-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UhVjALHvDX6JdpHNXu/kMRMQtl1OZOJ26f1wc7gsUsdg9n+dZEEaVwJllEzx4/W5 7/2u8cAXL/kXwocB6hi5/Q== 0000950137-01-000838.txt : 20010321 0000950137-01-000838.hdr.sgml : 20010321 ACCESSION NUMBER: 0000950137-01-000838 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 20001230 FILED AS OF DATE: 20010320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELOYALTY CORP CENTRAL INDEX KEY: 0001094348 STANDARD INDUSTRIAL CLASSIFICATION: [9995] IRS NUMBER: 364304577 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27975 FILM NUMBER: 1572088 BUSINESS ADDRESS: STREET 1: 150 FIELD DRIVE SUITE 250 CITY: LAKE FOREST STATE: IL ZIP: 60045 BUSINESS PHONE: 3122284500 MAIL ADDRESS: STREET 1: 205 NORTH MICHIGAN AVENUE, SUITE 1500 CITY: CHICAGO STATE: IL ZIP: 60601 10-K 1 c60662e10-k.txt ANNUAL REPORT 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (MARK ONE) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 30, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 0-27975 eLoyalty Corporation (Exact Name of Registrant as Specified in Its Charter) Delaware 36-4304577 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 150 Field Drive, Suite 250 Lake Forest, Illinois 60045 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (847) 582-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, par value $0.01 per share Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No _ 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 Common Stock held by non-affiliates of the registrant as of March 12, 2001 (based upon the closing price per share of registrant's Common Stock on March 12, 2001 as reported by the NASDAQ National Market System) was approximately $147,043,154. The number of shares of the registrant's Common Stock, $0.01 par value per share, outstanding as of March 12, 2001 was 49,959,740. DOCUMENTS INCORPORATED BY REFERENCE Portions of eLoyalty's Annual Report to Stockholders for the fiscal year ended December 30, 2000 are incorporated herein by reference in Parts I, II and IV where indicated. Portions of eLoyalty's Proxy Statement for its 2001 Annual Meeting of Stockholders, to be filed within 120 days after the end of eLoyalty's fiscal year, are incorporated herein by reference into Part III where indicated. 2 TABLE OF CONTENTS PART I
Item Page - ---- ---- 1. Business................................................................... 1 2. Properties................................................................. 5 3. Legal Proceedings.......................................................... 5 4. Submission of Matters to a Vote of Security Holders........................ 5 4A. Executive Officers of the Company.......................................... 5 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 7 6. Selected Financial Data.................................................... 8 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 7A. Quantitative and Qualitative Disclosures about Market Risk................. 8 8. Financial Statements and Supplementary Data................................ 8 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 8 PART III 10. Directors and Executive Officers of the Registrant......................... 8 11. Executive Compensation..................................................... 8 12. Security Ownership of Certain Beneficial Owners and Management............. 8 13. Certain Relationships and Related Transactions............................. 9 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 9 Signatures................................................................. 10 Report of Independent Accountants on Financial Statement Schedule.......... F-1 Schedule II -- Valuation and Qualifying Accounts........................... F-2 Exhibit Index.............................................................. I-1
i 3 PART I ITEM 1. BUSINESS GENERAL This Annual Report on Form 10-K (this "Form 10-K") contains forward-looking statements that are based on current management expectations, forecasts and assumptions. These include, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," "plans," "intends," "projects," "future" and similar expressions, references to plans, strategies, objectives and anticipated future performance, and other statements that are not strictly historical in nature. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. Such risks, uncertainties and other factors that might cause such a difference include, without limitation, those noted under Factors That May Affect Future Results or Market Price of Stock included elsewhere in this Form 10-K. Readers should also carefully review the risk factors described in other documents that eLoyalty Corporation files from time to time with the SEC. Readers are cautioned not to place undue reliance on forward-looking statements. They reflect opinions, assumptions and estimates only as of the date they are made, and eLoyalty Corporation undertakes no obligation to publicly update or revise any forward-looking statements in this report, whether as a result of new information, future events or circumstances or otherwise. INTRODUCTION eLoyalty Corporation (together with its subsidiaries "eLoyalty," "we" or the "Company") was incorporated in Delaware in May 1999 as a wholly-owned subsidiary of Technology Solutions Company ("TSC"). The Company's business was initiated in May 1994 as a call center business unit within TSC. This unit within TSC was subsequently renamed the Enterprise Customer Management ("ECM") business unit, and later the eLoyalty division. Since its inception and under its various names, this business unit has developed management consulting and technology capabilities in an effort to lead the development of, and stay at the forefront of, the customer relationship management or "CRM" market, with the specific focus on incorporating new technologies into CRM solutions. While the growth of the Company's business primarily was organic during its ownership by TSC, in 1997 TSC acquired and incorporated into its ECM unit The Bentley Group, a business and operations consulting firm, for total consideration of $17.5 million, and Geising International, a German-based business consulting firm, for $1.4 million. Further, in 1996, TSC acquired Aspen Consultancy Ltd., a privately owned consulting firm based in the United Kingdom for $3.4 million. The purpose of each of these acquisitions was to expand the range of the business's competencies in the CRM space in order to more effectively serve its clients' needs. In May 1999, TSC's ECM business unit was renamed eLoyalty and a new subsidiary by the same name formed in anticipation of a spin-off of eLoyalty. In February 2000, TSC transferred the businesses of its eLoyalty division to the Company and declared a dividend, payable to the stockholders of record of TSC, based upon a ratio of one share of the Company's common stock, par value of $0.01 per share (the "Common Stock"), for every one share of TSC Common Stock held. Effective February 15, 2000, all of the outstanding shares of Common Stock were distributed to TSC's stockholders. eLoyalty became a separate publicly traded company as of the same date. Our executive offices are located at 150 Field Drive, Suite 250, Lake Forest, Illinois 60045 (telephone number 847-582-7000). 1 4 OVERVIEW eLoyalty is a global management consulting and systems integration company focused exclusively on building customer loyalty. We offer a range of CRM-related services including evaluating and developing business strategy, designing and implementing technical architecture, selecting, implementing and integrating appropriate CRM software applications and providing ongoing support for multi-vendor systems. We refer to the solutions that we provide our clients to enhance their customer relations as "loyalty solutions," in that they are designed to create long-term customer loyalty measured by factors including an increase in repeat sales, reduction of the cost of sales and increase in customer referrals. We help companies identify and measure the impact of improved customer relationships on profitability. Our customized solutions align many isolated customer contact channels, including the Internet, e-mail, call centers, field sales and field service. The solutions we design and implement enable our clients to sustain higher levels of success with their customers. Our revenues are generated primarily from professional services, which are billed principally on a time and materials basis and, occasionally, on a fixed fee basis. These services generally include the following: - Evaluating our clients' efficiency and effectiveness in handling customer interactions. We capture and analyze the performance measures of each customer interaction, including the number of legacy systems used to handle the situation, interaction time, reason for interaction and actions taken to resolve any customer issues. - Assisting our clients in identifying their most valuable customers through detailed segmentation of their customer base. This allows our clients to target high-value customers to receive special offers or service levels. - Performing detailed financial analysis to calculate the expected return on investment for the implementation of various loyalty solutions. This process helps our clients establish goals, alternatives and priorities and assigns client accountability throughout resulting projects. - Selecting the appropriate loyalty solution for our client. The implementation of our loyalty solutions can lead to significant organizational, structural, operational and staffing changes and we assist our clients in determining the steps they need to take in this regard. - Implementing the technical aspects of our loyalty solutions, including the integration of a variety of software applications from third-party vendors and our own software. In addition, we generate revenues from licensing of our proprietary Loyalty Suite(TM) software, which ties together the critical components of a loyalty solution. This software provides sophisticated real-time information regarding a customer's various contacts with the client's organization, allowing the client to handle each customer interaction in a consistent manner throughout the enterprise. Other sources of revenue include maintenance and support of our solutions, the provision of purpose-built hosted solutions and services relating to e-PROFILE(TM) internet banking products. These licensing and "managed services" offerings, in the aggregate, accounted for less than 10% of our revenues in each of the last three years. Information regarding domestic and foreign revenues and long-term assets is incorporated herein by reference to Note 14 to the Consolidated Financial Statements of eLoyalty, filed as Exhibit 13.1 to this Annual Report on Form 10-K. INTELLECTUAL PROPERTY RIGHTS A majority of our clients require that we grant to them all proprietary and intellectual property rights with respect to the original work product resulting from our services, including the intellectual property rights to any custom software developed for them. While each grant of proprietary and intellectual property rights limits our ability to reuse work product components with other clients, it is our practice to retain the rights in the underlying core intellectual property on which it is based, including methodologies, workplans and software. 2 5 We regard these software and methodologies as proprietary and intend to protect our rights, where appropriate, with registered copyrights, patents, registered trademarks, trade secret laws and contractual restrictions on disclosure and transferring title. Further, in a limited number of situations, we have obtained, and will continue to attempt to obtain, an ownership interest or a license from our clients to permit us to market custom software to other clients. These arrangements may be nonexclusive or exclusive, and licensors to us may retain the right to sell products and services that compete with those of eLoyalty. In addition, to protect our proprietary information, we rely upon a combination of trade secret and common law, employee nondisclosure policies and third-party confidentiality agreements. SEASONALITY The Company typically experiences seasonal revenue and earnings fluctuations globally in the fourth quarter, as the total number of billing days is reduced due to holidays. Additionally, our European operations historically have experienced decreased revenues and earnings in the third quarter because of extended vacation periods. These decreases, while not significant in the past, may increase in the future, especially as we expand our international operations. CLIENTS During fiscal 2000, our five and twenty largest clients accounted for 37.7% and 66.2%, respectively, of our revenues. Only one client, Agilent Technologies, accounted for more than 10% of our total revenues during the year, contributing 15% of total annual revenues. For the fiscal year ended December 30, 2000, 44 clients each accounted for over $1 million of revenues. While the Company's focus, consistent with the focus of its services, is on developing long-term relationships with its clients, the nature of its business is such that its activities with specific clients will fluctuate periodically as individual projects are initiated and progress through their life span. As a result, the percentage of revenue contributed by any particular client can be expected to vary, perhaps significantly, among periods. COMPETITION We operate in a highly competitive and rapidly changing market and compete with a variety of organizations that offer services similar to those we offer. The market includes a variety of participants that compete with us at various levels of our business, including strategic consulting firms, systems integrators, web-consulting firms, online agencies and firms that provide both consulting and systems integration services. In our opinion, few competitors offer the full range of CRM services that we can provide. We believe that our principal competitors are the "Big 5" consultancies: Accenture, Cap Gemini Ernst & Young, Deloitte Consulting, KPMG Consulting and PricewaterhouseCoopers. Many of our competitors have longer operating histories, more clients, longer relationships with their clients, greater brand or name recognition and significantly greater financial, technical, marketing and public relations resources than we do. As a result, our competitors may be in a better position to respond quickly to new or emerging technologies and changes in client requirements. They may also develop and promote their products and services more effectively than we do. New market entrants also pose a threat to our business. Existing or future competitors may develop or offer solutions that are comparable or superior to ours at a lower price. In addition, several competitors have announced their intention to offer a broader range of services than they currently provide. RESEARCH AND DEVELOPMENT The market in which we operate is constantly evolving and we believe that it is necessary to invest in research and development to remain competitive. In 1998, we formally established our Loyalty Lab(TM) in Austin, Texas as a center for our research and development group. Its activities include the research and evaluation of emerging technologies, working with technology partners to decrease the time and difficulty of integrating various CRM software products, developing and enhancing our Loyalty Suite(TM) software, 3 6 acting as a center for demonstrating loyalty solutions to our current and prospective clients and training our employees on our solutions. Our research and development expenditures for the years ended December 30, 2000, December 31, 1999 and December 31, 1998 were approximately $9.3 million, $5.6 million and $3.9 million, respectively. EMPLOYEES As of December 30, 2000, eLoyalty employed 1,018 persons. Of the 1,018 employees, 689 were located in North America, with the balance in Europe and Australia. As our business consists primarily of the provision of professional services, it is inherently people intensive. We believe we have a satisfactory relationship with our employees. Our average annualized turnover of billable employees was 22% in 2000. None of our employees is represented by a union. Most of our Vice Presidents and European employees generally have employment agreements requiring three months' notice of termination by us. In addition, the laws and regulations of the foreign countries in which we operate may increase the cost of terminating employees in those countries. We maintain various programs and strategies to retain and recruit employees. FACTORS THAT MAY AFFECT FUTURE RESULTS OR MARKET PRICE OF STOCK Some of the factors that may affect eLoyalty's future results or the market price of its stock and cause or contribute to material differences between actual results and those reflected in forward-looking statements contained in this report include the following: - uncertainties associated with the attraction of new clients, the continuation of existing and new engagements with existing clients and the timing of related client commitments, including potential client delays or deferrals of new engagements or existing project extensions in light of prevailing general economic conditions and uncertainties; - reliance on major clients and suppliers, and maintenance of good relations with key business partners; - management of the risks associated with increasingly complex client projects in general as well as new services offerings, including risks relating to the variability and predictability of the number, size, scope, cost and duration of, and revenues from, client engagements, unanticipated cancellations or deferrals of client projects or follow-on phases of engagements in process, collection of billed amounts, shifts from time and materials-based engagements to alternative pricing or value-based models and variable employee utilization rates, project personnel costs and project requirements; - management of growth, expansion into new geographic and market areas and development and introduction of new services offerings, including the timely and cost-effective implementation of enhanced operating, financial and other infrastructure systems and procedures; - challenges in attracting, training, motivating and retaining highly skilled management, strategic, technical, product development and other professional employees in a competitive information technology labor market; - continuing intense competition in the information technology services industry generally and, in particular, among those focusing on the provision of CRM services and software, including both firms with significantly greater financial and technical resources than eLoyalty and new entrants; - the rapid pace of technological innovation in the information technology services industry, including frequent technological advances and new product introductions and enhancements, and the ability to create innovative and adaptable solutions that are consistent with evolving standards and responsive to client needs, preferences and expectations; 4 7 - access in tightening capital and credit markets to sufficient debt and/or equity capital to meet eLoyalty's future operating and financial needs; - protection of eLoyalty's technology, proprietary information and other intellectual property rights or challenges to eLoyalty's intellectual property by third parties; - future legislative or regulatory actions relating to the information technology or information technology services industries; - risks associated with global operations, including those relating to the economic conditions in each country, potential currency exchange and credit volatility, compliance with a variety of foreign laws and regulations and management of a geographically dispersed organization; - the overall demand for CRM services and software and information technology generally; and - the continued impact of the current economic slowdown, as well as other future general business, capital market and economic conditions and volatility. ITEM 2. PROPERTIES. Our principal physical properties consist of our headquarters offices, representing approximately 23,500 square feet of leased office facilities in Lake Forest, Illinois (north of Chicago), and the facilities that house our Loyalty Lab and related offices, comprising approximately 41,000 square feet located in Austin, Texas. We also lease office facilities in other locations throughout the United States, including Atlanta, Georgia, Dallas, Texas, New York, New York, San Francisco, California, and Washington, D.C., and in various international locations, including Toronto (Ontario), Canada, London, England, Frankfurt, Germany, Paris, France and Sydney, Australia. We believe that our leased facilities are appropriate for our current and anticipated business requirements. ITEM 3. LEGAL PROCEEDINGS. As of the date of this report, we are not a party to any pending legal proceedings, other than ordinary routine litigation or other legal proceedings incidental to our business, none of which we believe would constitute material legal proceedings for which disclosure is required under this item. 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 of our fiscal year ended December 30, 2000. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY The following table includes the name, age, current position and term of office of each of eLoyalty's executive officers, as of March 12, 2001.
NAME AGE CURRENT POSITION HELD SINCE - ---- --- ---------------- ---------- Kelly D. Conway* 44 President and Chief Executive Officer 1999 Timothy J. Cunningham 47 Senior Vice President, Chief Financial Officer 1999 and Corporate Secretary
5 8 Craig D. Lashmet 41 Senior Vice President, North American Operations 1999 N. Vaughan Thomas 44 Senior Vice President, International Operations 2000 Jay A. Istvan 41 Senior Vice President, Strategy and Marketing 2001 Jackie L. Hilt 44 Senior Vice President, Employee Loyalty 1999 Christopher J. Danson 33 Senior Vice President, Research and Development 1999 Deidra D. Gold 46 Vice President and General Counsel 2000 Mark D. Kuchel 46 Senior Vice President (Area Practice Leader, East 1999 Region) Robert W. Albo 42 Senior Vice President (Area Practice Leader, West 1999 Region)
* Member of the Board of Directors Except as required by individual employment agreements between executive officers and the Company, there exists no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was elected. Each executive officer serves until his or her successor is elected and qualified or until his or her earlier removal or resignation. The principal business experience of the executive officers for at least the last five years is as follows: Kelly D. Conway has been the President and Chief Executive Officer and a Director of eLoyalty since its incorporation in May 1999. Mr. Conway joined TSC in November 1993 as Senior Vice President, assumed the position of Executive Vice President in July 1995 and became Group President in October 1998. From 1991 until joining TSC, Mr. Conway served as a Partner in the management consulting firm of Spencer, Shenk and Capers. Prior thereto, he held various management positions with Telcom Technologies, a manufacturer of automatic call distribution equipment, including President and Chief Executive Officer from 1989 to 1991, and Vice President of Finance and Marketing from 1984 to 1989. Timothy J. Cunningham has served as eLoyalty's Senior Vice President, Chief Financial Officer and Corporate Secretary since November 1999. From October 1998 until November 1999, he was the Vice President -- Finance and Chief Financial Officer of CTS Corporation, a publicly traded electronics and communications company. Mr. Cunningham was Vice President -- Finance of the Moore Document Solutions division of Moore Corporation from July 1996 until September 1998, and Group Controller for the ConAgra Refrigerated Foods group of ConAgra, Inc. from 1995 to 1996. Craig B. Lashmet has served as eLoyalty's Senior Vice President of Operations from May 1999 until June 2000 and its Senior Vice President, North American Operations since July 2000. From October 1995 until May 1999, Mr. Lashmet was a Senior Vice President of TSC. Prior to joining TSC, he was a Partner with Grant Thornton LLP, an international accounting and consulting firm, where he managed the firm's advanced technology consulting practice for nine years. 6 9 N. Vaughan Thomas has been eLoyalty's Senior Vice President, International Operations since July 2000. From July 1998 until June 2000, Mr. Thomas was a Partner of PricewaterhouseCoopers LLP and, from April 1998 until his departure, a member of the firm's Global Management Consultancy Leadership team, which had responsibility for global strategy and investment management for the firm. Mr. Thomas was a Partner with Coopers & Lybrand UK from 1993 until June 1998, prior to the merger of Coopers & Lybrand with Price Waterhouse, and was the Chairman of the Commerce & Industry Collection of practices from January 1996 until March 1998. Jay A. Istvan has been the Senior Vice President, Strategy and Marketing, of eLoyalty since February 2001. Mr. Istvan was affiliated with The Boston Consulting Group, Inc., a global strategic consulting firm, for more than fourteen years prior to joining eLoyalty. He was a Vice President of Boston Consulting Group from 1993 and was Midwest Regional Leader of its Healthcare Practice from 1997 until joining eLoyalty and Regional Leader of its High Technology and Convergence Practice from 1993 to 1997. Jackie L. Hilt has been eLoyalty's Senior Vice President of Employee Loyalty since May 1999, with responsibility for recruiting and human resources functions with a specific focus on employee relationships. Previously, Ms. Hilt had been with TSC for more than ten years, most recently as the Senior Vice President in charge of its international recruiting organization, a role she assumed in 1994. Christopher J. Danson has been the Senior Vice President, Research and Development, of eLoyalty since May 1999, with current responsibility for its Loyalty Lab in Austin, Texas and its Managed Services offerings (including Loyalty Support(TM), purpose-built hosted solutions and e-PROFILE(TM)). From February 1993 until the time he joined eLoyalty, Mr. Danson held various positions with TSC in its ECM/Call Center practice, including Senior Vice President from September 1998 until May 1999, Vice President from June 1996 until September 1998 and Senior Principal for TSC Europe from June 1995 until June 1996. Deidra D. Gold has served as eLoyalty's Vice President and General Counsel since July 2000. Her former positions include: Counsel and Corporate Secretary of Ameritech Corporation, a publicly traded communications company, from March 1998 through December 1999; Principal (Partner) of Goldberg, Kohn et al, a Chicago law firm, from August 1997 until March 1998; Vice President and General Counsel of Premier Industrial (renamed Premier Farnell) Corporation, a publicly traded electronics and industrial distribution company, from November 1991 to June 1997; and Partner, Jones, Day, Reavis & Pogue, an international law firm, from January 1988 until November 1991. Mark D. Kuchel has been a Senior Vice President of eLoyalty since May 1999 and the Area Practice Leader for the Eastern Region of North America since November, 2000. Prior to such time, Mr. Kuchel had been a Senior Vice President of TSC since March 1996. Robert W. Albo has acted as a Senior Vice President of eLoyalty since May 1999 and the Area Practice Leader for the Western Region of North America since November, 2000. From June 1997 until May 1999, Mr. Albo was a Senior Vice President of TSC. From 1993 until joining TSC, he was associated with Axiom Management Consulting, Inc., a management consulting subsidiary of Cambridge Technology Partners, most recently as a Vice President and Regional Manager, a position he assumed in 1994. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information in "Common Stock Information" on page 23 of eLoyalty's Annual Report to Stockholders is incorporated herein by reference in response to this item. There were approximately 279 owners of record of eLoyalty Common Stock, par value $0.01 per share, as of March 12, 2001. 7 10 ITEM 6. SELECTED FINANCIAL DATA. The information in "Selected Financial Data" and in "Common Stock Information -- Dividends" on pages 22-23 of eLoyalty's 2000 Annual Report to Stockholders is incorporated herein by reference in response to this item. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 24 through 32 of eLoyalty's 2000 Annual Report to Stockholders is incorporated herein by reference in response to this item. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Information relating to market risk is included in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the captions "Qualitative and Quantitative Disclosures about Market Risk" on page 31 of eLoyalty's 2000 Annual Report to Stockholders and is incorporated herein by reference in response to this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Report of Independent Accountants, Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Cash Flows, Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (Loss), and Notes to Consolidated Financials Statements on pages 33 through 50 of eLoyalty's 2000 Annual Report to Stockholders are incorporated herein by reference in response to this item. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT. For information about our executive officers, see "Executive Officers of the Company" included as Item 4A of Part I of this report. The information contained under the captions "Director Election - General" and "Security Ownership of Certain Beneficial Owners and Management --- Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement to be filed by eLoyalty for its 2001 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION. The information under "Director Election - Compensation of Directors" and "Executive Compensation - Summary Compensation Table", "--- Compensation Committee Interlocks and Insider Participation", "--- Option Grants in Fiscal 2000", "--- Option Exercises in Fiscal 2000 and Option Values at December 30, 2000", "--- Option Repricings", "--- Employment Contracts and Employment Termination and Change in Control Arrangements" in the Proxy Statement to be filed by eLoyalty for its 2001 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under the heading "Security Ownership of Certain Beneficial Owners and Management --- Beneficial Ownership Information" in the 8 11 Proxy Statement to be filed by eLoyalty for its 2001 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the caption "Certain Relationships and Related Transactions" in the Proxy Statement to be filed by eLoyalty for its 2001 Annual Meeting of Stockholders is incorporated herein by reference in response to this item. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: (1) Financial Statements. You will find these financial statements as indicated below:
Page ---- Report of Independent Accountants.................................................. * Consolidated Balance Sheets........................................................ * Consolidated Statements of Operations.............................................. * Consolidated Statements of Cash Flows.............................................. * Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (Loss).................................................................. * Notes to Consolidated Financial Statements......................................... *
* Located in our 2000 Annual Report to Stockholders at pages 33 through 50 and incorporated herein by reference. All of the foregoing financial statements, other than the Consolidated Balance Sheets, are for the years ended December 30, 2000 and December 31, 1999, as well as the seven month period June 1, 1998 to December 31, 1998 and the fiscal year ended May 31, 1998. The Consolidated Balance Sheets are as of December 30, 2000 and December 31, 1999. (2) Financial Statement Schedules. We have omitted financial statement schedules other than that listed below because such schedules are not required or applicable. Report of Independent Accountants................................ F-1 Schedule II -- Valuation and Qualifying Accounts................. F-2 (3) The list of exhibits filed with or incorporated by reference into this report is contained in the Exhibit Index to this report on Page I-1, which is incorporated herein by reference. We will furnish to a stockholder, on request, without charge, a copy of this report (including the financial statements and financial statement schedule), as well as our 2000 Annual Report to Stockholders and the Notice of 2001 Annual Meeting and Proxy Statement, portions of which are referred to in and considered part of this report. Copies of our Annual Report to Stockholders will also be available on eLoyalty's web site at www.eloyalty.com. We will furnish any other exhibit to this report at cost. (b) Reports on Form 8-K: eLoyalty did not file any Current Reports on Form 8-K during the fourth quarter of 2000. 9 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on March 19, 2001. eLOYALTY CORPORATION By /s/ KELLY D. CONWAY ------------------------------ Kelly D. Conway President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant in the capacities indicated on this 19th day of March, 2001.
