes that such projects offer maximum profit potential
and represent one of the fastest growing areas of the eBusiness market. TSC has
implemented major new systems within manufacturing, distribution, retail,
transportation, telecommunications, banking, insurance, health care and
financial services firms.
Competitive Differentiation
Important factors in TSC's project work are project management as well as
industry-specific and application knowledge. TSC dedicates an experienced,
senior level project manager (often a Vice President who averages 20 years of
experience) to manage the typical large project. TSC's professional staff (which
averages 13 years of experience) has specialized application skills and industry
knowledge. This knowledge and experience is important not only to the successful
development and implementation of the solution, but also to the redesign and the
restructuring of the business processes utilizing the affected systems.
TSC's project model is based on providing its clients with more experienced
personnel and less personnel per client than might be provided by other firms.
TSC's goal is to operate with a ratio of Vice President/Project Manager to
professional staff ranging from 1 Vice President to 5 professional staff to 1
Vice President to 15 professional staff. This compares to ratios of 1 partner
(Vice President equivalent) to 30 professional staff in many of the Big 5
consulting/accounting firms. TSC believes that its project staffing model
reduces the risk of project failure and increases the consultants' ability to
successfully address the clients' needs by having a knowledgeable and
experienced project workforce.
The project work undertaken by TSC is generally performed on a time-and-
materials basis. The size of the team of TSC's professional staff assigned to a
particular project varies depending on the size of the project and the stage of
implementation. TSC's professional staff assigned to a project are billed out at
various rates, depending upon the level of expertise of each individual.
TSC's business is focused on the commercial market. TSC does not currently have
significant activity in the local, state, and federal government segments of the
domestic systems integration market.
TSC works in close conjunction with client personnel, at the client site, on
projects. This partnering with the client results in TSC providing the project
management and other higher-end skills that might not be available in the client
organization and the client providing business and functional expertise, as well
as the programmers and lower level technical resources. TSC
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endeavors to help each of its clients increase the knowledge and skills of its
IT organization and provides the necessary knowledge transfer so that the client
is better able to maintain its new system.
In each of its areas of business, TSC has developed methodologies, software,
tools, templates, project management plans, best practice and benchmark
information and other intellectual property which are used by TSC consultants to
help improve the quality of the work performed by TSC, as well as lower the cost
of the implementation and reduce the time required to perform the work. These
methodologies, software, tools, templates, project management plans and best
practice and benchmark information are maintained, along with proposals, project
plans and other information, in knowledge databases that can be accessed by our
personnel working on projects throughout TSC.
TSC's professionals bring to each client engagement technical skills,
experience, industry-specific and functional experience, significant consulting
project experience and expertise in the following areas:
Systems Integration and Project Management -- TSC works with the client to
design and develop an appropriate solution to meet the client's needs. TSC's
Project Manager typically assumes overall project management responsibility
during the development and implementation phases, overseeing the team assembled
by TSC (which normally consists of a combination of TSC, client, and vendor
personnel) to implement the project and coordinate the various hardware,
software, networking, and other components.
Software Products Expertise -- Application software and other software products
are increasingly used to reduce development time and cut costs. TSC is familiar
with many third-party software products for the industries it serves.
Reusable Tools and Methodologies -- TSC has developed a number of methodologies,
templates and tools which are used in various areas of the strategic planning,
market analysis, business case, systems integration, project management, and
software package integration/implementation aspects of TSC's project work. These
methodologies, templates, and tools decrease the time required to implement a
system, as well as increase reliability and reduce client risk associated with a
particular project phase.
Change Management and Training -- TSC embeds a change management component in
its delivery of solutions, recognizing that the ability and speed of the people
in a client organization to adapt to new systems is a critical success factor.
Whether it is a package implementation or a large complex systems integration
project, employees at all levels of the client are affected. The failure of the
users to properly utilize the system can prevent the client from obtaining the
benefits originally specified for the project. TSC's change management programs
are designed to ensure the project's successful implementation by reducing
resistance, along with expanding the client's understanding and commitment to
the change necessitated by the project.
TSC offers its clients a variety of training options in its project work. TSC's
training programs can range from basic "train the trainer" programs for a new
client system to sophisticated multi-
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media computer-based and web-based training programs that can be used for
training the users of the system, as well as detailed process and system
education.
Practice Areas
TSC currently manages its business in one reportable segment, named E-Solutions.
However, E-Solutions is comprised of three practice areas: Digital Enterprise
Consulting; Knowledge Management; and ASP+. Each serves TSC customers in the
U.S. and international markets. TSC believes that offering these three bands of
services allows the company to serve clients in all aspects of their information
technology and eBusiness needs. This structure also allows its employees the
flexibility and opportunity to grow and develop. The three areas work in an
integrated manner that develops, shares and cross references methodologies,
tools, project management plans, benchmark information, templates and best
practices overall. All information related to client projects--including
proposals and project plans--is in knowledge databases that can be accessed by
TSC personnel working on projects throughout TSC.
TSC believes that within each of its practice areas, it competes primarily on
the basis of the experience and expertise of its project managers, its proven
track record in applying new technologies and innovative business solutions, its
use of methodologies and implementation tools and the creativity of its
proposals and delivered work product. Price has not typically been the primary
factor in these major systems projects. More price-sensitive projects have
generally tended to be performed by low-cost providers, such as contract
programmers.
Digital Enterprise Consulting
The Digital Enterprise Consulting (DEC) practice area provides IT consulting and
business consulting services that help clients in developing and implementing
all aspects of their electronic business capabilities. Historically, TSC has
focused on implementing third-party application software packages, primarily in
the ERP area. TSC believes that those services provide a "backbone" for
additional eBusiness services that are more focused on external customers and
vendors, and the Company is now offering and providing those additional services
to both existing and new customers. The DEC practice area represented the
majority of TSC'S 1999 revenues.
For the back-end (or traditional) aspects of the DEC practice, TSC implements
the human resources, financial and manufacturing systems supplied by PeopleSoft,
Inc.; the integrated client/server product family R/3 supplied by SAP AG and its
U.S. subsidiary SAP America, Inc.; the Oracle Applications suite of
client/server products developed by Oracle Corporation; and the Baan IV and Baan
V integrated client/server product supplied by Baan Company N.V. and its U.S.
subsidiary Baan U.S.A., Inc.
Within DEC, customers can take advantage of areas of expertise and resources
that fall under the following business elements:
Core ERP develops "backbone" automated structures that help businesses automate
and streamline human resources, manufacturing and financial processes and
systems. In addition to its consulting services associated with the ERP software
products offered by PeopleSoft, SAP, Oracle, and Baan, TSC is a "solution
assembler." TSC customers are adding specialized best-of-
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breed software applications to their existing ERP installations through the use
of TSC's Solution Assembly and Architecture services.
eBusiness Strategy and Planning provides consulting strategy, architecture and
system design services along with rapid eBusiness solution delivery
capabilities. Clients receive a rapid assessment of their Internet strategy by
benchmarking against industry best practices. Additionally, competitor
capabilities are evaluated to identify potential Internet-based opportunities,
and TSC makes process recommendations for the future. TSC utilizes its extensive
experience in designing and building systems that operate across multiple
computing platforms and communications technologies to develop state-of-the-art
E-commerce solutions.
eProcurement Solutions involves developing and implementing customized software
that brings buyers and sellers together in the electronic marketplace.
Oftentimes, TSC interfaces these solutions with existing customer systems. This
requires expertise in various third-party software packages that serve multiple
areas of a customer's business.
Supply Chain Management Solutions involves developing and implementing
customized software for our clients that create dynamic links between the
clients and their suppliers. This requires expertise in multiple third-party
software packages that serve numerous areas of a customer's business.
Change and Learning assists organizations in managing the human side of
implementing strategic change in a corporate environment through change
management services, customized educational programs, and multi-media resources
that help organizations achieve the greatest benefits from their strategic
investments. TSC consultants and training specialists deliver change management,
education and training, and multi-media services specifically tailored to each
client environment. In all areas, TSC customizes the deliverables to the project
and the business and the culture of the client.
In the area of change management, the services provided by TSC include:
Strategic Visioning; leadership of the change process; development and training
of the teams; development and deployment of a communications plan to ensure
consistent and clear messages about the project; and development of objectives
by employees that can be measured and attained.
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TSC's services in the education and training area include: the analysis of the
audience to be trained; the development of executive education programs,
including the linkage of performance measures to project goals; development of
customized education courses; development of specific educational courses that
highlight the business processes being implemented and explain their benefits;
development of customized skills training programs; and development of new
policies and procedures and the incorporation of these into training programs.
Knowledge Management
The Knowledge Management practice area is focused on harnessing the intellectual
capital of client companies. To do this, TSC employs knowledge management tools
and technologies ranging from sophisticated knowledge-based business processes
and web-based training to business intelligence.
In October 1999, TSC announced that it had acquired CourseNet Systems, Inc.
(CourseNet) an e-learning solutions delivery company. CourseNet expanded the
Knowledge Management practice to meet growing demand from clients. CourseNet's
XML-based software allows users to create and reuse "learning objects," which
can be integrated into multiple training programs with minimal effort. With this
software, TSC's Knowledge Management offering includes a suite of tools to
author, deliver, and administer online training, allowing companies to identify
experts, take online courses, collaborate in the development of new knowledge,
and share knowledge with the entire organization and even the entire supply
chain. TSC itself is using the solution and several other major companies are
implementing CourseNet programs.
ASP+
The Company has recently developed an ASP+ practice area. The ASP+ practice area
provides clients comprehensive hosting services for integrated eBusiness
solutions that include multiple applications and legacy systems. TSC's ASP+
services include solutions and development support, network services and data
centers, network operations support and help desk services. Some of these
services are provided directly by TSC while other services are provided by TSC's
ASP partners. ASP+ can support single or multiple applications ranging from
back-office ERP systems to Web site front ends. ASP+ support is priced on a
monthly fee and/or fee per use basis.
Sales
TSC utilizes a high-end relationship-selling model in most of its business
areas. The critical component in this selling model is TSC's Vice
President/Project Manager. The Project Managers are responsible for growing and
enhancing the relationship between TSC and its current clients. By developing a
thorough knowledge of the client's business, along with a close working
relationship with the most senior members of the client's management team, TSC's
Project Managers are able to establish TSC as a business partner with the
client. By having a detailed knowledge of the mission, vision and strategy of
the client, TSC strives to be the preferred supplier of IT and business
consulting services to each client.
The Company has a relatively small dedicated sales organization (approximately
30 people). This sales organization is responsible for developing and qualifying
leads which come from a variety of sources. These sources include referrals from
current and former clients; leads from employees;
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contacts from industry research organizations; leads generated by attendance at
conferences and trade shows; and leads from marketing efforts, including TSC's
web site, telemarketing and advertising. Additionally, all senior personnel are
encouraged to work their own network of contacts to develop potential new
business sources.
As the potential client becomes more serious about a proposed project that would
involve TSC, the salesperson brings a TSC Project Manager into the process to
develop a proposal and/or respond to the client RFP (request for proposal). At
this time, the Project Manager becomes TSC's primary interface with the
potential client. The extensive experience of the TSC Project Manager is used to
evaluate the potential project and develop an insightful proposal, which will
address the specific project request of the potential client. The TSC Project
Manager is often able to provide in the proposal insight and ideas that result
from TSC's focus on delivering business benefits through technology.
TSC's practice areas participate in a number of software vendor and industry
conferences and trade shows each year. These events serve to broaden TSC's
exposure as its senior technical and management personnel participate in
speaking engagements and other conference events.
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International
TSC's international operations have been focused in Latin America and Europe. In
each of these areas, ERP is the primary focus.
The Company's international operations accounted for 6 percent of revenues for
the year ended December 31, 1999, 4 percent of revenues for the seven month
transition period ended December 31, 1998, 5 percent of revenues for fiscal 1998
and 6 percent of revenues for fiscal 1997. Total staffing at the Company's
international operations was 68 as of December 31, 1999. For discussion of
certain risks related to the Company's International Operations, See Risks of
Conducting International Operations.
Clients
The Company's five largest clients during the year ended December 31, 1999
accounted for 4 percent, 4 percent, 4 percent, 4 percent and 3 percent of total
revenues respectively; in the seven month transition period ended December 31,
1998 the five largest clients accounted for 5 percent, 5 percent, 3 percent, 3
percent, and 3 percent of total revenues, respectively; in fiscal 1998, the five
largest clients accounted for 6 percent, 4 percent, 3 percent, 3 percent, and 3
percent of total revenues, respectively; in fiscal 1997, they accounted for 11
percent, 5 percent, 5 percent, 5 percent and 5 percent of total revenues,
respectively. No client accounted for 10 percent or more of revenues during the
year ended December 31, 1999, the seven month transition period ended December
31, 1998 or fiscal 1998. In fiscal 1997, The Prudential accounted for 11 percent
of revenues.
TSC views its current clients as a valuable source of additional work once a
project has commenced. TSC's Project Managers and relationship managers are
responsible for establishing the high-level client management contact and
relationships that will allow TSC to be considered for additional project work
at the particular client, regardless of the specific business group or practice
area that may be performing work at that client.
TSC's client focus is on global 2000 accounts and includes the middle-market
segment that the Company defines as firms having annual revenues of between $500
million and $5 billion. TSC does perform work at larger firms, often at large
divisions or subsidiaries that fall into this market segment. During the year
ended December 31, 1999, TSC performed work at 15 of the Fortune 50 companies
and 25 of the Fortune 100 companies.
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Personnel
As of December 31, 1999, TSC had a total staff of 599 (excluding Global Core
Services). The following table summarizes, as of December 31, 1999, the
experience levels of TSC's professional staff.
<TABLE>
<CAPTION>
Average Relevant Experience (Years)
---------------------------------------
% of
Level Total Consulting Industry Total
----------- ----- ---------- -------- -----
<S> <C> <C> <C> <C>
Vice Presidents 11% 10 10 20
Senior Principals 19% 7 11 18
Principals 26% 6 10 16
Senior Consultants 22% 4 7 11
Consultants 18% 2 4 6
Associate Consultants 4% 1 2 3
</TABLE>
In order to accommodate typical project development lead times, TSC has found
that, from time to time, it must recruit and hire additional Project Managers on
the basis of anticipated demand for their services. There can be no assurance
that demand for TSC's services will materialize as anticipated.
Global Core Services
As of December 31, 1999, TSC had a staff of 99 individuals who comprised the
Global Core Services (GCS) support function. The objective of the GCS function
is to facilitate local decision-making and support the autonomy of the practice
areas and project managers, while maintaining the internal structure necessary
to support TSC's goals. The functional areas within this area include: senior
corporate management; accounting; financial reporting; finance; tax; legal;
treasury; human resources; employee benefits; marketing; public and investor
relations; office operations; recruiting; training; internal communications;
internal technology applications; planning; quality assurance; and insurance.
Intellectual Property Rights
Many of the Company's clients have required that the Company grant to them all
proprietary and intellectual property rights with respect to the work product
resulting from the Company's performance of services, including the intellectual
property rights to any custom software developed by the Company for them. Each
grant of proprietary and intellectual property rights limits the Company's
ability to reuse work product components and work product solutions with other
clients. In a limited number of such situations, the Company has obtained, and
in the future may attempt to obtain, an ownership interest or a license from its
clients to permit the Company to market custom software for the joint benefit of
the client and the Company. These arrangements may be nonexclusive or exclusive,
and licensors to the Company may retain the right to sell products and services
that compete with those of the Company. There can be no assurance, however, that
the Company will be able to negotiate future software licenses upon terms
acceptable to the Company.
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The Company also develops certain foundation and application software tools,
methodologies and products that are owned by the Company and licensed to its
clients. The Company regards these software tools, methodologies and products as
proprietary and intends to protect its rights, where appropriate, with
registered copyrights, patents, registered trademarks, trade secret laws and
contractual restrictions on disclosure and transferring title. There can be no
assurance that any of these steps taken by the Company will be adequate to deter
misappropriation of its proprietary rights or independent third party
development of functionally equivalent products. "TSC" is a registered service
mark of the Company.
In addition, the Company's success is dependent upon its specialized expertise
and methodologies. To protect its proprietary information, the Company relies
upon a combination of trade secret and common law, employee nondisclosure
policies and third-party confidentiality agreements. However, there can be no
assurance that any of these steps taken by the Company will be adequate to deter
misappropriation of its specialized expertise and methodologies.
Although the Company believes that its services and products do not infringe on
the intellectual property rights of others, there can be no assurance that
infringement claims will not be asserted against the Company in the future.
Competition
The eBusiness consulting and systems integration markets are highly competitive
and include participants from a variety of market segments. Participants
include systems consulting and implementation firms, contract programming
companies, application software firms, the service groups of computer equipment
companies, facilities management companies, "Big Five" accounting firms, and
general management consulting firms. Thousands of firms fall into these
categories. Among the more recognizable participants in the eBusiness consulting
and systems integration business are Andersen Consulting; Booz, Allen & Hamilton
Inc.; Cambridge Technology Partners, Inc.; Computer Sciences Corporation; Arthur
Andersen LLP; Deloitte & Touche LLP; Electronic Data Systems Corporation; Ernst
& Young LLP; IBM; KPMG Peat Marwick LLP; PricewaterhouseCoopers LLP; and Sapient
Corporation. TSC believes that its ability to compete depends in part on a
number of factors outside its control. These factors include the ability of its
competitors to hire, retain, train and motivate a significant number of senior
project managers, the ownership by competitors of software used by potential
clients, the development by others of software that is competitive with TSC's
tools and services, and the price at which others offer comparable services.
Participants in the eBusiness consulting and systems integration business also
face potential competition from in-house systems staff. In-house systems staffs
are often considered to be a lower cost alternative to outside systems firms. In
addition, the use of in-house staff permits the client to build skills for
maintaining and enhancing the system, as well as skills to implement future
systems. On the other hand, use of an in-house staff for a major systems project
often requires hiring a significant number of additional people with no
assurances that the new hires will be able to perform as needed. Furthermore,
the increased staff must often be re-deployed at the end of the project.
Finally, clients often have difficulty attracting highly skilled individuals
because of salary constraints.
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Many participants in the eBusiness consulting and systems integration business
have significantly greater financial, technical, and marketing resources and
generate greater systems consulting and implementation revenues than does TSC.
TSC competes more frequently with Andersen Consulting for major systems
integration projects than with any other participant in the market. Andersen
Consulting has substantially greater revenues, employee headcount, and market
share than does TSC.
Executive Officers of the Registrant
The executive officers of TSC as of March 23, 2000 are as follows:
<TABLE>
<S> <C>
William H. Waltrip Chairman
Jack N. Hayden President and CEO
Timothy P. Dimond Senior Vice President and Chief Financial Officer
Paul R. Peterson Senior Vice President, General Counsel and Corporate Secretary
</TABLE>
William H. Waltrip, age 62, has been a Director of the Company since December
1992 and Chairman of the Board since June 1993. Mr. Waltrip also served as Chief
Executive Officer from June 1993 to June 1995. From 1996 to 1998, he served as
the Chairman of the Board of Directors and, during 1996, he served as Chief
Executive Officer of Bausch & Lomb, Inc. From 1991 to 1993, he was Vice Chairman
of Unifax, Inc., a broad-line food service distributor. From 1985 to 1988, he
was President, Chief Operating Officer and a Director of IU International, a
diversified services company with major interests in transportation,
environmental services and distribution. From 1982 to 1985, he was President,
Chief Executive Officer and a Director of Purolator Courier Corporation. From
1972 to 1982, he was President, Chief Operating Officer and Director of Pan
American World Airways, Inc. He is also currently serving as a Director of
Bausch & Lomb, Inc., the Teachers Insurance and Annuity Association and Thomas &
Betts Corporation.
Jack N. Hayden, age 52, has been President and Chief Executive Officer of the
Company since February 2000. He joined TSC in April 1992 as Senior Vice
President, served as interim Chief Financial Officer during late 1992 and early
1993, and assumed the role of Executive Vice President in July 1995. Mr. Hayden
served as Chief Executive Officer of Coleman Consulting Group, Inc., from
September 1998 to March 1999. He rejoined the TSC executive team in March 1999
as Group President of the E-Solutions business. Prior to coming to TSC, Mr.
Hayden held the position of Vice President - Operations, Commercial Transport
Division of McDonnell Douglas Corporation from 1990 to 1992. From 1989 to 1990,
he served as Vice President-Finance of McDonnell Douglas Corporation. From 1971
to 1989, he served in numerous manufacturing and procurement positions at
McDonnell Douglas Corporation.
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Timothy P. Dimond, age 40, joined TSC in 1994 as Corporate Controller and in
April 1999 assumed the role of Chief Financial Officer. In August 1998, he
assumed the role of Vice President of Finance and Chief Accounting Officer after
serving as the Vice President of Latin America Operations from 1996 to 1998.
From 1990 to 1994, he was Director of Financial Reporting for The Marmon Group,
Inc. From 1981 to 1990, he worked in the audit department of Ernst and Young
most recently as an audit manager.
Paul R. Peterson, age 58, joined TSC in September 1992 as Vice President and
General Counsel and was appointed Corporate Secretary in October 1992. In June
1996, he was made a Senior Vice President of the Company. Prior to coming to
TSC, he worked for Bridgestone/Firestone, Inc. during the periods 1981 to 1984
and 1987 to 1992--where he held several positions including Divisional General
Counsel. From 1984 to 1987, he was a corporate executive with Block Management
Corporation, an H&R Block subsidiary which managed Hyatt Legal Services. He also
served at the Federal Trade Commission as a senior executive from 1974 to 1981,
and as a trial attorney from 1971 to 1974.
ITEM 2. PROPERTIES
TSC's principal executive offices are located at 205 North Michigan Avenue,
Suite 1500, Chicago, Illinois 60601. TSC's lease on these premises expires July
31, 2004. TSC also leases facilities in Atlanta, GA; Dallas, TX; New York, NY;
and San Francisco, Soquel and Irvine, CA. Additionally, TSC leases or shares
office premises in Bogota, Colombia; London, England; and Mexico City, Mexico.
TSC believes that these facilities are adequate for its current business needs
and that it will be able to obtain suitable space as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to lawsuits arising out of the normal course of business.
Management believes the final outcome of such litigation will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter ended December
31, 1999.
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Technology Solutions Company
PART II.
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market(R) under the
symbol "TSCC." As of March 10, 2000, there were approximately 800 holders of
record of the Company's Common Stock. That number does not include beneficial
owners of Common Stock whose shares are held in the name of banks, brokers,
nominees or other fiduciaries.
The following table sets forth the range of high and low trade prices on The
Nasdaq Stock Market(R) for the Company's Common Stock for each quarter period in
the years ended December 31, 1999 and 1998.