Name Capacity - ---- -------- /s/ KELLY D. CONWAY Director, President and Chief Executive Officer - --------------------------------- (Principal Executive Officer) Kelly D. Conway * - --------------------------------- Chairman of the Board and Director Tench Coxe * - --------------------------------- Director Jay C. Hoag * - --------------------------------- Director John T. Kohler * - --------------------------------- Director Michael J. Murray * - --------------------------------- Director John R. Purcell - --------------------------------- /s/ TIMOTHY J. CUNNINGHAM Senior Vice President, Chief Financial - --------------------------------- Officer and Corporate Secretary Timothy J. Cunningham (Principal Financial and Accounting Officer)
*By: /s/ TIMOTHY J. CUNNINGHAM ---------------------------------------- Timothy J. Cunningham, Attorney-in-Fact 10 13 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of eLoyalty Corporation: Our audits of the consolidated financial statements referred to in our report dated January 30, 2001 appearing in the 2000 Annual Report to Stockholders of eLoyalty Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Chicago, Illinois January 30, 2001 F-1 14 eLoyalty Corporation Schedule II -- Valuation and Qualifying Accounts For the Years Ended December 30, 2000 and December 31, 1999, the Seven-Month Period Ended December 31, 1998 and the Year Ended May 31, 1998 (In thousands)
BALANCE AT BALANCE AT DESCRIPTION OF BEGINNING END OF ALLOWANCE AND RESERVES OF PERIOD ADDITIONS DEDUCTIONS PERIOD - ------------------------------------------ ---------- ---------- ---------- -------- Year ended May 31, 1998 Receivable reserves for potential losses.................... $ 198 $ 531 $ (254) $ 475 Seven month period ended December 31, 1998 Receivable reserves for potential losses.................... $ 475 $ 2,652 $ (489) $2,638 Year ended December 31, 1999 Receivable reserves for potential losses.................... $2,638 $ 2,059 $(2,613) $2,084 Year ended December 30, 2000 Receivable reserves for potential losses.................... $2,084 $ 4,064 $(4,543) $1,605
F-2 15 EXHIBIT INDEX We are including as exhibits to this Annual Report on Form 10-K certain documents that we have previously filed with the SEC as exhibits, and we are incorporating such documents as exhibits herein by reference from the respective filings identified in parentheses below. The management contracts and compensatory plans or arrangements required to be filed as exhibits to this Annual Report on Form 10-K pursuant to Item 14(c) are those listed below as Exhibits 10.14 through 10.30, inclusive. EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ---------------------- 2.1 Form of Reorganization Agreement between Technology Solutions Company ("TSC") and eLoyalty Corporation ("eLoyalty") (included as Exhibit 2.1 to eLoyalty's Registration Statement on Form S-1 (Registration No. 333-94293) (the "S-1")) 3.1 Certificate of Incorporation of eLoyalty, as amended (filed as Exhibit 3.1 to the S-1) 3.2 Certificate of Designation of Series A Junior Participating Preferred Stock of the Company (included as Exhibit 4.2 to Amendment No. 1 to eLoyalty's Registration Statement on Form 8-A (File No. 0-27975) filed with the SEC on March 24, 2000 (the "8-A Amendment")) 3.2 By-Laws of eLoyalty (filed as Exhibit 3.2 to the S-1) 4.1 Rights Agreement, dated as of March 17, 2000, between eLoyalty and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (filed as Exhibit 4.1 to the 8-A Amendment) 10.1 Common Stock Purchase and Sale Agreement, dated as of August 13, 1999, among TSC, eLoyalty Corporation, Sutter Hill Ventures, TCV III (GP), TCV III, L.P., TCV III (Q), L.P. and TCV III Strategic Partners, L.P. (filed as Exhibit 10.3 to the S-1) 10.2 Common Stock Purchase Agreement, dated as of May 26, 2000, among eLoyalty Corporation and TCV IV, L.P., TCV IV Strategic Partners, L.P., TCV III (GP), TCV III (Q), L.P. and TCV III Strategic Partners, L.P. (filed as Exhibit 10.1 to eLoyalty's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 0-27975)) 10.3 Investor Rights Agreement, dated as of May 26, 2000, among eLoyalty Corporation and TCV IV, L.P., TCV IV Strategic Partners, L.P., TCV III (GP), TCV III (Q), L.P. and TCV III Strategic Partners, L.P. (filed as Exhibit 10.2 to eLoyalty's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (File No. 0-27975)) 10.4+ Amendment, dated as of February 12, 2001, to the Investor Rights Agreement, dated as of May 26, 2000, among eLoyalty Corporation and TCV IV, L.P., TCV IV Strategic Partners, L.P., TCV III (GP), TCV III (Q), L.P. and TCV III Strategic Partners, L.P. 10.5+ Amended and Restated Business Loan Agreement, dated as of December 30, 2000, between eLoyalty Corporation and Bank of America, N.A. 10.6 Form of Shared Services Agreement between TSC and eLoyalty (filed as Exhibit 10.5 to the S-1) 10.7 Form of Tax Sharing and Disaffiliation Agreement between TSC and eLoyalty (filed as Exhibit 10.6 to the S-1) 10.8 Form of TSC (Licensor) Intellectual Property License Agreement (filed as Exhibit 10.7 to the S-1) I-1 16 10.9 Form of eLoyalty (Licensor) Intellectual Property License Agreement (filed as Exhibit 10.8 to the S-1) 10.10 Office Lease -- Two Conway Park made as of December 6, 1999 by and between Riggs & Company, a division of Riggs Bank, N.A., as Landlord, and eLoyalty Corporation, as Tenant (filed as Exhibit 10.13 to the S-1) 10.11 River Place Point II Lease Agreement, dated March 17, 2000, by and between Investors Life Insurance Company of North America, as Landlord, and eLoyalty Corporation, as Tenant (filed as Exhibit 10.15 to eLoyalty's Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 0-27975)) 10.12 eLoyalty Ventures, L.L.C. Operating Agreement, dated as of July 21, 2000, by and among Brookside Capital Partners Fund LP, Sutter Hill Ventures L.P., TCV IV, L.P. and TCV Strategic Partners IV, L.P. and eLoyalty Employee Investors, L.L.C. (filed as Exhibit 10.2 to eLoyalty's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 0-27975)) 10.13+ eLoyalty Employee Investors, L.L.C. Operating Agreement, entered into in July 2000, among eLoyalty Employee Investors, L.L.C., eLoyalty Corporation as the initial member and Sarah Faux as the manager. 10.14+ eLoyalty Corporation 1999 Stock Incentive Plan (as Amended and Restated as of February 28, 2001) 10.15+ eLoyalty Corporation 2000 Stock Incentive Plan (as Amended and Restated as of February 28, 2001) 10.16+ 1999 Employee Stock Purchase Plan (as Amended and Restated as of February 28, 2001) 10.17 eLoyalty Corporation Executive Deferred Compensation Plan dated January 1, 2000 (filed as Exhibit 10.14 to the S-1) 10.18+ Summary of Discretionary Cash Bonus Program for Executive Officers 10.19 Employment Agreement, dated as of January 19, 1996, between Kelly D. Conway and TSC (to which eLoyalty has succeeded) (filed as Exhibit 10.9 to the S-1) 10.20 Promissory Note, dated November 12, 1998, by Kelly D. Conway in favor of TSC (filed as Exhibit 10.12 to the S-1) 10.21+ Promissory Note, dated December 15, 1999, by Kelly D. Conway in favor of TSC 10.22 Employment Agreement, dated as of October 20, 1998, between Craig Lashmet and TSC (to which eLoyalty has succeeded) (filed as Exhibit 10.11 to the S-1) 10.23 Employment Agreement, dated as of November 15, 1999, between Timothy J. Cunningham and TSC (to which eLoyalty has succeeded) (filed as Exhibit 10.10 to the S-1) 10.24+ Promissory Note, dated November 19, 1999, of Timothy J. Cunningham in favor of TSC (to which eLoyalty has succeeded) 10.25 Contract of Employment, entered into May 12, 2000, between eLoyalty (UK) Limited and Vaughan Thomas (filed as Exhibit 10.1 to eLoyalty's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 0-27975)) I-2 17 10.26 Form of Loan Note, dated July 1, 2000, of Vaughan Thomas in favor of eLoyalty (UK) Ltd. (filed as Exhibit 10.3 to eLoyalty's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 0-27975)) 10.27+ Employment Agreement, dated as of June 1, 1995, between Christopher J. Danson and TSC (to which eLoyalty has succeeded) 10.28+ Promissory Note, dated September 13, 1999, of Christopher J. Danson in favor of TSC (to which eLoyalty has succeeded), together with the Amendment of such Promissory Note, dated August 31, 1999 10.29+ Promissory Note, dated February 23, 1998, of Chrisopher J. Danson in favor of TSC (to which eLoyalty has succeeded) 10.30 Form of Indemnification Agreement entered into between eLoyalty Corporation and each of Tench Coxe and Jay C. Hoag (filed as Exhibit 10.15 to the S-1) 13.1+ Excerpted portions of eLoyalty Corporation's 2000 Annual Report to its shareowners, which are incorporated in response to various items of this Annual Report on Form 10-K 21.1+ Subsidiaries of eLoyalty Corporation 23.1+ Consent of PricewaterhouseCoopers LLP, Independent Accountants 24.1+ Power of Attorney from Tench Coxe, Director 24.2+ Power of Attorney from Jay C. Hoag, Director 24.3+ Power of Attorney from John T. Kohler, Director 24.4+ Power of Attorney from Michael D. Murray, Director 24.5+ Power of Attorney from John R. Purcell, Director - ---------------- + Filed herewith I-3 EX-10.4 2 c60662ex10-4.txt AMENDMENT TO INVESTOR RIGHTS AGREEMENT 1 EXHIBIT 10.4 AMENDMENT TO INVESTOR RIGHTS AGREEMENT Reference is made to that certain Investor Rights Agreement, dated as of May 26, 2000, by and among eLoyalty Corporation and the persons set forth on the Schedule of Investors attached thereto (the" Agreement"). In accordance with the provisions of Section 20 of the Agreement, the undersigned, constituting the holders of at least a majority of the outstanding Registrable Securities (as defined in the Agreement), agree that Section 5 of the Agreement is hereby amended so that as amended the date specified therein, i.e. February 15, 2001, shall be changed to April 30, 2001. In Witness Whereof, the parties have executed this Amendment to the Agreement as of February 12, 2001. eLoyalty Corporation By:____________________ Name: Title: TCV IV, L.P. a Delaware Limited Partnership By: Technology Crossover Management IV, L.L.C., Its: General Partner By:___________________________________ Name: Robert C. Bensky Title: Attorney in Fact TCV IV STRATEGIC PARTNERS, L.P. a Delaware Limited Partnership By: Technology Crossover Management IV, L.L.C., Its: General Partner By:___________________________________ Name: Robert C. Bensky Title: Attorney in Fact 2 TCV III (GP) a Delaware Limited Partnership By: Technology Crossover Management III, L.L.C., Its: General Partner By:___________________________________ Name: Robert C. Bensky Title: Attorney in Fact TCV III, L.P. a Delaware Limited Partnership By: Technology Crossover Management III, L.L.C., Its: General Partner By:___________________________________ Name: Robert C. Bensky Title: Attorney in Fact TCV III (Q), L.P. a Delaware Limited Partnership By: Technology Crossover Management III, L.L.C., Its: General Partner By:___________________________________ Name: Robert C. Bensky Title: Chief Financial Officer TCV III STRATEGIC PARTNERS, L.P. a Delaware Limited Partnership By: Technology Crossover Management III, L.L.C., Its: General Partner By:___________________________________ Name: Robert C. Bensky Title: Chief Financial Officer EX-10.5 3 c60662ex10-5.txt AMENDED AND RESTATED BUSINESS LOAN AGREEMENT 1 Exhibit 10.5 AMENDED AND RESTATED [BANK OF AMERICA LOGO] BUSINESS LOAN AGREEMENT BANK OF AMERICA, N.A. This Agreement dated as of December 30, 2000, is between BANK OF AMERICA, N.A. (the "Bank") and eLOYALTY CORPORATION (the "Borrower"). 1. LINE OF CREDIT AMOUNT AND TERMS 1.1 LINE OF CREDIT AMOUNT. (a) During the availability period described below, the Bank will provide a line of credit to the Borrower. The amount of the line of credit (the "Commitment") is Ten Million Dollars ($10,000,000). (b) This is a revolving line of credit providing for cash advances and letters of credit. During the availability period, the Borrower may repay principal amounts and reborrow them. (c) Each advance will be for at least One Hundred Thousand Dollars ($100,000), or for the amount of the remaining available line of credit, if less. (d) The Borrower agrees not to permit the outstanding principal balance of advances under the line of credit plus the outstanding amounts of any letters of credit, including amounts drawn on letters of credit and not yet reimbursed, to exceed the Commitment. 1.2 AVAILABILITY PERIOD. The line of credit is available between the date of this Agreement and December 30, 2001(the "Expiration Date") unless the Bank has declared the Borrower to be in default and has elected to stop making any additional credit available to the Borrower as permitted by Article 8. 1.3 INTEREST RATE. (a) Unless the Borrower elects an optional interest rate as described below, the interest rate is a per annum rate equal to the Bank's Prime Rate. (b) The Prime Rate is the rate of interest publicly announced from time to time by the Bank as its Prime Rate. The Prime Rate is set by the Bank based on various factors, including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans. The Bank may price loans to its customers at, above, or below the Prime Rate. Any change in the Prime Rate will take effect at the opening of business on the day specified in the public announcement of a change in the Bank's Prime Rate. 1.4 OPTIONAL INTEREST RATE. Instead of the interest rate based on the Bank's Prime Rate, the Borrower may elect the optional interest rate listed below during interest periods agreed to by the Bank and the Borrower. The optional interest rate shall be subject to the terms and conditions described later in this Agreement. Any principal amount bearing interest at an optional rate under this Agreement is referred to as a "Portion." The following optional interest rate is available: the IBOR Rate plus 0.75 percentage points. 1.5 REPAYMENT TERMS. (a) The Borrower will pay interest on January 31, 2001, and then monthly thereafter until payment in full of any principal outstanding under this line of credit. (b) The Borrower will repay in full all principal and any unpaid interest or other charges outstanding under this line of credit no later than the Expiration Date. 1.6 LETTERS OF CREDIT. This line of credit may be used for financing: 2 (i) standby letters of credit with a maximum maturity not to extend more than one year beyond the Expiration Date. (ii) The amount of the letters of credit outstanding at any one time (including amounts drawn on the letters of credit and not yet reimbursed) may not exceed Five Million Dollars ($5,000,000) (the "L/C Sublimit"). The Borrower agrees: (a) any sum drawn under a letter of credit may, at the option of the Bank, be added to the principal amount outstanding under this Agreement. The amount will bear interest and be due as described elsewhere in this Agreement. (b) if there is a default under this Agreement, to immediately prepay and make the Bank whole for any outstanding letters of credit. (c) the issuance of any letter of credit and any amendment to a letter of credit is subject to the Bank's written approval and must be in form and content satisfactory to the Bank and in favor of a beneficiary reasonably acceptable to the Bank. (d) to sign the Bank's form Application and Agreement for Standby Letter of Credit. (e) to pay any issuance and/or other fees that the Bank notifies the Borrower in advance will be charged for issuing and processing letters of credit for the Borrower. (f) to allow the Bank to automatically charge the Borrower's checking account for applicable fees, discounts, and other charges. 2. OPTIONAL INTEREST RATE 2.1 OPTIONAL RATE. The optional interest rate is a rate per year. Interest will be paid on the last day of each interest period, and, if the interest period is longer than 90 days, then on the last day of each quarter during the interest period. At the end of any interest period, the interest rate will revert to the Prime Rate, unless the Borrower has designated another optional interest rate for the Portion. No Portion will be converted to a different interest rate during the applicable interest period. Upon the occurrence of an event of default under this Agreement, the Bank may terminate the availability of optional interest rates for interest periods commencing after the default occurs. 2.2 IBOR RATE. The election of IBOR Rates shall be subject to the following terms and requirements: (a) The interest period during which the IBOR Rate will be in effect will be no shorter than 30 days and no longer than 180 days. The first day of the interest period must be a Banking Day on which the Bank is also open for business in California and dealing in offshore dollars. The last day of the interest period will be determined by the Bank using the practices of the offshore dollar inter-bank market. (b) Each IBOR Rate Portion will be for an amount not less than the following: (i) for interest periods of 91 days or longer, Five Hundred Thousand Dollars ($500,000). (ii) for interest periods of between 31 and 90 days, One Million Dollars ($1,000,000). (c) The Borrower may not elect an IBOR Rate with respect to any principal amount which is scheduled to be repaid before the last day of the applicable interest period. (d) The "IBOR Rate" means the interest rate determined by the following formula, rounded upward to the nearest 1/100 of one percent. (All amounts in the calculation will be determined by the Bank as of the first day of the interest period.) IBOR Rate = IBOR Base Rate --------------------------------- (1.00 - Reserve Percentage) Where, -2- 3 (i) "IBOR Base Rate" means the interest rate at which the Bank's Grand Cayman Branch, Grand Cayman, British West Indies, would offer U.S. dollar deposits for the applicable interest period to other major banks in the offshore dollar inter-bank market. (ii) "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency Liabilities, as defined in Federal Reserve Board Regulation D, rounded upward to the nearest 1/100 of one percent. The percentage will be expressed as a decimal, and will include, but not be limited to, marginal, emergency, supplemental, special, and other reserve percentages. (e) Each prepayment of an IBOR Rate Portion, whether voluntary, by reason of acceleration or otherwise, will be accompanied by the amount of accrued interest on the amount prepaid, and a prepayment fee as described below. A "prepayment" is a payment of an amount on a date earlier than the scheduled payment date for such amount as required by this Agreement. The prepayment fee shall be equal to the amount (if any) by which: (i) the additional interest which would have been payable during the interest period on the amount prepaid had it not been prepaid, exceeds (ii) the interest which would have been recoverable by the Bank by placing the amount prepaid on deposit in the domestic certificate of deposit market, the eurodollar deposit market, or other appropriate money market selected by the Bank for a period starting on the date on which it was prepaid and ending on the last day of the interest period for such Portion (or the scheduled payment date for the amount prepaid, if earlier). (f) The Bank will have no obligation to accept an election for an IBOR Rate Portion if any of the following described events has occurred and is continuing: (i) Dollar deposits in the principal amount, and for periods equal to the interest period, of an IBOR Rate Portion are not available in the offshore Dollar inter-bank market; or (ii) the IBOR Rate does not accurately reflect the cost of an IBOR Rate Portion. 3. FEES AND EXPENSES 3.1 FEES. (a) LOAN FEE. The Borrower agrees to pay a loan fee in the amount of Five Thousand Dollars ($5,000). This fee is due on or before February 15, 2001. (b) UNUSED COMMITMENT FEE. The Borrower agrees to pay a fee on any difference between the Commitment and the amount of credit it actually uses, determined by the weighted average credit outstanding during the specified period. The fee will be calculated at 0.125% per year. The calculation of credit outstanding will include the undrawn amount of letters of credit. This fee is due on March 31, 2001 and on the last day of each quarter thereafter until the Expiration Date. 3.2 EXPENSES. The Borrower agrees to reimburse the Bank upon demand, whether or not any loan is made under this Agreement, for: (a) filing, recording and search fees, appraisal fees, title report fees, documentation fees, and other similar fees, costs and expenses reasonably incurred by the Bank. (b) any expenses the Bank reasonably incurs in the preparation, negotiation and execution of this Agreement and any agreement or instrument required by this Agreement. Expenses include, but are not limited to, reasonable attorneys' fees, including any allocated costs of the Bank's in-house counsel. (c) any stamp or other taxes which may be payable with respect to the execution or delivery of this Agreement and any agreement or instrument required by this Agreement. -3- 4 4. DISBURSEMENTS, PAYMENTS AND COSTS 4.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made in writing in a manner acceptable to the Bank, or by another means acceptable to the Bank. 4.