Quarter Ended High Low
------------- ---- ---
March 31, 1998 $22.667 $13.834
June 30, 1998 $23.667 $16.834
September 30, 1998 $21.500 $ 9.000
December 31, 1998 $13.938 $ 6.125
March 31, 1999 $11.250 $ 6.375
June 30, 1999 $11.563 $ 6.500
September 30, 1999 $15.500 $ 9.625
December 31, 1999 $39.250 $13.813
On March 10, 2000, the last reported sale price on The Nasdaq Stock Market(R)
for the Company's Common Stock was $9.0625. This price reflects the effect of
the February 15, 2000 eLoyalty spin-off into a separate publicly traded company.
The market price for the Common Stock may be significantly affected by factors
such as the announcement of new products or services by the Company or its
competitors, technological innovation by the Company, its competitors or other
vendors, quarterly variations in the Company's operating results or the
operating results of the Company's competitors, general conditions in the
Company's and its customers' markets, changes in the earnings estimates by
analysts or reported results that vary materially from such estimates. In
addition, the stock market
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has experienced significant price fluctuations that have particularly affected
the market prices of equity securities of many high technology and emerging
growth companies and that often have been unrelated to the operating performance
of such companies. These broad market fluctuations may materially and adversely
affect the market price of the Company's Common Stock. Following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company and its
officers and directors. Any such litigation against the Company could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect on the Company's business, financial
condition, operating results and cash flows.
The Company has never paid dividends on its Common Stock and currently intends
to retain all earnings for use in the expansion of its business and other
corporate purposes. The Company does not anticipate paying any dividends on its
Common Stock in the foreseeable future. The declaration and payment of dividends
by the Company are subject to the discretion of the Board of Directors.
All per share data has been adjusted to reflect all of the Company's prior stock
splits as of December 31, 1999.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data that is derived
from the Company's audited financial statements. All the information should be
read in conjunction with the Company's audited financial statements and notes
thereto and with Management's Discussion and Analysis of Financial Condition and
Results of Operations, which are included elsewhere in this filing. The
Company's audited statements of operations for the year ended December 31, 1999,
for the seven month transition period ended December 31, 1998 and for the years
ended May 31, 1998 and 1997 and the audited balance sheets as of December 31,
1999 and 1998 are included elsewhere in this filing, and the corresponding
selected financial data set forth below is qualified by reference to such
audited financial statements. All amounts are in thousands, except for (loss)
earnings per common share and (loss) earnings per common share assuming
dilution.
<TABLE>
<CAPTION>
Seven Month
For the Transition
Year Ended Period Ended
December 31, December 31, For the Year Ended May 31,
-------------- -------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues $156,320 $126,839 $189,603 $122,063 $71,224 $59,686
Operating (loss) income $(20,697) $ 1,844 $ 22,471 $ 14,094 $(4,279) $ 1,391
(Loss) income from
continuing operations $(11,578) $ 1,954 $ 14,233 $ 9,758 $(1,018) $ 2,379
Income from
discontinued operations $ 5,133 $ 2,521 $ 6,787 $ 5,309 $ 5,592 $ 988
Loss on distribution of
discontinued operations $ (6,789) -- -- -- -- --
Net (loss) income $(13,234) $ 4,475 $ 21,020 $ 15,067 $ 4,574 $ 3,367
======== ======== ======== ======== ======= =======
(Loss) income per
common share from
continuing operations $ (0.27) $ 0.05 $ 0.37 $ 0.28 $ (0.03) $ 0.08
(Loss) income from
discontinued operations $ (0.04) $ 0.06 $ 0.17 $ 0.15 $ 0.18 $ 0.03
-------- -------- -------- -------- ------- -------
Net (loss) earnings
per common share* $ (0.31) $ 0.11 $ 0.54 $ 0.43 $ 0.15 $ 0.11
======== ======== ======== ======== ======= =======
(Loss) income per
common share from
continuing operations
assuming dilution $ (0.27) $ 0.04 $ 0.33 $ 0.25 $ (0.02) $ 0.06
(Loss) income from
discontinued operations
assuming dilution $ (0.04) $ 0.06 $ 0.16 $ 0.13 $ 0.15 $ 0.03
-------- -------- -------- -------- ------- -------
Net (loss) earnings
per common share
assuming dilution* $ (0.31) $ 0.10 $ 0.49 $ 0.38 $ 0.13 $ 0.09
======== ======== ======== ======== ======= =======
</TABLE>
*Earnings per common share data have been restated to reflect all of the
Company's prior stock splits.
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<TABLE>
<CAPTION>
December 31, May 31,
----------------------------- ----------------------------------------------------------
1999 1998 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Total assets.................. $223,309 $219,099 $197,148 $133,866 $89,437 $65,222
Long-term debt................ __ __ __ __ __ __
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CALENDAR 1999 COMPARED WITH CALENDAR 1998
On February 15, 2000 TSC successfully completed the spin-off of its eLoyalty
division into a separate publicly traded company. Previously on January 27,
2000, TSC received a favorable ruling from the Internal Revenue Service that the
spin-off of its eLoyalty division would be a tax free distribution of all of the
Company's eLoyalty shares to TSC's shareholders. Accordingly, this report
discusses the TSC consolidated statements of operations with eLoyalty's
operations presented on a discontinued operations basis.
Consolidated net revenues for the year ended December 31, 1999 decreased 27
percent to $156.3 million compared with $215.1 million for the same period last
year. This decrease was mainly due to a decline in the demand for certain TSC
services as a result of clients facing budgetary restraints as they focused on
Year 2000 issues. This has been evidenced by a reduction in new license sales by
package software vendors such as PeopleSoft and Baan. Historically, TSC's main
revenues consisted mainly of core Enterprise Resource Planning (ERP) solutions.
Prospectively, the Company expects its other eBusiness solution offerings to
experience greater future growth rates than core ERP.
Project personnel costs, which represent mainly professional salaries and
benefits, decreased to $81.6 million for the year ended December 31, 1999 from
$102.0 million for the same period last year, a decrease of 20 percent. The
decrease was mainly due to a decrease in professional headcount. Project
personnel costs as a percentage of net revenues increased to 52 percent for the
year ended December 31, 1999 from 47 percent for the same period last year due
to the decline in revenues and lower staff utilization in the first half of the
year. To reduce these costs and improve utilization, the Company streamlined and
refocused its business, which resulted in restructuring and other charges of
$17.5 million (as discussed further in this section).
Other project expenses consist of nonbillable expenses directly incurred for
client projects and business development. These expenses include recruiting
fees, sales and marketing expenses, personnel training and provisions for
valuation allowances and reserves for potential losses on continuing projects.
Other project expenses for the year ended December 31, 1999 were $25.3 million,
compared with $32.5 million in the comparable period last year, a decrease of
$7.2 million, or 22 percent. The decrease in other project expenses primarily
included the following: a decrease of $4.6 million in domestic practice area
development including marketing, business development, travel and sales
commissions; a decrease of $5.1 million in domestic hiring, training,
communication and computer expenses due to a decrease in average headcount; and
a decrease in various other costs of $0.6 million, which include items such as
depreciation expense, new employee costs and various other costs. These
decreases were offset by increases of $3.1 million in the provision for
valuation allowances and reserves for potential losses and international costs.
Other project expenses as a percentage of net revenues increased slightly to 16
percent for the year ended December 31, 1999 from 15 percent for the same period
last year.
Management and administrative support costs decreased $15.5 million to $42.5
million for the year ended December 31, 1999 from $58.0 million for the same
period last year, a decrease of
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27 percent. Approximately $4.8 million of this decrease is attributable to
reduced practice area management and administrative costs. This decrease
primarily resulted from a decline in travel and hiring costs of $1.5 million, a
decrease in international expenses of $1.4 million, a decrease in practice area
support personnel of $0.2 million and a decrease in various other domestic
management and administrative expenses of $1.7 million, which include items such
as practice area sales, amortization of software costs and other expenses. The
Company also had a decrease of $5.4 million in Global Core Service (GCS) costs
over last year. The decrease in GCS costs versus the same period last year
included the following: a decrease in the internal systems and human resources
areas of $1.3 million and a decrease in corporate recruiting expenses of $2.2
million as a result of a reduction in headcount; a decrease in international
expenses of $0.4 million; a decrease in domestic office costs of $1.0 million
due to the closing of several offices; and a decrease in legal expenses of $0.8
million, slightly offset by an increase in various other costs of $0.3 million.
In addition, the Company recorded expenses of $5.3 million during the year ended
December 31, 1998 resulting from decisions made to abandon an investment in an
Internet-based commerce software tool of $3.3 million and expenses to sever
certain management and administrative employees of $2.0 million.
Goodwill amortization decreased to $0.2 million for the year ended December 31,
1999 compared to $0.4 million for the same period last year. This decrease
mainly results from the goodwill relating to the McLaughlin & Associates
acquisition being written off at the end of the first quarter of 1999.
On March 30, 1999, the Company announced that it was making a number of changes
to its business operations and, as a result, the Company recorded a
restructuring charge of $10.5 million associated with those changes and the
severance of approximately 300 people, primarily consulting personnel. The
restructuring charge was determined based on a plan prepared at the time the
restructuring actions were approved by management and the Board of Directors.
During the year ended December 31, 1999, the Company used $9.3 million of the
restructuring accrual as a result of cash paid during the year of $7.8 million
associated with the severance of approximately 270 employees and $1.5 million in
asset write-offs and other costs. In addition, during the quarter ended December
31, 1999, the Company recorded $7.0 million in restructuring and other costs
associated with lease terminations of $3.0 million, former executive severance
costs of $1.8 million, CourseNet Systems, Inc. (CourseNet) costs of $1.3 million
and write-offs of other assets of $0.9 million. The restructuring accrual
balance is considered adequate to cover the remaining committed restructuring
actions.
Incentive compensation of $9.9 million was accrued during the year ended
December 31, 1999 compared to $8.3 million for the same period last year.
Incentive compensation as a percentage of net revenues increased to 6 percent
for the year ended December 31, 1999 compared to 4 percent for the same period
last year. The increase was primarily due to an increase in the bonus accrual
for non-vice president personnel. The Company expects to continue to accrue
incentive compensation throughout the 2000 calendar year.
Consolidated operating loss from continuing operations was $20.7 million for the
year ended December 31, 1999 compared with consolidated operating income of
$13.9 million in the prior period, due to the reasons outlined above. Excluding
the restructuring and other charges, consolidated operating loss was $3.2
million during the year ended December 31, 1999. This
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decrease was mainly due to a decrease in the demand for certain TSC services and
resulting lower utilization rates.
Other income and expense for the year ended December 31, 1999 was $3.6 million
compared to $2.9 million for the same period a year ago. The increase is a
result of higher cash and cash equivalent balances for the year ended December
31, 1999 compared to the same period a year ago.
The Company's effective tax rate for the year ended December 31, 1999 was a 32
percent benefit compared to a 42 percent provision for the same period a year
ago. The tax rate for the year ended December 31, 1999 was lower than in the
previous year because certain amounts related to the CourseNet acquisition, as
well as the goodwill amortization related to this acquisition, were not tax
deductible.
Income from discontinued operations from the eLoyalty division was $5.1 million
for the year ended December 31, 1999 compared with $6.7 million for the same
period last year. Excluding fees and other costs related to the eLoyalty
transaction of $4.4 million, income from discontinued operations for the year
ended December 31, 1999 was $9.5 million, an increase of 41 percent over the
prior period. This increase was primarily due to the increased demand for
eLoyalty services.
Weighted average number of common shares outstanding increased due to the
exercise of stock options, the issuance of shares under the Company's employee
stock purchase plan and the investment by the venture capital firms (see Note
12), partially offset by the repurchase of some outstanding shares. Weighted
average number of common and common equivalent shares outstanding decreased
because there were no adjustments for the effect of stock options as the
adjustment would have been anti-dilutive for the year.
THE SEVEN MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1998 COMPARED WITH THE
PRIOR PERIOD ENDED DECEMBER 31, 1997
This report discusses the seven month transition period ended December 31, 1998,
due to the Company changing from a May 31 fiscal year-end to a fiscal year
aligned with the calendar year beginning January 1, 1999. In addition, on
February 15, 2000 TSC successfully completed the spin-off of its eLoyalty
division into a separate publicly traded company. Accordingly, this report
discusses the TSC consolidated statements of operations with eLoyalty's
operations presented on a discontinued operations basis.
Consolidated net revenues for the seven month transition period ended December
31, 1998 increased 25 percent to $126.8 million compared with $101.4 million for
the same period in the prior year. This increase was primarily due to continued
demand for consulting services that implement third-party application software
packages. Domestic revenue grew 27 percent due to the Company's ability to
generate additional revenue through an increased consulting staff, as well as an
overall 4 percent increase in average domestic billing rates compared to the
same period a year ago. These increases were slightly offset by international
revenues which declined approximately six percent.
Project personnel costs for the seven month transition period ended December 31,
1998, which represent mainly professional salaries and benefits, increased to
$61.5 million from $47.0 million
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for the same period in the prior year, an increase of 31 percent. The increase
was partially due to an increase in professional headcount and was consistent
with the higher revenues reported during the seven month transition period ended
December 31, 1998. Project personnel costs as a percentage of net revenues
increased to 48 percent for the seven month transition period ended December 31,
1998 from 46 percent for the same period in the prior year due to lower staff
utilization.
Other project expenses consist of nonbillable expenses directly incurred for
client projects and business development including recruiting fees, sales and
marketing expenses, personnel training and provisions for valuation allowances
and reserves for potential losses on continuing projects. Other project expenses
for the seven month transition period ended December 31, 1998 were $19.8
million, compared with $14.2 million in the comparable period in the prior year,
an increase of $5.6 million, or 39 percent. The increase in other project
expenses primarily included the following: an increase of $2.5 million in
domestic hiring, training, communication and computer expenses associated with
increased headcount; an increase of $1.1 million associated with domestic
practice area development including marketing, business development, travel and
sales commissions; an increase in international costs of $1.2 million associated
with travel, marketing and business development expenses; and a net increase of
$0.8 million in various other costs which includes termination costs,
depreciation expense and various other costs. Other project expenses as a
percentage of net revenues increased to 16 percent in the seven month transition
period ended December 31, 1998 from 14 percent for the same period in the prior
year due mainly as a result of the items mentioned above.
Management and administrative support costs increased $13.4 million to $36.9
million for the seven month transition period ended December 31, 1998 from $23.5
million for the same period in the prior year, an increase of 57 percent.
Approximately $5.0 million of this increase was attributable to the increase in
Global Core Service (GCS) costs over the same period in the prior year, which
was necessary to support the growth in business. The increase in these costs
versus the same period in the prior year included: increased expenses in the
internal systems and human resources areas of $3.5 million; higher expenses of
$0.6 million related to the expansion of the Company's corporate recruiting
organization; higher marketing expenses of $0.8 million as a result of increased
corporate marketing efforts; and a net increase in various other costs of $0.1
million including corporate legal, accounting, finance and investor relations
costs. The Company also incurred an additional $3.1 million of practice area
management and administrative costs. These costs primarily included additional
domestic regional management and practice area support personnel of $1.0
million; international growth of $0.7 million; and various other domestic
management and administrative expenses of $1.4 million, which include items such
as practice area marketing, recruiting, sales and other expenses. In addition,
the Company recorded expenses of $5.3 million during the seven month transition
period ended December 31, 1998. This results from decisions made during the
seven month transition period to abandon an investment in an Internet-based
commerce software tool of $3.3 million and expenses to sever certain management
and administrative employees of $2.0 million.
Goodwill amortization remained unchanged for the seven month transition period
ended December 31, 1998 compared to the same period in the prior year at $0.2
million.
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Incentive compensation of $6.7 million was accrued during the seven month
transition period ended December 31, 1998 compared to $5.6 million for the same
period in the prior year. The increase is due to increased headcount, at both
the consulting staff and the project manager levels. Incentive compensation as a
percentage of net revenues remained virtually unchanged between years at
approximately 5 percent.
Consolidated operating income from continuing operations was $1.8 million during
the seven month transition period ended December 31, 1998 compared with $10.8
million in the same period in the prior year. This decrease was mainly due to
increased practice area overhead as a result of various investments and higher-
than-average management turnover, offset in part by higher staff utilization and
higher billing rates compared to the prior period. Also contributing to this
decrease was higher GCS costs and expenses to sever certain management and
administrative employees and amortization expenses, as described above.
Net investment income for the seven month transition period ended December 31,
1998 was $1.7 million compared to $0.9 million for the same period a year ago.
The increase is a result of higher cash and cash equivalent balances for the
seven month transition period ended December 31, 1998 compared to the same
period a year ago.
The Company's effective tax rate increased slightly to 45 percent for the seven
month transition period ended December 31, 1998 compared to 43 percent in the
prior period.
Income from discontinued operations from the eLoyalty division increased to $2.5
million for the seven month transition period ended December 31, 1998 compared
to $2.3 million in the prior period, an increase of 9 percent. This increase was
due to the increased demand in eLoyalty services and an increase in revenues,
offset in part by investments in product development, expansion into Australia
and further investment spending in Europe.
Weighted average number of common shares outstanding and weighted average number
of common and common equivalent shares outstanding increased primarily due to
the exercise of stock options and the issuance of shares under the Company's
employee stock purchase plan.
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FISCAL 1998 COMPARED WITH FISCAL 1997
On February 15, 2000 TSC successfully completed the spin-off of its eLoyalty
division into a separate publicly traded company. Accordingly, this report
discusses the TSC consolidated statements of operations with eLoyalty's
operations presented on a discontinued operations basis.
Consolidated net revenues for the year ended May 31, 1998 increased 55 percent
to $189.6 million compared with $122.1 million in fiscal 1997. This increase was
primarily due to continued demand for consulting services that implement third-
party application software packages. The Company's domestic revenue grew 58
percent and international revenue grew 18 percent. The Company's ability to
generate additional revenue was due to the Company's increased consulting staff
from heightened recruiting efforts and the additional staff that joined the
Company in previously reported business combinations. The additional hours
billed by the increased consulting staff, combined with an increase in average
domestic billing rates, were the primary factors in revenue growth compared to
fiscal 1997.
Project personnel costs for the year ended May 31, 1998, which represent mainly
professional salaries and benefits, increased to $87.6 million from $58.6
million in fiscal 1997, an increase of 50 percent. The increase was primarily
due to an increase in professional headcount and was consistent with the higher
revenues reported in fiscal 1998. Project personnel costs as a percentage of net
revenues decreased to 46 percent for fiscal year 1998 compared to 48 percent in
fiscal 1997.
The Company charges most of its project expenses directly to the client. Other
project expenses consist of nonbillable expenses directly incurred for client
projects and business development efforts including recruiting fees, sales and
marketing expenses, personnel training and provisions for valuation allowances
and reserves for potential losses on continuing projects. Other project expenses
for fiscal 1998 were $27.0 million, compared with $15.9 million for fiscal 1997.
This change was partially due to increases in hiring, training, practice area
development and nonbillable travel expenses of $7.9 million as a result of
increased headcount and business development. Other project expenses as a
percentage of net revenues increased to 14 percent for fiscal 1998 compared to
13 percent in fiscal 1997.
Management and administrative support costs increased $19.0 million to $44.6
million for the year ended May 31, 1998 from $25.6 million for the year ended
May 31, 1997, an increase of 74 percent. Approximately $11.6 million of this
increase was attributable to the investment made in Global Core Services (GCS)
over the prior fiscal year, which was necessary to support the growth in
business. The increase in costs included: the opening and expansion of several
domestic and international offices of $2.6 million; increased expenses in the
internal systems and human resources areas of $3.9 million; higher expenses of
$1.4 million related to the expansion of the Company's corporate recruiting
organization; and higher marketing expenses of $0.9 million as a result of
increased corporate marketing efforts. The Company also incurred an additional
$7.4 million of practice area management and administrative costs. These costs
primarily included international growth of $1.1 million; additional domestic
regional management and practice area support personnel of $3.3 million; and
various other management and administrative expenses of
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$3.0 million which include items such as practice area marketing, recruiting,
sales and other expenses.
Goodwill amortization remained unchanged for fiscal year 1998 compared to fiscal
year 1997 at $0.4 million.
Incentive compensation of $7.5 million was accrued for the year ended May 31,
1998 compared to $7.4 million for the same period the prior year. This amount
reflects the Company's annual bonus payout for fiscal 1998 made shortly after
the end of the fiscal year.
Consolidated operating income from continuing operations increased 59 percent to
$22.5 million in fiscal 1998 compared with $14.1 million in fiscal 1997. This
increase was due to higher staff utilization and higher billing rates compared
to the prior period and were consistent with the increase in revenues. This
increase was partially offset by higher GCS costs, as described above.
Net investment income in fiscal 1998 was $2.0 million compared to $2.1 million a
year earlier.
The Company's effective tax rate for the year ended May 31, 1998 was 42 percent
compared to 40 percent for the year ended May 31, 1997. The increase in the
effective tax rate in fiscal 1998 was the result of the increased non-deductible
expenses for U.S. tax purposes and the increase in the percentage of the
Company's income from taxable investment income.
Income from discontinued operations from the eLoyalty division increased to $6.8
million for fiscal year 1998 compared to $5.3 million in the prior period, an
increase of 28 percent. This increase was primarily due to the increased demand
in eLoyalty services and an increase in eLoyalty revenues, offset in part by
investment programs and geographic expansion.
Weighted average number of common shares outstanding and weighted average number
of common and common equivalent shares outstanding increased primarily due to
the exercise of stock options and the issuance of shares under the Company's
employee stock purchase plan.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $27.1 million for the year ended
December 31, 1999 compared to net cash provided by operating activities of $18.3
million in the prior year. Operating cash flow for the year ended December 31,
1999 included the restructuring and other charges and other favorable working
capital activities, such as depreciation and amortization expense, accrued
compensation and related costs and other current liabilities, offset by lower
net income.
Net cash used in investing activities was $18.8 million for the year ended
December 31, 1999 and reflects $13.5 million of cash held by discontinued
operations as of December 31, 1999. The Company purchased $1.5 million of
available-for-sale securities and received $2.8 million from the sale of
available-for-sale securities. The proceeds from available-for-sale securities
were transferred to cash and cash equivalents and reinvested in ongoing business
activities.
Capital expenditures for the year ended December 31, 1999 were $2.5 million.
Capital expenditures may continue at the current rate throughout the 2000
calendar year. The Company currently has no material commitments for capital
expenditures.
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Net cash outlays related to net assets of acquired businesses and other assets
were $4.2 million for the year ended December 31, 1999. This represents the
October 29, 1999 acquisition of CourseNet.
The Company has a $10.0 million unsecured line of credit facility (the
"Facility") with Bank of America National Trust and Savings Association (Bank of
America). The agreement expires December 30, 2000. At the Company's election,
loans made under the Facility bear interest at either the Bank of America
reference rate or the applicable Eurodollar interest rate plus 0.75 percent. The
unused line fee is 0.125 percent of the unused portion of the commitment. The
Facility requires, among other things, the Company to maintain certain financial
ratios. As of December 31, 1999, the Company was in compliance with these
financial ratio requirements. As of December 31, 1999, no borrowings had been
made under the Facility.