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank will be made in immediately available funds and will be evidenced by records kept by the Bank. In addition, the Bank may, at its discretion, require the Borrower to sign one or more promissory notes. Each payment made by the Borrower will be made without set-off or counterclaim in immediately available funds not later than 2:00 p.m., Chicago time, on the date called for under this Agreement at the Bank's office at 231 South LaSalle Street, Chicago, Illinois 60697. Funds received on any day after such time will be deemed to have been received on the next Banking Day. Whenever any payment to be made under this Agreement is stated to be due on a day which is not a Banking Day, such payment will be made on the next succeeding Banking Day and such extension of time will be included in the computation of any interest. 4.3 TELEPHONE AND FACSIMILE AUTHORIZATION. (a) The Bank may honor telephone or telefax instructions for advances or repayments or for the designation of optional interest rates and telefax requests for the issuance of letters of credit given, or purported to be given, by any one of the individuals authorized to sign loan agreements on behalf of the Borrower, or any other individual designated by any one of such authorized signers. (b) Advances will be deposited in and repayments will be withdrawn from the Borrower's account number 86667-12596, or such other of the Borrower's accounts with the Bank as designated in writing by the Borrower. (c) Upon the Bank's request, the Borrower will provide written confirmation to the Bank of any telephone or facsimile instructions within 2 days. If there is a discrepancy and the Bank has already acted on the instructions, the telephone or facsimile instructions will prevail over the written confirmation. (d) The Borrower indemnifies and excuses the Bank (including its officers, employees, and agents) from all liability, loss, and costs in connection with any act resulting from telephone or facsimile instructions the Bank reasonably believes are made by any individual authorized by the Borrower to give such instructions. This indemnity and excuse will survive this Agreement. 4.4 DIRECT DEBIT. (a) The Borrower agrees that interest and any fees will be deducted automatically on the due date from the Borrower's checking account number 86667-12596, or such other of the Borrower's accounts with the Bank as designated in writing by the Borrower. (b) The Bank will debit the account on the dates the payments become due. If a due date does not fall on a Banking Day, the Bank will debit the account on the first Banking Day following the due date. (c) The Borrower will maintain sufficient funds in the account on the dates the Bank enters debits authorized by this Agreement. If there are insufficient funds in the account on the date the Bank enters any debit authorized by this Agreement, the debit will be reversed. 4.5 BANKING DAYS. Unless otherwise provided in this Agreement, a "Banking Day" is a day other than a Saturday or a Sunday on which the Bank is open for business in Chicago, Illinois. All payments and disbursements which would be due on a day which is not a Banking Day will be due on the next Banking Day. All payments received on a day which is not a Banking Day will be applied to the credit on the next Banking Day. 4.6 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all interest and fees, if any, will be computed on the basis of a 360 day year and the actual number of days elapsed. Installments of principal which are not paid when due under this Agreement shall continue to bear interest until paid. -4- 5 4.7 DEFAULT RATE. Upon the occurrence (after the expiration of any applicable notice or cure periods) and during the continuation of any default under this Agreement, principal amounts outstanding under this Agreement will at the option of the Bank bear interest at a rate which is 2 percentage point(s) higher than the rate of interest otherwise provided under this Agreement. This will not constitute a waiver of any default. 5. CONDITIONS The Bank must receive the following items, in form and content acceptable to the Bank, before it is required to extend any credit to the Borrower under this Agreement: 5.1 AUTHORIZATIONS. Evidence that the execution, delivery and performance by the Borrower (and any guarantor) of this Agreement and any instrument or agreement required under this Agreement have been duly authorized. 5.2 GOVERNING DOCUMENTS. A copy of the Borrower's articles of incorporation. 5.3 INSURANCE. Evidence of insurance coverage, as required in the "Covenants" section of this Agreement. 5.4 PAYMENT OF FEES. Payment of all accrued and unpaid expenses reasonably incurred by the Bank as required by the paragraph entitled "Expenses". 5.5 GOOD STANDING. Certificates of good standing for the Borrower from its state of formation and from any other state in which it is qualified to conduct its business. 5.6 OTHER ITEMS. Any other items that the Bank reasonably requires. 6. REPRESENTATIONS AND WARRANTIES When the Borrower signs this Agreement, and until the Bank is repaid in full, the Borrower makes the following representations and warranties. Each request for an extension of credit constitutes a renewed representation. 6.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and existing under the laws of the state where organized. 6.2 AUTHORIZATION. This Agreement, and any instrument or agreement required hereunder, are within the Borrower's corporate powers, have been duly authorized, and do not conflict with its certificate of incorporation or by-laws, as amended. 6.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding agreement of the Borrower, enforceable against the Borrower in accordance with its terms, and any instrument or agreement required hereunder, when executed and delivered, will be similarly legal, valid, binding and enforceable. 6.4 GOOD STANDING. The Borrower is duly qualified as a foreign corporation and is in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for jurisdictions in which failure to so qualify or to be in good standing would not have a material adverse effect on the Borrower's financial condition or its ability to repay any amounts due under this Agreement. 6.5 NO CONFLICTS. This Agreement does not conflict with any law applicable to the Borrower or conflict with any material agreement or obligation by which the Borrower is bound. 6.6 FINANCIAL INFORMATION. Each of the historical financial statements supplied to the Bank, including the Borrower's unaudited quarterly financial statements dated as of September 30, 2000, fairly presents in all material respects the consolidated financial position and the consolidated results of operations, retained earnings and cash flows of the Borrower and its subsidiaries as of the date and for the periods set forth therein (subject, in the case of unaudited financial statements, to notes and other normal year-end audit adjustments), in each case in conformity with U.S. generally accepted accounting principals ("GAAP") consistently applied during the periods involved, except as otherwise indicated in the notes thereto, and are: -5- 6 (a) in compliance in all material respects with any government regulations that apply. Since the date of the financial statement specified above, there has been no material adverse change in the Borrower's business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit. 6.7 LAWSUITS. There is no lawsuit, claim, action or proceeding pending or, to the knowledge of the executive officers of the Borrower, threatened against the Borrower, which would be reasonably likely to result in a material adverse effect on Borrower's financial condition or its ability to repay the loan, except as disclosed in writing to the Bank. 6.8 PERMITS, FRANCHISES. The Borrower possesses all permits, franchises, and licenses and all trademark rights, trade name rights, patent rights and fictitious name rights reasonably necessary to continue to conduct its business as heretofore conducted. 6.9 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for borrowed money, any purchase money obligation or in any material respect on any other material lease, commitment, contract, instrument or obligation. 6.10 INCOME TAXES. The Borrower has filed all tax returns required to be filed and has paid, or made adequate provisions for the payment of, all taxes due and payable as shown thereon pursuant to such returns and pursuant to any assessments made against it or any of its property. No tax liens have been filed (other than any liens for taxes not yet due and payable or being contested in good faith by appropriate proceedings) and no material claims are being asserted with respect to any such taxes. The reserves on the books of the Borrower in respect of taxes is adequate. The Borrower is not aware of any proposed assessment or adjustment for additional taxes (or any basis for any such assessment) which would be material to the Borrower. 6.11 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse of time or both would be, a default under this Agreement, except for those events, if any, that have been disclosed in writing to the Bank or waived in writing by the Bank. 6.12 INSURANCE. The Borrower has obtained, and maintained in effect, the insurance coverage required in the "Covenants" section of this Agreement. 6.13 ERISA PLANS. (a) Each Plan (other than a multiemployer plan) is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. Each Plan, other than the Borrower's 401(k) plan being updated, has received a favorable determination letter from the IRS and, to the knowledge of the executive officers of the Borrower, nothing has occurred which would cause the loss of such qualification. The Borrower has fulfilled its obligations, if any, under the minimum funding standards of ERISA and the Code with respect to each Plan, and has not incurred any liability with respect to any Plan under Title IV of ERISA. (b) There are no claims, lawsuits or actions (including by any governmental authority), and there has been no prohibited transaction or violation of the fiduciary responsibility rules, with respect to any Plan which has resulted or could reasonably be expected to result in a material adverse effect. (c) With respect to any Plan subject to Title IV of ERISA: (i) No reportable event has occurred under Section 4043(c) of ERISA for which the PBGC requires 30 day notice. (ii) No action by the Borrower or any ERISA Affiliate to terminate or withdraw from any Plan has been taken and no notice of intent to terminate a Plan has been filed under Section 4041 of ERISA. -6- 7 (iii) No termination proceeding has been commenced with respect to a Plan under Section 4042 of ERISA, and no event has occurred or condition exists which might constitute grounds for the commencement of such a proceeding. (d) The following terms have the meanings indicated for purposes of this Agreement: (i) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (ii) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. (iii) "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b) or (c) of the Code. (iv) "PBGC" means the Pension Benefit Guaranty Corporation. (v) "Plan" means a pension, profit-sharing, or stock bonus plan intended to qualify under Section 401(a) of the Code, maintained or contributed to by the Borrower or any ERISA Affiliate, including any multiemployer plan within the meaning of Section 4001(a)(3) of ERISA. 6.14 YEAR 2000 COMPLIANCE. The Borrower has conducted a comprehensive review and assessment of the Borrower's computer applications and made inquiry of the Borrower's key suppliers, vendors and customers with respect to the "year 2000 problem" (that is, the inability of computers, as well as embedded microchips in non-computing devices, to be able to properly perform date-sensitive functions after December 31, 1999) and, based on that review and inquiry, the Borrower does not believe the year 2000 problem will result in a material adverse change in the Borrower's business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit. 7. COVENANTS The Borrower agrees, so long as credit is available under this Agreement and until the Bank is repaid in full: 7.1 USE OF PROCEEDS. To use the proceeds of the credit only for general corporate purposes and issuing letters of credit (up to the L/C Sublimit). 7.2 FINANCIAL INFORMATION. To provide the following financial information and statements in form and content acceptable to the Bank, and such additional information as reasonably requested by the Bank from time to time: (a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual financial statements. These financial statements must be audited by a "big 5" public accounting firm or otherwise by a Certified Public Accountant acceptable to the Bank. The statements shall be prepared on a consolidated basis. (b) Within 45 days of the period's end, the Borrower's quarterly financial statements. These financial statements may be Borrower prepared and unaudited. The statements shall be prepared on a consolidated basis. (c) Within the period(s) provided in (a) and (b) above, a compliance certificate of the Borrower signed by an authorized financial officer of the Borrower setting forth (i) the information and computations (in sufficient detail) to establish that the Borrower is in compliance with all financial covenants at the end of the period covered by the financial statements then being furnished and (ii) whether there existed as of the date of such financial statements and whether there exists as of the date of the certificate, any default under this Agreement and, if any such default exists, specifying the nature thereof and the action the Borrower is taking and proposes to take with respect thereto. 7.3 TANGIBLE NET WORTH. To maintain on a consolidated basis Tangible Net Worth (as defined below) equal to at least Seventy Million Dollars ($70,000,000). "Tangible Net Worth" means the gross book value of the Borrower's assets (excluding goodwill, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and -7- 8 expense, capitalized or deferred research and development costs, deferred marketing expenses, deferred receivables, and other like intangibles, and monies due from Affiliates, officers, directors, employees, or shareholders, of the Borrower, except for monies due from employees in respect of short-term travel or similar advances in the normal course of the Borrower's business) plus liabilities subordinated to the Bank in a manner acceptable to the Bank (using the Bank's standard form) less total liabilities, including but not limited to accrued and deferred income taxes, and any reserves against assets. "Affiliates" means any person or entity directly or indirectly controlling, controlled by or under the common control of the Borrower. A person or entity shall be deemed to control another person or entity if the controlling person or entity is the beneficial owner of greater than fifty one percent (51%) or more of any class of voting securities (or other voting interests) of the controlled person or entity or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled person or entity, whether through ownership of capital stock, or any other equity interest, by contract or otherwise. 7.4 OTHER DEBTS. Not to have outstanding or incur any direct or contingent liabilities or lease obligations (other than those to the Bank), or become liable for the liabilities of others without the Bank's written consent. This does not prohibit: (a) trade credit incurred to acquire goods, supplies, services (including, without limitation, compensation owed to employees and subcontractors for services rendered to Borrower) and merchandise incurred in the ordinary course of the Borrower's business and on terms customary for businesses comparable to those of the Borrower; (b) lease payment obligations which the Borrower is permitted to incur under this Agreement; (c) intercompany indebtedness among entities constituting part of the Borrower's consolidated group, provided that indebtedness owed by the Borrower to any subsidiaries or other such entities cannot to exceed $1,000,000 in the aggregate; (d) deferred taxes; (e) unfunded employee benefit plan obligations and liabilities to the extent that they are permitted to remain unfunded under applicable law; (f) endorsements of negotiable instruments received in the ordinary course of business; (g) warranty, indemnification or other liabilities or claims relating to services performed or software or other materials provided by the Borrower and arising out of the ordinary course of the Borrower's business; and (h) other liabilities in addition to (a) through (g) above reflected or provided for in the consolidated balance sheet of the Borrower as of September 30, 2000, and liabilities incurred since that date not to exceed in the aggregate $1,000,000. 7.5 OTHER LIENS. Not to create, assume, or allow any security interest or lien (including judicial liens) on property the Borrower now or later owns, except: (a) Mortgages, deeds of trust and security agreements, if any, in favor of the Bank. (b) Liens for taxes or other governmental assessments, charges or levies either not yet due or payable or being contested in good faith by appropriate proceedings or for which nonpayment thereof is otherwise permitted by this Agreement. (c) Workers', mechanics', suppliers', carriers', warehousemen's, or other similar liens arising in the ordinary course of business and securing obligations not yet due and payable. (d) Pledges or deposits: securing obligations under workmen's compensation, unemployment insurance, social security or public liability laws or similar legislation or other public or statutory obligations of -8- 9 the Borrower; securing bids, tenders, contracts (other than ones for the payment of money) or leases (to which the Borrower is lessee) made in the ordinary course of business; or securing or in lieu of surety, appeal or customs bonds in proceedings to which the Borrower is a party, not to exceed in the aggregate $1,000,000. (e) Liens created by or resulting from any litigation or legal proceedings which are currently being contested in good faith by appropriate proceedings, not to exceed in the aggregate $500,000. (f) Zoning restrictions, easements, licenses, restrictions on the use of real property or irregularities in the title which do not materially impair the use of such property in the operation of the Borrower's business. (g) Other liens arising in connection with obligations or transactions not prohibited by this Agreement and incurred by the Borrower in the ordinary course of its business and that do not exceed in the aggregate $500,000. 7.6 LEASES. Not to permit the aggregate payments due in any fiscal year under all leases (including capital and operating leases for real or personal property) to exceed Fifteen Million Dollars ($15,000,000). 7.7 LOANS AND INVESTMENTS. Not to make any extensions of credit, or make any investments in, or make any capital contributions or other transfers of assets to, any individual or entity, except the following: (a) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale, license or lease of goods or services in the ordinary course of business. (b) investments in any of the following: (i) U.S. treasury bills and other obligations of the federal government; (ii) stock of its subsidiaries; (iii) intercompany indebtedness permitted by Section 7.4 (c). (c) investments in venture capital funds, with others, created to invest in companies in loyalty technology. (d) intercompany transfers solely between or among Borrower and any other entities constituting part of Borrower's consolidated group associated with the restructuring of the Borrower's European subsidiaries to be completed so long as no transfers of such assets are distributed to third parties. (e) intercompany transfers incurred in the normal course of business. (f) other transfers of assets not prohibited by Section 7.17. 7.8 NOTICES TO BANK. To notify the Bank in writing, promptly after learning thereof, of: (a) any lawsuit over Ten Million Dollars ($10,000,000) against the Borrower. (b) any substantial dispute between the Borrower and any government authority. (c) any event of default under this Agreement, or any event which, with notice or lapse of time or both, would constitute such an event of default. (d) any material adverse change in the Borrower's business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit. (e) any change in the Borrower's name, legal structure, place of business, or chief executive office if the Borrower has more than one place of business. (f) (i) other than liabilities permitted under Sections 7.4(a)-(g) & 7.4(i), and (ii) other than unasserted contingent liabilities permitted under Section 7.4(h), any contingent liabilities of the Borrower, which contingent liabilities are known to or reasonably foreseeable by the Borrower's executive officers, in either case where - -9- 10 such liabilities are reasonably estimable and in excess of Five Million Dollars ($5,000,000) in the aggregate, provided further that asserted claims or damages relating to contingent liabilities permitted under Section 7.4(h) shall be included only to the extent they exceed $5,000,000 in the aggregate. (g) any filing by Borrower with the Securities and Exchange Commission of a Form 8-K. 7.9 BOOKS AND RECORDS. To maintain adequate books and records. 7.10 AUDITS. To allow the Bank and its agents to inspect the Borrower's properties and examine, audit and make copies of books and records at any reasonable time. If any of the Borrower's properties, books or records are in the possession of a third party, the Borrower authorizes that third party to permit the Bank or its agents to have access to perform inspections or audits and to respond to the Bank's requests for information concerning such properties, books and records. 7.11 COMPLIANCE WITH LAWS. To comply in all material respects with the laws (including any fictitious name statute), regulations, and orders of any government body with authority over the Borrower's business. 7.12 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges, and franchises the Borrower now has. 7.13 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements reasonably required to keep the Borrower's properties in use in its business in good working condition, normal wear and tear excepted. 7.14 PERFECTION OF LIENS. To help the Bank perfect and protect its security interests and liens, if any, in any assets of the Borrower and reimburse it for related costs it reasonably incurs to protect any such security interests and liens. 7.15 COOPERATION. To take any action reasonably requested by the Bank to carry out the intent of this Agreement. 7.16 INSURANCE. (a) GENERAL BUSINESS INSURANCE. To maintain insurance as is usual for the business it is in. (b) EVIDENCE OF INSURANCE. Upon the request of the Bank, to deliver to the Bank a copy of each insurance policy, or, if permitted by the Bank, a certificate of insurance listing all insurance in force. 7.17 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written consent: (a) engage in any business activities substantially different from the Borrower's present business. (b) liquidate or dissolve the Borrower's business. (c) enter into any consolidation, merger, pool, joint venture, syndicate, or other combination, or become a partner in a partnership, a member of a joint venture, or a member of a limited liability company, except for any such arrangements or affiliations the Borrower may enter into to invest in companies in loyalty technology as permitted under Section 7.7 (c) hereunder. (d) sell, assign, lease, transfer or otherwise dispose of any assets for less than fair market value, or enter into any agreement to do so, except for sales or licenses of inventory in the ordinary course of business and sales or other dispositions of obsolete or surplus assets. (e) enter into any sale and leaseback agreement covering any of its fixed or capital assets. (f) acquire or purchase a business or its assets. - -10- 11 (g) voluntarily suspend its business for more than 7 days in any 30 day period. 7.18 BANK AS PRINCIPAL DEPOSITORY. To maintain the Bank as its principal depository bank, including for the maintenance of business, cash management, operating and administrative deposit accounts, provided, however, that neither the foregoing nor any other terms of this Agreement shall prevent the Borrower from maintaining accounts with other banks or financial institutions as long as the Bank remains its principal depository bank and the applicable terms of Section 7.20 hereof are satisfied. 7.19 ERISA PLANS. With respect to a Plan subject to Title IV of ERISA, to give prompt written notice to the Bank of: (a) The occurrence of any reportable event under Section 4043(c) of ERISA for which the PBGC requires 30 day notice. (b) Any action by the Borrower or any ERISA Affiliate to terminate or withdraw from a Plan or the filing of any notice of intent to terminate under Section 4041 of ERISA. (c) The commencement of any proceeding with respect to a Plan under Section 4042 of ERISA. 7.20 UNENCUMBERED LIQUID ASSETS. Borrower shall hold Unencumbered Liquid Assets having an aggregate market value of not less than (a) 150 percent of Borrower's total committed facility, (b) 125 percent of Borrower's total committed facility if all Unencumbered Liquid Assets required for purposes of this covenant are maintained with the Bank, or (c) 100 percent of Borrower's total committed facility if all Unencumbered Liquid Assets required for purposes of this covenant are maintained with the Bank and consist of cash, money market accounts or Bank of America Short Term Asset Management accounts. For the purposes of this Agreement, "Unencumbered Liquid Assets" shall mean the following assets owned by Borrower (excluding assets of any retirement plan established pursuant to the provisions of Sections 401(a) and 501(a) of the Internal Revenue Code, any individual retirement account or annuity, simplified employee pension plan or SIMPLE plan established pursuant to the provisions of Section 408 the Internal Revenue Code, or any other retirement plan or arrangement established pursuant to any other federal or state statute) which (i) are not the subject of any lien, mortgage, encumbrance, security interest, pledge, conditional sale, set-off right, title retention arrangement, or any other arrangement with any creditor (other than any set-off or similar rights afforded to the Bank or any other financial institution with whom such assets are maintained so long as Borrower has no funded indebtedness with such financial institution) to have its claim satisfied out of the asset (or proceeds thereof) prior to the general creditors of Borrower, and (ii) may be converted to cash by sale or other means within five (5) business days: (a) Cash; (b) Demand deposits or interest-bearing time and eurodollar deposits, certificates of deposit or similar banking arrangements held in the United States where either (i) such deposits or other arrangements are held with banks or other financial institutions which have capital and surplus of not less than $100,000,000 or (ii) such deposits are fully FDIC-insured; (c) Direct obligations of the United States of America in the form of United States Treasury obligations or any governmental agency or instrumentality whose obligations constitute full faith and credit obligations of the United States of America and which are regularly traded on a public market or exchange; (d) Commercial paper rated P-1 by Moody's Investors Services, Inc. or A-1 by Standard & Poor's Corporation, a division of McGraw Hill, Inc.; (e) Bonds and other fixed income instruments (including tax-exempt bonds) from companies or public entities rated investment grade by one of the rating agencies described in (d), and mutual funds that invest substantially all of their assets in such bonds and other fixed income instruments, either owned directly by Borrower or managed on Borrower's behalf by (i) any nationally recognized investment advisor or (ii) any investment advisor who or which has assets under management in excess of $250,000,000; (f) Eligible Stocks (defined below), either owned directly by Borrower or managed on Borrower's behalf by (i) any nationally recognized investment advisor or (ii) any investment advisor who or which has assets under management in excess of $250,000,000; and - -11- 12 (g) Mutual funds or money market funds that invest substantially all of their assets in instruments described above in (a), (b), (c), (d), (e) and/or (f) of this Section and which are quoted in either the Wall Street Journal or Barron's." "Eligible Stocks" shall include any common or preferred stock which is traded on a U.S. national stock exchange or included in the National Market tier of NASDAQ and which (x) is issued by a company with a market capitalization, as of the close of the most recent trading day, of at least $500,000,000, (y) has, as of the close of the most recent trading day, a per share price of at least $15, and (z) is not subject to any restriction or limitation by applicable laws or agreements governing the sale, transfer or other disposition thereof in the public market. 8. DEFAULT If any of the following events occurs, the Bank may do one or more of the following: declare the Borrower in default, stop making any additional credit available to the Borrower, and require the Borrower to repay its entire debt immediately and, except as otherwise provided in this Article 8, without prior notice. If an event of default occurs under the paragraph entitled "Voluntary Bankruptcy, Etc." or "Involuntary Bankruptcy, Etc." below, with respect to the Borrower, then the entire debt outstanding under this Agreement will automatically be due immediately. 8.1 FAILURE TO PAY. The Borrower fails to make a payment under this Agreement when due. 8.2 FALSE INFORMATION. Any representation or warranty in this Agreement or in any written statement, report, financial statement or certificate made or delivered to the Bank by the Borrower, or by any officer, employee or authorized agent of the Borrower, or any oral statement made to the Bank by a senior financial officer of Borrower, shall be untrue or incorrect in any material respect, as of the date when made or reaffirmed. 8.3 VOLUNTARY BANKRUPTCY, ETC. The Borrower files a petition seeking relief under any applicable bankruptcy laws, consents to the filing of any such petition, to the institution of proceedings thereunder or to the appointment of a custodian, receiver, liquidator, bankruptcy trustee or similar official of the Borrower or any substantial part of its properties or make a general assignment for the benefit of its creditors. 8.4 INVOLUNTARY BANKRUPTCY, ETC. A decree or order by a court having proper jurisdiction (a) for involuntary relief in respect of the Borrower under any applicable bankruptcy law, (b) appointing a custodian, receiver, liquidator, bankruptcy trustee or similar official of the Borrower or any substantial part of its properties or (c) ordering the winding up or liquidation of the affairs or the Borrower shall be entered. 8.5 LAWSUITS. Any lawsuit or lawsuits filed on behalf of one or more trade creditors against the Borrower which have reasonable likelihood to result in damages in an aggregate amount of Ten Million ($10,000,000) or more in excess of any insurance coverage which have reasonable likelihood to result in damages. 8.6 JUDGMENTS. Any final judgments or arbitration awards for the payment of money are entered against the Borrower, or the Borrower enters into any settlement agreements with respect to any litigation or arbitration, in an aggregate amount of Ten Million Dollars ($10,000,000) or more in excess of any insurance coverage, and the same are not vacated, stayed, bonded, paid or discharged for a period of twenty (20) days after entry thereof; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during such period. 8.7 GOVERNMENT ACTION. Any government authority takes action with respect to the Borrower that the Bank reasonably believes materially adversely affects the Borrower's financial condition or ability to repay any amounts due under this Agreement, and the Bank has given the Borrower at least ten (10) days notice thereof; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during such notice period. 8.8 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the Borrower's business condition (financial or otherwise), operations, properties or prospects, or ability to repay the credit since the date of the -12- 13 financial statements referred to in Section 6.6 hereof and the Bank has given the Borrower at least ten (10) days notice thereof; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during such notice period. 8.9 CROSS-DEFAULT. Any default occurs, and continues beyond any applicable contractual grace period, in connection with any loan or line of credit involving indebtedness for borrowed money that the Borrower or any other entity constituting part of the Borrower's consolidated group has obtained from anyone else, or which the Borrower or any other entity constituting part of the Borrower's consolidated group has guaranteed if the default under such guaranteed indebtedness consists of failing to make a payment when due (and continues beyond any applicable grace period therefor) or gives the other lender the right to accelerate the obligation. 8.10 DEFAULT UNDER RELATED DOCUMENTS. Any guaranty, subordination agreement, security agreement, mortgage, deed of trust, or other document required by this Agreement is violated in any material respect or no longer in effect. 8.11 OTHER BANK AGREEMENTS. The Borrower fails in any material respect to meet the conditions of, or fails to perform any material obligation under any other agreement the Borrower has with the Bank or any affiliate of the Bank, or demand is made by the Bank or any affiliate of the Bank and not satisfied by the Borrower within twenty (20) days after such demand on any material obligation owing to the Bank or such affiliate under any other agreement the Borrower has with the Bank or any affiliate of the Bank; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during such cure period. 8.12 ERISA PLANS. The occurrence of any one or more of the following events with respect to a Plan subject to Title IV of ERISA, provided such event or events could reasonably be expected, in the judgment of the Bank, to subject the Borrower to any tax, penalty or liability (or any combination of the foregoing) which, in the aggregate, would be reasonably likely to have a material adverse effect on the financial condition of the Borrower: (a) A reportable event shall occur under Section 4043(c) of ERISA with respect to a Plan. (b) Any Plan termination (or commencement of proceedings to terminate a Plan) or the full or partial withdrawal from a Plan by the Borrower or any ERISA Affiliate. 8.13 OTHER BREACH UNDER AGREEMENT. The Borrower fails in any material respect to meet the conditions of, or fails to perform any obligation under, any term of this Agreement not specifically referred to in this Article 8, and the same shall remain unremedied for a period of twenty (20) days; provided, however, that the Bank will not be obligated to extend any additional credit to the Borrower during such cure period. This includes any failure in any material respect by the Borrower to comply with any financial covenants set forth in this Agreement, whether such failure is evidenced by financial statements delivered to the Bank or is otherwise known to the Borrower or the Bank. 9. ENFORCING THIS AGREEMENT; MISCELLANEOUS 9.1 GAAP. Except as otherwise stated in this Agreement, all financial information provided to the Bank and all financial covenants will be made under GAAP, consistently applied. 9.2 ILLINOIS LAW. THIS AGREEMENT IS GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. 9.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and the Bank's successors and assignees. The Borrower agrees that it may not assign this Agreement without the Bank's prior consent. The Bank may sell participations in or assign this loan, and may exchange financial information about the Borrower with actual or potential participants or assignees; provided that such actual or potential participants or assignees agree to treat all financial information exchanged as confidential. 9.4 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable, the rest of the Agreement may be enforced. The Bank retains all rights, even if it makes a loan after default. If the Bank waives a default, it may enforce a later default. Any consent or waiver under this Agreement must be in writing. -13- 14 9.5 ADMINISTRATION COSTS. The Borrower will pay the Bank for all reasonable costs incurred by the Bank in connection with administering this Agreement. 9.6 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any reasonable costs and attorneys' fees incurred by the Bank in connection with the enforcement or preservation of any rights or remedies under this Agreement and any other documents executed in connection with this Agreement, and in connection with any amendment, waiver, "workout" or restructuring under this Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing party is entitled to recover costs and reasonable attorneys' fees incurred in connection with the lawsuit or arbitration proceeding, as determined by the court or arbitrator. In the event that any case is commenced by or against the Borrower under the Bankruptcy Code (Title 11, United States Code) or any similar or successor statute, the Bank is entitled to recover costs and reasonable attorneys' fees incurred by the Bank related to the preservation, protection, or enforcement of any rights of the Bank in such a case. As used in this paragraph, "attorneys' fees" includes the allocated costs of the Bank's in-house counsel. 9.7 ONE AGREEMENT. This Agreement and any related security or other agreements required by this Agreement, collectively: (a) represent the sum of the understandings and agreements between the Bank and the Borrower concerning this credit; and (b) replace any prior oral or written agreements between the Bank and the Borrower concerning this credit; and (c) are intended by the Bank and the Borrower as the final, complete and exclusive statement of the terms agreed to by them. In the event of any conflict between this Agreement and any other agreements required by this Agreement, this Agreement will prevail. 9.8 INDEMNIFICATION. The Borrower will indemnify and hold the Bank harmless from any loss, liability, damages, judgments, and costs of any kind relating to or arising directly or indirectly out of (a) this Agreement or any document required hereunder, (b) any credit extended or committed by the Bank to the Borrower hereunder, and (c) any litigation or proceeding related to or arising out of this Agreement, any such document, or any such credit; provided, however, that the Borrower shall not be liable for such indemnification and hold harmless to the extent that any such loss, liability, damages, judgments or costs result from the Bank's gross negligence or willful misconduct; and provided further, that nothing in this Section 9.8 shall obligate the Borrower to indemnify the Bank or hold it harmless (i) against any taxes payable in respect of any income earned by the Bank as a result of its having entered into this Agreement or any related agreements, instruments or documents or extended credit hereunder or (ii) in respect to any violations resulting from any such entry or credit extension by the Bank of any applicable banking, credit, usury or similar laws. This indemnity includes but is not limited to reasonable attorneys' fees (including the reasonable allocated cost of in-house counsel). This indemnity extends to the Bank, its parent, subsidiaries and all of their directors, officers, employees, agents, successors, attorneys, and assigns. This indemnity will survive repayment of the Borrower's obligations to the Bank. All sums due to the Bank hereunder shall be obligations of the Borrower, due and payable immediately without demand. 9.9 NOTICES. All notices required under this Agreement will be in writing and will be transmitted by personal delivery, first class mail, overnight courier, or facsimile to the addresses or facsimile numbers on the signature page of this Agreement, or to such other addresses or facsimile numbers as the Bank and the Borrower may specify from time to time in writing. 9.10 HEADINGS. Article and paragraph headings are for reference only and do not affect the interpretation or meaning of any provisions of this Agreement. 9.11 COUNTERPARTS. This Agreement may be executed in as many counterparts as necessary or convenient, and by the different parties on separate counterparts each of which, when so executed, will be deemed an original but all such counterparts will constitute but one and the same agreement. -14- 15 9.12 PRIOR AGREEMENT SUPERSEDED. This Agreement supersedes that certain Business Loan Agreement entered into as of March 31, 2000 between the Bank and the Borrower, and any credit outstanding thereunder shall be deemed to be outstanding under this Agreement. 9.13 CONSENT TO JURISDICTION. To induce the Bank to accept this Agreement, the Borrower irrevocably agrees that, subject to the Bank's sole and absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY ARISING OUT OF OR RELATED TO THIS AGREEMENT WILL BE LITIGATED IN COURTS HAVING SITUS IN CHICAGO, ILLINOIS. THE BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY COURT LOCATED WITHIN CHICAGO, ILLINOIS, WAIVES PERSONAL SERVICE OF PROCESS UPON THE BORROWER, AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY REGISTERED MAIL DIRECTED TO THE BORROWER AT THE ADDRESS STATED ON THE SIGNATURE PAGE HEREOF AND SERVICE SO MADE WILL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT. 9.14 WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK EACH WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (a) UNDER THIS AGREEMENT OR ANY RELATED AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS AGREEMENT OR (b) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING WILL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. [signature page follows] This Agreement is executed as of the date stated at the top of the first page.