Subsequent to December 31, 1999 and in connection with the eLoyalty spin-off,
the Company contributed an additional $20.0 million of cash to eLoyalty
Corporation. In light of this recent transaction, the Company still retains
significant amounts of cash and cash equivalents and marketable securities to
provide ample liquidity to handle the Company's current cash requirements.
IMPACT OF INFLATION AND BACKLOG
Inflation should not have a significant impact on the Company's income to the
extent the Company is able to raise its consulting rates commensurate with its
staff compensation rates, which it has done successfully in the past. Because
the majority of the Company's contracts may be terminated on relatively short
notice, the Company does not consider backlog to be meaningful.
NEW ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended is
effective for financial statements issued for periods ending after June 15,
2000. SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company anticipates that, due
to its limited use of derivative instruments, the adoption of SFAS No. 133 will
not have a significant effect on the Company's results of operations or its
financial position.
================================================================================
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<PAGE>
ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY
AFFECT FUTURE RESULTS
This Form 10-K includes or may include certain forward-looking statements that
involve risks and uncertainties. This Form 10-K contains certain forward-looking
statements concerning the Company's financial position, business strategy,
budgets, projected costs and plans and objectives of management for future
operations as well as other statements including words such as "anticipate,"
"believe," "plan," "estimate," "expect," "intend," and other similar
expressions. Although the Company believes its expectations reflected in such
forward-looking statements are based on reasonable assumptions, readers are
cautioned that no assurance can be given that such expectations will prove
correct and that actual results and developments may differ materially from
those conveyed in such forward-looking statements. Important factors that could
cause actual results to differ materially from the expectations reflected in the
forward-looking statements in this Form 10-K include, among others, the pace of
technological change, the Company's ability to manage growth and attract and
retain employees, general business and economic conditions in the Company's
operating regions, and competitive and other factors, all as more fully
described below. Such forward-looking statements speak only as of the date on
which they are made and the Company does not undertake any obligation to update
any forward-looking statement to reflect events or circumstances after the date
of this Form 10-K. If the Company does update or correct one or more forward-
looking statements, investors and others should not conclude that the Company
will make additional updates or corrections with respect thereto or with respect
to other forward-looking statements. The cautionary statements provided below
are being made pursuant to the provisions of the Private Securities Litigation
Reform Act of 1995 (the PSLRA) and with the intention of obtaining the benefits
of the "safe harbor" provisions of the PSLRA for any such forward-looking
information. Many of the factors discussed below, as well as other factors, have
also been discussed in prior filings made by the Company.
Factors which could cause the Company's actual financial and other results to
differ materially from any results that might be projected, forecast, estimated
or budgeted by the Company in the forward-looking statements include, but are
not limited to, the following:
Year 2000 Issue
The Year 2000 issue is a general term used to address a class of problems which
are caused by the inability of some 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. The Company has not experienced any
significant Year 2000 disruptions and none of the Company's suppliers or vendors
have experienced Year 2000 disruptions that have had a significant impact on the
Company.
The Company has conducted an assessment of its computer information systems by
inventorying related hardware and software systems and has determined the nature
and extent of the work required to ensure that its internal systems are Year
2000 compliant. The Company's internal systems can be grouped into three
principal categories - its accounting and human resources software, its legacy
systems that perform a variety of processes, and its office automation software
products. With respect to the suite of software products licensed by the Company
and
================================================================================
Page 26
<PAGE>
relied upon in the administration of accounting and human resources functions,
which was licensed by the Company in the first quarter of its 1997 fiscal year,
the licensor has indicated that the version previously employed by the Company
was not Year 2000 compliant and, therefore, the Company has replaced the
production and development versions with newer ones that are Year 2000
compliant. The Company plans to apply future patches to address the Year 2000
issue as they are made available. Based on currently available information, the
Company believes the expense associated with these efforts will not be material.
Other important internal business processes of the Company, such as time and
expense reporting and labor distribution (and their associated back-office
functions), are performed by legacy systems that have been re-written to be Year
2000 compliant. The remaining office automation products have been inventoried
and each vendor has been contacted for the product's Year 2000 status. All
identified products have either been upgraded with patches, entirely replaced,
determined to be Year 2000 compliant, or shown to possess no date-associated
functions within the product. The Company believes it has completed the
compliance project effort, and all of the identified systems were compliant as
of December 31, 1999. To date, the cost associated with replacing/upgrading
these systems, excluding labor costs, is less than $0.3 million, and the cost
for replacement of these systems was included in its operating and capital
budgets for calendar year 1999.
Vendors of the standard office automation software packages have been contacted
and patches and/or newer versions of the applications have been secured.
Distribution of the patches and newer versions of the software occurred during
the third and fourth quarters of the calendar year 1999.
Based on presently available information, the Company believes that any
necessary additional 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 the Company is not currently
aware are required and are not completed on time, or if the cost of any required
updating, modification or replacement of the Company's information systems
exceeds the Company's estimates, the Year 2000 issue could have a material
adverse impact on the Company's business, operating results and financial
condition.
In addition to the Company's internal systems, the Company relies on third party
vendors in the conduct of its business. The Company has sought and received
assurances from its material vendors and suppliers that there will be no
interruption of service as a result of the Year 2000 issue.
The Company has generally refrained from performing Year 2000 remediation
services for its clients. It is possible, however, that former, present and
future clients could assert that certain services performed by the Company from
time to time involve, or are related to, the Year 2000 issue. The Company has
recommended, implemented and customized various third party software packages
for its clients, and to the extent that such software programs may not be Year
2000 compliant, the Company could be subjected to claims as a result thereof.
Since the Company's inception in 1988, it also has designed and developed
software and systems for its clients. Due to the large number of such
engagements undertaken by the Company over the years, there can be
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<PAGE>
no assurance that all such software programs and systems will be Year 2000
compliant, which could also result in the assertion of claims against the
Company.
The Company's policy has been to endeavor to secure provisions in its client
contracts that, among other things, disclaim implied warranties, limit the
duration of the Company's express warranties, relate the Company's liability to
the amount of fees paid by the client to the Company in connection with the
project, and disclaim any liability arising from third party software that is
implemented, customized or installed by the Company. There can be no assurance
that the Company will be able to secure contractual protections in agreements
concerning future projects, or that any contractual protections secured by the
Company in agreements governing pending and completed projects will dissuade the
other party thereto from asserting claims against the Company 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, customized or implemented by
the Company as described above, the Company may be subjected to claims,
regardless of whether the failure is related to the services provided by the
Company. There can be no assurance that the Company would be able to establish
that it 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, secured by the Company in connection with any past, present or future
clients will operate to insulate the Company from, or limit the amount of, any
liability arising from claims asserted against the Company. If asserted, the
resolution of such claims (and the associated defense costs) could have a
material adverse effect on the Company's business, operating results and
financial condition.
Rapid Technological Change
The systems consulting and implementation market has experienced rapid
technological advances and developments in recent years. Failure of the Company
to stay abreast of such advances and developments could materially adversely
affect its business. The Company additionally utilizes a number of different
technologies in developing and providing IT solutions for its customers. The
technologies used by the Company are developing rapidly and are characterized by
evolving industry standards in a wide variety of areas. While the Company
evaluates technologies on an ongoing basis and endeavors to utilize those that
are most effective in developing IT solutions for its customers, there can be no
assurance that the technologies utilized by the Company and the expertise gained
in those technologies will continue to be applicable in the future. There can be
no assurance that new technologies will be made available to the Company or that
such technologies can be economically applied by the Company. The inability to
apply existing technologies and expertise to subsequent projects could have a
material adverse effect on the Company's business, operating results and
financial condition.
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<PAGE>
Management of Growth
The Company's business has experienced periods of significant growth since its
inception, and the Company anticipates future growth. The growth of the
Company's business and the expansion of its customer base have resulted in a
corresponding growth in the demands on the Company's management and other
personnel and its operating systems and internal controls. Any future growth may
further strain existing management resources and operational, financial, human
resources and management information systems and controls, which may not be
adequate to support the Company's operations.
The Company is currently increasing its expense levels as a result of a number
of factors, including increases in the number of employees, investments in
equipment, training of employees and the development of methodologies, tools,
etc. An unexpected decline in revenues without a corresponding and timely
reduction in staffing and other expenses, or a staffing increase that is not
accompanied by a corresponding increase in revenues, could have a material
adverse effect on the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to manage its
recent or future growth successfully. In addition, there can be no assurance
that the Company will continue to grow or achieve the rates of growth it has
experienced in the past.
The Company expects that it will need to further develop its financial and
management controls, reporting systems and procedures to accommodate future
growth. There can be no assurance that the Company will be able to develop such
controls, systems or procedures effectively or on a timely basis, and the
failure to do so could have a material adverse effect on the Company's business,
operating results and financial condition.
Ability to Attract and Retain Employees
The Company's business consists mainly of professional services and is
inherently labor intensive. The Company's success depends in large part upon its
ability to attract, retain and motivate highly skilled employees, particularly
project managers and other senior personnel, for its domestic and international
operations. Qualified project managers within and outside the United States are
in particularly great demand and are likely to remain a limited resource for the
foreseeable future. Several attributes of the Company's work environment pose
challenges to the Company's ability to attract and retain employees, including
(i) extensive travel requirements, (ii) the Company's intense work environment
and culture, (iii) the Company's standards for employee technical skills and job
performance, and (iv) the Company's practice of adjusting the number of
technical personnel to reflect active project levels. Although the Company
expects to continue to attract sufficient numbers of highly skilled employees
and to retain its existing project managers and other senior personnel for the
foreseeable future, there can be no assurance that the Company will be able to
do so. Failure to attract and retain key personnel could have a material adverse
effect upon the Company's business, operating results and financial condition.
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<PAGE>
Growth by Acquisition
The Company may grow in part by acquiring existing businesses. The success of
any such acquisition will depend upon, among other things, the ability of the
Company and its management to integrate acquired personnel, operations, products
and technologies into its organization effectively, to retain and motivate key
personnel of acquired businesses and to retain customers of acquired firms.
There can be no assurance that the Company will be able to identify suitable
acquisition opportunities, consummate acquisitions or successfully integrate
acquired personnel and operations into the Company. In addition, acquisitions by
the Company may involve certain other risks, including potentially dilutive
issuances of equity securities and the diversion of management's attention from
other business concerns.
Dependence on Key Personnel
Although the Company does not believe that the loss of any particular individual
would have a material adverse impact on the Company, the loss of some or all of
the Company's project managers could have a material adverse impact on the
Company, including its ability to secure and complete engagements. The Company
has employment agreements with its President, executive officers and Vice
Presidents that contain noncompetition, nondisclosure and nonsolicitation
covenants. The employment agreements with the President and executive officers
do not have fixed expiration dates and may be terminated by either the Company
or the employee on 90 days written notice. The employment agreements with the
other Vice Presidents generally have a fixed initial term but are automatically
renewed for successive one-year periods unless terminated by either the Company
or the employee on 90 days written notice. Other senior employees also have
employment agreements that are generally terminable by the Company or the
employee upon 30 to 90 days written notice.
Unassigned Labor Costs
The Company's unassigned labor costs, which represent salaries and other
expenses allocated to systems professionals not assigned to a specific project,
can vary as a percentage of revenues over time. The Company attempts to reassign
employees who meet its performance requirements to other active projects when
they are no longer needed on a particular project. However, since the Company
generally recruits personnel in advance of the commencement of certain projects
in order to meet the needs of such projects, any cancellation or delays in the
anticipated projects could increase the unassigned labor costs and might cause a
material adverse effect upon the Company's business, operating results and
financial condition.
Cyclicality
Certain of the Company's customers and potential customers are in industries
that experience cyclical variations in profitability, which may in turn affect
their willingness or ability to fund systems projects such as those for which
the Company may be engaged. The Company's experience indicates, however, that
competitive pressures in cyclical industries sometimes compel businesses to
undertake systems projects even during periods of losses or reduced
profitability.
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<PAGE>
Quarterly Results May Fluctuate
The Company's results may fluctuate from quarter to quarter as a result of
various factors such as differences in the number of billing days and/or
holidays between quarters, the number of vacation days and sick days taken by
the Company's employees in a particular quarter, and varying weather conditions.
These and other factors can reduce revenues in a given quarter with a
corresponding adverse impact on the Company's margins.
Project Risks
Because of the project-based nature of the Company's work and the fact that many
of the projects undertaken by the Company are large projects, there is a risk of
a material adverse impact on operating results because of the unanticipated
suspension or cancellation of a large project or the financial difficulties of a
client. The suspension or cancellation of a project or the financial
difficulties of a client could result in a decrease in revenues, the need to
reassign staff, a potential dispute with a client regarding monies owed for
consulting work and expenses, and damage to TSC's reputation.
In addition, because many of the Company's projects are high profile, mission
critical projects for major clients, a failure or inability to meet a client's
expectations with respect to a major project undertaken by the Company could
damage its reputation and affect its ability to attract new business. Third
party products and services are integral to the success of certain Company
projects. To the extent that third parties do not deliver effective products and
services on a timely basis, the Company's project results could be negatively
impacted. Although the Company attempts to limit this risk in its engagement
arrangements with clients and maintains errors and omissions insurance, the
failure of a project could also result in significant financial exposure to the
Company.
Competition
The systems consulting and implementation market comprises a large number of
participants, is subject to rapid changes and is highly competitive. The Company
competes with and faces potential competition from a number of companies that
have significantly greater financial, technical and marketing resources and
greater name recognition than the Company. The Company also competes with
smaller service providers whose specific, more narrowly focused service
offerings may be more attractive to potential clients than the Company's multi-
dimensional approach. The Company may also compete for certain clients and
engagements with eLoyalty, which may have the benefit of contact relationships
established and client information procured while that business was still a
division of TSC. The Company's clients primarily consist of Fortune 1000 and
other large corporations and there are an increasing number of professional
services firms seeking systems consulting and implementation engagements from
that client base. The Company believes that its ability to compete depends in
part on a number of factors outside its control, including the ability of its
competitors to hire, retain and motivate a significant number of senior project
managers, the ownership by competitors of software used by potential clients,
the development by others of software that is competitive with the Company's
products and services, and the price at which others offer comparable services.
================================================================================
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<PAGE>
In addition, the Company's clients could develop or acquire in-house expertise
in services similar to those provided by the Company, which would significantly
reduce demand for the Company's services. No assurance can be given that the
Company will be able to maintain its existing client base, maintain or increase
the level of revenue generated by its existing clients or be able to attract new
clients.
Susceptibility to General Economic Conditions
The Company's revenues and results of operations will be subject to fluctuations
based on the general economic conditions of the United States as well as the
foreign countries in which it operates. If there were to be a general economic
downturn or a recession in the United States or the foreign countries in which
it operates, then the Company expects that business enterprises would cut back
their spending on, or reduce their budget for, IT services. In the event of such
an economic downturn, there can be no assurance that the Company's business,
operating results and financial condition would not be materially adversely
affected.
Cost Overruns
Although the Company's engagements are generally on a time-and-materials basis,
some of its projects are on a "not-to-exceed" or fixed-price basis. The failure
of the Company to complete a project to the client's satisfaction within the
"not-to-exceed" or fixed fee exposes the Company to unrecoverable cost overruns,
which could have a material adverse effect on the Company's business, operating
results and financial condition.
Intellectual Property Rights
Many of the Company's clients have required that the Company grant to them all
proprietary and intellectual property rights with respect to the work product
resulting from the Company's performance of services, including the intellectual
property rights to any custom software developed by the Company for them. Each
grant of proprietary and intellectual property rights limits the Company's
ability to reuse work product components and work product solutions with other
clients. In a limited number of such situations, the Company has obtained, and
in the future may attempt to obtain, ownership interest or a license from its
clients to permit the Company to market custom software for the joint benefit of
the client and the Company. These arrangements may be nonexclusive or exclusive,
and licensors to the Company may retain the right to sell products and services
that compete with those of the Company. There can be no assurance, however, that
the Company will be able to negotiate future software licenses upon terms
acceptable to the Company.
The Company also develops certain foundation and application software tools,
methodologies and products that are owned by the Company and licensed to its
clients. The Company regards these software tools, methodologies and products as
proprietary and intends to protect its rights, where appropriate, with
registered copyrights, patents, registered trademarks, trade secret laws and
contractual restrictions on disclosure and transferring title. There can be no
assurance that any of these steps taken by the Company will be adequate to deter
misappropriation of its proprietary rights or independent third party
development of functionally equivalent products. "TSC" is a registered service
mark of the Company.
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<PAGE>
In addition, the Company's success is dependent upon its specialized expertise
and methodologies. To protect its proprietary information, the Company relies
upon a combination of trade secret and common law, employee nondisclosure
policies and third-party confidentiality agreements. However, there can be no
assurance that any of these steps taken by the Company will be adequate to deter
misappropriation of its specialized expertise and methodologies.
Although the Company believes that its services and products do not infringe on
the intellectual property rights of others, there can be no assurance that
infringement claims will not be asserted against the Company in the future.
Risks of Conducting International Operations
The Company engages in international operations. Because the cost of doing
business abroad is typically higher for U.S. businesses than the cost of doing
business domestically, the Company could experience a decline in its operating
margins as the significance of its international operations increases.
International operations and the provision of services in foreign markets are
subject to a number of special risks, including currency exchange rate
fluctuations, trade barriers, exchange controls, national and regional labor
strikes, political risks, additional security concerns and risks of increases in
duties, taxes and governmental royalties, as well as changes in laws and
policies governing operations of foreign-based companies. In addition, the
Company's growth internationally will depend upon its ability to attract,
develop and retain a sufficient number of highly skilled, motivated local
professional employees in each of those foreign countries where it conducts
operations. Competition for such local personnel qualified to deliver most of
the Company's services is intense, and there can be no assurance that the
Company will be able to recruit, develop and retain a sufficient number of
highly skilled, motivated local professional employees to successfully compete
internationally.
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<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
The financial statements and supplementary data required with respect to this
Item 8 are listed in Item 14(a)(1) and (a)(2) in this filing.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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<PAGE>
Technology Solutions Company
PART III.
================================================================================
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT
The information contained under the headings "Election of Directors," "Nominees
for Director," "Members of Board of Directors Continuing in Office" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive
proxy statement for the Company's 2000 Annual Meeting of Stockholders (the
"Proxy Statement") and the information contained under the heading "Executive
Officers of the Registrant" in Item 1 hereof is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Except for the information relating to Item 13 hereof and except for the
information referred to in Item 402(a)(8) of Regulation S-K, the information
contained under the headings "Executive Officer Compensation" and "Other
Transactions" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the headings "Security Ownership of Directors
and Management" and "Additional Information Relating to Voting Securities" in
the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Except for the information relating to Item 11 hereof and except for the
information referred to in Item 402(a)(8) of Regulation S-K, the information
contained under the headings "Executive Officer Compensation" and "Other
Transactions" in the Proxy Statement is incorporated herein by reference.
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<PAGE>
Technology Solutions Company
PART IV.
================================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
TECHNOLOGY SOLUTIONS COMPANY
----------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
AND FINANCIAL STATEMENT SCHEDULE
--------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Report of Independent Accountants............................................ 37
- ---------------------------------
Financial Statements (Item 14(a)(1))
- ------------------------------------
Consolidated Balance Sheets as of December 31, 1999 and 1998............. 38
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998 (unaudited), for the seven month transition
period ended December 31, 1998 and for each of the two years in the
period ended May 31, 1998................................................ 39
Consolidated Statements of Changes in Stockholders' Equity for
the year ended December 31, 1999, for the seven month transition period
ended December 31, 1998 and for each of the two years in the period
ended May 31, 1998....................................................... 41
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998 (unaudited), for the seven month transition period ended
December 31, 1998 and for each of the two years in the period
ended May 31, 1998....................................................... 43
Notes to Consolidated Financial Statements............................... 44
Financial Statement Schedule (Item 14(a)(2))
- --------------------------------------------
Schedule II Valuation and Qualifying Accounts........................... 72
</TABLE>
All other schedules have been omitted because the required information is
included in the financial statements or notes thereto or because they are not
required.