BANK OF AMERICA, N.A. eLOYALTY CORPORATION By: By: ----------------------------------------- ----------------------------------------- Title: Title: -------------------------------------- -------------------------------------- Address and facsimile number Address and facsimile number where notices to the Bank are where notices to the Borrower to be sent: are to be to be sent: 231 South LaSalle Street 150 Field Drive Chicago, Illinois 60697 Suite 250 Attention: Upper MW Strategies II Lake Forest, Illinois 60045 Attention: Senior Vice President and CFO FAX: (312) 974-2109 FAX: (847) 582-7002 Copy to: Vice President and General Counsel at address listed above
-15- EX-10.13 4 c60662ex10-13.txt ELOYALTY EMPLOYEE INVESTORS, LLC OPERATING AGRMT 1 EXHIBIT 10.13 ELOYALTY EMPLOYEE INVESTORS, L.L.C. OPERATING AGREEMENT This Operating Agreement of ELOYALTY EMPLOYEE INVESTORS, L.L.C., a Delaware Limited Liability Company (the "COMPANY"), is entered into this ____ day of July 2000, by eLoyalty Corporation, a Delaware corporation (the "INITIAL MEMBER"), Sarah Faux (the "MANAGER") and the Company shall be formed as follows: 1. NAME. The name of the Company is eLoyalty Employee Investors, L.L.C. 2. PURPOSES AND POWERS. The Company is organized for engaging in any lawful act or activity for which a limited liability company may be organized under the laws of the State of Delaware. The Company shall have the power to make and perform all contracts and to engage in all activities and transactions necessary or advisable to carry out the purposes of the Company, and all other powers available to it as a limited liability company under the laws of the State of Delaware. 3. MEMBERS. The name and membership interest (the "MEMBERSHIP INTEREST") in the Company of the Initial Member are set forth on Exhibit A attached hereto and incorporated herein by reference. 4. TERM. The Company shall commence upon the filing of the Company's Certificate of Formation in the Office of the Secretary of State of the State of Delaware and shall conclude upon the determination of the Manager. 5. MANAGER. Sarah Faux is hereby designated as the Manager of the Company. 6. CAPITAL CONTRIBUTIONS. The Initial Member shall contribute capital to the Company from time to time at the request of the Manager. 7. ALLOCATIONS. All income, gains and losses will be allocated to the accounts of the Initial Member in accordance with its Membership Interest. 8. DISTRIBUTIONS TO MEMBERS. The Initial Member will receive distributions if, upon winding up of the Company, the assets or proceeds available exceed the amount required for the payment and discharge of all of the Company's debts and liabilities. Other than as stated above, distributions to the Initial Member shall be in the discretion of the Manager. The Manager may, in her discretion, make distributions to the Initial Member which include a return of all or any part of the Initial Member's contribution. The Initial Member has no right to demand or receive property other than cash from the Company in return for its capital contribution. 9. MANAGEMENT. The management, operation and policies of the Company are vested exclusively in the Manager. The Manager shall have the power on behalf and in the name of the Company to carry out and implement any and all of the objects and purposes of the Company. The Manager shall not be liable to the Initial Member for honest mistakes of judgment or for any losses due to such mistakes or for the negligence, dishonesty or bad faith of any employee, broker or other agent of the Company selected by it with reasonable care. 2 10. MISCELLANEOUS. The terms and provisions of this Agreement may be modified or amended at any time and from time to time by the Initial Member. This Agreement shall be binding upon the heirs, personal representatives and other successors of the Initial Member. This Agreement shall be construed in accordance with the laws of the State of Delaware. [SIGNATURE PAGE FOLLOWS] 3 IN WITNESS WHEREOF, the undersigned have signed this OPERATING AGREEMENT as of the day and year first above written. INITIAL MEMBER: ELOYALTY CORPORATION By: ---------------------------------- Name --------------------------------- Title: ------------------------------- MANAGER: - --------------------------------------- SARAH FAUX 4 EXHIBIT A Name and Address Membership Interest - ---------------- ------------------- eLoyalty Corporation 100.00% EX-10.14 5 c60662ex10-14.txt ELOYALTY CORP. 1999 STOCK INCENTIVE PLAN 1 EXHIBIT 10.14 ELOYALTY CORPORATION 1999 STOCK INCENTIVE PLAN (AS AMENDED AND RESTATED AS OF FEBRUARY 28, 2001) I. INTRODUCTION 1.1 PURPOSES. The purposes of the 1999 Stock Incentive Plan (the "Plan") of eLoyalty Corporation, a Delaware corporation (the "Company"), are to (i) align the interests of the Company's stockholders and the recipients of awards under this Plan by increasing the proprietary interest of such recipients in the Company's growth and success, (ii) advance the interests of the Company by attracting and retaining directors (including Non-Employee Directors), officers, other key employees, consultants, independent contractors and agents and (iii) motivate such persons to act in the long-term best interests of the Company's stockholders. 1.2 CERTAIN DEFINITIONS. "AGREEMENT" shall mean the written agreement evidencing an award hereunder between the Company and the recipient of such award. "BOARD" shall mean the Board of Directors of the Company. "BONUS STOCK" shall mean shares of Common Stock which are not subject to a Restriction Period or Performance Measures. "BONUS STOCK AWARD" shall mean an award of Bonus Stock under this Plan. "CHANGE IN CONTROL" shall have the meaning set forth in Section 6.8(b). "CODE" shall mean the Internal Revenue Code of 1986, as amended. "COMMITTEE" shall mean (i) prior to the date that the Company shall become a separate publicly held corporation for purposes of section 162(m) of the Code, the Committee under the Technology Solutions Company 1996 Stock Incentive Plan and (ii) on or after such date, one or more committees of the Board that have been designated by the Board to carry out certain respective actions under this Plan on behalf of the Board, subject to the limitations provided by the Board in any such designations; provided, however, that where necessary for compliance with Section 16 of the Exchange Act and the rules and regulations promulgated thereunder, or where the Board deems it to be advisable for any reason whatsoever, such committee will consist of two or more members of the Board, each of whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act; and provided further, that where the grant of an award is being made to any person who at the time of the grant is a "covered employee," or who is then believed likely to be a "covered employee" at any time during the period an award hereunder to such person would be outstanding, and where necessary for such grant to qualify as performance based compensation under the provisions of section 162(m) of the Code, such committee will consist of two or more members of the Board, each of whom shall be an "outside director" within the meaning of section 162(m) of the Code. Notwithstanding any such committee designations, the Board retains the right to assume full authority to administer the Plan in all respects hereunder pursuant to Section 1.3 hereof. "COMMON STOCK" shall mean the common stock, $.01 par value, of the Company. "COMPANY" shall have the meaning set forth in Section 1.1. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended. "FAIR MARKET VALUE" shall mean the closing transaction price of a share of Common Stock as reported by The Nasdaq Stock Market or the principal national securities exchange on which the Common Stock is then traded, on the date as of which such value is being determined, or, if there shall be no reported transactions for such date, on the next preceding date for which 2 transactions were reported; provided, however, that if (i) the determination date occurs prior to the initial date that shares of Common Stock are traded on The Nasdaq Stock Market or a national securities exchange or (ii) the Fair Market Value for any date cannot be so determined, Fair Market Value shall be determined by the Committee by whatever means or method as the Committee, in the good faith exercise of its discretion, shall at such time deem appropriate. "FREE-STANDING SAR" shall mean an SAR which is not issued in tandem with, or by reference to, an option and which entitles the holder thereof to receive, upon exercise, shares of Common Stock (which may be Restricted Stock), cash or a combination thereof with an aggregate value equal to the excess of the Fair Market Value of one share of Common Stock on the date of exercise over the base price of such SAR, multiplied by the number of such SARs which are exercised. "INCENTIVE STOCK OPTION" shall mean an option to purchase shares of Common Stock that meets the requirements of Section 422 of the Code, or any successor provision, and which is designated as an Incentive Stock Option. "INCUMBENT BOARD" shall have the meaning set forth in Section 6.8(b)(2) hereof. "MATURE SHARES" shall mean shares of Common Stock for which the holder thereof has good title, free and clear of all liens and encumbrances and which such holder has held for at least six months. "NON-EMPLOYEE DIRECTOR" shall mean any director of the Company who is not an officer or employee of the Company or any Subsidiary; provided, however, that prior to the Reference Date, "Non-Employee Director" shall mean any director of the Company who is not an officer or employee of the Company, TSC, any subsidiary of TSC or any Subsidiary. "NON-STATUTORY STOCK OPTION" shall mean a stock option which is not an Incentive Stock Option. "OUTSTANDING COMMON STOCK" shall have the meaning set forth in Section 6.8(b)(1) hereof. "OUTSTANDING VOTING SECURITIES" shall have the meaning set forth in Section 6.8(b)(1) hereof. "PERFORMANCE MEASURES" shall mean the criteria and objectives, established by the Committee, which shall be satisfied or met (i) as a condition to the exercisability of all or a portion of an option or SAR, (ii) as a condition to the grant of a Stock Award or (iii) during the applicable Restriction Period or Performance Period as a condition to the holder's receipt, in the case of a Restricted Stock Award, of the shares of Common Stock subject to such award, or, in the case of a Performance Share Award, of the shares of Common Stock subject to such award and/or of payment with respect to such award. In the sole discretion of the Committee, the Committee may amend or adjust the Performance Measures or other terms and conditions of an outstanding award in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in law or accounting principles. Such criteria and objectives may include one or more of the following: the attainment by a share of Common Stock of a specified Fair Market Value for a specified period of time, earnings per share, return to stockholders (including dividends), operating income, operating income margin, return on equity, earnings of the Company, revenues, market share, cash flow or cost reduction goals, or any combination of the foregoing. If the Committee desires that compensation payable pursuant to any award subject to Performance Measures be "qualified performance-based compensation" within the meaning of Section 162(m) of the Code, the Performance Measures (i) shall be established by the Committee no later than 90 days after the beginning of the Performance Period or Restriction Period, as applicable (or such other time designated by the Internal Revenue Service) and (ii) shall satisfy all other applicable requirements imposed under Treasury Regulations promulgated under Section 162(m) of the Code, including the requirement that such Performance Measures be stated in terms of an objective formula or standard. 2 3 "PERFORMANCE PERIOD" shall mean any period designated by the Committee during which the Performance Measures applicable to a Performance Share Award shall be measured. "PERFORMANCE SHARE" shall mean a right, contingent upon the attainment of specified Performance Measures within a specified Performance Period, to receive one share of Common Stock, which may be Restricted Stock, or in lieu of all or a portion thereof, the Fair Market Value of such Performance Share in cash. "PERFORMANCE SHARE AWARD" shall mean an award of Performance Shares under this Plan. "PERMANENT AND TOTAL DISABILITY" shall have the meaning set forth in Section 22(e)(3) of the Code or any successor thereto. "REFERENCE DATE" shall mean the initial date that the Company shall be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act. "RESTRICTED STOCK" shall mean shares of Common Stock which are subject to a Restriction Period. "RESTRICTED STOCK AWARD" shall mean an award of Restricted Stock under this Plan. "RESTRICTION PERIOD" shall mean any period designated by the Committee during which the Common Stock subject to a Restricted Stock Award may not be sold, transferred, assigned, pledged, hypothecated or otherwise encumbered or disposed of, except as provided in this Plan or the Agreement relating to such award. "SAR" shall mean a stock appreciation right which may be a Free-Standing SAR or a Tandem SAR. "SPIN-OFF" shall mean a pro rata distribution by TSC to its stockholders of all of the shares of Common Stock then owned by TSC. "STOCK AWARD" shall mean a Restricted Stock Award or a Bonus Stock Award. "SUBSIDIARY" shall have the meaning set forth in Section 1.4. "SUBSTITUTE OPTIONS" shall have the meaning set forth in Section 2.4. "TANDEM SAR" shall mean an SAR which is granted in tandem with, or by reference to, an option (including a Non-Statutory Stock Option granted prior to the date of grant of the SAR), which entitles the holder thereof to receive, upon exercise of such SAR and surrender for cancellation of all or a portion of such option, shares of Common Stock (which may be Restricted Stock), cash or a combination thereof with an aggregate value equal to the excess of the Fair Market Value of one share of Common Stock on the date of exercise over the base price of such SAR, multiplied by the number of shares of Common Stock subject to such option, or portion thereof, which is surrendered. "TAX DATE" shall have the meaning set forth in Section 6.5. "TEN PERCENT HOLDER" shall have the meaning set forth in Section 2.1(a). "TSC" shall mean Technology Solutions Company, a Delaware corporation, and its successors. "TSC OPTIONS" shall have the meaning set forth in Section 2.4. 1.3 ADMINISTRATION. This Plan shall be administered by the Committee, pursuant to and subject to the terms of the Board's designation thereof and delegation thereto in accordance with Section 1.2 hereof. Notwithstanding any such Committee designation, the Board retains the right to assume full authority to administer the Plan in all respects hereunder. Any one or a combination of the following awards may be made under this Plan to eligible persons: (i) options to purchase shares of Common Stock in the form of Incentive Stock Options or Non-Statutory 3 4 Stock Options, (ii) SARs in the form of Tandem SARs or Free-Standing SARS, (iii) Stock Awards in the form of Restricted Stock or Bonus Stock and (iv) Performance Shares. The Board or, if applicable, the Committee shall, subject to the terms of this Plan, select eligible persons for participation in this Plan and determine the form, amount and timing of each award to such persons and, if applicable, the number of shares of Common Stock, the number of SARs and the number of Performance Shares subject to such an award, the exercise price or base price associated with the award, the time and conditions of exercise or settlement of the award and all other terms and conditions of the award, including, without limitation, the form of the Agreement evidencing the award. The Board or, if applicable, the Committee may, in its sole discretion and for any reason at any time, subject to the requirements imposed under Section 162(m) of the Code and regulations promulgated thereunder in the case of an award intended to be qualified performance-based compensation, take action such that (i) any or all outstanding options and SARs shall become exercisable in part or in full, (ii) all or a portion of the Restriction Period applicable to any outstanding Restricted Stock Award shall lapse, (iii) all or a portion of the Performance Period applicable to any outstanding Performance Share Award shall lapse and (iv) the Performance Measures applicable to any outstanding Restricted Stock Award (if any) and to any outstanding Performance Share Award shall be deemed to be satisfied at the maximum or any other level. The Board or, if applicable, the Committee shall, subject to the terms of this Plan, interpret this Plan and the application thereof, establish rules and regulations it deems necessary or desirable for the administration of this Plan and may impose, incidental to the grant of an award, conditions with respect to the award, such as limiting competitive employment or other activities. All such interpretations, rules, regulations and conditions shall be final, binding and conclusive. 1.4 ELIGIBILITY. Participants in this Plan shall consist of such directors, officers, other key employees, consultants, independent contractors and agents of the Company and its subsidiaries (individually a "Subsidiary" and collectively the "Subsidiaries") and, prior to the Spin-Off, directors, officers and other key employees of TSC and its subsidiaries, as the Committee in its sole discretion may select from time to time and such other persons receiving Substitute Options. For purposes of this Plan, references to employment shall also mean service as a director or pursuant to an agency or independent contractor relationship, and references to employment by the Company shall also mean employment by a Subsidiary or such other employer designated in the Agreement evidencing the award. Notwithstanding the preceding sentence, in the case of (i) options granted hereunder prior to the Reference Date and (ii) Substitute Options, references to employment with the Company shall include all employment with TSC or any of its subsidiaries. The Committee's selection of a person to participate in this Plan at any time shall not require the Committee to select such person to participate in this Plan at any other time. Without limiting their eligibility for discretionary awards under the Plan, as described above, Non-Employee Directors of the Company shall be eligible to participate in this Plan in accordance with Section V. Notwithstanding anything contained herein to the contrary, no person other than an employee of the Company or a Subsidiary may be granted an Incentive Stock Option hereunder. 1.5 SHARES AVAILABLE. Subject to adjustment as provided in Section 6.7, the total number of shares of Common Stock initially available for all grants of awards over the term of the Plan, other than Substitute Options, shall be 5,340,000. As of the first day of each fiscal year of the Company beginning on or after January 1, 2000, the total number of shares of Common Stock available for all grants under this Plan, other than Incentive Stock Options, shall automatically increase by an amount equal to five percent (5%) of the number of shares of Common Stock then outstanding. To the extent that shares of Common Stock subject to an outstanding option granted hereunder (except to the extent shares of Common Stock are issued or delivered by the Company in connection with the exercise of a Tandem SAR), Free-Standing SAR Stock Award or Performance Share are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or by reason of the delivery or withholding of shares of Common Stock to pay all or a portion of the exercise price of an award, if any, or to satisfy all or a portion of the tax withholding obligations relating to an award, then such shares of Common Stock shall again be available under this Plan. 4 5 Shares of Common Stock shall be made available from authorized and unissued shares of Common Stock, or authorized and issued shares of Common Stock reacquired and held as treasury shares or otherwise or a combination thereof. To the extent required by Section 162(m) of the Code and the rules and regulations thereunder, the maximum number of shares of Common Stock with respect to which options or SARS, Stock Awards or Performance Share Awards or a combination thereof may be granted to any person during (i) the 1999 fiscal year shall be 750,000 and (ii) any other fiscal year of the Company shall be 300,000, subject to adjustment as provided in Section 6.7. II. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS 2.1 STOCK OPTIONS. The Committee may, in its discretion, grant options to purchase shares of Common Stock to such eligible persons as may be selected by the Committee. Each option, or portion thereof, that is granted to a person other than an employee of the Company or a Subsidiary or that is otherwise not an Incentive Stock Option, shall be a Non-Statutory Stock Option. Each Incentive Stock Option shall be granted within ten years of the effective date of this Plan. To the extent that the aggregate Fair Market Value (determined as of the date of grant) of shares of Common Stock with respect to which options designated as Incentive Stock Options are exercisable for the first time by a participant during any calendar year (under this Plan or any other plan of the Company, or any parent or subsidiary as defined in Section 424 of the Code) exceeds the amount (currently $100,000) established by the Code, such options shall constitute Non-Statutory Stock Options. Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable: (a) Number of Shares and Purchase Price. The number of shares of Common Stock subject to an option and the purchase price per share of Common Stock purchasable upon exercise of the option shall be determined by the Committee; provided, however, that the purchase price per share of Common Stock purchasable upon exercise of an Incentive Stock Option shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant of such option; provided further, that if an Incentive Stock Option shall be granted to any person who, at the time such option is granted, owns capital stock possessing more than ten percent of the total combined voting power of all classes of capital stock of the Company (or of any parent or subsidiary) (a "Ten Percent Holder"), the purchase price per share of Common Stock shall be the price (currently 110% of Fair Market Value) required by the Code in order to constitute an Incentive Stock Option. (b) Option Period and Exercisability. The period during which an option may be exercised shall be determined by the Committee; provided, however, that no Incentive Stock Option shall be exercised later than ten years after its date of grant; provided further, that if an Incentive Stock Option shall be granted to a Ten Percent Holder, such option shall not be exercised later than five years after its date of grant. The Committee may, in its discretion, establish Performance Measures which shall be satisfied or met as a condition to the grant of an option or to the exercisability of all or a portion of an option. The Committee shall determine whether an option shall become exercisable in cumulative or non-cumulative installments and in part or in full at any time. An exercisable option, or portion thereof, may be exercised only with respect to whole shares of Common Stock. (c) Method of Exercise. An option may be exercised (i) by giving written notice to the Company specifying the number of whole shares of Common Stock to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Company's satisfaction) either (A) in cash, (B) by delivery of Mature Shares having an aggregate Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price 5 6 payable by reason of such exercise, (C) in cash by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (D) a combination of (A) and (B), in each case to the extent set forth in the Agreement relating to the option, (ii) if applicable, by surrendering to the Company any Tandem SARs which are cancelled by reason of the exercise of the option and (iii) by executing such documents as the Company may reasonably request. The Company shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(D) and in the case of an optionee who is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Common Stock which would be required to pay such purchase price shall be disregarded and the remaining amount due shall be paid in cash by the optionee. No certificate representing Common Stock shall be delivered until the full purchase price therefor has been paid (or arrangement made for such payment to the Company's satisfaction). 2.2 STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant SARs to such eligible persons as may be selected by the Committee. The Agreement relating to an SAR shall specify whether the SAR is a Tandem SAR or a Free-Standing SAR. SARs shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable: (a) Number of SARs and Base Price. The number of SARs subject to an award shall be determined by the Committee. Any Tandem SAR related to an Incentive Stock Option shall be granted at the same time that such Incentive Stock Option is granted. The base price of a Tandem SAR shall be the purchase price per share of Common Stock of the related option. The base price of a Free-Standing SAR shall be determined by the Committee. (b) Exercise Period and Exercisability. The Agreement relating to an award of SARs shall specify whether such award may be settled in shares of Common Stock (including shares of Restricted Stock) or cash or a combination thereof. The period for the exercise of an SAR shall be determined by the Committee; provided, however, that no Tandem SAR shall be exercised later than the expiration, cancellation, forfeiture or other termination of the related option. The Committee may, in its discretion, establish Performance Measures which shall be satisfied or met as a condition to the grant of an SAR or to the exercisability of all or a portion of an SAR. The Committee shall determine whether an SAR may be exercised in cumulative or non-cumulative installments and in part or in full at any time. An exercisable SAR, or portion thereof, may be exercised, in the case of a Tandem SAR, only with respect to whole shares of Common Stock and, in the case of a Free-Standing SAR, only with respect to a whole number of SARs. If an SAR is exercised for shares of Restricted Stock, a certificate or certificates representing such Restricted Stock shall be issued in accordance with Section 3.2(c) and the holder of such Restricted Stock shall have such rights of a stockholder of the Company as determined pursuant to Section 3.2(d). Prior to the exercise of an SAR for shares of Common Stock, including Restricted Stock, the holder of such SAR shall have no rights as a stockholder of the Company with respect to the shares of Common Stock subject to such SAR and shall have rights as a stockholder of the Company in accordance with Section 6.10. (c) Method of Exercise. A Tandem SAR may be exercised (i) by giving written notice to the Company specifying the number of whole SARs which are being exercised, (ii) by surrendering to the Company any options which are cancelled by reason of the exercise of the Tandem SAR and (iii) by executing such documents as the Company may reasonably request. A Free-Standing SAR may be exercised (i) by giving written notice to the Company specifying the whole number of SARs which are being exercised and (ii) by executing such documents as the Company may reasonably request. 2.3 TERMINATION OF EMPLOYMENT OR SERVICE. Subject to Section 1.4, all of the terms relating to the exercise, cancellation or other disposition of an option or SAR upon a termination of employment with or service to the Company of the holder of such option or SAR, as 6 7 the case may be, whether by reason of disability, retirement, death or other termination, shall be determined by the Committee. Such determination shall be made at the time of the grant of such option or SAR, as the case may be, and shall be specified in the Agreement relating to such option or SAR. 2.4 SUBSTITUTE AWARDS. In the event of a Spin-Off, the Committee shall be authorized to grant substitute options ("Substitute Options") to purchase Common Stock, in accordance with the terms hereof, to holders of options to acquire common stock of TSC ("TSC Options"). Such Substitute Options shall not be subject to the limit on the aggregate number of shares of Common Stock available for grants of awards under the Plan set forth in Section 1.5. The number of shares of Common Stock subject to Substitute Options shall be determined as follows: (a) eLoyalty Employees and Directors. A Substitute Option shall be granted to each holder of a TSC Option who, immediately after the Spin-Off, is an employee or director of the Company (but who is not also a director of TSC). The number of shares of Common Stock subject to such Substitute Option shall be determined by multiplying the number of shares subject to the TSC Option to which such Substitute Option relates by a ratio, the numerator of which is the trading price of a share of TSC common stock, traded "regular way," and the denominator of which is the trading price of a share of Common Stock, traded on a "when-issued" basis, in each case over a fixed period of time determined by the Committee on or around the record date of the Spin-Off. (b) Other TSC Option Holders. A Substitute Option shall be granted to each holder of a nonqualified TSC Option granted prior to June 22, 1999 who, immediately after the Spin-Off, is either (i) an employee or director of TSC or (ii) an employee or director of neither TSC nor the Company. The number of shares of Common Stock subject to such Substitute Option shall equal the number of shares of Common Stock that would be distributed in the Spin-Off with respect to a number of shares of TSC common stock equal to the number of shares subject to the TSC Option to which such Substitute Option relates immediately prior to the Spin-Off. The Committee shall determine the exercise price of each Substitute Option in a manner that preserves the economic value of the TSC Option to which such Substitute Option relates. The terms and conditions of each Substitute Option, including, without limitation, the expiration date of the option, the time or times when, and the manner in which, such Substitute Option shall be exercisable, the duration of the exercise period, the method of exercise, settlement and payment, and, subject to Section 1.4, the rules in the event of termination of employment, shall be the same as those of the TSC Option to which the Substitute Option relates. III. STOCK AWARDS 3.1 STOCK AWARDS. The Committee may, in its discretion, grant Stock Awards to such eligible persons as may be selected by the Committee. The Agreement relating to a Stock Award shall specify whether the Stock Award is a Restricted Stock Award or Bonus Stock Award. 3.2 TERMS OF STOCK AWARDS. Stock Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. (a) Number of Shares and Other Terms. The number of shares of Common Stock subject to a Restricted Stock Award or Bonus Stock Award and the Performance Measures (if any) and Restriction Period applicable to a Restricted Stock Award shall be determined by the Committee. (b) Vesting and Forfeiture. The Agreement relating to a Restricted Stock Award shall provide, in the manner determined by the Committee, in its discretion, and subject to the provisions of this Plan, for the vesting of the shares of Common Stock subject to such award (i) if 7 8 specified Performance Measures are satisfied or met during the specified Restriction Period or (ii) if the holder of such award remains continuously in the employment of or service to the Company during the specified Restriction Period and for the forfeiture of the shares of Common Stock subject to such award (x) if specified Performance Measures are not satisfied or met during the specified Restriction Period or (y) if the holder of such award does not remain continuously in the employment of or service to the Company during the specified Restriction Period. Bonus Stock Awards shall not be subject to any Performance Measures or Restriction Periods. (c) Share Certificates. During the Restriction Period, a certificate or certificates representing a Restricted Stock Award may be registered in the holder's name and may bear a legend, in addition to any legend which may be required pursuant to Section 6.6, indicating that the ownership of the shares of Common Stock represented by such certificate is subject to the restrictions, terms and conditions of this Plan and the Agreement relating to the Restricted Stock Award. All such certificates shall be deposited with the Company, together with stock powers or other instruments of assignment (including a power of attorney), each endorsed in blank with a guarantee of signature if deemed necessary or appropriate by the Company, which would permit transfer to the Company of all or a portion of the shares of Common Stock subject to the Restricted Stock Award in the event such award is forfeited in whole or in part. Upon termination of any applicable Restriction Period (and the satisfaction or attainment of applicable Performance Measures), or upon the grant of a Bonus Stock Award, in each case subject to the Company's right to require payment of any taxes in accordance with Section 6.5, a certificate or certificates evidencing ownership of the requisite number of shares of Common Stock shall be delivered to the holder of such award. (d) Rights with Respect to Restricted Stock Awards. Unless otherwise set forth in the Agreement relating to a Restricted Stock Award, and subject to the terms and conditions of a Restricted Stock Award, the holder of such award shall have all rights as a stockholder of the Company, including, but not limited to, voting rights, the right to receive dividends and the right to participate in any capital adjustment applicable to all holders of Common Stock; provided, however, that a distribution with respect to shares of Common Stock, other than a regular cash dividend, shall be deposited with the Company and shall be subject to the same restrictions as the shares of Common Stock with respect to which such distribution was made. (e) Awards to Certain Executive Officers. Notwithstanding any other provision of this Article III, and only to the extent necessary to ensure the deductibility of the award to the Company, the Fair Market Value of the number of shares of Common Stock subject to a Stock Award granted to a "covered employee" within the meaning of Section 162(m) of the Code shall not exceed $250,000 (i) at the time of grant in the case of a Stock Award granted upon the attainment of Performance Measures or (ii) in the case of a Restricted Stock Award with Performance Measures which shall be satisfied or met as a condition to the holder's receipt of the shares of Common Stock subject to such award, on the earlier of (x) the date on which the Performance Measures are satisfied or met and (y) the date the holder makes an election under Section 83(b) of the Code. 3.3 TERMINATION OF EMPLOYMENT OR SERVICE. All of the terms relating to the satisfaction of Performance Measures and the termination of the Restriction Period relating to a Restricted Stock Award, or any cancellation or forfeiture of such Restricted Stock Award upon a termination of employment with or service to the Company of the holder of such Restricted Stock Award, whether by reason of disability, retirement, death or other termination, shall be set forth in the Agreement relating to such Restricted Stock Award. 8 9 IV. PERFORMANCE SHARE AWARDS 4.1 PERFORMANCE SHARE AWARDS. The Committee may, in its discretion, grant Performance Share Awards to such eligible persons as may be selected by the Committee. 4.2 TERMS OF PERFORMANCE SHARE AWARDS. Performance Share Awards shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable. (a) Number of Performance Shares and Performance Measures. The number of Performance Shares subject to any award and the Performance Measures and Performance Period applicable to such award shall be determined by the Committee. (b) Vesting and Forfeiture. The Agreement relating to a Performance Share Award shall provide, in the manner determined by the Committee, in its discretion, and subject to the provisions of this Plan, for the vesting of such award, if specified Performance Measures are satisfied or met during the specified Performance Period, and for the forfeiture of such award, if specified Performance Measures are not satisfied or met during the specified Performance Period. (c) Settlement of Vested Performance Share Awards. The Agreement relating to a Performance Share Award (i) shall specify whether such award may be settled in shares of Common Stock (including shares of Restricted Stock) or cash or a combination thereof and (ii) may specify whether the holder thereof shall be entitled to receive, on a current or deferred basis, dividend equivalents, and, if determined by the Committee, interest on or the deemed reinvestment of any deferred dividend equivalents, with respect to the number of shares of Common Stock subject to such award. If a Performance Share Award is settled in shares of Restricted Stock, a certificate or certificates representing such Restricted Stock shall be issued in accordance with Section 3.2(c) and the holder of such Restricted Stock shall have such rights of a stockholder of the Company as determined pursuant to Section 3.2(d). Prior to the settlement of a Performance Share Award in shares of Common Stock, including Restricted Stock, the holder of such award shall have no rights as a stockholder of the Company with respect to the shares of Common Stock subject to such award and shall have rights as a stockholder of the Company in accordance with Section 6.10. 4.3 TERMINATION OF EMPLOYMENT OR SERVICE. All of the terms relating to the satisfaction of Performance Measures and the termination of the Performance Period relating to a Performance Share Award, or any cancellation or forfeiture of such Performance Share Award upon a termination of employment with the Company of the holder of such Performance Share Award, whether by reason of disability, retirement, death or other termination, shall be set forth in the Agreement relating to such Performance Share Award. V. PROVISIONS RELATING TO NON-EMPLOYEE DIRECTORS 5.1 ELIGIBILITY. Each Non-Employee Director shall be granted options to purchase shares of Common Stock in accordance with this Article V. All options granted under this Article V ("Automatic Non-Employee Director's Options") shall constitute Non-Statutory Stock Options. Notwithstanding anything to the contrary herein, any Non-Employee Director who was granted an option pursuant to Section 2.1 hereof on or around July 1, 1999 shall not be eligible to receive Automatic Non-Employee Director's Options hereunder. 5.2 GRANTS OF STOCK OPTIONS. Except as provided otherwise in Section 5.1, each Non-Employee Director shall be granted Automatic Non-Employee Director's Options as follows: (a) Automatic Initial Grant of Options. Each person who becomes a Non-Employee Director shall be automatically awarded and issued on the date of his or her first election to the Board, without further action of the Board or the Committee, an Automatic Non-Employee Director's Option to purchase 50,000 shares of Common Stock. An option described in this Section 5.2(a) shall hereinafter be referred to as an "Initial Grant." 9 10 (b) Automatic Annual Grant of Options. On the day immediately following the date of each annual meeting of stockholders of the Company (the "Current Annual Meeting"), beginning with the annual meeting that occurs in 2000, each Non-Employee Director (other than a Non-Employee Director who received an Initial Grant at the Current Annual Meeting) shall be automatically awarded and issued on such date, without further action of the Board or the Committee, an Automatic Non-Employee Director's Option to purchase 12,000 shares of Common Stock (an "Annual Grant"); provided that in the case of an Annual Grant to a Non-Employee Director who received an Initial Grant within the twelve-month period ending on the date of the Current Annual Meeting, the number of shares subject to such Annual Grant shall be 12,000 multiplied by a fraction, the numerator of which is the number of days in the period beginning on the day after the date of such Initial Grant and ending on the day of the Current Annual Meeting, and the denominator of which is 365. (c) Option Price. The purchase price per share of Common Stock subject to each Automatic Non-Employee Director's Option shall be 100 percent of the Fair Market Value of a share of Common Stock on the date such option is automatically granted. (d) Exercisability. Except as otherwise provided herein, each Automatic Non-Employee Director's Option shall not be exercisable until the last day of the calendar month following the calendar month in which such option is granted (the "Initial Date of Exercisability"). Each Initial Grant shall become exercisable incrementally on its Initial Date of Exercisability and on the last day of each of the next 47 calendar months following the Initial Date of Exercisability with respect to 1/48 of the shares of Common Stock subject to the Initial Grant on the date of its grant. Each Annual Grant shall become exercisable incrementally on its Initial Date of Exercisability and on the last day of each of the next 11 calendar months following the Initial Date of Exercisability with respect to one-twelfth of the shares of Common Stock subject to such Annual Grant on the date of its grant. An exercisable option, or portion thereof, may be exercised in whole or in part only with respect to whole shares of Common Stock. Automatic Non-Employee Director's Options shall be exercisable in accordance with Section 2.1(c). (e) Options Granted Prior to Reference Date. Notwithstanding Section 5.2(d), no option granted prior to the Reference Date pursuant to this Article V shall be exercisable until the Reference Date, at which time such option shall become exercisable for the same number of shares for which such option would have been exercisable under Section 5.2(d) as of the Reference Date. Such option shall thereafter continue to become exercisable in accordance with Section 5.2(d). The number of shares of Common Stock subject to each such option, and the exercise price thereof, shall be adjusted in accordance with the Agreement setting forth the terms of such option. 5.3 OPTION PERIOD AND TERMINATION OF DIRECTORSHIP. (a) Term and Termination of Option. The maximum term of each Automatic Non-Employee Director's Option shall be the date which is 10 years after the date on which it was granted (the "Expiration Date"). Each Automatic Non-Employee Director's Option shall terminate, to the extent not exercised or earlier terminated pursuant to the terms of this Article V, on its Expiration Date. In no event may an Automatic Non-Employee Director's Option be exercised, in whole or in part, after it terminates. (b) Termination of Directorship Other than by Death, Disability or Retirement. If the holder of an Automatic Non-Employee Director's Option ceases to be a director of the Company for any reason other than death, Disability, or Retirement, the option shall remain exercisable with respect to the number of shares subject to such option that are exercisable upon the effective date of such holder's ceasing to be a director and may thereafter be exercised for a period of five years from the effective date of such holder's ceasing to be a director or until the Expiration Date, whichever period is shorter, after which the Automatic Non-Employee Director's Option shall terminate in its entirety. (c) Death. If the holder of an Automatic Non-Employee Director's Option ceases to be a director of the Company by reason of death, the option shall become exercisable as of the date of death with respect to any or all of the shares subject to such option and may thereafter be exercised 10 11 for a period of one year from the date of death or until the Expiration Date, whichever period is shorter, after which the Automatic Non-Employee Director's Option shall terminate in its entirety. (d) Disability. If the holder of an Automatic Non-Employee Director's Option ceases to be a director of the Company by reason of Disability, the option shall become exercisable as of the effective date of such holder's ceasing to be a director with respect to any or all of the shares subject to such option and may thereafter be exercised for a period of five years from the effective date of such holder's ceasing to be a director or until the Expiration Date, whichever period is shorter, after which the Automatic Non-Employee Director's Option shall terminate in its entirety. For purposes of this Article V, "Disability" shall mean the inability of an individual to fully perform the duties of a director of the Company for a continuous period in excess of 360 days, as determined by the Board in its sole discretion. (e) Retirement. If the holder of an Automatic Non-Employee Director's Option ceases to be a director of the Company by reason of retirement after such holder has completed five years of service as a director of the Company and is at least 55 years of age ("Retirement"), the option shall remain exercisable with respect to the number of shares subject to such option that are exercisable upon the effective date of such Retirement, and may thereafter be exercised for a period of five years from the effective date of such Retirement or until the Expiration Date, whichever period is shorter, after which the Automatic Non-Employee Director's Option shall terminate in its entirety. (f) Death After Termination of Directorship. If the holder of an Automatic Non-Employee Director's Option dies after he or she has ceased to be a director of the Company, the option shall be exercisable only to the extent that it is exercisable on the date of such holder's death and may thereafter be exercised only for that period of time for which the option is exercisable immediately prior to the holder's death pursuant to Sections 5.3(b) through (e). VI. GENERAL 6.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan was initially adopted by the Board of Directors and approved by the stockholders on June 22, 1999 (the "Effective Date"). This Plan shall terminate ten years after its Effective Date, unless terminated earlier by the Board. Termination of this Plan shall not affect the terms or conditions of any award granted prior to termination. 6.2 AMENDMENTS. The Board may amend this Plan as it shall deem advisable, subject to any requirement of stockholder approval required by applicable law, rule or regulation, including Section 162(m) and Section 422 of the Code; provided, however, that no amendment shall be made without stockholder approval if such amendment would (a) increase the maximum number of shares of Common Stock available under this Plan (subject to Section 6.7), (b) effect any change inconsistent with Section 422 of the Code or (c) extend the term of this Plan. No amendment may impair the rights of a holder of an outstanding award without the consent of such holder. 6.3 AGREEMENT. Each award under this Plan shall be evidenced by an Agreement setting forth the terms and conditions applicable to such award. A copy of such document shall be provided to the recipient, and the Committee may, but need not, require that the recipient sign a copy of such document. Such document is referred to in the Plan as an "Agreement" regardless of whether any recipient signature is required. 6.4 NON-TRANSFERABILITY OF AWARDS. Unless otherwise specified in the Agreement relating to an award, no award shall be transferable other than by will, the laws of descent and distribution or pursuant to beneficiary designation procedures approved by the Company. Except to the extent permitted by the first sentence of this Section 6.4, or the Agreement relating to an award, each award may be exercised or settled during the holder's lifetime only by the holder or the holder's legal representative or similar person. Except to the extent permitted by the 11 12 first sentence of this Section 6.4 or the Agreement relating to an award, no award may be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any such award, other than as permitted by the first sentence of this Section 6.4 or the Agreement relating to an award, such award and all rights thereunder shall immediately become null and void. 6.5 TAX WITHHOLDING. The Company shall have the right to require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash pursuant to an award made hereunder, payment by the holder of such award of any Federal, state, local or other taxes which may be required to be withheld or paid in connection with such award. An Agreement may provide that (i) the Company shall withhold whole shares of Common Stock which would otherwise be delivered to a holder, having an aggregate Fair Market Value determined as of the date the obligation to withhold or pay taxes arises in connection with an award (the "Tax Date"), or withhold an amount of cash which would otherwise be payable to a holder, in the minimum amount necessary to satisfy any such obligation or (ii) the holder may satisfy any such obligation by any of the following means: (A) a cash payment to the Company, (B) delivery to the Company of Mature Shares having an aggregate Fair Market Value, determined as of the Tax Date, equal to the amount necessary to satisfy any such obligation, (C) authorizing the Company to withhold whole shares of Common Stock which would otherwise be delivered having an aggregate Fair Market Value, determined as of the Tax Date, or withhold an amount of cash which would otherwise be payable to a holder, equal to the minimum amount necessary to satisfy any such obligation, (D) in the case of the exercise of any option, a cash payment by a broker-dealer acceptable to the Company to whom the optionee has submitted an irrevocable notice of exercise or (E) any combination of (A), (B), and (C), in each case to the extent set forth in the Agreement relating to the award; provided, however, that the Company shall have sole discretion to disapprove of an election pursuant to any of clauses (B)-(E) and that in the case of a holder who is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the holder. 6.6 RESTRICTIONS ON SHARES. Each award made hereunder shall be subject to the requirement that if at any time the Company determines that the listing, registration or qualification of the shares of Common Stock subject to such award upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the delivery of shares thereunder, such shares shall not be delivered unless such listing, registration, qualification, consent, approval or other action shall have been effected or obtained, free of any conditions not acceptable to the Company. The Company may require that certificates evidencing shares of Common Stock delivered pursuant to any award made hereunder bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder. 6.7 ADJUSTMENT. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a regular cash dividend, the number and class of securities available under this Plan, the number and class of securities subject to each outstanding option and the purchase price per security, the number of securities subject to each option to be granted to Non-Employee Directors pursuant to Article V, the terms of each outstanding SAR, the number and class of securities subject to each outstanding Stock Award, and the terms of each outstanding Performance Share Award shall be appropriately adjusted by the Committee. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. If any such adjustment would result in a fractional security being (a) available under this Plan, such fractional security shall be disregarded, or (b) subject to an award under this Plan, the Company shall pay the holder 12 13 of such award, in connection with the first vesting, exercise or settlement of such award in whole or in part occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on the vesting, exercise or settlement date over (B) the exercise or base price, if any, of such award. 