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
of Technology Solutions Company
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) present fairly, in all material respects, the
financial position of Technology Solutions Company and its subsidiaries (the
"Company") at December 31, 1999 and 1998, and the results of their operations
and their cash flows for the year ended December 31, 1999, for the seven month
transition period ended December 31, 1998, and for each of the two years in the
period ended May 31, 1998, in conformity with accounting principles generally
accepted in the United States. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14 (a)(2), presents
fairly in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
February 15, 2000
Chicago, Illinois
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<PAGE>
Technology Solutions Company
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
ASSETS
------
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................................... $ 81,002 $ 59,473
Marketable securities................................................... 17,826 25,269
Receivables, less allowance for doubtful receivables
of $3,715 and $4,845................................................. 24,036 69,212
Deferred income taxes................................................... 9,969 15,297
Other current assets.................................................... 4,664 13,764
-------- --------
Total current assets............................................... 137,497 183,015
COMPUTERS, FURNITURE AND EQUIPMENT, NET.................................. 4,116 9,372
GOODWILL................................................................. 4,446 17,901
LONG-TERM RECEIVABLES AND OTHER.......................................... 2,788 8,811
NET ASSETS OF DISCONTINUED OPERATIONS.................................... 74,462 --
-------- --------
Total assets....................................................... $223,309 $219,099
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable........................................................ $ 2,995 $ 3,263
Accrued compensation and related costs.................................. 18,453 25,184
Deferred compensation................................................... 10,322 16,494
Restructuring and other accruals........................................ 12,708 --
Other current liabilities............................................... 5,220 5,913
-------- --------
Total current liabilities.......................................... 49,698 50,854
-------- --------
COMMITMENTS AND CONTINGENCIES............................................ -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; shares authorized --
10,000,000; none issued........................................... -- --
Common stock, $.01 par value; shares authorized --
100,000,000; shares issued -- 43,354,725 and 41,242,886............ 434 412
Capital in excess of par value.......................................... 110,455 94,886
Retained earnings....................................................... 63,704 76,938
Treasury stock, at cost, 0 and 275,911 shares........................... -- (2,646)
Accumulated Other Comprehensive Loss:
Unrealized holding loss, net....................................... (131) (9)
Cumulative translation adjustment.................................. (851) (1,336)
-------- --------
Total stockholders' equity......................................... 173,611 168,245
-------- --------
Total liabilities and stockholders' equity......................... $223,309 $219,099
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
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38
<PAGE>
Technology Solutions Company
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Seven Month
For the Transition
Years Ended Period Ended For the Years
December 31, December 31, Ended May 31,
----------------------- ------------- --------------------
1999 1998 1998 1998 1997
---------- ----------- ------------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES................................. $156,320 $215,141 $126,839 $189,603 $122,063
-------- -------- -------- -------- --------
COSTS AND EXPENSES:
Project personnel...................... 81,575 101,978 61,459 87,582 58,561
Other project expenses................. 25,347 32,528 19,777 26,996 15,959
Management and administrative support.. 42,473 57,996 36,884 44,615 25,653
Goodwill amortization.................. 225 406 221 402 435
Restructuring and other charges........ 17,489 -- -- -- --
Incentive compensation................. 9,908 8,320 6,654 7,537 7,361
-------- -------- -------- -------- --------
177,017 201,228 124,995 167,132 107,969
-------- -------- -------- -------- --------
OPERATING (LOSS) INCOME.................. (20,697) 13,913 1,844 22,471 14,094
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Net investment income.................. 3,705 2,967 1,710 2,041 2,280
Interest expense....................... (139) (60) (13) (21) (191)
-------- -------- -------- -------- --------
3,566 2,907 1,697 2,020 2,089
-------- -------- -------- -------- --------
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES........ (17,131) 16,820 3,541 24,491 16,183
INCOME TAX (BENEFIT) PROVISION........... (5,553) 6,986 1,587 10,258 6,425
-------- -------- -------- -------- --------
(LOSS) INCOME FROM
CONTINUING OPERATIONS................. (11,578) 9,834 1,954 14,233 9,758
DISCONTINUED OPERATIONS:
Income from discontinued
operations (net of income taxes).... 5,133 6,732 2,521 6,787 5,309
Loss on distribution of discontinued
operations (net of income taxes).... (6,789) -- -- -- --
-------- -------- -------- -------- --------
(LOSS) INCOME FROM DISCONTINUED
OPERATIONS (net of income taxes).... (1,656) 6,732 2,521 6,787 5,309
-------- -------- -------- -------- --------
NET (LOSS) INCOME........................ $(13,234) $ 16,566 $ 4,475 $ 21,020 $ 15,067
======== ======== ======== ======== ========
</TABLE>
================================================================================
39
<PAGE>
Technology Solutions Company
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Seven Month
For the Transition
Years Ended Period Ended For the Years
December 31, December 31, Ended May 31,
--------------------- ------------ ----------------
1999 1998 1998 1998 1997
-------- ----------- ------------ ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
NET (LOSS) EARNINGS PER COMMON SHARE:
(LOSS) INCOME PER COMMON SHARE
FROM CONTINUING OPERATIONS.......... $ (0.27) $ 0.24 $ 0.05 $ 0.37 $ 0.28
(LOSS) INCOME FROM
DISCONTINUED OPERATIONS............. (0.04) 0.17 0.06 0.17 0.15
------- ------- ------- ------- -------
NET (LOSS) EARNINGS
PER COMMON SHARE.................... $ (0.31) $ 0.41 $ 0.11 $ 0.54 $ 0.43
======= ======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING............ 42,044 40,190 40,668 38,887 35,333
======= ======= ======= ======= =======
(LOSS) INCOME PER COMMON SHARE
FROM CONTINUING OPERATIONS
ASSUMING DILUTION................... $ (0.27) $ 0.23 $ 0.04 $ 0.33 $ 0.25
(LOSS) INCOME FROM DISCONTINUED
OPERATIONS ASSUMING DILUTION........ (0.04) 0.15 0.06 0.16 0.13
------- ------- ------- ------- -------
NET (LOSS) EARNINGS PER COMMON
SHARE ASSUMING DILUTION................ $ (0.31) $ 0.38 $ 0.10 $ 0.49 $ 0.38
======= ======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING................... 42,044 43,263 43,409 42,781 39,869
======= ======= ======= ======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
================================================================================
40
<PAGE>
Technology Solutions Company
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the year ended December 31, 1999, for the seven month transition period
ended December 31, 1998 and for the years ended May 31, 1998 and 1997 -- (In
thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Issued Capital in Other
-------------------- Excess of Retained Treasury Comprehensive Comprehensive
Shares Amount Par Value Earnings Stock Loss Total Income (Loss)
---------- -------- ---------- --------- ----------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of May 31, 1996........... 40,282,454 $403 $50,120 $35,983 $(15,835) $ (642) $ 70,029 $ 4,785
=======
Issuance of 2,565,747 treasury shares
from exercise of stock options..... -- -- 12,140 -- 6,001 -- 18,141
Issuance of 179,165 treasury shares
from employee stock purchase plan.. -- -- 1,396 -- 418 -- 1,814
Change in net unrealized holding
loss on available-for-sale
securities......................... -- -- -- -- -- 323 323 $ 323
Net income........................... -- -- -- 15,067 -- -- 15,067 15,067
Cumulative translation adjustment.... -- -- -- -- -- (318) (318) (318)
Issuance of 851,199 treasury shares
for business combinations.......... -- -- (1,832) 577 1,986 -- 731
---------- ------- -------- -------- ---------- -------- -------- -------
Balance as of May 31, 1997........... 40,282,454 403 61,824 51,627 (7,430) (637) 105,787 $15,072
=======
Issuance of 2,429,116 treasury shares
from exercise of stock options..... -- -- 15,993 -- 5,660 -- 21,653
Issuance of 269,347 treasury shares
from employee stock purchase plan.. -- -- 3,070 -- 625 -- 3,695
Change in net unrealized holding
loss on available-for-sale
securities......................... -- -- -- -- -- 277 277 $ 277
Net income........................... -- -- -- 21,020 -- -- 21,020 21,020
Cumulative translation adjustment.... -- -- -- -- -- (891) (891) (891)
Issuance of 105,841 treasury shares
for business combinations.......... -- -- 4,202 (184) 247 -- 4,265
---------- ------- -------- -------- ---------- -------- -------- -------
Balance as of May 31, 1998........... 40,282,454 $403 $85,089 $72,463 $ (898) $(1,251) $155,806 $20,406
---------- ------- -------- -------- ---------- -------- -------- =======
</TABLE>
================================================================================
Page 41
<PAGE>
Technology Solutions Company
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
For the year ended December 31, 1999, for the seven month transition period
ended December 31, 1998 and for the years ended May 31, 1998 and 1997 -- (In
thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Issued Capital in Other
--------------------- Excess of Retained Treasury Comprehensive Comprehensive
Shares Amount Par Value Earnings Stock Loss Total Income (Loss)
----------- -------- ---------- --------- ----------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of 779,161 common stock
shares and 401,575 treasury shares
from exercise of stock options........ 779,161 $ 8 $ 7,567 $ -- $ 1,094 $ -- $ 8,669
Issuance of 181,271 common stock
shares from employee stock purchase
plan.................................. 181,271 1 2,230 -- -- -- 2,231
Purchase of 296,300 treasury shares..... -- -- -- -- (2,842) -- (2,842)
Change in net unrealized holding
loss on available-for-sale securities. -- -- -- -- -- 33 33 $ 33
Net income.............................. -- -- -- 4,475 -- -- 4,475 4,475
Cumulative translation adjustment....... -- -- -- -- -- (127) (127) (127)
----------- ------- -------- --------- --------- -------- --------- ----------
Balance as of December 31, 1998......... 41,242,886 412 94,886 76,938 (2,646) (1,345) 168,245 $ 4,381
========
Purchase of 480,000 treasury shares..... -- -- -- -- (4,930) -- (4,930)
Issuance of 1,258,702 common stock
shares and 597,146 treasury shares
from exercise of stock options........ 1,258,702 13 8,814 -- 5,990 -- 14,817
Issuance of 353,137 common stock
shares and 158,765 treasury shares
from employee stock purchase plan..... 353,137 4 2,254 -- 1,586 -- 3,844
Issuance of 500,000 common stock
shares to venture capital firms....... 500,000 5 4,501 -- -- -- 4,506
Change in net unrealized holding
loss on available-for-sale securities. -- -- -- -- -- (122) (122) $ (122)
Net loss................................ -- -- -- (13,234) -- -- (13,234) (13,234)
Cumulative translation adjustment....... -- -- -- -- -- 485 485 485
----------- ------- -------- -------- --------- -------- --------- ----------
Balance as of December 31, 1999......... 43,354,725 $434 $110,455 $ 63,704 $ -- $ (982) $173,611 $(12,871)
=========== ======= ======== ======== ========= ======== ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
================================================================================
Page 42
<PAGE>
Technology Solutions Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Seven Month
Transition
For the Years Period Ended For the Years
Ended December 31, December 31, Ended May 31,
---------------------- ------------- --------------------
1999 1998 1998 1998 1997
--------- ----------- ------------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net (loss) income........................................... $(13,234) $ 16,566 $ 4,475 $ 21,020 $ 15,067
Restructuring and other charges............................. 17,489 -- -- -- --
Adjustments to reconcile net (loss) income to net
cash from operating activities:
Depreciation and amortization............................ 10,154 14,076 10,725 7,107 4,442
Provisions for receivable valuation allowances and
reserves for possible losses........................... 5,909 2,748 2,913 1,897 2,712
(Gain) loss on sale of investments....................... (102) 19 13 (43) (17)
Deferred income taxes.................................... (6,216) (5,948) (7,837) (225) (2,692)
Changes in assets and liabilities:
Receivables............................................ (5,786) (22,953) 138 (28,031) (21,533)
Purchases of trading securities related to
deferred compensation program........................ (1,003) (5,397) (2,928) (6,724) (4,182)
Other current assets................................... 3,120 (2,151) 970 (95) (4,884)
Accounts payable....................................... 338 1,943 1,334 352 (73)
Accrued compensation and related costs................. 5,125 8,176 4,187 3,914 5,260
Deferred compensation.................................. 1,003 5,397 2,928 6,724 4,182
Other current liabilities.............................. 8,470 8,636 5,753 11,592 11,687
Other assets........................................... 1,849 (2,765) (502) (4,369) (3,456)
-------- -------- ------- -------- --------
Net cash provided by operating activities............ 27,116 18,347 22,169 13,119 6,513
-------- -------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities................... (1,500) (7,675) (1,725) (10,250) (1,000)
Proceeds from available-for-sale securities................. 2,820 10,090 7,260 5,337 1,314
Proceeds from held-to-maturity investments.................. -- 2,520 1,200 6,910 8,890
Capital expenditures........................................ (2,464) (4,731) (2,499) (5,745) (6,057)
Net assets of acquired businesses and other assets.......... (4,166) (8,999) (8,618) (10,741) (1,127)
Cash held by discontinued operations........................ (13,462) -- -- -- --
-------- -------- ------- -------- --------
Net cash (used in) provided by investing activities.. (18,772) (8,795) (4,382) (14,489) 2,020
-------- -------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options..................... 9,214 5,827 3,903 8,721 6,445
Proceeds from employee stock purchase plan.................. 3,844 4,476 2,231 3,688 1,805
Purchase of treasury shares................................. (4,930) (2,842) (2,842) -- --
Sale of common stock........................................ 4,506 -- -- -- --
Capitalized lease obligation................................ -- (70) (79) 71 (1,311)
-------- -------- ------- -------- --------
Net cash provided by financing activities............... 12,634 7,391 3,213 12,480 6,939
-------- -------- ------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS........................................ 551 (192) 15 (603) (511)
-------- -------- ------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS.......................... 21,529 16,751 21,015 10,507 14,961
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................. 59,473 42,722 38,458 27,951 12,990
-------- -------- ------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................... $ 81,002 $ 59,473 $59,473 $ 38,458 $ 27,951
======== ======== ======= ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of this financial information.
================================================================================
Page 43
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share data)
================================================================================
NOTE 1 -- THE COMPANY
TSC delivers business benefits through eBusiness consulting and systems
integration services that help clients transform their businesses, their
internal business processes and their relationships with customers, suppliers,
distributors and employees and help these organizations realize the full
benefits of information technology throughout the enterprise. The Company's
clients generally are located throughout the United States and in Latin America
and Europe.
On February 15, 2000 TSC successfully completed its spin-off of its eLoyalty
division into a separate publicly traded company. Accordingly the consolidated
balance sheet as of December 31, 1999 and the consolidated statements of
operations for the years ended December 31, 1999 and 1998, the seven month
transition period ended December 31, 1998 and for the fiscal years ended May 31,
1998 and 1997 have been reclassified to report these operations as discontinued
operations. The consolidated balance sheet as of December 31, 1998 and
consolidated statements of cash flows have not been restated on a discontinued
operations basis.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of the Company and all of its subsidiaries. All
significant intercompany transactions have been eliminated. Acquired businesses,
accounted for using the purchase method, are included in the results of
operations since their acquisition dates.
FISCAL YEAR CHANGE -- The Consolidated Financial Statements and Notes to the
Consolidated Financial Statements for the year ended December 31, 1999 represent
the first full calendar year since the Company changed from a May 31 fiscal year
end. The unaudited financial information for the year ended December 31, 1998 is
presented for comparative purposes and includes any adjustments (consisting of
normal, recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation.
REVENUE RECOGNITION -- The Company derives its revenues from information
technology, strategic business and management consulting, systems integration,
programming, and packaged software integration and implementation services. The
Company recognizes revenue on contracts as work is performed primarily based on
hourly billing rates. Out-of-pocket expenses are presented net of amounts billed
to clients in the accompanying consolidated statements of operations. Contracts
are performed in phases. Losses on contracts, if any, are reserved in full when
determined.
================================================================================
Page 44
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
CASH AND CASH EQUIVALENTS -- The Company 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 -- The Company's marketable securities primarily consist
of preferred stocks and trading securities. The preferred stocks, all of which
are classified as available-for-sale, are reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a net after-
tax amount in a separate component of stockholders' equity until realized. The
Company's investments related to the executive deferred compensation plan (see
Note 10) are classified as trading securities, with unrealized gains and losses
included in the Company's consolidated statements of operations. 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. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
estimated useful lives of the assets or the underlying lease term. Normal
maintenance and repair costs are expensed as incurred. The costs and related
accumulated depreciation or amortization of the assets sold or disposed of are
moved from the account and resulting gain or loss is included in operations.
The carrying value of computers, furniture and equipment is periodically
reviewed to assess recoverability based on undiscounted future cash flows.
GOODWILL -- Goodwill (the excess of cost over the fair market value of the net
identifiable tangible and intangible assets of businesses acquired) is amortized
on a straight-line basis, typically over a five-year period. Accumulated
amortization of goodwill as of December 31, 1999 and 1998 was $153 and $7,085,
respectively. The carrying value of goodwill is periodically reviewed to assess
recoverability based on undiscounted cash flows.
SOFTWARE DEVELOPMENT COSTS -- The Company capitalizes certain software
development costs incurred subsequent to the achievement of technological
feasibility and prior to the general release of the product for sale.
Amortization of software costs is 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.
================================================================================
Page 45
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
(LOSS) EARNINGS PER COMMON SHARE -- The Company discloses basic and diluted
(loss) earnings per share in the consolidated statements of operations under the
provisions of SFAS No. 128, "Earnings Per Share." (Loss) earnings per common
share assuming dilution is computed by dividing net (loss) income by the
weighted average number of common shares outstanding during each period
presented, plus the dilutive effect of common equivalent shares arising from the
assumed exercise of stock options using the treasury stock method. For 1999,
common equivalent shares of 2,277 were not included in the diluted loss per
share calculation as they were antidilutive. (Loss) earnings per common share is
computed by dividing net (loss) income by the weighted average number of common
shares outstanding during each period presented. All share and per share amounts
have been adjusted to reflect all of the Company's prior stock splits as of
December 31, 1999.
<TABLE>
<CAPTION>
Reconciliation of Basic and Diluted (Loss) Earnings Per Share for the Year Ended
- --------------------------------------------------------------------------------------------------------------
December 31, 1999 December 31, 1998
------------------------------------------- -----------------------------------------
(unaudited)
Per Per
Net Common Net Common
(Loss) Shares Share Income Shares Share
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic (loss)
Earning Per Share $(13,234) 42,044 $(0.31) $16,566 40,190 $0.41
====== =====
Effect of Stock
Options -- -- -- 3,073
-------- ------ ------- ------
Diluted (Loss)
Earnings Per Share $(13,234) 42,044 $(0.31) $16,566 43,263 $0.38
======== ====== ====== ======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of Basic and Diluted Earnings Per Share
for the Seven Month Transition Period
Ended December 31, 1998
- -------------------------------------------------------
Per
Net Common
Income Shares Share
------ ------ ------
<S> <C> <C> <C>
Basic EPS $4,475 40,668 $0.11
=====
Effect of Stock
Options -- 2,741
------ ------
Diluted EPS $4,475 43,409 $0.10
====== ====== =====
</TABLE>
================================================================================
Page 46
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
<TABLE>
<CAPTION>
Reconciliation of Basic and Diluted Earnings Per Share for the Fiscal Year Ended
- ---------------------------------------------------------------------------------------------------------
May 31, 1998 May 31, 1997
---------------------------------------- ----------------------------------------
Per Per
Net Common Net Common
Income Shares Share Income Shares Share
----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $21,020 38,887 $0.54 $15,067 35,333 $0.43
===== =====
Effect of Stock
Options -- 3,894 -- 4,536
------- ------ ------- ------
Diluted EPS $21,020 42,781 $0.49 $15,067 39,869 $0.38
======= ====== ===== ======= ====== =====
</TABLE>
FOREIGN CURRENCY TRANSLATION -- The functional currencies for the Company's
foreign subsidiaries are their local currencies. All assets and liabilities of
foreign subsidiaries are translated to U.S. dollars at end of period exchange
rates. The resulting translation adjustments are recorded as a component of
stockholders' 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 consolidated
statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying values of current assets,
including marketable securities, and liabilities and long-term receivables
approximated their fair values at December 31, 1999 and 1998, respectively.
Investments in companies accounted for under the equity method for which fair
value are not readily available are believed to approximate their carrying
amount.
STOCK-BASED COMPENSATION -- The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Compensation costs for employee stock options is measured as
the excess, if any, of the quoted market price of the Company's common stock at
the date of grant over the amount an employee must pay to acquire the stock.
NEW ACCOUNTING STANDARDS -- On June 15, 1998, the Financial Accounting Standards
Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133, as amended is effective for financial
statements issued for periods ending after June 15, 2000. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company anticipates that, due to its limited use of
derivative instruments, the adoption of SFAS No. 133 will not have a significant
effect on the Company's results of operations or its financial position.
================================================================================
Page 47
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
INCOME TAXES -- The Company uses an asset and liability approach to financial
accounting and reporting for income taxes. Deferred income taxes are provided
when tax laws and financial accounting standards differ with respect to the
amount of income for a year and the basis of assets and liabilities. The Company
does not provide U.S. deferred income taxes on earnings of foreign subsidiaries
which are expected to be indefinitely reinvested.
EMPLOYEE BENEFIT PLAN -- The Company has a 401(K) Savings Plan (the " 401(K)
Plan"). The 401(K) Plan allows employees to contribute up to 15 percent of their
annual compensation, subject to Internal Revenue Service statutory limitations.
Company contributions to the 401(K) Plan are discretionary. The Company
contributed $2,301, $1,806 and $1,234 to the 401(K) Plan in the year ended
December 31, 1999 and in fiscal 1998 and 1997, respectively. There were no
Company contributions during the seven month transition period ended December
31, 1998, although the Company accrued amounts during the seven month transition
period for the contribution made during the year ended December 31, 1999.
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 and
the 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.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior periods
to conform to the current period classification. These reclassifications had no
impact on net (loss) income or shareholders' equity.
NOTE 3 -- ACQUISITIONS
The following acquisitions are part of TSC's continuing operations.
On October 29, 1999, the Company acquired CourseNet Systems, Inc. (CourseNet) a
leader in the delivery of e-learning solutions. Total consideration was
approximately $5.2 million which consisted of $4.2 million in cash and the
Company's $1.0 million previous investment in CourseNet. Goodwill of
approximately $4.6 million resulted from the CourseNet acquisition and is being
amortized over a five year period.
In March 1997, the Company combined with HRM Resources, Inc. (HRM) through the
exchange of the Company's Common Stock for all the issued and outstanding shares
of HRM. The Common Stock exchanged included 865,135 shares of unregistered
treasury stock. HRM was a technology implementation firm based in New York that
specialized in large-scale financial and human resources software packages. This
combination was accounted for as a pooling of interests. The operations of HRM
were not material to the Company's consolidated operations.
================================================================================
Page 48
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
On February 15, 2000, TSC successfully completed the spin-off of its eLoyalty
division. The following acquisitions are part of the eLoyalty transaction and
are not considered part of TSC's continuing operations.
In June 1997, the Company acquired The Bentley Company, Inc. (Bentley). Bentley
specialized in business and operations consulting in the eLoyalty division of
the Company's business. Total consideration aggregated $17.5 million, including
cash of $12.0 million (which includes $4.8 million of earn-out payments), 44,303
shares of the Company's 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, the Company acquired Geising International, a German-based
business consulting firm in the eLoyalty division of the Company's business.
Total consideration included cash of $1.0 million and 37,962 shares of the
Company's Common Stock. Goodwill of approximately $1.0 million resulted from the
Geising International acquisition and is being amortized over five years.
These acquisitions, except for the HRM combination, have been accounted for
under the purchase method and accordingly their results have been included in
the Company's results since the date of acquisition. Consolidated pro forma
information for these acquisitions has not been presented, as pro forma results
would not have been materially different from the Company's reported results.
NOTE 4 -- RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
------------- -------------
1999 1998
------------- -------------
<S> <C> <C>
Amounts billed to clients............ $27,136 $70,662
Contracts in process................. 615 3,395
------- -------
27,751 74,057
Receivable valuation allowances and
reserves for possible losses........ (3,715) (4,845)
------- -------
$24,036 $69,212
======= =======
</TABLE>
Amounts billed to clients represent professional fees and reimbursable project-
related expenses. Contracts in process represent unbilled professional fees,
project costs such as out-of-pocket expense, materials and subcontractor costs.
The amounts above are expected to be collected within one year from the balance
sheet date. Amounts billed to clients are unsecured and generally due within 30
days.
================================================================================
Page 49
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 5 -- MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS
Marketable securities are reported at fair value. The marketable securities
consist of preferred stocks of $7,504 classified as available-for-sale and
securities related to the Company's executive deferred compensation plan of
$10,322 classified as trading securities (see Note 10). As of December 31, 1999
and 1998, the gross unrealized holding gain relative to the preferred stocks was
$43 and $192 and the gross unrealized holding loss was $242 and $203,
respectively, and are presented net and after-tax in a separate component of
stockholders' equity. The Company recognized gains of $521, $134, $129 and $189
in its Statements of Operations for the year ended December 31, 1999, the seven
month transition period ended December 31, 1998 and for the fiscal years ended
May 31, 1998 and 1997, respectively, related to the trading securities. Since
the trading securities are related to the Company's executive deferred
compensation plan, a corresponding charge to earnings is included in the
Statements of Operations to recognize the Company's increased liability for the
deferred compensation plan.
Municipal bonds, included in long-term investments are presented at cost, net of
accumulated amortized premiums and discounts. All of these bonds reached
maturity during the seven month transition period ended December 31, 1998.
NOTE 6 -- COMPUTERS, FURNITURE AND EQUIPMENT
Computers, furniture and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
------------- -------------
1999 1998
------------- -------------
<S> <C> <C>
Computers................. $ 13,183 $ 14,877
Furniture and equipment... 4,760 7,030
-------- --------
17,943 21,907
Accumulated depreciation.. (13,827) (12,535)
-------- --------
$ 4,116 $ 9,372
======== ========
</TABLE>
Depreciation and amortization expense was $3,305, $2,215, $3,344, and $3,361 for
the year ended December 31, 1999, the seven month transition period ended
December 31, 1998 and for the fiscal years ended May 31, 1998 and 1997,
respectively.
================================================================================
Page 50
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 7 -- LONG-TERM RECEIVABLES AND OTHER
Long-term receivables and other consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
------------ ------------
1999 1998
------------ ------------
<S> <C> <C>
Customer receivables........ $2,016 $2,016
Employee receivables........ 116 807
Capitalized software costs.. -- 132
Investments................. 450 5,010
Other....................... 206 846
------ ------
$2,788 $8,811
====== ======
</TABLE>
Amortization expense associated with capitalized software available for resale
was $132, $4,158, $364 and $344 for the year ended December 31, 1999, the seven
month transition period ended December 31, 1998 and the fiscal years ended May
31, 1998 and 1997, respectively. Included in the amortization expense for the
seven month transition period ended December 31, 1998 was a charge to abandon an
investment in an Internet-based commerce software tool of $3.3 million. The
amounts capitalized for software costs were $139, $4,249 and $273 for the seven
month transition period ended December 31, 1998 and the fiscal years ended May
31, 1998 and 1997, respectively. No amounts were capitalized during the year
ended December 31, 1999.
NOTE 8 -- INCOME TAXES
The (benefit) provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------- ------------- ------------------
1999 1998 1998 1997
------------- ------------- -------- --------
<S> <C> <C> <C> <C>
Current:
Federal............ $(1,764) $ 8,923 $ 9,235 $ 7,498
State.............. (420) 1,972 2,238 2,512
Foreign............ 306 1,868 1,291 49
------- -------- ------- -------
Total current..... (1,878) 12,763 12,764 10,059
------- -------- ------- -------
Deferred:
Federal............ (986) (6,712) (843) (3,317)
State.............. (198) (1,385) (71) (577)
Foreign............ (2,491) (3,079) (1,592) 260
------- -------- ------- -------
Total deferred.... (3,675) (11,176) (2,506) (3,634)
------- -------- ------- -------
(Benefit) provision
for income taxes.... $(5,553) $ 1,587 $10,258 $ 6,425
======= ======== ======= =======
</TABLE>
================================================================================
Page 51
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
Total income tax (benefit) 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>
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------- ------------- ----------------------
1999 1998 1998 1997
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Federal tax (benefit) provision,
at statutory rate.................. $ (5,996) $ 1,239 $ 8,572 $ 5,664
State tax (benefit) provision,
net of Federal benefit............. (857) 257 1,242 1,151
Effect of foreign tax rate
differences........................ 509 6 29 (33)
Nontaxable investment income.......... (232) (144) (160) (532)
Nondeductible goodwill and
other acquisition related
charges........................... 581 21 47 (99)
Other................................. 442 208 528 274
-------- ------- -------- --------
Income tax (benefit) provision........ $ (5,553) $ 1,587 $ 10,258 $ 6,425
======== ======= ======== ========
</TABLE>
Total income tax was allocated as follows:
<TABLE>
<CAPTION>
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------ ------------ ---------------------
1999 1998 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
(Loss) income from
continuing operations.................... $ (5,553) $ 1,587 $ 10,258 $ 6,425
Items charged directly to
stockholders' equity..................... (5,860) (4,956) (13,493) (11,605)
-------- ------- -------- --------
Total income tax...................... $(11,413) $(3,369) $ (3,235) $ (5,180)
======== ======= ======== ========
</TABLE>
================================================================================
Page 52
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
Deferred tax assets and liabilities were comprised of the following:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred compensation and bonuses.......................... $ 4,129 $ 6,925
Net operating loss and credits............................. 1,305 3,011
Receivable valuation allowances and reserves
for possible losses....................................... 1,736 2,061
Legal and other accruals................................... 1,666 3,100
Depreciation and amortization.............................. 184 1,523
Goodwill................................................... -- 1,221
Restructuring and other charges............................ 1,980 --
Other...................................................... 226 21
------- -------
Total deferred tax assets................................. 11,226 17,862
------- -------
Deferred tax liabilities:
Prepaid expenses........................................... (882) (2,296)
Capitalized software development costs..................... -- (53)
Other...................................................... (375) (216)
------- -------
Total deferred tax liabilities............................ (1,257) (2,565)
------- -------
Net deferred tax asset....................................... $ 9,969 $15,297
======= =======
</TABLE>
(Loss) income before income taxes consisted of the following:
<TABLE>
<CAPTION>
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------ ------------ -----------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States................................................ $ (9,854) $ 7,134 $25,355 $15,413
Foreign...................................................... (7,277) (3,593) (864) 770
-------- ------- ------- -------
Total........................................................ $(17,131) $ 3,541 $24,491 $16,183
======== ======= ======= =======
</TABLE>
Income taxes paid during the year ended December 31, 1999, the seven month
transition period ended December 31, 1998 and for the fiscal years ended May 31,
1998 and 1997 were $1,192, $6,907, $1,864 and $135, respectively.
================================================================================
Page 53
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 9 -- LINE OF CREDIT
The Company has a $10.0 million unsecured line of credit facility (the
"Facility") with Bank of America. The agreement expires December 30, 2000. At
the Company's election, loans made under the Facility bear interest at either
the Bank of America reference rate or the applicable Eurodollar interest rate
plus 0.75 percent. The unused line fee is 0.125 percent of the unused portion of
the commitment. The Facility requires, among other things, the Company to
maintain certain financial ratios. As of December 31, 1999, the Company was in
compliance with these financial ratio requirements. There was no borrowing under
the line of credit during the year ended December 31, 1999.
NOTE 10 -- EXECUTIVE DEFERRED COMPENSATION PLAN
Effective July 1, 1995, the Company instituted a nonqualified executive deferred
compensation plan. All Company 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 consolidated balance sheets include the deferred compensation
liability, including investment earnings thereon, owed to participants. The
accompanying consolidated balance sheets also include the investments,
classified as trading securities, purchased by the Company with the deferred
funds. These investments remain assets of the Company and are available to the
general creditors of the Company in the event of the Company's insolvency.
NOTE 11 -- EMPLOYEE STOCK PURCHASE PLAN
The Company instituted the Technology Solutions Company 1995 Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan qualifies as
an "employee stock purchase plan" under Section 423 of the Internal Revenue Code
of 1986, as amended. The Stock Purchase Plan is administered by the Compensation
Committee of the Board of Directors. The Stock Purchase Plan permits eligible
employees to purchase an aggregate of 1,687,500 shares of the Company's Common
Stock.
Shares are purchased for the benefit of the participants at the end of each
three month purchase period. The number of shares of the Company's Common Stock
purchased under the Stock Purchase Plan during the year ended December 31, 1999,
the seven month transition period ended December 31, 1998 and fiscal 1998 and
1997 were 511,902, 181,271, 269,347 and 179,165, respectively.
================================================================================
Page 54
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 12 -- CAPITAL STOCK
During June 1999, the Company entered into an agreement with two venture capital
firms whereby these venture capital firms agreed to purchase 500,000 shares of
the Company's common stock. On August 13, 1999, Technology Crossover Ventures
and Sutter Hill Ventures funded to the Company cash proceeds of approximately
$4.5 million and the Company delivered 500,000 shares of Common Stock (the
"Company Shares") to the venture capital firms. The purchase price of $9.013 per
share was equal to the average last reported sales price for the ten consecutive
trading days ended June 25, 1999 (the date of the agreement). Both venture
capital firms have a single demand registration right with respect to the
Company Shares, which expires twelve months after the date of the purchase.
In November 1998, the Company announced a 2,000,000 share repurchase program.
During the year ended December 31, 1999 and during the seven month transition
period ended December 31, 1998 the Company repurchased 480,000 shares for $4,930
and 296,300 shares for $2,842, respectively under this plan.
On October 29, 1998, the Board of Directors declared a dividend distribution of
one Right for each outstanding share of the Company's Common Stock. The
description and terms of the Rights are set forth in a Rights Agreement between
the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (see
Note 17).
On October 1, 1998, the Company's shareholders approved an increase in the
authorized number of shares of Common Stock of the Company from 50,000,000
shares to 100,000,000 shares.
On June 29, 1998, the Board of Directors declared a three-for-two stock split to
be effected as a 50 percent stock dividend for stockholders of record on July
16, 1998. The stock split was effected August 10, 1998. The financial statements
and the relevant share and per share data included herein have been adjusted to
reflect the stock split.
================================================================================
Page 55
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 13 -- STOCK OPTIONS
On September 26, 1996, the Company's stockholders approved the Technology
Solutions Company 1996 Stock Incentive Plan (the "1996 Plan"). The 1996 Plan
replaced each of the Technology Solutions Company's Stock Option Plan (the
"Original Plan"), the Technology Solutions Company 1992 Stock Incentive Plan
(the "1992 Plan") and the Technology Solutions Company 1993 Outside Directors
Stock Option Plan (the "1993 Plan" and together with the Original Plan and the
1992 Plan, the "Predecessor Plans"). With the approval of the 1996 Plan, no
future awards will be made under the Predecessor Plans. Previous awards made
under the Predecessor Plans are not affected. Shares subject to awards made
under any of the Predecessor Plans will be available under the 1996 Plan, under
certain circumstances, to the extent that such shares are not issued or
delivered in connection with such awards. A total of 2,370,239 shares of the
Company's Common Stock were available for grant on September 26, 1996 under the
Predecessor Plans. With the approval of the 1996 Plan, these shares became
available for grant under the 1996 Plan. On September 26, 1996, the stockholders
also approved the addition of 2,250,000 shares to the 1996 Plan.
The 1996 Plan and the Predecessor Plans authorize the grant of a variety of
stock options and other awards if authorized by the Company's Board of Directors
at prices not less than the fair market value at the date of grant. Options
granted under the Predecessor Plans are generally exercisable beginning one year
after the date of grant and are fully exercisable in three to four years from
date of grant. Options granted under the 1996 Plan are generally exercisable
beginning twelve months after date of grant and are fully exercisable within
forty-two months from date of grant. Options available for grant were 573,220
and 1,583,934 as of December 31, 1999 and 1998, respectively.
On September 4, 1998, the Compensation Committee of the Board of Directors
approved the repricing of stock options issued under the 1996 Plan that had an
exercise price above $10.875, the closing price of the Company's Common Stock on
September 4, 1998. The repriced options have a grant date of September 4, 1998,
an exercise price of $10.875 and expire ten years from the date of grant. The
repriced options vest beginning one year from the date of grant and are fully
exercisable in three years from the date of grant.
The Company has elected to disclose the pro forma effects of SFAS No. 123,
"Accounting for Stock-Based Compensation." As allowed under the provisions of
this statement, the Company will continue to apply APB Opinion No. 25 and
related interpretations in accounting for the stock options awarded under the
Company's 1996 Plan. Accordingly, no compensation expense has been recognized
for these stock options. Had compensation expense for the Company's 1996
================================================================================
Page 56
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
Plan and Employee Stock Purchase Plan been determined consistent with SFAS No.
123, the Company's net (loss) income and (loss) earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------- ------------- ----------------
1999 1998 1998 1997
------------- ------------- ------- -------
<S> <C> <C> <C> <C>
Net (loss) income:
As reported:
Continuing Operations.... $(11,578) $ 1,954 $14,233 $ 9,758
Discontinued Operations.. $ (1,656) $ 2,521 $ 6,787 $ 5,309
-------- ------- ------- -------
Total.................. $(13,234) $ 4,475 $21,020 $15,067
======== ======= ======= =======
Pro forma:
Continuing Operations.... $(15,214) $(1,609) $ 8,966 $ 6,984
Discontinued Operations.. $ (3,783) $ 490 $ 4,074 $ 4,034
-------- ------- ------- -------
Total.................. $(18,997) $(1,119) $13,040 $11,018
======== ======= ======= =======
(Loss) earnings per share:
As reported:
Continuing Operations.... $ (0.27) $ 0.05 $ 0.37 $ 0.28
Discontinued Operations.. $ (0.04) $ 0.06 $ 0.17 $ 0.15
-------- ------- ------- -------
Total.................. $ (0.31) $ 0.11 $ 0.54 $ 0.43
======== ======= ======= =======
Pro forma:
Continuing Operations.... $ (0.36) $ (0.04) $ 0.23 $ 0.20
Discontinued Operations.. $ (0.09) $ 0.01 $ 0.11 $ 0.11
-------- ------- ------- -------
Total.................. $ (0.45) $ (0.03) $ 0.34 $ 0.31
======== ======= ======= =======
(Loss) earnings per share
assuming dilution:
As reported:
Continuing Operations.... $ (0.27) $ 0.04 $ 0.33 $ 0.25
Discontinued Operations.. $ (0.04) $ 0.06 $ 0.16 $ 0.13
-------- ------- ------- -------
Total.................. $ (0.31) $ 0.10 $ 0.49 $ 0.38
======== ======= ======= =======
Pro forma:
Continuing Operations.... $ (0.36) $ (0.04) $ 0.21 $ 0.18
Discontinued Operations.. $ (0.09) $ 0.01 $ 0.09 $ 0.10
-------- ------- ------- -------
Total.................. $ (0.45) $ (0.03) $ 0.30 $ 0.28
======== ======= ======= =======
</TABLE>
================================================================================
Page 57
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------- ------------- ------------------------
1999 1998 1998 1997
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Expected volatility....... 49.7%-54.2% 43.6%-49.8% 41.9%-44.1% 40.9%-51.4%
Risk-free interest rates.. 4.6%-6.3% 4.1%-5.6% 5.3%-6.5% 5.3%-6.8%
Expected lives............ 4.5 years 4.5 years 4.5 years 4.5 years
</TABLE>
The Company has not paid and does not anticipate paying dividends; therefore,
the expected dividend yield is assumed to be zero.
================================================================================
Page 58
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
A summary of the status of the Company's option plans is presented below:
<TABLE>
<CAPTION>
For the Year Ended Seven Month Transition Period
December 31, Ended December 31, For the Years Ended May 31,
---------------------------- ------------------------------- -------------------------------------------
1999 1999 1998 1998 1998 1998 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Prices Shares Prices Shares Prices Shares Prices
---------- --------- ---------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 9,483,316 $ 8.05 9,845,695 $ 7.71 10,157,024 $ 5.03 10,450,710 $ 3.01
Granted 2,130,863 $10.65 1,349,922 $18.58 2,466,222 $18.27 2,865,929 $10.93
Exercised (1,855,848) $ 4.96 (1,180,736) $ 3.31 (2,429,116) $18.85 (2,565,747) $15.02
Forfeited (1,120,149) $12.29 (531,565) $13.88 (348,435) $ 9.72 (593,868) $ 8.50
---------- ---------- ---------- ----------
Outstanding at
end of year 8,638,182 $ 8.87 9,483,316 $ 8.05 9,845,695 $ 7.71 10,157,024 $ 5.03
========== ========== ========== ==========
Exercisable at
end of year 5,508,918 $ 7.36 6,211,300 $ 5.70 4,815,339 $ 4.81 4,288,095 $ 3.01
========== ============ ========== ==========
</TABLE>
================================================================================
Page 59
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
Weighted-average grant date fair value of options granted during the year:
<TABLE>
<CAPTION>
Seven Month
For the Transition
Year Ended Period Ended For the
December 31, December 31, Years Ended May 31,
----------- ------------ -------------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C>
$5.08 $8.15 $7.90 $5.24
</TABLE>
The following summarizes information about options outstanding as of December
31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ---------------------
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life Prices Shares Prices
- --------------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.01-$ 3.00 2,335,867 9 years $ 2.27 2,335,867 $ 2.27
$ 3.01-$ 8.00 566,896 10 years $ 5.62 400,899 $ 5.06
$ 8.01-$10.00 3,090,022 8 years $ 9.06 1,446,538 $ 9.36
$10.01-$12.00 1,222,271 9 years $10.86 471,514 $10.86
$12.01-$15.00 104,495 8 years $13.90 37,938 $14.46
$15.01-$18.00 770,981 7 years $15.88 639,471 $15.88
$18.01-$23.00 407,425 9 years $21.51 176,691 $21.95
$23.01-$36.00 140,225 10 years $31.19 -- $ --
--------- ---------
8,638,182 9 years $ 8.87 5,508,918 $ 7.36
========= =========
</TABLE>
================================================================================
Page 60
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
IMPACT OF THE FEBRUARY 15, 2000 SPIN-OFF ON TSC OPTIONS -- At the time of the
eLoyalty spin-off, TSC options were appropriately adjusted to reflect the impact
of the spin-off. TSC option holders (excluding eLoyalty employees and directors)
with options granted prior to June 22, 1999 had each of their options converted
into both an adjusted TSC option and an eLoyalty Corporation option on a one-
for-one basis. The original strike price of the TSC option was split into a
strike price for (1) the adjusted TSC option and (2) the eLoyalty Corporation
option based on the relative trading values of the two companies' common stock
immediately after the spin. Immediately after the spin-off, TSC stock traded at
16.5278 percent of the combined value of one share of TSC stock and one share of
eLoyalty stock. Accordingly, the strike price for the adjusted TSC option was
set at 16.5278 percent of the original TSC option strike price while the
eLoyalty option strike price was set at 83.4722 percent of the original TSC
option strike price.
TSC option holders (excluding eLoyalty employees and directors) with options
granted subsequent to June 21, 1999 did not receive any eLoyalty Corporation
options but did have their TSC options adjusted by reducing the strike price and
increasing the number of options. The adjustments were calculated based on the
relative trading values of TSC and eLoyalty Common Stock immediately after the
spin. The adjusted strike price was determined by multiplying the original
strike price by 16.5278 percent. The adjusted number of options was determined
by dividing the original number of options by 16.5278 percent.
eLoyalty employees and directors who held TSC options forfeited their TSC
options at the time of the spin-off and, in return, received additional eLoyalty
options.
In all cases, the TSC and eLoyalty option adjustments described above were
calculated to (1) preserve the intrinsic value of the option as well as (2)
preserve the ratio of the exercise price to the fair market value of the stock
subject to the option.
As a net result of these adjustments, the number of TSC options outstanding
increased by approximately 2.9 million at the time of the spin-off.
The option share and price information contained in this footnote have not been
adjusted for the effects of the February 15, 2000 spin-off.
================================================================================
Page 61
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 14 -- BUSINESS SEGMENTS
Prior to the spin-off of the eLoyalty division of TSC, the Company was organized
into two business segments which each had its own business focus and service
offering -- Enterprise Solutions (E-Solutions) and eLoyalty. Each served the
Company's customers in the U.S. and international markets. The Company believed
that a structure based on these focused business segments addressed its clients'
needs for very specialized industry and systems knowledge and allowed its
employees the flexibility and opportunity to grow and develop. Each business
segment developed its own specific methodologies, tools, project management
plans, best practice and benchmark information and templates. The E-Solutions
business segment now represents TSC's continuing operations and it has
specialized expertise in helping organizations access the ability of their
current systems to meet the changing and often increasing demands of business.
E-Solutions is a recognized leader in packaged software implementation and
integration, supply chain management, e-business and knowledge management. The
eLoyalty division is not a part of TSC's continuing operations. eLoyalty is a
global information technology services company focused on providing enterprise-
wide solutions across all customer access channels, including the Internet.
Prior to the spin-off of eLoyalty, the Company evaluated the performance of its
segments and allocated resources to them based partially on receivables. The
receivable balances before allowance for doubtful receivables for the E-
Solutions business segment was $27.8 million and $46.5 million at December 31,
1999 and 1998, respectively. Receivable balances for the eLoyalty division were
$46.1 million and $27.6 million at December 31, 1999 and 1998, respectively.
================================================================================
Page 62
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
The following is revenue and long-lived asset information by geographic area (in
thousands):
<TABLE>
<CAPTION>
Net Assets of
For the year ended United Foreign Discontinued
December 31, 1999 States Subsidiaries Operations Total
- ----------------------- -------- ------------ ------------- --------
<S> <C> <C> <C> <C>
Revenues $147,377 $ 8,943 $ -- $156,320
Identifiable assets $143,030 $ 4,996 $75,283 $223,309
Seven month transition Net Assets of
period ended United Foreign Discontinued
December 31, 1998 States Subsidiaries Operations Total
- ----------------------- -------- ------------ ------------- --------
Revenues $121,385 $ 5,454 $ -- $126,839
Identifiable assets $190,738 $28,361 $ -- $219,099
Net Assets of
For the year ended United Foreign Discontinued
May 31, 1998 States Subsidiaries Operations Total
- ----------------------- -------- ------------ ------------- --------
Revenues $180,890 $ 8,713 $ -- $189,603
Identifiable assets $176,949 $20,199 $ -- $197,148
Net Assets of
For the year ended United Foreign Discontinued
May 31, 1997 States Subsidiaries Operations Total
- ----------------------- -------- ------------ ------------- --------
Revenues $114,672 $ 7,391 $ -- $122,063
Identifiable assets $117,110 $16,756 $ -- $133,866
</TABLE>
Foreign revenue is based on the country in which the legal subsidiary is
domiciled. No single foreign country's revenue was material as defined by SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
to the consolidated revenues of the Company.
================================================================================
Page 63
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 15 -- MAJOR CLIENTS
The Company's five largest clients in the year ended December 31, 1999 accounted
for 4 percent, 4 percent, 4 percent, 4 percent and 3 percent of total revenues,
respectively; in the seven month transition period ended December 31, 1998 the
five largest clients accounted for 5 percent, 5 percent, 3 percent, 3 percent,
and 3 percent of total revenues, respectively; in fiscal 1998, the five largest
clients accounted for 6 percent, 4 percent, 3 percent, 3 percent, and 3 percent
of total revenues, respectively; in fiscal 1997, they accounted for 11 percent,
5 percent, 5 percent, 5 percent, and 5 percent of total revenues, respectively.
No client accounted for 10 percent or more of revenues during the year ended
December 31, 1999, the seven month transition period ended December 31, 1998 or
fiscal 1998. In fiscal 1997, The Prudential accounted for 11 percent of
revenues.
NOTE 16 -- LEASES
The Company leases various office facilities under operating leases expiring at
various dates through July 31, 2004. Additionally, the Company leases various
property and office equipment under operating leases expiring at various dates.