6.8 CHANGE IN CONTROL. (a) (1) Notwithstanding any provision in this Plan or any Agreement, in the event of a Change in Control, the Board may, but shall not be required to, make such adjustments to outstanding awards hereunder as it deems appropriate, including, without limitation, electing that each outstanding award shall be surrendered to the Company by the holder thereof, and that each such award shall immediately be cancelled by the Company, and that the holder shall receive, within a specified period of time from the occurrence of the Change in Control, a cash payment from the Company in an amount equal to: (i) in the case of an option, the number of shares of Common Stock then subject to such option, multiplied by the excess, if any, of the greater of (A) the highest per share price offered to stockholders of the Company in any transaction whereby the Change in Control takes place or (B) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control, over the purchase price per share of Common Stock subject to the option, (ii) in the case of a Free-Standing SAR, the number of shares of Common Stock then subject to such SAR, multiplied by the excess, if any, of the greater of (A) the highest per share price offered to stockholders of the Company in any transaction whereby the Change in Control takes place or (B) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control, over the base price of the SAR, and (iii) in the case of a Restricted Stock Award or Performance Award, the number of shares of Common Stock or the number of Performance Shares, as the case may be, then subject to such award, multiplied by the greater of (A) the highest per share price offered to stockholders of the Company in any transaction whereby the Change in the Control takes place or (B) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control. In the event of a Change in Control in which options are cancelled, each Tandem SAR related to a cancelled option shall be surrendered by the holder thereof and shall be cancelled simultaneously with the cancellation of the related option. The Company may, but is not required to, cooperate with any person who is subject to Section 16 of the Exchange Act to assure that any cash payment in accordance with the foregoing to such person is made in compliance with Section 16 and the rules and regulations thereunder. In the event of a Change in Control, the Board may, but shall not be required to, substitute for each share of Common Stock available under this Plan, whether or not then subject to an outstanding award, the number and class of shares into which each outstanding share of Common Stock shall be converted pursuant to such Change in Control. In the event of any such substitution, the purchase price per share in the case of an option and the base price in the case of an SAR shall be appropriately adjusted by the Committee. (b) Prior to the consummation of a Spin-Off, "Change in Control" shall mean any event, other than a Spin-Off, after which TSC is the beneficial owner of less than a majority of the Outstanding Voting Securities. After the consummation of a Spin-Off, "Change in Control" shall mean one or more of the following events: (1) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting 13 14 Securities"); excluding, however, the following: (A) any acquisition directly from the Company (excluding any acquisition resulting from the exercise of an exercise, conversion or exchange privilege unless the security being so exercised, converted or exchanged was acquired directly from the Company), (B) any acquisition by the Company, (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by a corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this Section 6.8(b); provided further, that for purposes of clause (B), if any Person (other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 25% or more of the Outstanding Common Stock or 25% or more of the Outstanding Voting Securities by reason of an acquisition by the Company, and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Common Stock or any additional Outstanding Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership shall constitute a Change in Control; (2) individuals who, as of the date of the Spin-Off constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to the date of the Spin-Off whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall not be deemed a member of the Incumbent Board; (3) the consummation of a reorganization, merger or consolidation of the Company or sale or other disposition of all or substantially all of the assets of the Company (a "Corporate Transaction"); excluding, however, a Corporate Transaction pursuant to which (i) all or substantially all of the individuals or entities who are the beneficial owners, respectively, of the Outstanding Common Stock and the Outstanding Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the outstanding securities of such corporation entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or indirectly) in substantially the same proportions relative to each other as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Common Stock and the Outstanding Voting Securities, as the case may be, (ii) no Person (other than: the Company; any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; the corporation resulting from such Corporate Transaction; and any Person which beneficially owned, immediately prior to such Corporate Transaction, directly or indirectly, 25% or more of the Outstanding Common Stock or the Outstanding Voting Securities, as the case may be) will beneficially own, directly or indirectly, 25% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or (4) the consummation of a plan of complete liquidation or dissolution of the Company. (c) (1) With respect to any optionee who is subject to Section 16 of the Exchange Act, notwithstanding the exercise period contained in any Agreement to which such optionee is a party and notwithstanding the expiration date of the term of such option (other than an Incentive Stock Option), in the event the Company is involved in a business 14 15 combination which is intended to be treated as a pooling of interests for financial accounting purposes (a "Pooling Transaction") or pursuant to which such optionee receives a substitute option to purchase securities of any entity, including an entity directly or indirectly acquiring the Company, then each option (or option in substitution thereof) held by such optionee shall be exercisable to the extent set forth in the Agreement evidencing such option until and including the latest of (x) the expiration date of the term of the option, (y) the date which is six months and one day after the consummation of such business combination and (z) the date which is ten business days after the date of expiration of any period during which such optionee may not dispose of a security issued in the Pooling Transaction in order for the Pooling Transaction to be accounted for as a pooling of interests; and (2) With respect to any holder of an SAR (other than an SAR which may be settled only for cash) who is subject to Section 16 of the Exchange Act, notwithstanding the exercise periods set forth in any Agreement to which such holder is a party, and notwithstanding the expiration date of the term of such SAR (other than a Tandem SAR which is related to an Incentive Stock Option), in the event the Company is involved in a Pooling Transaction or pursuant to which such holder receives a substitute SAR relating to any entity, including an entity directly or indirectly acquiring the Company, then each such SAR (or SAR in substitution thereof) held by such holder shall be exercisable to the extent set forth in the Agreement evidencing such SAR until and including the latest of (x) the expiration date of the term of such SAR, (y) the date which is six months and one day after the consummation of such business combination and (z) the date which is ten business days after the date of expiration of any period during which such holder many not dispose of a security issued in the Pooling Transaction in order for the Pooling Transaction to be accounted for as a pooling of interests. 6.9 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person shall have any right to participate in this Plan. Neither this Plan nor any award made hereunder shall confer upon any person any right to continued employment by the Company, TSC, or any of their subsidiaries or affiliates or affect in any manner the right of the Company, TSC, or any of their subsidiaries or affiliates to terminate the employment of any person at any time without liability hereunder. 6.10 RIGHTS AS STOCKHOLDER. No person shall have any right as a stockholder of the Company with respect to any shares of Common Stock or other equity security of the Company which is subject to an award hereunder unless and until such person becomes a stockholder of record with respect to such shares of Common Stock or equity security. 6.11 GOVERNING LAW. This Plan, each award hereunder and the related Agreement, and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to the principles of conflicts of laws. 15 EX-10.15 6 c60662ex10-15.txt ELOYALTY CORP. 2000 STOCK INCENTIVE PLAN 1 Exhibit 10.15 eLOYALTY CORPORATION 2000 STOCK INCENTIVE PLAN (AS AMENDED AND RESTATED AS OF FEBRUARY 28, 2001) I. INTRODUCTION 1.1 PURPOSES. The purposes of the 2000 Stock Incentive Plan (the "Plan") of eLoyalty Corporation, a Delaware corporation (the "Company"), are to (i) align the interests of the Company's stockholders and the recipients of awards under this Plan by increasing the proprietary interest of such recipients in the Company's growth and success, subject to the limitations set forth in Section 1.5 hereof, (ii) advance the interests of the Company by attracting and retaining employees of, and consultants and independent contractors performing services for, the Company or any of its Subsidiaries (as defined below) and (iii) motivate such persons to act in the long-term best interests of the Company's stockholders. 1.2 CERTAIN DEFINITIONS. "AGREEMENT" means the written agreement evidencing an award hereunder between the Company and the recipient of such award. "BOARD" means the Board of Directors of the Company. "CHANGE IN CONTROL" has the meaning set forth in Section 3.8(b). "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means one or more committees of the Board that have been designated by the Board to carry out certain respective actions under this Plan on behalf of the Board, subject to the limitations provided by the Board in any such designations; provided, however, that where necessary for compliance with Section 16 of the Exchange Act, and the rules and regulations promulgated thereunder, or where the Board deems it to be advisable for any reason whatsoever, such committee will consist of two or more members of the Board, each of whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3 under the Exchange Act. Notwithstanding any such committee designations, the Board retains the right to assume full authority to administer the Plan in all respects hereunder pursuant to Section 1.3 hereof. "COMMON STOCK" means the common stock, $.01 par value, of the Company. "COMPANY" has the meaning set forth in Section 1.1 hereof. "CORPORATE TRANSACTION" has the meaning set forth in Section 3.8(b)(3) hereof. "EFFECTIVE DATE" has the meaning set forth in Section 3.1 hereof. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FAIR MARKET VALUE" means the closing transaction price of a share of Common Stock as reported by The Nasdaq Stock Market or the principal national securities exchange on which the Common Stock is then traded, on the date as of which such value is being determined, or, if there are no reported transactions for such date, on the next preceding date for which transactions were reported; provided, however, that if the Fair Market Value for any date cannot be so determined, Fair Market Value will be determined by the Committee by whatever means or method as the Committee, in the good faith exercise of its discretion, shall at such time deem appropriate. "INCUMBENT BOARD" has the meaning set forth in Section 3.8(b)(2) hereof. "MATURE SHARES" mean shares of Common Stock for which the holder thereof has good title, free and clear of all liens and encumbrances, and which such holder has held for at least six months. "NON-EMPLOYEE DIRECTOR" means any director of the Company who is not an officer or employee of the Company or any Subsidiary. 2 "NON-STATUTORY STOCK OPTION" means a stock option that is not intended to be an "incentive stock option" pursuant to Section 422 of the Code. "OUTSTANDING COMMON STOCK" has the meaning set forth in Section 3.8(b)(1) hereof. "OUTSTANDING VOTING SECURITIES" has the meaning set forth in Section 3.8(b)(1) hereof. "PERFORMANCE MEASURES" mean the criteria and objectives, established by the Committee, which shall be satisfied or met as a condition to the exercisability of all or a portion of an option. In the discretion of the Committee, and subject to Section 3.2 hereof, the Committee may amend the Performance Measures or other terms and conditions of an outstanding award in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in law or accounting principles. Such criteria and objectives may include one or more of the following: the attainment by a share of Common Stock of a specified Fair Market Value for a specified period of time, earnings per share, return to stockholders (including dividends), operating income, operating income margin, return on equity, earnings of the Company, revenues, market share, cash flow or cost reduction goals, or any combination of the foregoing. "PERMANENT AND TOTAL DISABILITY" has the meaning set forth in Section 22(e)(3) of the Code or any successor thereto. "PERSON" has the meaning set forth in Section 3.8(b)(1) hereof. "POOLING TRANSACTION" has the meaning set forth in Section 3.8(c) hereof. "SUBSIDIARY" means any of the Company's subsidiaries within the meaning of Code Section 424(f). "TAX DATE" has the meaning set forth in Section 3.5. 1.3 ADMINISTRATION. This Plan will be administered by the Committee, pursuant to and subject to the terms of the Board's designation thereof and delegation thereto in accordance with Section 1.2 hereof. Notwithstanding any such Committee designation, the Board retains the right to assume full authority to administer the Plan in all respects hereunder. The Board or, if applicable, the Committee has the discretion to select eligible persons for participation in this Plan, subject to the restrictions on eligibility contained in Section 1.4 hereof, and determine the timing of each award to such persons, the number of shares of Common Stock subject to such an award, commensurate with the authority delegated to the Committee in accordance with the preceding paragraph and subject to the limitations set forth in Section 1.5 hereof, the exercise price associated with the award, subject to the limitations set forth in Section 2.1(a) hereof, the time and conditions of exercise of the award and all other terms and conditions of the award, including, without limitation, the form of the Agreement evidencing the award. The Board or, if applicable, the Committee may, in its discretion and for any reason at any time, take action such that any or all outstanding options under the Plan will become exercisable in part or in full. The Board or, if applicable, the Committee shall, subject to the terms of this Plan, interpret this Plan and the application thereof, establish rules and regulations it deems necessary or desirable for the administration of this Plan and may impose, incidental to the grant of an award, conditions with respect to the award, such as limiting competitive employment or other activities. All such interpretations, rules, regulations and conditions will be final, binding and conclusive. 1.4 ELIGIBILITY. Participants in this Plan will be limited to employees of, or consultants and independent contractors performing services for, the Company or any of its Subsidiaries. Non-Employee Directors are ineligible to participate in this Plan. For purposes of this Plan, references to employment also mean an agency or independent contractor relationship and references to employment by the Company also mean employment by a Subsidiary. The selection of a person to participate in this Plan at any time will not require the selection of such person to participate in this Plan at any other time. 2 3 1.5 SHARES AVAILABLE. Subject to adjustment as provided in Section 3.7, the total number of shares of Common Stock available for all grants of awards over the term of the Plan shall be 2,800,000. To the extent that shares of Common Stock subject to an outstanding option granted hereunder are not issued or delivered by reason of the expiration, termination, cancellation or forfeiture of such award or by reason of the delivery or withholding of shares of Common Stock to pay all or a portion of the exercise price of an award, if any, or to satisfy all or a portion of the tax withholding obligations relating to an award, then such shares of Common Stock will again be available under this Plan. Shares of Common Stock will be made available from authorized and unissued shares of Common Stock, or authorized and issued shares of Common Stock reacquired and held as treasury shares or otherwise or a combination thereof. Notwithstanding the foregoing, the maximum percentage of shares of Common Stock with respect to which awards may be granted under this Plan to officers and other persons subject to Section 16 of the Exchange Act will be 20% of the total number of shares available for awards under this Plan, as adjusted pursuant to Section 3.7. II. STOCK OPTIONS 2.1 STOCK OPTIONS. The Committee may, in its discretion and commensurate with the authority delegated to it pursuant to Section 1.3 hereof, grant options to purchase shares of Common Stock to such eligible persons, as set forth in Section 1.4 hereof, as may be selected by the Committee. The Committee will establish the terms and conditions of such options in accordance with this Section 2.1. All awards made under this Plan to eligible persons will be in the form of Non-Statutory Stock Options to purchase shares of Common Stock. Options shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem advisable: (a) Number of Shares and Purchase Price. The number of shares of Common Stock subject to an option and the purchase price per share of Common Stock purchasable upon exercise of the option will be determined by the Committee, subject to the limitations set forth in Section 1.5 hereof and this Section 2.1(a). The exercise price per share of Common Stock purchasable upon exercise of the option will not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant of an award; provided, however, that for any option granted in connection with the recipient's hiring, promotion or similar event, the option exercise price may not be less than the Fair Market Value of a share of Common Stock on the date on which the recipient is hired or promoted (or similar event), if the grant of the option occurs not more than 90 days after the date of such hiring, promotion or similar event. (b) Option Period and Exercisability. The period during which an option may be exercised will be determined by the Committee. The Committee may establish Performance Measures which will be satisfied or met as a condition to the grant of an option or to the exercisability of all or a portion of an option. The Committee will determine whether an option will become exercisable in cumulative or non-cumulative installments and in part or in full at any time. An exercisable option, or portion thereof, may be exercised only with respect to whole shares of Common Stock. (c) Method of Exercise. An option may be exercised (i) by giving written notice to the Company, on a form prescribed by the Company for this purpose, specifying the number of whole shares of Common Stock to be purchased and accompanied by payment therefor in full (or arrangement made for such payment to the Company's satisfaction) either (A) in cash or by certified or cashier's check payable in U.S. currency, (B) by tendering (either by actual delivery or by attestation of ownership) Mature Shares having an aggregate Fair Market Value, determined as of the date of exercise, equal to the aggregate purchase price payable by reason of such exercise, 3 4 (C) in cash by a third-party broker acceptable to the Company to whom the optionee has submitted copies of his or her irrevocable notice of exercise and irrevocable authorization for such third-party broker to sell shares of Common Stock acquired upon exercise of the option and to remit to the Company a sufficient portion of the sales proceeds to pay the aggregate exercise price for all of the shares of Common Stock acquired through the exercise of the option and any related tax withholdings pursuant to Section 3.5 hereof (with the original notice of exercise and authorization to be submitted to the Company or in accordance with such procedures as the Company may establish from time to time) or (D) a combination of any of the above, (ii) by executing such documents and complying with such procedures in connection therewith as the Committee may establish from time to time, and (iii) by satisfying an obligation to pay any Federal, state, local or other withholding taxes due upon the exercise of the option as set forth in Section 3.5 hereof. The Company will have sole discretion to disapprove of an election pursuant to any of clauses (B)-(D), and in the case of an optionee who is subject to Section 16 of the Exchange Act, the Company may require that the method of making such payment be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Common Stock which would be required to pay such purchase price will be disregarded and the remaining amount due will be paid in cash by the optionee. No certificate representing Common Stock will be delivered until the full purchase price therefor has been paid (or arrangement made for such payment to the Company's satisfaction). 2.2 TERMINATION OF EMPLOYMENT OR SERVICE. Subject to Section 1.4, all of the terms relating to the exercise, cancellation or other disposition of an option upon a termination of employment with or service to the Company of the holder of such option, as the case may be, whether by reason of disability, retirement, death or other termination, will be determined by the Committee. Such determination will be made at the time of the grant of such option and will be specified in the Agreement relating to such option. III. GENERAL 3.1 EFFECTIVE DATE AND TERM OF PLAN. This Plan will not be submitted to the stockholders of the Company for approval. This Plan became effective as of May 12, 2000 (the "Effective Date"), the date as of which the Board approved this Plan. This Plan will terminate ten years after its Effective Date, unless terminated earlier by the Board. Termination of this Plan will not affect the terms or conditions of any award granted prior to termination. 3.2 AMENDMENTS. The Board may amend or terminate this Plan as it deems advisable, prior to the expiration date set forth in Section 3.1 hereof, subject to any requirement of stockholder approval then required by applicable law, rule or regulation. No amendment may impair the rights of a holder of an outstanding award, without the consent of such holder. 3.3 AGREEMENT. Each award under this Plan will be evidenced by an Agreement setting forth the terms and conditions applicable to such award. A copy of such document shall be provided to the recipient, and the Committee may, but need not require that the recipient sign a copy of such document. Such document is referred to in the Plan as an "Agreement" regardless of whether any recipient signature is required. The Agreement is subject to all terms of this Plan. In the event of a discrepancy between the Agreement, or any document referencing or describing the Agreement, and this Plan, this Plan will govern in all respects. 3.4 NON-TRANSFERABILITY OF AWARDS. Unless otherwise specified in the Agreement relating to an award, no award may be transferable other than upon the option holder's death to his or her designated beneficiary, which beneficiary was designated pursuant to beneficiary designation procedures established by the Committee from time to time, or if no beneficiary was so designated, then by will or, if no will exists, then by the laws of descent and distribution. Except to the extent permitted by the first sentence of this Section 3.4, or the Agreement relating to an award, each award may be exercised or settled during the holder's lifetime only by the holder 4 5 or the holder's legal representative or similar person. Except to the extent permitted by the first sentence of this Section 3.4 or the Agreement relating to an award, no award may be sold, transferred, assigned, pledged, hypothecated, encumbered or otherwise disposed of (whether by operation of law or otherwise) or be subject to execution, attachment or similar process. Upon any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or otherwise dispose of any such award, other than as permitted by the first sentence of this Section 3.4 or the Agreement relating to an award, such award and all rights thereunder will immediately become null and void. 3.5 TAX WITHHOLDING. The Company has the right to require, prior to the issuance or delivery of any shares of Common Stock, payment by the holder of such award of any Federal, state, local or other taxes which may be required to be withheld or paid in connection with such award. At the Committee's discretion, and in accordance with procedures established by the Committee from time to time, the option holder may elect to satisfy any such obligation by any of the following means: (A) a payment to the Company in cash or by certified or cashier's check in U.S. currency, (B) by tendering (either by actual delivery or by attestation of ownership) Mature Shares having an aggregate Fair Market Value, determined as of the date the obligation to withhold or pay taxes arises in connection with an award (the "Tax Date"), equal to the amount necessary to satisfy any such obligation, (C) by authorizing the Company to withhold whole shares of Common Stock which would otherwise be delivered to the holder under this Plan, having an aggregate Fair Market Value determined as of the Tax Date, or withhold an amount of cash which would otherwise be payable to the holder, in the minimum amount necessary to satisfy any such obligation, (D) a cash payment by a third-party broker acceptable to the Company to whom the optionee has submitted copies of his or her irrevocable notice of exercise and authorization to such third-party broker to sell shares of Common Stock acquired upon exercise of the option and to remit to the Company a sufficient portion of the sales proceeds to cover such withholding tax obligations (with the original notice of exercise and authorization to be submitted to or as directed by the Company in accordance with Section 2.1(c) hereof), and (E) any combination of the above; provided, however, that the Company has the sole discretion to disapprove of an election pursuant to any of clauses (B)-(E), and that in the case of a holder who is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 and the rules and regulations thereunder. Any fraction of a share of Common Stock which would be required to satisfy such an obligation will be disregarded and the remaining amount due will be paid in cash by the holder. 3.6 RESTRICTIONS ON SHARES. Each award made hereunder will be subject to the requirement that if at any time the Company determines that the listing, registration or qualification of the shares of Common Stock subject to such award upon any securities exchange or under any law, or the consent or approval of any governmental body, or the taking of any other action is necessary or desirable as a condition of, or in connection with, the delivery of shares thereunder, such shares will not be delivered unless such listing, registration, qualification, consent, approval or other action has been effected or obtained, free of any conditions not acceptable to the Company. The Company may require that certificates evidencing shares of Common Stock delivered pursuant to any award made hereunder bear a legend indicating that the sale, transfer or other disposition thereof by the holder is prohibited except in compliance with the Securities Act of 1933, as amended, and the rules and regulations thereunder. 3.7 ADJUSTMENT. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination or exchange of shares, liquidation, split-up, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a regular cash dividend, the Board or, if applicable, the Committee will make adjustments to the number and class of securities available under this Plan, the number and class of securities subject to each outstanding option, and the purchase price per security for outstanding options and any other adjustments that the Board or Committee determines to be equitable and appropriate to preserve the benefits or potential benefits of awards under this Plan. The decision of the Board or Committee regarding any such adjustment will be final, binding and conclusive. If any such adjustment would result in a fractional security being (a) available under this Plan, such fractional security will be disregarded, or (b) subject to an option under this Plan, 5 6 the Company will pay the holder of such option, in connection with the first exercise thereof in whole or in part occurring after such adjustment, an amount in cash determined by multiplying (i) the fraction of such security (rounded to the nearest hundredth) by (ii) the excess, if any, of (A) the Fair Market Value on the exercise date over (B) the exercise price, if any, of such option. 