Rental expense for all operating leases approximated $7,826, $7,927 $9,789 and
$3,084 for the year ended December 31, 1999, for the seven month transition
period ended December 31, 1998 and for the fiscal years ended May 31, 1998 and
1997, respectively. Future minimum rental commitments under noncancelable
operating leases with terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Calendar Year Amount
------------- ------
<S> <C>
2000............................. $3,124
2001............................. 1,116
2002............................. 509
2003............................. 289
2004............................. 168
------
$5,206
======
</TABLE>
The Company had no capital leases as of December 31, 1999.
================================================================================
Page 64
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 17 -- STOCKHOLDER RIGHTS PLAN
On October 29, 1998, the Board of Directors adopted a Stockholder Rights Plan
(the "Rights Plan"). The Rights Plan is intended to assure fair and equal
treatment for all of the Company's stockholders in the event of a hostile
takeover attempt.
On February 9, 2000, the Rights Plan was amended to remove certain restrictions
on the ability of the Company to redeem or amend the Rights following specified
changes in the composition of the Board of Directors.
Under the terms of the Rights Plan, each share of the Company's Common Stock has
associated with it one Right. Each Right entitles the registered holder to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share, at an exercise price of
$100 (subject to adjustment). The Rights become exercisable under certain
circumstances following the announcement that any person has acquired 15 percent
or more of the Company's Common Stock or the announcement that any person has
commenced a tender offer for 15 percent or more of the Company's Common Stock.
In general, the Company may redeem the Rights in whole, but not in part, at a
price of $.01 per Right at any time until ten days after any person has acquired
15 percent or more of the Company's Common Stock. The Rights will expire on
October 29, 2008, unless earlier redeemed by the Company or exchanged for other
shares of the Company's Common Stock.
Under specified conditions, each Right will entitle the holder to purchase the
Company's Common Stock at the exercise price (or if the Company is acquired in a
merger or other business combination, common stock of the acquiror) having a
current market value of two times the exercise price. The terms of the Rights
may be amended by the Company's Board of Directors.
================================================================================
Page 65
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 18 -- COMPREHENSIVE INCOME
The Company's comprehensive income and related tax effects were as follows:
<TABLE>
<CAPTION>
For the Year Ended Before-Tax Tax (Expense) Net-of-Tax
December 31, 1999 Amount Benefit Amount
- ----------------------- ----------- ------------- -----------
<S> <C> <C> <C>
Change in unrealized holding loss on
available-for-sale securities:
Unrealized holding losses arising
during the period.................. $ (86) $ 30 $ (56)
Less: adjustment for gain
realized in net loss............... (102) 36 (66)
----- ---- -----
Net unrealized loss................... (188) 66 (122)
Cumulative translation adjustment..... 485 -- 485
----- ---- -----
Other comprehensive income............ $ 297 $ 66 $ 363
===== ==== =====
</TABLE>
<TABLE>
<CAPTION>
Seven Month Transition
Period Ended Before-Tax Tax (Expense) Net-of-Tax
December 31, 1998 Amount Benefit Amount
- ----------------------- ----------- ------------- -----------
<S> <C> <C> <C>
Change in unrealized holding loss on
available-for-sale securities:
Unrealized holding gains arising
during the period.................. $ 38 $(14) $ 24
Less: adjustment for loss
realized in net income............. 13 (4) 9
----- ---- -----
Net unrealized gain................... 51 (18) 33
Cumulative translation adjustment..... (127) -- (127)
----- ---- -----
Other comprehensive loss.............. $ (76) $(18) $ (94)
===== ==== =====
</TABLE>
================================================================================
Page 66
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
<TABLE>
<CAPTION>
For the Year Ended Before-Tax Tax (Expense) Net-of-Tax
May 31, 1998 Amount Benefit Amount
- ------------------ ----------- ------------- -----------
<S> <C> <C> <C>
Change in unrealized holding loss on
available-for-sale securities:
Unrealized holding gains arising
during the period.................. $ 453 $(158) $ 295
Less: adjustment for gain
realized in net income............. (27) 9 (18)
----- ----- -----
Net unrealized gain................... 426 (149) 277
Cumulative translation adjustment..... (891) -- (891)
----- ----- -----
Other comprehensive loss.............. $(465) $(149) $(614)
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended Before-Tax Tax (Expense) Net-of-Tax
May 31, 1997 Amount Benefit Amount
- ------------------ ----------- ------------- -----------
<S> <C> <C> <C>
Change in unrealized holding loss on
available-for-sale securities:
Unrealized holding gains arising
during the period.................. $ 505 $(178) $ 327
Less: adjustment for gain
realized in net income............. (6) 2 (4)
----- ----- -----
Net unrealized gain................... 499 (176) 323
Cumulative translation adjustment..... (318) -- (318)
----- ----- -----
Other comprehensive income............ $ 181 $(176) $ 5
===== ===== =====
</TABLE>
NOTE 19 -- LITIGATION
The Company is party to lawsuits arising out of the normal course of business.
Management believes the final outcome of such litigation will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cashflows.
================================================================================
Page 67
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 20 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
Quarter Ended 1999/(b)/ 1999 1999 1999/(c)/
- ------------- --------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 46,204 $43,777 $36,278 $ 30,061
Operating (loss) income $(15,423) $ 1,170 $ 950 $ (7,394)
(Loss) income from
continuing operations $ (9,278) $ 1,080 $ 994 $ (4,374)
Income (loss) from
discontinued operations $ 2,608 $ 2,839 $ 2,358 $ (2,672)
Loss on distribution of
discontinued operations $ -- $ -- $ -- $ (6,789)
Net (loss) income $ (6,670) $ 3,919 $ 3,352 $(13,835)
======== ======= ======= ========
(Loss) income per
common share from
continuing operations/(a)/ $ (0.22) $ 0.02 $ 0.03 $ (0.10)
Income (loss) from
discontinued operations/(a)/ $ 0.06 $ 0.07 $ 0.05 $ (0.22)
-------- ------- ------- --------
Net (loss) earnings
per common share/(a)/ $ (0.16) $ 0.09 $ 0.08 $ (0.32)
======== ======= ======= ========
(Loss) income per common
share from continuing
operations assuming dilution/(a)/ $ (0.22) $ 0.02 $ 0.03 $ (0.10)
Income (loss) from discontinued
operations assuming dilution/(a)/ $ 0.06 $ 0.07 $ 0.05 $ (0.22)
-------- ------- ------- --------
Net (loss) earnings per common
share assuming dilution/(a)/ $ (0.16) $ 0.09 $ 0.08 $ (0.32)
======== ======= ======= ========
</TABLE>
________________
(a) All earnings per share data have been restated to reflect all of the
Company's prior stock splits as of December 31, 1999.
(b) Includes a restructuring charge of $10.5 million.
(c) Includes restructuring and other charges of $7.0 million.
================================================================================
Page 68
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
Quarter Ended 1998 1998 1998 1998
- ------------- --------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $50,376 $57,938 $57,260 $49,567
Operating income (loss) $ 6,902 $ 7,342 $ 5,253 $(5,584)
Income (loss) from
continuing operations $ 4,213 $ 4,923 $ 3,682 $(2,984)
Income (loss) from
discontinued operations $ 2,222 $ 2,499 $ 1,427 $ 584
Net income (loss) $ 6,435 $ 7,422 $ 5,109 $(2,400)
======= ======= ======= =======
Income (loss) per
common share from
continuing operations/(a)/ $ 0.11 $ 0.12 $ 0.09 $ (0.08)
Income from
discontinued operations/(a)/ $ 0.05 $ 0.07 $ 0.04 $ 0.01
------- ------- ------- -------
Net earnings (loss)
per common share/(a)/ $ 0.16 $ 0.19 $ 0.13 $ (0.07)
======= ======= ======= =======
Income (loss) per common
share from continuing
operations assuming dilution/(a)/ $ 0.10 $ 0.11 $ 0.09 $ (0.08)
Income per common
share from discontinued
operations assuming dilution/(a)/ $ 0.05 $ 0.06 $ 0.03 $ 0.01
------- ------- ------- -------
Net earnings (loss) per common
share assuming dilution/(a)/ $ 0.15 $ 0.17 $ 0.12 $ (0.07)
======= ======= ======= =======
</TABLE>
________________
(a) All earnings per share data have been restated to reflect all of the
Company's prior stock splits as of December 31, 1999.
================================================================================
Page 69
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
NOTE 21 -- OTHER EVENTS
On March 30, 1999, the Company announced that it was making a number of changes
to its business operations and, as a result, the Company recorded a
restructuring charge of $10.5 million associated with those changes and the
severance of approximately 300 people, primarily consulting personnel. The
restructuring charge was determined based on a plan prepared at the time the
restructuring actions were approved by management and the Board of Directors.
During the year ended December 31, 1999, the Company used $9.3 million of the
restructuring accrual as a result of cash paid during the year of $7.8 million
associated with the severance of approximately 270 employees and $1.5 million in
asset write-offs and other costs. In addition, during the quarter ended December
31, 1999 the Company recorded $7.0 million in restructuring and other costs
associated with lease terminations of $3.0 million, former executive severance
costs of $1.8 million, CourseNet Systems, Inc. (CourseNet) costs of $1.3 million
and write-offs of other assets of $0.9 million. The restructuring accrual
balance is considered adequate to cover the remaining committed restructuring
actions.
NOTE 22 -- SUBSEQUENT EVENTS
On February 15, 2000 TSC successfully completed the spin-off of its eLoyalty
division into a separate publicly traded company. Previously on January 27,
2000, TSC received a favorable ruling from the Internal Revenue Service that the
spin-off of its eLoyalty division would be a tax free distribution of all of the
Company's eLoyalty shares to TSC's shareholders. Operating results from
eLoyalty were as follows:
<TABLE>
<CAPTION>
Seven Month
For the Transition
Year Ended Period Ended For the Years
December 31, December 31, Ended May 31,
------------- ------------ ----------------
1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues.............................. $140,465 $62,600 $82,272 $43,024
-------- ------- ------- -------
Income before income taxes............ $ 12,954 $ 5,042 $11,891 $ 8,795
Income tax provision.................. 7,821 2,521 5,104 3,486
-------- ------- ------- -------
Income from
discontinued operations............ 5,133 2,521 6,787 5,309
Loss on distribution of discontinued
operations before income taxes..... (7,336) -- -- --
Income tax benefit.................... (547) -- -- --
-------- ------- ------- -------
Loss on distribution of
discontinued operations............ (6,789) -- -- --
-------- ------- ------- -------
Total (loss) income from
discontinued operations............ $ (1,656) $ 2,521 $ 6,787 $ 5,309
======== ======= ======= =======
</TABLE>
================================================================================
Page 70
<PAGE>
Technology Solutions Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
================================================================================
The $6.8 million loss on distribution of discontinued operations represents fees
and other costs related to the eLoyalty transaction and the net loss incurred by
eLoyalty from January 1, 2000 through February 15, 2000. The net assets of
discontinued operations of $74,462 as of December 31, 1999 consists of current
assets of $77,915, non-current assets of $18,688, current liabilities of $22,988
and accumulated other comprehensive loss of $847.
In addition in connection with the spin-off, on February 15, 2000, Technology
Crossover Ventures and Sutter Hill Ventures purchased from eLoyalty Corporation
2.5 million common shares for $8.4 million. TSC also has provided a short-term
guarantee for a $10.0 million revolving credit facility entered into by eLoyalty
with Bank of America. TSC received a fee from eLoyalty. The guarantee will
terminate on December 30, 2000.
================================================================================
Page 71
<PAGE>
Technology Solutions Company
================================================================================
Schedule II - Valuation and Qualifying Accounts
For the Year Ended December 31, 1999, the Seven Month Transition Period
Ended December 31, 1998 and for the Years Ended May 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Balance at Net Assets of Balance at
Description of beginning Discontinued end of
Allowance and Reserves of year Operations Additions Deductions year
- ---------------------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
May 31, 1997
- ------------
Valuation allowances
and receivable reserves
for potential losses $1,870 -- $2,712 $(1,236) $3,346
====== ====== ======= ======
May 31, 1998
- ------------
Valuation allowances
and receivable reserves
for potential losses $3,346 -- $1,897 $(1,997) $3,246
====== ====== ======= ======
December 31, 1998
- -----------------
Valuation allowances
and receivable reserves
for potential losses $3,246 -- $2,913 $(1,314) $4,845
====== ====== ======= ======
December 31, 1999
- -----------------
Valuation allowances
and receivable reserves
for potential losses $4,845 $(2,084) $5,909 $(4,955) $3,715
====== ======= ====== ======= ======
</TABLE>
================================================================================
Page 72
<PAGE>
Technology Solutions Company
PART IV. (CONTINUED)
================================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
Item 14(a)(3) Exhibits
- -----------------------
The following documents are filed herewith or incorporated by reference and made
a part of this Report.
Exhibit # Description of Document
- --------- -----------------------
2.1* Reorganization Agreement with eLoyalty Corporation.
3(i) Restated Certificate of Incorporation of Technology Solutions
Company, filed as Exhibit 3(i) to TSC's Quarterly Report on Form
10-Q for the quarter ended November 30, 1998, is hereby
incorporated by reference.
3(ii) Bylaws of TSC, as amended, filed as Exhibit 3 to TSC's Current
Report on Form 8-K dated November 22, 1998, is hereby
incorporated by reference.
4.1* Certificate of Designation of Series A Junior Participating
Preferred Stock.
4.2 Rights Agreement with ChaseMellon Shareholder Services, L.L.C.,
filed as exhibit 4 to TSC's current report on Form 8-K dated
October 29, 1998, is hereby incorporated by reference.
4.3* First Amendment to Rights agreement with ChaseMellon Shareholder
Services, L.L.C.
10.01 Technology Solutions Company Original Option Plan, as amended,
filed as Exhibit 10.02 to TSC's Annual Report on Form 10-K for
the fiscal year ended May 31, 1992, is hereby incorporated by
reference.
10.02 Technology Solutions Company 1992 Stock Incentive Plan, filed as
Exhibit 10.03 to TSC's Annual Report on Form 10-K for the fiscal
year ended May 31, 1992, is hereby incorporated by reference.
______________
*Filed herewith
================================================================================
Page 73
<PAGE>
Technology Solutions Company
PART IV. (CONTINUED)
================================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
Item 14(a)(3) Exhibits (Continued)
- ----------------------------------
10.03 1993 Outside Directors Stock Option Plan, as amended, filed as
Exhibit 10.05 to TSC's Annual Report on Form 10-K for the fiscal
year ended May 31, 1994, is hereby incorporated by reference.
10.04 The Bentley Company Stock Option Plan, as amended, filed as
Exhibits 4.4 and 4.5 to TSC's Registration Statement on Form S-8
filed July 16, 1997, is hereby incorporated by reference.
10.05 Technology Solutions Company 1996 Stock Incentive Plan, as
amended, filed as Exhibit 4.3 to TSC's Registration Statement on
Form S-8 filed July 16, 1997, is hereby incorporated by
reference.
10.06 Employment Agreement of William H. Waltrip, filed as Exhibit
10.06 to TSC's Annual Report on Form 10-K for the fiscal year
ended May 31, 1996, is hereby incorporated by reference.
10.07 Employment Agreement of John T. Kohler, filed as Exhibit 10.07 to
TSC's Annual Report on Form 10-K for the fiscal year ended May
31, 1996, is hereby incorporated by reference.
10.08 Employment Agreement of Paul R. Peterson, filed as Exhibit 10.11
to TSC's Annual Report on Form 10-K for the fiscal year ended May
31, 1998, is hereby incorporated by reference.
10.09 Extension of Promissory Note of John T. Kohler, filed as Exhibit
10.13 to TSC's Transition Report on Form 10-K for the seven month
transition period ended December 31, 1998, is hereby incorporated
by reference.
10.10 Employment Agreement of Jack N. Hayden, filed as Exhibit 10.09 to
TSC's Annual Report on Form 10-K for the fiscal year ended May
31, 1996, is hereby incorporated by reference.
10.11 Letter of Understanding with Jack N. Hayden, filed as Exhibit
10.14 to TSC's Annual Report on Form 10-K for the fiscal year
ended May 31, 1998, is hereby incorporated by reference.
================================================================================
Page 74
<PAGE>
Technology Solutions Company
PART IV. (CONTINUED)
================================================================================
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(Continued)
Item 14(a)(3) Exhibits (Continued)
- ----------------------------------
10.12* Separation Agreement and Limited Mutual Release from Employment
Agreement with John T. Kohler.
10.13* Letter Agreement with Jack N. Hayden.
10.14* Employment Agreement Amendment with Jack N. Hayden.
10.15* Employment Agreement Amendment with Paul R. Peterson.
10.16* Employment Agreement with Timothy P. Dimond.
10.17* Employment Agreement Amendment with Timothy P. Dimond.
10.18* Shared Services Agreement with Eloyalty Corporation.
21* Subsidiaries of the Company.
23* Consent of PricewaterhouseCoopers LLP.
27* Financial Data Schedule
Exhibits 10.01 through 10.17 listed above are the management contracts and
compensatory plans or arrangements required to be filed as exhibits hereto
pursuant to the requirements of Item 601 of Regulation S-K.
Item 14(b) Reports on Form 8-K
- --------------------------------
During the quarter ended December 31, 1999, the Company did not file any reports
on Form 8-K.
______________
*Filed herewith
================================================================================
Page 75
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 23rd day of March
2000.
TECHNOLOGY SOLUTIONS COMPANY
By: /s/ TIMOTHY P. DIMOND
-----------------------
Timothy P. Dimond
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant, in
the capacities and on the date indicated.
Signature
---------
/s/ WILLIAM H. WALTRIP (March 23, 2000) Chairman,
- -----------------------------------------------
William H. Waltrip Officer and Director
/s/ JACK N. HAYDEN (March 23, 2000) President, Chief Executive
- -----------------------------------------------
Jack N. Hayden Officer and Director
/s/ TIMOTHY P. DIMOND (March 23, 2000) Chief Financial Officer and
- -----------------------------------------------
Timothy P. Dimond Principal Accounting Officer
/s/ RAYMOND P. CALDIERO (March 23, 2000) Director
- -----------------------------------------------
Raymond P. Caldiero
/s/ STEPHEN B. ORESMAN (March 23, 2000) Director
- -----------------------------------------------
Stephen B. Oresman
/s/ MICHAEL R. ZUCCHINI (March 23, 2000) Director
- -----------------------------------------------
Michael R. Zucchini
(Being the principal executive officers, the principal financial and accounting
officers and a majority of the directors of Technology Solutions Company).
================================================================================
Page 76
<PAGE>
EXHIBIT 2.1
-----------
REORGANIZATION AGREEMENT
Dated as of February 15, 2000
by and between
TECHNOLOGY SOLUTIONS COMPANY
and
eLOYALTY CORPORATION
<PAGE>
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
-i-
<PAGE>
7.3. Non-Assignable Contracts...................................... 20
7.4. Novation of Assumed Liabilities............................... 21
7.5. Further Assurances............................................ 22
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...................................... 24
7.11. No Noncompetition; Nonhiring; Nonsolicitation................. 24
7.12. Litigation.................................................... 25
7.13. eLoyalty Bank Accounts........................................ 25
7.14. Signs; Use of Company Name.................................... 25
7.15. Reasonable Efforts............................................ 26
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.............. 27
8.4. SEC Filings and Approvals..................................... 27
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..................................................... 29
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
-ii-
<PAGE>
9.10. WARN Act...................................................... 32
9.11. Information to be Provided to TSC............................. 32
ARTICLE X - INSURANCE MATTERS.............................................. 32
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. Certain Adjustments........................................... 35
10.8. Non-Waiver of Rights to Coverage.............................. 35
10.9. Scope of Affected Policies of Insurance....................... 36
ARTICLE XI - EXPENSES...................................................... 36
11.1. Allocation of Expenses........................................ 36
ARTICLE XII - INDEMNIFICATION.............................................. 37
12.1. Release of Pre-Distribution Claims............................ 37
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.......... 42
12.7. Procedures for Indemnification of Direct Claims............... 44
12.8. Contribution.................................................. 44
12.9. Remedies Cumulative........................................... 44
12.10. Survival...................................................... 45
ARTICLE XIII - DISPUTE RESOLUTION.......................................... 45
13.1. Agreement to Arbitrate........................................ 45
13.2. Escalation and Mediation...................................... 45
13.3. Procedures for Arbitration.................................... 46
13.4. Selection of Arbitrator....................................... 47
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
-iii-
<PAGE>
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....................................... 51
14.6. Production of Witnesses....................................... 51
14.7. Confidentiality............................................... 51
14.8. Privileged Matters............................................ 52
ARTICLE XV - MISCELLANEOUS................................................. 53
15.1. Entire Agreement.............................................. 53
15.2. Choice of Law and Forum....................................... 53
15.3. Amendment..................................................... 53
15.4. Waiver........................................................ 53
15.5. Partial Invalidity............................................ 54
15.6. Execution in Counterparts..................................... 54
15.7. Successors and Assigns........................................ 54
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................................................... 56
-iv-
<PAGE>
EXHIBITS
- --------
Exhibit A - eLoyalty Business
Exhibit B-1 - Form of TSC Intellectual Property License Agreement
Exhibit B-2 - 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 - Form of 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
-v-
<PAGE>
REORGANIZATION AGREEMENT
-------------------------
REORGANIZATION AGREEMENT, dated as of February 15, 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:
ARTICLE I
<PAGE>
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.
---------------
(S)(S)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).
-------------- --------------
-2-
<PAGE>
"Contracts" has the meaning specified in Section 4.1(g).
--------- --------------
"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).
-3-
<PAGE>
"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).
"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.
-4-
<PAGE>
"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 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.
-5-
<PAGE>
"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.
"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.
--------------- -----------
-6-
<PAGE>
"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).
"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 C 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,
-7-
<PAGE>
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 D hereto.
---------
"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).
--------- --------------
-8-
<PAGE>
"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:
(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;
-9-
<PAGE>
(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 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
-10-
<PAGE>
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
------------------------------------------
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 20, 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
-11-
<PAGE>
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.
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 Interim 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.
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
-12-
<PAGE>
January 20, 2000 the Board of Directors of eLoyalty adopted the Stockholders
Rights Plan (the "Rights Plan") in substantially the form attached as Exhibit E
----------- ---------
hereto, and established 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 December 31, 1999
attached as Exhibit F 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");
-----------
(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,
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<PAGE>
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 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;
--------------------
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<PAGE>
(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
-----------------
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;
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<PAGE>
(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 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;
-16-
<PAGE>
(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 the eLoyalty Business with respect to any Retained
Liabilities (as hereinafter defined);
-17-
<PAGE>
(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;
(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; and
------------ ---
(f) Any right, title or interest in any prepaid insurance existing at
the Distribution Date or any payments received after the Distribution Date
with respect thereto.
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; and
(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.
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<PAGE>
(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.
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
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<PAGE>
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 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
approvals, to 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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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 G 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%.
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<PAGE>
7.10. Registration and Listing. Prior to the Distribution Date:
------------------------
(a) TSC and eLoyalty shall prepare a registration statement on Form
S-1, 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/prospectus 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.
(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
-24-
<PAGE>
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 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.
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<PAGE>
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.
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.
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<PAGE>
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.
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, 2000, 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.
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<PAGE>
(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 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.
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<PAGE>
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 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
-29-
<PAGE>
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 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
-30-
<PAGE>
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.
(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
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<PAGE>
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.
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
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<PAGE>
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 establish and maintain 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 each case with commercially reasonable limits and
deductibles. eLoyalty agrees to maintain errors and omissions coverage with
limits of at least $35,000,000 for a period of at least five (5) years after the
Distribution Date. 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 maintain such coverage for at least five
(5) years after the Distribution Date. eLoyalty shall arrange for TSC and the
TSC Indemnified Parties to be named insureds under the errors and omissions
policies and the contractual indemnity policies described above. 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 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
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<PAGE>
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 behalf and on behalf of
eLoyalty and its Subsidiaries and Affiliates, which decisions,
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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. Certain Adjustments. (a) The Parties acknowledge that prepaid
-------------------
insurance and any cash received by TSC with respect to prepaid insurance is not
included within the Transferred Assets. Notwithstanding the foregoing, TSC
agrees to pay to eLoyalty, promptly upon receipt by TSC, the amount of any cash
received by TSC from Arthur J. Gallagher Risk Management Services Inc. as a
premium adjustment to reflect the exclusion of eLoyalty and its Subsidiaries
from the coverage of the TSC Policies.
(b) TSC will enter into a letter agreement with Aon Financial
Services Group providing for the provision of certain insurance brokerage and
consulting services to TSC. Such letter agreement requires three annual payments
by TSC to Aon Financial Services Group, the first of which has been paid.
eLoyalty agrees to reimburse TSC, on demand, for 50% of each of the second and
third annual payments due under such letter agreement.
10.8. 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
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Distribution occurred or in the absence of the provisions of this Article X) by
---------
virtue of the provisions hereof.
10.9. 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 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"; and (xi) 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;
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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 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;
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(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 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;
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<PAGE>
(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 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
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<PAGE>
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 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
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<PAGE>
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
- ------
an Indemnified Party in a Tax period shall be due and payable within 30 days
from the 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:
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<PAGE>
(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 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
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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 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
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<PAGE>
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 Tax audit or proceeding
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 Tax audit or proceeding.
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.
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.
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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
Escalation Notice.
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(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 H, 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
---------------
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<PAGE>
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 in 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
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<PAGE>
Section 13.5 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 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.
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<PAGE>
(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
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
-49-
<PAGE>
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 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 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
-50-
<PAGE>
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 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
-51-
<PAGE>
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.
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
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<PAGE>
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
-------------
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
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<PAGE>
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.
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:
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<PAGE>
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.
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
-55-
<PAGE>
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 written 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.
-56-
<PAGE>
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: /s/ WILLIAM H. WALTRIP
-------------------------------------------
William H. Waltrip
Chairman of the Board
eLOYALTY CORPORATION
By: /s/ TIMOTHY J. CUNNINGHAM
-------------------------------------------
Timothy J. Cunningham
Chief Financial Officer, Secretary and
Treasurer
Signature Page
to the
Reorganization Agreement
<PAGE>
EXHIBIT 4.1
CERTIFICATE OF DESIGNATION
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
TECHNOLOGY SOLUTIONS COMPANY
________________________________________________________________________________
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 Technology Solutions Company, a
Delaware corporation (the "Corporation"), on October 29, 1998:
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
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<PAGE>
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 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 October
29, 1998 (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
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<PAGE>
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 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
-3-
<PAGE>
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 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
-4-
<PAGE>
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 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
-5-
<PAGE>
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 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
-6-
<PAGE>
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.
-----------------
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
-7-
<PAGE>
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 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
-8-
<PAGE>
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 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.
-9-
<PAGE>
IN WITNESS WHEREOF, Technology Solutions Company has caused its
corporate seal to be hereunto affixed and this certificate to be signed by John
T. Kohler, its President and Chief Executive Officer, and the same to be
attested to by Paul R. Peterson, its Secretary and General Counsel, this 29th
day of October, 1998.
TECHNOLOGY SOLUTIONS COMPANY
By: /s/ JOHN T. KOHLER
------------------------------------
Name: John T. Kohler
Title: President and Chief
Executive Officer
(Corporate Seal)
Attest:
/s/ PAUL R. PETERSON
- ---------------------------------
Paul R. Peterson
Secretary and General Counsel
-10-
<PAGE>
EXHIBIT 4.3
First Amendment to Rights Agreement
First Amendment, dated as of February 9, 2000 (this "Amendment"), to Rights
Agreement, dated as of October 29, 1998 (the "Rights Agreement"), between
Technology Solutions Company, 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, the Board of Directors of the Company, at a meeting held on
January 26, 2000 and based in part on the recommendation of the Company's legal
advisors, has determined that it is advisable and in the best interest of the
Company to amend the Rights Agreement as set forth below;
Whereas, at the date of this Amendment, the Distribution Date has not
occurred and there is no Acquiring Person; and
Whereas, in compliance with Section 27 of the Rights Agreement, the Company
and the Rights Agent are willing to amend the Rights Agreement as hereinafter
set forth and the Company and the Rights Agent have each executed and delivered
this Amendment.
Now, therefore, in consideration of the Rights Agreement and the premises
and mutual agreements herein set forth, the parties hereby agree as follows:
1. The second sentence of Section 1(a) of the Rights Agreement is hereby
amended and restated to read as follows:
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 the proportionate number of
shares beneficially owned by such Person to 15% or more of
the
<PAGE>
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".
2. The last paragraph of Section 1 of the Rights Agreement is hereby
amended by moving the word "and" appearing immediately before clause (xxii) to
immediately before clause (xxi) and deleting clause (xxii) in its entirety.
3. Section 2 of the Rights Agreement is hereby amended by adding the
following sentence at the end thereof:
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.
4. The first sentence of Section 3(a) of the Rights Agreement is hereby
amended and restated to read as follows:
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
2
<PAGE>
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).
5. Section 6(a) of the Rights Agreement is hereby amended by adding the
following sentence at the end thereof:
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.
6. Section 11(o) of the Rights Agreement is hereby amended by inserting
the phrase", Section 24" immediately after the phrase "Section 23".
7. Section 13(a) of the Rights Agreement is hereby amended by deleting
each occurrence of the phrase "or during the pendency of a 180 Day Period".
8. Section 13(d) of the Rights Agreement is hereby deleted and Section
13(e) of the Rights Agreement is hereby redesignated as Section 13(d).
9. Section 14 of the Rights Agreement is hereby amended by adding Section
14(e), which shall read as follows:
(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.
10. Section 18(a) of the Rights Agreement is hereby amended (i) by adding
the phrase "(each as finally determined by a court of competent jurisdiction)"
immediately after the word "misconduct" and (ii) by adding the word "punitive,"
immediately after the word "indirect,".
11. Section 20(c) of the Rights Agreement is hereby amended by adding the
phrase "(each as finally determined by a court of competent jurisdiction)"
immediately after the word "misconduct".
3
<PAGE>
12. Section 23(c) of the Rights Agreement is hereby deleted.
13. The third occurrence of the word "such" appearing in Section 27 of the
Rights Agreement and the last sentence of Section 27 of the Rights Agreement are
hereby deleted.
14. The first sentence of the first paragraph appearing on page B-2 of
the form of Rights Certificate attached as Exhibit B to the Rights Agreement is
hereby amended by inserting the phrase", as the same may be amended from time
to time" immediately after the first occurrence of the phrase "October 29,
1998".
15. The third full paragraph appearing on page B-3 of the form of Rights
Certificate attached as Exhibit B to the Rights Agreement is hereby amended by
deleting the sentence "Under certain circumstances set forth in the Rights
Agreement, the Rights may not be redeemed for a period of one hundred eighty
days (180)."
16. The last sentence of the first paragraph of the Summary of Rights to
Purchase Preferred Stock attached as Exhibit C to the Rights Agreement is hereby
amended and restated to read as follows:
The description and terms of the Rights are set forth in a
Rights Agreement, dated as of October 29, 1998 as amended by
the First Amendment dated as of February 9, 2000 thereto
(collectively, the "Rights Agreement"), between the Company
and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent.
17. The second paragraph of the Summary of Rights to Purchase Preferred
Stock attached as Exhibit C to the Rights Agreement is hereby amended and
restated to read as follows:
Initially, the Rights will be attached to all Common Stock
certificates representing shares then outstanding, and no
separate Rights certificates will be distributed. The Rights
will separate from the Common Stock and the Distribution
Date will occur upon the earlier of (i) 10 days following a
public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 15%
or more of the outstanding shares of Common Stock (the
"Stock Acquisition Date") or (ii) 10 business days (or such
later date as may be determined by action of the Board of
Directors prior to such time as any person or group becomes
an
4
<PAGE>
Acquiring Person) following the commencement of a tender
offer or exchange offer which, if consummated, would result
in a person or group beneficially owning 15% or more of the
outstanding shares of Common Stock.
18. The ninth paragraph of the Summary of Rights to Purchase Preferred
Stock attached as Exhibit C to the Rights Agreement is amended by deleting the
phrase "or during the pendency of a 180 day period".
19. The last sentence of the thirteenth paragraph of the Summary of Rights
to Purchase Preferred Stock attached as Exhibit C to the Rights Agreement is
hereby deleted.
20. The last sentence of the fifteenth paragraph of the Summary of Rights
to Purchase Preferred Stock attached as Exhibit C to the Rights Agreement is
hereby deleted.
21. This Amendment 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
with in accordance with the laws of such State applicable to contracts to be
made and performed entirely within such State.
22. This Amendment may be executed in two or more counterparts, each of
which shall for all purposes be deemed to be an original, but all such
counterparts shall together constitute one and the same instrument.
23. Any capitalized term used herein without definition shall have the
meaning specified in the Rights Agreement.
24. Except as otherwise expressly set forth herein, this Amendment shall
not by implication or otherwise alter, modify, amend or in any other manner
affect any of the terms, conditions, obligations, covenants or agreements
contained in the Rights Agreement, all of which are hereby ratified and
confirmed in all respects and shall continue in full force and effect.
5
<PAGE>
In Witness Whereof, the parties hereto have caused this Amendment to be
duly executed and attested, all as of the day and year first above written.
Attest: Technology Solutions Company
By: /s/ PAUL R. PETERSON ____ By: /s/ TIMOTHY P. DIMOND __
Name: Paul R. Peterson Name: Timothy P. Dimond
Title: Secretary and General Counsel Title: Senior Vice President and
Chief Financial Officer
Attest: ChaseMellon Shareholder Services, L.L.C.
By: /s/ LEE TINTO ___________
By: /s/ LYNORE LECONCHE ____ Name: Lee Tinto
Name: Lynore LeConche_____ Title: Vice President
Title:_Vice President _______
6
<PAGE>
EXHIBIT 10.12
SEPARATION AGREEMENT AND
LIMITED MUTUAL RELEASE FROM EMPLOYMENT AGREEMENT
This Separation Agreement and Limited Mutual Release from Employment
Agreement (the "Separation Agreement") is entered into this ___ day of November,
1999 by and between Technology Solutions Company, a Delaware corporation with
its principal place of business at 205 North Michigan Avenue, Suite 1500,
Chicago, Illinois 60601 ("TSC") and John T. Kohler, an individual who resides in
Chicago, Illinois ("Employee"). Collectively, TSC and Employee are referred to
herein as the "Parties."
WHEREAS, TSC and Employee previously entered into an Employment Agreement
(the "Employment Agreement") dated as of January 19, 1996 pursuant to which
Employee has since been employed by TSC as President and Chief Executive
Officer;
WHEREAS, Employee has also served as a member of the TSC Board of Directors
since June 1994;
WHEREAS, TSC is in the process of undergoing a series of transactions that
are anticipated to result in its eLoyalty division becoming an independent,
publicly-traded corporation that is subject to the reporting requirements under
the Securities Exchange Act of 1934, as amended, and known as eLoyalty
Corporation ("eLoyalty") through a distribution of eLoyalty shares to
shareholders of TSC (the "Spin-off");
WHEREAS, Employee has served as a member of the eLoyalty Board of Directors
since May 1999;
WHEREAS, on the day prior to the Spin-off, Employee's Employment Agreement
shall terminate as provided herein;
WHEREAS, on the effective date of the Spin-off Employee shall resign as a
director of TSC, as provided herein;
WHEREAS, in lieu of any payment or other obligations that may be triggered
by termination of the Employment Agreement, the Parties agree that TSC will make
payments and other commitments to Employee as provided below;
WHEREAS, the Parties desire to set forth their agreement in this Separation
Agreement and to detail those respective obligations of the Parties from which
each will be released and those respective obligations of the Parties that will
survive the termination of the Employment Agreement.
<PAGE>
NOW THEREFORE, in consideration of the mutual premises and obligations
contained herein, and notwithstanding anything contained in the Employment
Agreement to the contrary, the Parties hereby agree as follows:
1. Termination of Employment Agreement. Effective at the close of
------------------------------------
business on the day before TSC distributes its shares of eLoyalty to the
shareholders of TSC, Employee shall resign as President and Chief Executive
Officer of TSC and Employee's Employment Agreement shall terminate.
2. Lump Sum Payment of Salary. In lieu of the on-going Current Salary
---------------------------
payments to Employee as provided in Section 3(a) of the Employment Agreement,
upon termination of the Employment Agreement TSC shall make a one-time, lump sum
payment to Employee in the amount of $1,100,000 (less required withholding),
such amount equal to two times Employee's current salary of $550,000 per year.
3. Lump Sum Payment of Bonus. In lieu of the on-going Average Bonus
--------------------------
payments to Employee as provided in Section 3(a) of the Employment Agreement,
upon termination of the Employment Agreement TSC shall make a one-time, lump sum
payment to Employee in the amount of $647,000 (the "Bonus Payment"). If
Employee so elects for the period commencing January 1, 2000, a portion of the
Bonus Payment as elected will be contributed to Employee's deferred compensation
account under the TSC Executive Deferred Compensation Plan, and the balance will
be paid in cash to Employee (subject to required withholding).
4. Continuation of Health Benefits. TSC shall continue Employee's health
--------------------------------
insurance benefits until the end of the two year period following the
termination of the Employment Agreement or until Employee is re-employed,
whichever comes first.
5. Resignation from TSC Board of Directors. Effective upon termination of
----------------------------------------
the Employment Agreement, Employee shall resign from the TSC Board of Directors.
6. Service as eLoyalty Director. Employee will continue to serve as a
-----------------------------
director of eLoyalty. As a director of eLoyalty, Employee shall be entitled to
receive the normal compensation given to eLoyalty directors. Employee agrees,
however, that he shall not be entitled to receive any eLoyalty stock options as
a director of eLoyalty until Employee would otherwise have received 125,000
eLoyalty options, at which time Employee shall be entitled to participate in the
stock option program provided to eLoyalty directors at that time.
7. Forfeit of Previously Granted eLoyalty Options. Employee hereby agrees
-----------------------------------------------
to forfeit 75,000 unvested options to acquire shares of stock of eLoyalty.
8. Treatment of Other TSC and eLoyalty Stock Options. As a director of
--------------------------------------------------
eLoyalty, all stock options in both TSC and eLoyalty held by Employee pursuant
to Stock Option Agreements shall continue to vest in accordance with the vesting
schedules provided in the Stock Option Agreements for so long as Employee
continues to serve as a
<PAGE>
director of eLoyalty; and further, the provisions in any of the Stock Option
Agreements that require Employee to exercise vested options within 90 days of
termination of employment with TSC shall not be triggered until the effective
date of Employee's termination as a director of eLoyalty.
9. Treatment of Employee Deferred Compensation Account. TSC agrees that
----------------------------------------------------
the Compensation Committee of its Board of Directors will adopt a resolution
that will provide that for purposes of the TSC Executive Deferred Compensation
Plan, Employee's service as a director of eLoyalty shall be treated as service
as an Eligible Employee as defined in the Plan.
10. Continuation of Voice Mail; Use of TSC Assets. TSC agrees that
----------------------------------------------
Employee will be entitled to continue use of voice mail for so long as Employee
remains a director of eLoyalty. TSC further agrees that following termination
of the Employment Agreement, Employee shall be entitled to retain possession and
use of the TSC computers and equipment previously provided to Employee during
his employment with TSC as set forth in Schedule A hereto for so long as
Employee remains a director of eLoyalty.
11. Release of TSC by Employee. Except as specifically provided in this
---------------------------
Separation Agreement, upon termination of the Employment Agreement TSC shall be
released from all of its obligations under the Employment Agreement, including
without limitation the obligations to continue paying Employee's base salary or
from making any Current Salary payments or Average Bonus payments (as such terms
are defined in Section 3(a) of the Employment Agreement).
12. Release of Employee by TSC. Upon termination of the Employment
---------------------------
Agreement, Employee shall be released from his obligations to perform the duties
of President and Chief Executive Officer of TSC.
13. Survival of Certain Terms. The following provisions of the Employment
--------------------------
Agreement shall survive termination: Section 8 (Noncompetition and
Nondisclosure), Section 9 (Remedies), Section 10 (Intellectual Property),
Section 12 (Assignment), Section 13 (Notices), Section 14 (Entire Agreement),
Section 15 (Applicable Law), Section 16 (Mediation of Disputes), Section 17
(Binding Arbitration), and Section 18 (Severability).
14. Notices. All notices shall be in writing. Notices intended for TSC
--------
shall be sent by registered or certified mail addressed to it at 205 North
Michigan Avenue, 15th Floor, Chicago, Illinois 60601 or its current principal
office, and notices intended for Employee shall be either delivered personally
to him or sent by registered or certified mail addressed to his last known
address.
15. Entire Agreement. This Separation Agreement constitutes the entire
-----------------
agreement between TSC and Employee with respect to the subject matter hereof.
Neither Employee nor TSC may modify this Separation Agreement by oral
agreements, promises
<PAGE>
or representations. The Parties may modify this Separation Agreement only by a
written instrument signed by the Parties.
16. Applicable Law. This Separation Agreement shall be governed by and
---------------
construed in accordance with the laws of the State of Illinois.
17. Severability. Whenever possible, each provision of this Separation
-------------
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Separation Agreement is held to be
prohibited by or invalid under applicable law, such provision will be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Separation Agreement.
18. Dispute Resolution. Any dispute between the Parties arising from or
-------------------
in connection with this Separation Agreement shall be resolved using the
procedure set forth in Sections 16 and 17 of the Employment Agreement.
IN WITNESS WHEREOF, the Parties have executed this Separation Agreement and
Limited Mutual Release from Employment Agreement as of the date first set forth
above.
TECHNOLOGY SOLUTIONS COMPANY EMPLOYEE
By:_/s/ WILLIAM H. WATRIP /s/ JOHN T. KOHLER
William H. Waltrip John T. Kohler
Chairman of the Board of Directors
Date:________________________________ Date:________________________
By:_/s/ JOHN R. PURCELL____
John R. Purcell
Chairman of the Compensation Committee
<PAGE>
EXHIBIT 10.13
February 26, 1999
Mr. Jack N. Hayden
2608 Ocean Boulevard
Corona Del Mar,
California 92625
Dear Jack:
We are pleased that you have decided not to terminate your employment with TSC
and to resume your full-time employment effective April 1, 1999, pursuant to the
terms set forth below.
Your employment with TSC will continue to be governed by the letter of
understanding of August 5, 1998, until April 1, 1999. On that date you will
resume full-time employment pursuant to the terms of your January 19, 1996
employment agreement, subject to the following amendments: (a) your new
position, which reports directly to me, shall be Group President; and, (b) your
new base salary shall be $480 thousand per annum.
In consideration for your agreement to resume full-time employment in your new
role, TSC agrees to pay you a bonus of $460 thousand which shall not be grossed
up for taxes. Additionally, TSC agrees to guarantee you a bonus for calendar
year 1999 of at least $200 thousand. While the options you were previously
granted shall remain in full force pursuant to the terms thereof, TSC agrees to
grant you 150 thousand new options, subject to the approval of the Compensation
Committee of the Board, pursuant to the company's current option agreement for
existing employees.
I am very enthused about your decision to resume full-time employment with the
company in your new role.
If you are in agreement with the terms of this letter and the accompanying
agreement please execute them both and fax them to me at 312 228-4556. Following
the execution of the faxes it is our intention to exchange hard copies for
signature.
Very truly yours, Concurrence
/s/ JOHN T. KOHLER /s/ JACK N. HAYDEN
John T. Kohler Jack N. Hayden
President and Chief Executive Officer
<PAGE>
EXHIBIT 10.14
EMPLOYMENT AGREEMENT AMENDMENT
Technology Solutions Company ("TSC") and Jack N. Hayden ("Employee") enter
into this amendment to his Employment Agreement as of October 1, 1999.
WHEREAS, on January 19, 1996 Employee entered into an employment agreement
covering his position of Executive Vice President ("Employment Agreement").
WHEREAS, by agreement dated February 26, 1999 Employee's position was
changed to Group President.
WHEREAS, the Employment Agreement contains a termination provision which
entitles Employee to receive his salary, a bonus equal to the average annual
bonus earned during the two years immediately preceding the termination for each
of the two years, and health insurance benefits for a two year period or until
Employee is re-employed, whichever comes first, if Employee is terminated by TSC
other than for Serious Misconduct.
Employee and TSC now agree to amend the termination provision of his
Employment Agreement, Section 3. Termination, paragraph (a) by inserting the
following sentence at the end of paragraph (a): "Notwithstanding anything to
the contrary in any of Employee's stock option agreements, Employee's unvested
shares at option shall vest automatically when terminated if he is terminated by
TSC other than for Serious Misconduct."
Technology Solutions Company Jack N. Hayden
By: /s/ JOHN T. KOHLER /s/ JACK N. HAYDEN
--------------------- ---------------------
Position: CEO Date: 10/5/99
--------------- ---------------
Date: 10/4/99
------------------
<PAGE>
EXHIBIT 10.15
EMPLOYMENT AGREEMENT AMENDMENT
Technology Solutions Company ("TSC") and Paul R. Peterson ("Employee")
enter into this amendment to his Employment Agreement as of October 1, 1999.
WHEREAS, on November 22, 1994 Employee entered into an employment
agreement covering his position of General Counsel and Secretary ("Employment
Agreement").
WHEREAS, the Employment Agreement contains a Change in Control provision
which entitles Employee to receive his salary, bonus, and health insurance
benefits for a one year period if following a Change in Control his title,
position, duties, or salary is diminished and Employee resigns within 90 days
after the diminishment becomes effective; or, if Employee is ordered to relocate
permanently to any location outside the Chicago metropolitan area and employee
declines and is terminated.
Employee and TSC now agree to amend the Change in Control provision of his
Employment Agreement (paragraph two of Section 3.) by inserting the following
sentence after the first sentence in paragraph two: "Notwithstanding anything
to the contrary in any of Employee's stock option agreements, Employee's
unvested shares at option shall vest automatically upon a Change in Control."
Technology Solutions Company Paul R. Peterson
By: /s/ JOHN T. KOHLER /s/ PAUL R. PETERSON
-------------------
Position: CEO
------
<PAGE>
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
Technology Solutions Company, doing business as TSC, and Timothy P.
Dimond ("Employee") enter into this Employment Agreement ("Agreement") as of
April 28, 1999.
In consideration of the agreements and covenants contained in this
Agreement, TSC and Employee agree as follows:
1. Employment Duties: TSC shall employ Employee as Senior Vice President
and Chief Financial Officer. Employee shall have such responsibilities, duties
and authority as the Chief Executive Officer may reasonably designate. The
Chief Executive Officer may from time to time expand or contract such duties and
responsibility and may enhance but not diminish Employee's title or position.
Employee shall perform faithfully the duties assigned to him to the best of his
ability and shall devote his full and undivided business time and attention to
the transaction of TSC's business.
2. Term of Employment: The term of employment covered by this Agreement
shall commence as of the effective date of this Agreement and continue until
terminated pursuant to Section 3 below.
3. Termination: TSC may terminate Employee's employment and this
Agreement for any reason upon giving Employee 90 days notice of termination.
TSC may make the termination effective at any time within the 90 day notice
period. TSC must, however, continue Employee's normal salary, bonus, and health
insurance benefits for a period of one year following the effective date of the
termination unless Employee is terminated for Serious Misconduct. TSC may
terminate Employee's employment and this Agreement immediately without notice
and with no salary and benefit continuation if Employee engages in "Serious
Misconduct". "Serious Misconduct" means embezzlement or misappropriation of
corporate funds, other acts of dishonesty, significant activities materially
harmful to TSC's reputation, willful refusal to perform or substantial disregard
of Employee's assigned duties (including, but not limited to, refusal to travel
or work the requested hours), or any significant violation of any statutory or
common law duty of loyalty to TSC.
If following a Change in Control (which is defined as (i) the acquisition by any
individual, entity or group, of beneficial ownership (within the meaning of Rule
13 d-3 promulgated under the Securities Exchange Act of 1934) of 40% or more of
the outstanding shares of the common stock of TSC; (ii) the approval of the
stockholders of TSC of a merger, where immediately after the merger, persons who
were the holders of a majority of TSC's
<PAGE>
outstanding common stock immediately prior to the merger fail to own at least a
majority of the outstanding common stock of the surviving entity in
substantially the same proportions as their holdings of TSC common stock
immediately prior to the merger; (iii) the sale of substantially all the assets
of TSC other than to a corporation in which more that 60% of the outstanding
shares are beneficially owned by the individuals and entities who are the
beneficial owners of the Company stock prior to the acquisition, or (iv) the
naming of a new CEO), Employee's title, position, duties, or salary is
diminished and Employee resigns within 90 days after the diminishment becomes
effective, or if Employee is ordered to relocate permanently to any location
outside of the Chicago metropolitan area and employee declines and is
terminated, Employee shall be entitled to Employee's normal salary, bonus, and
health insurance benefits for a one-year period following his resignation or
termination.
Notwithstanding anything to the contrary in any of Employee's stock option
agreements, Employee's unvested TSC shares at option shall vest automatically
upon a Change in Control.
If Employee dies or becomes permanently disabled and unable to continue to work
at TSC, TSC must continue Employee's normal salary, bonus, and health insurance
benefits for a period of one year following the date of his death or his
permanent disability.
Employee may terminate employment upon giving TSC 90 day notice. Upon receiving
notice, TSC may waive its rights under this paragraph and make Employee's
resignation effective immediately or anytime before the 90 day notice period
ends.
4. Salary: As compensation for his services, TSC shall pay Employee a
base salary in the amount listed in Exhibit A to this Agreement. Employee's base
salary shall be subject to annual review and may, at the discretion of TSC's
management, be increased from that listed in Exhibit A according to Employee's
responsibilities, capabilities and performance during the preceding year.
5. Bonuses: TSC may elect to pay Employee annual bonuses. Payment of
such bonuses, if any, shall be at the sole discretion of TSC.
6. Employee Benefits: During the employment period, Employee shall be
entitled to participate in such employee benefit plans, including group pension,
life and health insurance and other medical benefits, and shall receive all
other fringe benefits, as TSC may make available to its Vice Presidents.
7. Business Expenses: TSC shall reimburse Employee for all reasonable
and necessary business expenses incurred by Employee in performing his duties.
Employee shall provide TSC with supporting documentation sufficient to satisfy
reporting requirements of the Internal Revenue Service and TSC. TSC's
determination as to reasonableness and necessary shall be final.
2
<PAGE>
8. Noncompetition and Nondisclosure: Employee acknowledges that the
successful development and marketing of TSC's professional services and products
require substantial time and expense. Such efforts generate for TSC valuable
and proprietary information ("confidential information") which gives TSC a
business advantage over others who do not have such information. Confidential
information of TSC and its clients and prospects includes, but is not limited
to, the following: business strategies and plans; proposals; deliverables;
prospects and customer lists; recruiting prospects and employee lists,
methodologies; training materials; and computer software. Employee acknowledges
that during the course of his employment, he will obtain knowledge of such
confidential information. Accordingly, Employee agrees to undertake the
following obligations which he acknowledges to be reasonably designed to protect
TSC's legitimate business interests without unnecessarily or unreasonably
restricting Employee's post-employment opportunities:
(a) Upon termination of employment for any reason, Employee shall return
all TSC property, including but not limited to computer programs, files, notes,
records, charts, or other documents or things containing in whole or in part any
of TSC's confidential information;
(b) During the course of his employment and subsequent to termination,
Employee agrees to treat all such information as confidential and to take all
necessary precautions against disclosure of such information to third parties
during and after Employee's employment with TSC. Employee shall refrain from
using or disclosing to any person, without the prior written approval of TSC's
Chief Executive Officer any confidential information unless at that time the
information has become generally and lawfully known to TSC's competitors;
(c) Without limiting the obligations of paragraph 8(b), Employee shall
not, for a period of one year following his termination for any reason, for
himself or as an agent, partner or employee of any person, firm or corporation,
engage in the practice of consulting or related services for any client of TSC
for whom Employee performed services, or prospective TSC client to whom Employee
submitted, or assisted in the submission of a proposal during the two year
period preceding his termination;
(d) During a one year period immediately following Employee's
termination for any reason, Employee shall not induce or assist in the
inducement of any TSC employee away from TSC's employ or from the faithful
discharge of such employee's contractual and fiduciary obligations to serve
TSC's interests with undivided loyalty;
(e) For one year following his termination for any reason, Employee
shall keep TSC currently advised in writing of the name and address of each
business organization for which he acts as agent, partner, representative or
employee.
9. Remedies: Employee recognizes and agrees that a breach of any or all
of the provisions of paragraph 8 will constitute immediate and irreparable harm
to TSC's business advantage, including but not limited to TSC's valuable
business relations, for
3
<PAGE>
which damages cannot be readily calculated and for which damages are an
inadequate remedy. Accordingly, Employee acknowledges that TSC shall therefore
be entitled to an order enjoining any further breaches by the Employee. Employee
agrees to reimburse TSC for all costs and expenses, including reasonable
attorneys' fees, incurred by TSC in connection with the enforcement of its
rights under any provision of this Agreement.
10. Intellectual Property: During the employment period, Employee shall
disclose to TSC all ideas, inventions and business plans which he develops
during the course of his employment with TSC which relate directly or indirectly
to TSC's business, including but not limited to any computer programs,
processes, products or procedures which may, upon application, be protected by
patent or copyright. Employee agrees that any such ideas, inventions or
business plans shall be the property of TSC and that Employee shall at TSC's
request and cost, provide TSC with such assurances as is necessary to secure a
patent or copyright.
11. Assignment: Employee acknowledges that the services to be rendered
pursuant to this Agreement are unique and personal. Accordingly, Employee may
not assign any of his rights or delegate any of his duties or obligations under
this Agreement. TSC may assign its rights, duties or obligations under this
Agreement to a purchaser or transferee of all, or substantially all, of the
assets of TSC.
12. Notices: All notices shall be in writing, except for notice of
termination which may be oral if confirmed in writing within 14 days. Notices
intended for TSC shall be sent by registered or certified mail addressed to it
at 205 North Michigan Avenue, 15th Floor, Chicago, Illinois 60601 or its current
principal office, and notices intended for Employee shall be either delivered
personally to his or sent by registered or certified mail addressed to his last
known address.
13. Entire Agreement: This Agreement constitutes the entire agreement
between TSC and Employee. Neither Employee nor TSC may modify this Agreement by
oral agreements, promises or representations. The parties may modify this
Agreement only by a written instrument signed by the parties.
14. Applicable Law: This Agreement shall be governed by and construed in
accordance with the laws of the State of Illinois.
15. Mediation of Disputes: Neither party shall initiate arbitration or
other legal proceedings (except for any claim in equity under Sections 8(b),
8(c), or 8(d) of this Agreement), against the other party, or, in the case of
TSC, any of its directors, officers, employees, agents, or representatives,
relating in any way to this Agreement, to Employee's employment with TSC, the
termination of his employment or any or all other claims that one party might
have against the other party until 30 days after the party against whom the
claim[s] is made ("respondent") receives written notice from the claiming party
of the specific nature of any purported claim and the amount of any purported
damages. Employee and TSC further agree that if respondent submits the claiming
party's claim to the Center for Public Resources, 680 Fifth Avenue, New York,
4
<PAGE>
New York 10019, for nonbinding mediation prior to the expiration of such 30 day
period, the claiming party may not institute arbitration or other legal
proceedings against respondent until the earlier of a) the completion of
nonbinding mediation efforts, or b) 90 days after the date on which the
respondent received written notice of the claimant's claim.
16. Binding Arbitration: Employee and TSC agree that all claims or
disputes relating to his employment with TSC or the termination of such
employment, and any and all other claims that Employee might have against TSC,
any TSC director, officer, employee, agent, or representative, and any and all
claims or disputes that TSC might have against Employee (except for any claim in
equity under Sections 8(b), 8(c), or 8(d) of this Agreement) shall be resolved
under the Expedited Commercial Rules of the American Arbitration Association.
If either party pursues a claim and such claim results in an Arbitrator's
decision, both parties agree to accept such decision as final and binding.
17. Severability: Whenever possible, each provision of this Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
18. Employee acknowledges that he has read, understood and accepts the
provisions of this Agreement.
Technology Solutions Company Timothy P. Dimond
By: /s/ JOHN T. KOHLER /s/ TIMOTHY P. DIMOND
-------------------------------
Position:_________________________ Position: Senior Vice President and
Chief Financial Officer
Date:____________________________ Date: 4/28/99
-------
5
<PAGE>
EXHIBIT A
---------
EMPLOYEE: Timothy P. Dimond
POSITION: Senior Vice President and Chief Financial Officer
BASE SALARY: $240,000
EFFECTIVE DATE: April 28, 1999
/s/ TIMOTHY P. DIMOND
Timothy P. Dimond
4/28/99
--------
Date
/s/ JOHN T. KOHLER
----------------------------
Technology Solutions Company
_____________________________
Date
6
<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT AMENDMENT
Technology Solutions Company ("TSC") and Timothy P. Dimond ("Employee")
enter into this amendment to his Employment Agreement as of October 1, 1999.
WHEREAS, on April 28, 1999 in conjunction with Employee's promotion to
Chief Financial Officer TSC and Employee entered into an employment agreement
consistent with his new position ("Employment Agreement").
WHEREAS, the Employment Agreement contains a Change in Control provision
which entitles Employee to receive his salary, bonus, and health insurance
benefits for a one year period if following a Change in Control his title,
position, duties, or salary is diminished and Employee resigns within 90 days
after the diminishment becomes effective; or, if Employee is ordered to relocate
permanently to any location outside the Chicago metropolitan area and employee
declines and is terminated.
Employee and TSC now agree to amend the Change in Control provision of his
Employment Agreement (paragraph two of Section 3.) by inserting the following
sentence after the first sentence in paragraph two: "Notwithstanding anything
to the contrary in any of Employee's stock option agreements, Employee's
unvested shares at option shall vest automatically upon a Change in Control."
Technology Solutions Company Timothy P. Dimond
By: /s/ JOHN T. KOHLER /s/ TIMOTHY P. DIMOND
------------------------
Position: CEO
------------------
<PAGE>
EXHIBIT 10.18
-------------
SHARED SERVICES AGREEMENT
by and between
TECHNOLOGY SOLUTIONS COMPANY
and
eLOYALTY CORPORATION
Dated as of February 15, 2000
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
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............................................................ 4
SECTION 3. Performance of Services by TSC.................................. 4
3.1 General......................................................... 5
3.2 Standard of Care................................................ 5
3.3 Service Modifications........................................... 5
3.4 Compliance with Law............................................. 6
3.5 Audit........................................................... 6
SECTION 4. Provision of eLoyalty Information............................... 7
SECTION 5. Fees............................................................ 7
5.1 General......................................................... 7
5.2 Sales Taxes..................................................... 7
5.3 License Fees.................................................... 7
5.4 Cap on Fees..................................................... 7
SECTION 6. Invoicing and Payment........................................... 7
SECTION 7. Independence.................................................... 8
SECTION 8. Nonexclusivity.................................................. 8
SECTION 9. Confidentiality................................................. 8
9.1 TSC Information................................................. 8
9.2 eLoyalty Information............................................ 9
9.3 Security........................................................ 9
9.4 General......................................................... 9
SECTION 10. Termination..................................................... 10
10.1 Grounds for Termination......................................... 10
10.2 Procedures on Termination....................................... 10
10.3 Termination Costs............................................... 10
SECTION 11. Limitation of Liability and Remedy.............................. 10
11.1 Damages......................................................... 10
11.2 eLoyalty's Exclusive Remedies................................... 11
11.3 TSC's Exclusive Remedies........................................ 11
11.4 Affiliates...................................................... 12
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 12. Force Majeure................................................... 12
SECTION 13. Assignment...................................................... 12
13.1 Assignment with Consent......................................... 12
13.2 Assignment in Event of Acquisition.............................. 12
SECTION 14. Indemnification and Insurance................................... 12
14.1 TSC's Obligation................................................ 12
14.2 eLoyalty's Obligation........................................... 13
14.3 Third-Party Claims.............................................. 13
14.4 Insurance....................................................... 15
SECTION 15. Disputes........................................................ 15
15.1 Agreement to Arbitrate.......................................... 15
15.2 Escalation and Mediation........................................ 15
15.3 Procedures for Arbitration...................................... 16
15.4 Arbitrator...................................................... 16
15.5 Hearings........................................................ 17
15.6 Discovery and Certain Other Matters............................. 17
15.7 Certain Additional Matters...................................... 18
15.8 Law Governing Arbitration Procedures............................ 19
15.9 Choice of Forum................................................. 19
SECTION 16. Miscellaneous Provisions........................................ 19
16.1 Notices......................................................... 19
16.2 Entire Agreement................................................ 20
16.3 Choice of Law................................................... 20
16.4 Amendment; Waiver............................................... 20
16.5 Severability.................................................... 20
16.6 Relationship of the Parties..................................... 20
16.7 Survival........................................................ 20
16.8 Counterparts.................................................... 20
16.9 Records Retention............................................... 21
16.10 Beneficiaries................................................... 21
</TABLE>
-ii-
<PAGE>
SHARED SERVICES AGREEMENT
This Agreement is made as of February 15, 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.
(iii) "Agreement" means this Shared Services Agreement dated as of
---------
February 15, 2000 including all Schedules attached hereto.
<PAGE>
(iv) "Arbitration Act" shall mean the United States Arbitration Act,
---------------
9 U.S.C. (S)(S) 1-14, as the same may be amended from time to time.
(v) "Change in Control" shall mean (i) the acquisition by any
-----------------
individual, entity or group, of beneficial ownership (within the meaning of Rule
13d-3 promulgated under the Securities Exchange Act of 1934) of 40% or more of
the outstanding shares of the common stock of either party; (ii) the approval of
the stockholders of either party of a merger, where immediately after the
merger, persons who were the holders of a majority of that party's outstanding
common stock immediately prior to the merger fail to own at least a majority of
the outstanding common stock of the surviving entity in substantially the same
proportions as their holdings of that party's common stock immediately prior to
the merger; or (iii) the sale of all or substantially all the assets of a party
other than to a corporation more than 60% of the outstanding shares of which are
beneficially owned by the individuals and entities who were the beneficial
owners of the party's stock prior to the asset sale.
(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 December
31, 1999. Cost shall not include any Costs associated with William H. Waltrip,
Jack Hayden or John T. Kohler, including Costs associated with their direct
support personnel.
(vii) "Exchange Act" shall mean the Securities Exchange Act of 1934,
------------
as amended.
(viii) "Fully Burdened Cost" shall mean all direct Costs allocable to
-------------------
the provision of any Service without regard to whether the Service is provided
to eLoyalty or to TSC. 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 401 k match and FUI, SUI,
OASDI, and Medicare) and any stay bonus or Severance Pay paid.
(ix) "Governmental Authority" shall mean any foreign, federal,
----------------------
state, local or other government, statutory or 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, administrator 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.
---
-2-
<PAGE>
(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 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;
-3-
<PAGE>
(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.
----
(a) General. The initial Term of this Agreement shall begin on the
-------
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.
(b) Extension Period Information Systems Services. eLoyalty may, for
---------------------------------------------
the period from July 1, 2000 up to December 31, 2000 (the "Extension Period"),
----------------
choose to receive the Extension Period Information Systems Services described in
Schedule 2 (V) (iii), (iv), and (vii) so long as TSC is notified in writing by
April 30, 2000 of eLoyalty's decision to extend. If eLoyalty chooses to
terminate the extension services prior to December 31, 2000 it must provide 30
days prior written notice of its decision to terminate. During the Extension
Period, unless otherwise agreed to by both parties, TSC will have no obligation
to provide any services other than those identified in Schedule 2 (V) (iii),
(iv), and (vii). TSC's provision of the Extension Period Information Systems
Services will be governed by the terms of this Agreement.
SECTION 3. Performance of Services by TSC.
------------------------------
-4-
<PAGE>
3.1 General. From time to time, beginning on the Effective Date, TSC
-------
will, subject to Section 3.2(c) and Section 5.3, 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, 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 Affiliates. 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
-5-
<PAGE>
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.
-------------------
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. Such agreement shall establish 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.
-6-
<PAGE>
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.
----------
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 is required to obtain a consent or license to
------------
permit it to use any intellectual property for the provision of Services to
eLoyalty, TSC will, together with eLoyalty, use reasonable efforts to obtain
such consent or license. eLoyalty shall be solely responsible for any consent or
license fees required to be paid. TSC will have no obligation to provide
Services requiring the use of such intellectual property if the consent or
license is required and eLoyalty is not able, for any reason, to obtain the
necessary consent or license.
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. Any license or consent
fees payable pursuant to Section 5.3 and any fees charged for the provision of
-----------
the Extension Period Information Systems Services shall not be subject to this
Section 5.4.
- -----------
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. 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 received of
each such statement hereunder.
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
-7-
<PAGE>
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 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
-8-
<PAGE>
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 connection with 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;
(ii) 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;
(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 February
15, 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 disclosures required by
---------
law; provided, however, that each Party will use reasonable efforts to notify
-------- -------
the other, prior to making any such
-9-
<PAGE>
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 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
-10-
<PAGE>
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 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 liabilities 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 performance 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 available under applicable law; and
(v) the right to terminate this Agreement for material breach as set
forth in Section 10.
----------
-11-
<PAGE>
11.4 Affiliates. The provisions of Sections 11.1 - 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 disturbances 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 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
-12-
<PAGE>
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 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 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.
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<PAGE>
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 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, proceeding
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 Indemnified 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.
----------
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
-14-
<PAGE>
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.
------------
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.
-15-
<PAGE>
(b) In the event that a dispute, controversy or claim is not resolved
pursuant to subsection (a) of Section 15.2, the Parties agree to submit the
------------
matter to mediation. 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. 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. 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) If the dispute, controversy, or claim is not resolved through
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 having to satisfy the Section 15.2 requirements. 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 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.
----------
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<PAGE>
(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 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
-17-
<PAGE>
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 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
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<PAGE>
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
served 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.
------------------------
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:
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<PAGE>
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
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 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.
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.
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<PAGE>
16.9 Records Retention. Each Party will retain all information obtained or
-----------------
created in the course of performance hereunder for five years from the Effective
Date.
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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<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
signed by their authorized representatives as of the Effective Date.
TECHNOLOGY SOLUTIONS COMPANY
By: /s/ WILLIAM H. WALTRIP
William H. Waltrip
Chairman of the Board of Directors
eLOYALTY CORPORATION
By: /s/ TIMOTHY J. CUNNINGHAM
Timothy J. Cunningham
Chief Financial Officer, Secretary and
Treasurer
Signature Page
to the
Shared Services Agreement
<PAGE>
EXHIBIT A
LIST OF MEDIATORS
-----------------
1. Hon. Michael B. Getty (Ret.)
2. Hon. Mel R. Jiganti (Ret.)
3. William F. Hartgering
<PAGE>
EXHIBIT 21
Technology Solutions Company
Subsidiaries of the Company
The following are all the subsidiaries of the Registrant and are included in its
audited consolidated financial statements filed with its Annual Report on Form
10-K for the year ended December 31, 1999.
Place of
Subsidiary (Year Organized or Acquired) Incorporation
----------------------------------------------------------- ---------------
Technology Solutions Company de Mexico S.A. de C.V. (1995) Mexico
TSC Europe (U.K.) Ltd (1999) England
TSC South America, Inc. (1996) Delaware
TSC Colombia, Inc. (1996) Delaware
TSC Latin America, Inc. (1996) Delaware
TSC Colombia S.A. (1996) Colombia
Goalsetters, Inc. (1996) Delaware
OrTech Solutions Company (1996) Delaware
TSC Asia, Inc. (1997) Delaware
Technology Solutions Company Brasil LTDA (1997) Brazil
HRM Resources, Inc. (1997) New York
TSC Europe (France) SARL (1999) France
Go Source, Inc. (1997) Delaware
Technology Solutions Company (TSC) Pte. Ltd. Singapore
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-63057), (No. 333-31387), (No. 33-63612), (No.
33-83434), (No. 33-83436) and (No. 33-98068) and the Prospectus constituting
part of the Registration Statement on Form S-3 (No. 333-33671) of Technology
Solutions Company of our report dated February 15, 2000 appearing in the
Technology Solutions Company Report on Form 10-K for the year ended December 31,
1999.
/s/ PricewaterhouseCoopers LLP
March 23, 2000
Chicago, Illinois
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