3.8 CHANGE IN CONTROL. (a) Notwithstanding any provision in this Plan or any Agreement, and subject to Section 3.7 hereof, in the event of a Change in Control, the Board may, but is not required to, make such adjustments to outstanding awards hereunder as it deems appropriate, including, without limitation, electing that each outstanding option will be surrendered to the Company by the holder thereof, and that each such option will immediately be cancelled by the Company, and that the holder will receive, within a specified period of time from the occurrence of the Change in Control, a cash payment from the Company in an amount equal to the number of shares of Common Stock then subject to such option, multiplied by the excess, if any, of the greater of (A) the highest per share price offered to stockholders of the Company in any transaction whereby the Change in Control takes place or (B) the Fair Market Value of a share of Common Stock on the date of occurrence of the Change in Control, over the purchase price per share of Common Stock subject to the option. The Company may, but is not required to, cooperate with any person who is subject to Section 16 of the Exchange Act to assure that any cash payment in accordance with the foregoing to such person is made in compliance with Section 16 and the rules and regulations thereunder. In the event of a Change in Control, the Board may, but is not required to, substitute for each share of Common Stock available under this Plan, whether or not then subject to an outstanding award, the number and class of shares into which each outstanding share of Common Stock will be converted pursuant to such Change in Control. In the event of any such substitution, the purchase price per share in the case of an option will be appropriately adjusted by the Committee. The preceding two sentences notwithstanding, in the event of a Change in Control, the Board will make any and all adjustments required pursuant to Section 3.7 hereof. (b) "Change in Control" means one or more of the following events: (1) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Common Stock") or (ii) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); excluding, however, the following: (A) any acquisition directly from the Company (excluding any acquisition resulting from the exercise of an exercise, conversion or exchange privilege unless the security being so exercised, converted or exchanged was acquired directly from the Company), (B) any acquisition by the Company, (C) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by a corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (3) of this Section 3.8(b); provided further, that for purposes of clause (B), if any Person (other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) becomes the beneficial owner of 25% or more of the Outstanding Common Stock or 25% or more of the Outstanding Voting Securities by reason of an acquisition by the Company, and such Person, after such acquisition by the Company, becomes the beneficial owner of any additional shares of the Outstanding Common Stock or any additional Outstanding Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership will constitute a Change in Control; (2) individuals who, as of the Effective Date of this Plan constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to the Effective Date whose election, or nomination for election by the Company's stockholders, was approved by the 6 7 vote of at least a majority of the directors then comprising the Incumbent Board will be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board will not be deemed a member of the Incumbent Board; (3) the consummation of a reorganization, merger or consolidation of the Company or sale or other disposition of all or substantially all of the assets of the Company (a "Corporate Transaction"); excluding, however, a Corporate Transaction pursuant to which (i) all or substantially all of the individuals or entities who are the beneficial owners, respectively, of the Outstanding Common Stock and the Outstanding Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the outstanding securities of such corporation entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or indirectly) in substantially the same proportions relative to each other as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Common Stock and the Outstanding Voting Securities, as the case may be, (ii) no Person (other than: the Company; any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; the corporation resulting from such Corporate Transaction; and any Person which beneficially owned, immediately prior to such Corporate Transaction, directly or indirectly, 25% or more of the Outstanding Common Stock or the Outstanding Voting Securities, as the case may be) will beneficially own, directly or indirectly, 25% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or (4) the consummation of a plan of complete liquidation or dissolution of the Company. (c) With respect to any optionee who is subject to Section 16 of the Exchange Act, notwithstanding the exercise period contained in any Agreement to which such optionee is a party and notwithstanding the expiration date of the term of such option, in the event the Company is involved in a business combination which is intended to be treated as a pooling of interests for financial accounting purposes (a "Pooling Transaction") or pursuant to which such optionee receives a substitute option to purchase securities of any entity, including an entity directly or indirectly acquiring the Company, then each option (or option in substitution thereof) held by such optionee shall be exercisable to the extent set forth in the Agreement evidencing such option until and including the latest of (x) the expiration date of the term of the option, (y) the date which is six months and one day after the consummation of such business combination and (z) the date which is ten business days after the date of expiration of any period during which such optionee may not dispose of a security issued in the Pooling Transaction to be accounted for as a pooling of interest. 3.9 NO RIGHT OF PARTICIPATION OR EMPLOYMENT. No person has any right to participate in this Plan. Neither this Plan nor any award made hereunder confers upon any person any right to continued employment by or service with the Company or any of its subsidiaries or affiliates, or affect in any manner the right of the Company or any of its subsidiaries or affiliates to terminate the employment of or the performance of services by any person at any time without liability hereunder. 3.10 RIGHTS AS STOCKHOLDER. No person has any right as a security holder of the Company or any successor with respect to any shares of Common Stock or other securities which are or become subject to an award hereunder unless and until such person becomes a holder of record with respect to such shares of Common Stock or other securities. 7 8 3.11 GOVERNING LAW. This Plan, each award hereunder and the related Agreement, and all determinations made and actions taken pursuant thereto, to the extent not otherwise governed by the Code or the laws of the United States, will be governed by the laws of the State of Delaware and construed in accordance therewith without giving effect to the principles of conflicts of laws. 8 EX-10.16 7 c60662ex10-16.txt 1999 EMPLOYEE STOCK PURCHASE PLAN 1 Exhibit 10.16 eLOYALTY CORPORATION 1999 EMPLOYEE STOCK PURCHASE PLAN (AS AMENDED AND RESTATED AS OF FEBRUARY 28, 2001) 1. Purpose. The purpose of the eLoyalty Corporation 1999 Employee Stock Purchase Plan (the "Plan") is to provide employees of eLoyalty Corporation, a Delaware corporation (the "Company"), and its Subsidiary Companies (as defined in Section 15) added incentive to remain employed by such companies and to encourage increased efforts to promote the best interests of such companies by permitting eligible employees to purchase shares of the common stock, par value $.01, of the Company ("Common Stock") at below-market prices. The Plan is intended to qualify as an "employee stock purchase plan" under section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The Company and its Subsidiary Companies are sometimes hereinafter called individually a "Participating Company" or collectively the "Participating Companies." 2. Eligibility. Participation in the Plan shall be open to each employee of the Participating Companies (a) who has been continuously employed by the Participating Companies for at least three months, (b) whose customary employment by the Participating Companies is greater than 20 hours per week; and (c) whose customary employment by the Participating Companies is more than five months in any calendar year (each an "Eligible Employee") or any of its subsidiaries. For purposes of the preceding sentence, employment with Technology Solutions Company ("TSC") or any of its subsidiaries immediately prior to the Effective Date shall be treated as employment by a Participating Company. No right to purchase Common Stock hereunder shall accrue under the Plan in favor of any person who is not an Eligible Employee as of the first day of a Purchase Period (as defined in Section 4). Notwithstanding anything contained in the Plan to the contrary, no Eligible Employee shall acquire a right to purchase Common Stock hereunder (i) if, immediately after receiving such right, such employee would own 5% or more of the total combined voting power or value of all classes of stock of the Company or any Subsidiary Company (including any stock attributable to such employee under section 424(d) of the Code), or (ii) if for a given calendar year such right would permit such employee's aggregate rights to 2 purchase stock under all employee stock purchase plans of the Company and its Subsidiary Companies or Parent Corporation (which aggregate rights are exercisable during such calendar year) to accrue at a rate which exceeds $25,000 of fair market value of such stock for such calendar year, all determined in the manner provided by section 423(b)(8) of the Code and the rules and regulations thereunder. In addition, the number of shares of Common Stock which may be purchased by any Eligible Employee during any Purchase Period shall not exceed 1,500, subject to adjustment pursuant to Section 14. 3. Effective Date of Plan. The Plan was adopted by the Board of Directors (the "Board") on October 21, 1999, and thereafter approved by the stockholders of eLoyalty. The Plan became effective on February 16, 2000 (the "Effective Date"), one day after the record date of the pro rata distribution by TSC to its stockholders of all of the shares of Common Stock then owned by TSC. 4. Purchase Periods. The first "Purchase Period" shall be the period beginning on the Effective Date and ending on the last business day of the calendar quarter in which the Effective Date occurs (or the last business day of the first calendar quarter beginning after the Effective Date, if so determined by the Committee prior to the Effective Date in its sole discretion), and shall be followed thereafter by successive three-month Purchase Periods, each of which shall begin on the first business day of the following calendar quarter and end on the last business day of such calendar quarter. 5. Basis of Participation. (a) Each Eligible Employee shall be entitled to enroll in the Plan as of the first day of any Purchase Period which begins on or after such employee becomes an Eligible Employee and shall be considered a Participant in the Plan thereafter (a "Participant"). (i) To enroll in the Plan, an Eligible Employee shall execute and deliver a payroll deduction authorization (the "Authorization") to the Participating Company which is the employee's employer, or its designated agent, in the time and manner specified by the Committee. The Authorization shall become effective on the first day of the Purchase Period commencing after the execution and delivery of such Authorization. Each Authorization shall direct that payroll deductions be made by the Participating Company which is the employee's employer for each payroll period during which the employee is a Participant in the Plan. The amount of each payroll deduction specified in an Authorization for each such payroll period shall be a whole percentage amount or a whole dollar amount, as determined by the Committee, in either case not to exceed 15%, or such lesser percentage as may be determined by the Committee, -2- 3 of the Participant's current regular wage or salary (before withholding or other deductions) paid to him or her by any of the Participating Companies. (ii) Payroll deductions (and any other amount paid under the Plan) shall be made for each Participant in accordance with his or her Authorization until his or her participation in the Plan terminates or the Plan terminates, all as hereinafter provided. (iii) A Participant may change the amount of his or her payroll deduction by filing a new Authorization with the Company or its designated agent, which shall become effective on the first day of the Purchase Period commencing after the execution and delivery of such Authorization. No other changes shall be permitted, except that a Participant may elect to terminate his or her participation in the Plan as provided in Section 8. (iv) Payroll deductions shall be credited to a purchase account established on the books of the Company on behalf of each Participant (a "Purchase Account"). At the end of each Purchase Period, the amount in each Participant's Purchase Account will be applied to the purchase from the Company of the number of shares of Common Stock determined by dividing such amount by the Purchase Price (as defined in Section 6) for such Purchase Period. (b) The Committee may, in its discretion, establish additional procedures whereby Eligible Employees may participate in the Plan by means other than payroll deduction, including, but not limited to, delivery of funds by Participants in a lump sum or automatic charges to Participants' bank accounts. Such other methods of participating shall be subject to such rules and conditions as the Committee may establish. The Committee may at any time amend, suspend to terminate any participation procedures established pursuant to this paragraph without prior notice to any Participant or Eligible Employee. 6. Purchase Price. The purchase price (the "Purchase Price") per share of Common Stock hereunder for any Purchase Period shall be 85% of the lesser of (i) the fair market value of a share of Common Stock on the first day of such Purchase Period and (ii) the fair market value of a share of Common Stock on the last day of such Purchase Period, unless, prior to the beginning of such Purchase Period, the Committee shall determine otherwise (subject to the limitations contained in clause (iii) of Section 9(c)). If such determination results in a fraction of one cent, the Purchase Price shall be increased to the next higher full cent. The fair market value of a share of Common Stock on a given day shall be the average of the high and low transaction prices of a share of Common Stock as reported on The Nasdaq Stock MarketSM on the date as of which such value is being determined or, if there shall be no reported transactions on such date, on the next preceding date for which transactions were reported. In no event, however, shall the Purchase Price be less than the par value of the Common Stock. -3- 4 7. Issuance of Shares. (a) The Common Stock purchased by each Participant shall be considered to be issued and outstanding to his or her credit as of the close of business on the last day of each Purchase Period. The total number of shares of Common Stock purchased by all Participants during each Purchase Period shall be issued, as of the last day in such Purchase Period, to a nominee or agent for the benefit of the Participants. A Participant will be issued a certificate for his or her shares upon the request of the Participant in accordance with procedures established by the Company. (b) No interest shall accrue at any time for any amount credited to a Purchase Account of a Participant. After the close of each Purchase Period, a report will be sent to each Participant stating the entries made to his or her Purchase Account, the number of shares of Common Stock purchased and the applicable Purchase Price. 8. Termination of Participation. (a) A Participant may elect at any time to terminate his or her participation in the Plan, provided such termination is received by the Company in writing prior to the last business day of the Purchase Period for which such termination is to be effective. Upon any such termination, the Company shall promptly deliver to such Participant cash in an amount equal to the balance to his or her credit in his or her Purchase Account on the date of such termination. At any time after such termination, the Participant may request the delivery to such Participant of one or more certificates for the number of whole shares of Common Stock held for his or her benefit, and the cash equivalent for any fractional share so held. Such cash equivalent shall be determined by multiplying the fractional share by the fair market value of a share of Common Stock on the last day of the Purchase Period immediately preceding such termination, determined as provided in Section 6. (b) If the Participant dies, terminates his or her employment with the Participating Companies for any reason, or otherwise ceases to be an Eligible Employee (including, without limitation, as a result of a Participating Company ceasing to be a Subsidiary Company), his or her participation in the Plan shall immediately terminate. Upon such terminating event, the Company shall promptly deliver to such -4- 5 Participant or his or her legal representative, as the case may be, cash in an amount equal to the balance to his or her credit in his or her Purchase Account on the date of such termination. 9. Termination or Amendment of the Plan. (a) The Company, by action of the Board or the Committee, may terminate the Plan at any time. Notice of termination shall be given to all Participants, but any failure to give such notice shall not impair the effectiveness of the termination. (b) Without any action being required, the Plan will terminate in any event when the maximum number of shares of Common Stock to be sold under the Plan (as provided in Section 13) has been purchased. Such termination shall not impair any rights which under the Plan shall have vested on or prior to the date of such termination. If at any time the number of shares remaining available for purchase under the Plan are not sufficient to satisfy all then-outstanding purchase rights, the Board may determine an equitable basis of apportioning available shares among all Participants consistent with Section 423 of the Code. (c) The Board or the Committee may amend the Plan from time to time in any respect for any reason; provided, however, no such amendment shall (i) materially adversely affect any purchase rights outstanding under the Plan during the Purchase Period in which such amendment is to be effected, (ii) unless approved by the stockholders of the Company, increase the maximum number of shares of Common Stock which may be purchased under the Plan, (iii) decrease the Purchase Price of the shares of Common Stock for any Purchase Period below the lesser of 85% of the fair market value thereof on the first day of such Purchase Period and 85% of the fair market value thereof on the last day of such Purchase Period, (iv) unless approved by the stockholders of the Company, change the class of employees eligible to participate in the Plan or (v) adversely affect the qualification of the Plan under section 423 of the Code. (d) Upon termination of the Plan, the respective cash balance, if any, to the credit of each Participant in his or her Purchase Account, one or more certificates for the number of whole shares of -5- 6 Common Stock held for his or her benefit, and the cash equivalent of any fractional share so held, determined as provided in Section 8(a), shall be promptly distributed to such Participant. 10. Non-Transferability. Rights acquired under the Plan are not transferable and may be exercised only by a Participant. 11. Stockholder's Rights. No Eligible Employee or Participant shall by reason of the Plan have any rights of a stockholder of the Company until and to the extent he or she shall acquire shares of Common Stock as herein provided. 12. Administration of the Plan. (a) The Plan shall be administered by the Compensation Committee of the Board (the "Committee"), provided that the Board may otherwise appoint (i) the entire Board or (ii) a committee consisting of two or more members of the Board, to act as the Committee. In addition to the power to amend or terminate the Plan pursuant to Section 9, the Committee shall have full power and authority to: (A) interpret and administer the Plan and any instrument or agreement entered into under the Plan; (B) establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (C) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan. Decisions of the Committee shall be final, conclusive and binding upon all persons, including the Company, any Participant and any other employee of the Company. A majority of the members of the Committee may determine its actions and fix the time and place of its meetings. (b) The Plan shall be administered so as to ensure all Participants have the same rights and privileges as required by section 423(b)(5) of the Code. 13. Maximum Number of Shares. Subject to the following sentence, the maximum number of shares of Common Stock which may be purchased under the Plan is 500,000, subject, however, to adjustment as hereinafter set forth. Effective upon approval by the Company's stockholders of the amendment to increase the maximum number of shares under the Plan as hereinafter set forth (which amendment is submitted to such stockholders for their approval at the Company's 2001 Annual -6- 7 Meeting of stockholders), the maximum number of shares of Common Stock which may be purchased under the Plan is 1,250,000, subject, however, to adjustment as hereinafter set forth. Shares of Common Stock sold hereunder may be treasury shares, authorized and unissued shares, or a combination thereof. 14. Adjustment. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a regular cash dividend, the maximum number and class of securities which may be purchased under this Plan, the maximum number and class of securities that may be purchased by any Eligible Employee during any Purchase Period, and the purchase price per security shall be appropriately adjusted by the Committee. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. If any such adjustment would result in a fractional security being available under this Plan, such fractional security shall be disregarded. 15. Miscellaneous. (a) Except as otherwise expressly provided herein, any Authorization, election, notice or document under the Plan from an Eligible Employee or Participant shall be delivered to the Company, the Participating Company that is the employer of such Eligible Employee, or their designated agents and, subject to any limitations specified in the Plan, shall be effective when so delivered. (b) The term "business day" shall mean any day other than Saturday, Sunday or a legal holiday recognized by the Participating Corporation for which the Participant is employed. (c) The term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (d) The term "Parent Corporation" shall mean any corporation which is, or becomes, after the Effective Date, a parent corporation of the Company (within the meaning of Section 424(e) of the Code). (e) The term "Subsidiary Companies" shall mean all corporations which are, or become, after the Effective Date, subsidiary corporations (within the meaning of Section 424(f) of the Code) and of which the Company is the common parent. -7- 8 (f) The Plan, and the Company's obligation to sell and deliver Common Stock hereunder, shall be subject to all applicable federal, state and foreign laws, rules and regulations, and to such approval by any regulatory or governmental agency as may, in the opinion of counsel for the Company, be required. 16. Change in Control. (a) In order to maintain the Participants' rights in the event of any Change in Control of the Company, as hereinafter defined, upon such Change in Control, the then current Purchase Period shall thereupon end, and all Participants' Purchase Accounts shall be applied to purchase shares of Common Stock pursuant to Section 6, and the Plan shall immediately thereafter terminate. (b) "Change in Control" for the purposes hereof means the occurrence of any of the following events after the Effective Date: (i) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 35% or more of either (A) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then outstanding securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following: (1) any acquisition directly from the Company (excluding any acquisition resulting from the exercise of an exercise, conversion or exchange privilege, unless the security being so exercised, converted or exchanged was acquired directly from the Company); (2) any acquisition by the Company; (3) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary Corporation; or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) of this Section 16(b); provided further, that for purposes of clause (2) above, if any Person (other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company) shall become the beneficial owner of 35% or more of the Outstanding Company Common Stock or 35% or more of the Outstanding Company Voting Securities by reason of an acquisition by the Company, and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Company Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership shall constitute a Change in Control; (ii) individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board, shall be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any -8- 9 other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board, shall not be deemed a member of the Incumbent Board; (iii) approval by the stockholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Corporate Transaction"); excluding, however, a Corporate Transaction pursuant to which (A) all or substantially all of the individuals or entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock and the combined voting power of the outstanding securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or indirectly) in substantially the same proportions relative to each other as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or a Subsidiary Corporation, the corporation resulting from such Corporate Transaction, and any Person who beneficially owned, immediately prior to such Corporate Transaction, directly or indirectly, 35% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) will beneficially own, directly or indirectly, 35% or more of, respectively, the outstanding shares of common stock or the combined voting power of the outstanding securities entitled to vote generally in the election of directors of the corporation resulting from such Corporate Transaction and (C) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or (iv) approval by the stockholders of the Company of a plan of complete liquidation or dissolution of the Company. -9- EX-10.18 8 c60662ex10-18.txt SUMMARY OF DISCRETIONARY CASH BONUS PROGRAM 1 EXHIBIT 10.18 eLOYALTY CORPORATION SUMMARY OF DISCRETIONARY CASH BONUS PROGRAM FOR EXECUTIVE OFFICERS GENERAL The Company believes a significant portion of its executive officers' compensation should be at risk and subject to achievement of financial goals and other critical business objectives. Accordingly, a significant portion of each executive officer's target total cash compensation is delivered through the Company's discretionary cash bonus program. All executive officers of the Company are eligible to receive a discretionary cash bonus award. A target bonus award is established for each executive officer. The target bonuses are stated as a percentage of base salary and currently range from 40% to 110% of base salary. Actual cash bonus awards paid may be equal to, more than or less than the targeted bonus amounts, depending on how actual results compare with pre-established strategic and financial goals. Except as noted in the following sentence, all cash bonus awards are discretionary and are not guaranteed. On occasion and related to a specific situation, such as an offer of employment, cash bonus awards may be guaranteed for a limited period of time. ADMINISTRATION The Compensation Committee of the Board of Directors (the "Committee") is responsible for identifying appropriate strategic and financial goals, determining appropriate weights and measures for such goals, and measuring actual performance achievement against such goals. Additionally, the Committee approves both the bonus targets and the actual bonus payment amounts for each of the executive officers. The Committee retains discretion to adjust, upward or downward, the bonus payment amounts. WEIGHTS AND MEASURES Performance is measured on an annual basis coincident with the Company's fiscal year. At the beginning of each annual performance period, the Committee identifies key strategic and financial objectives for each executive officer. The Committee has broad discretion to select appropriate strategic and financial objectives, and the respective weightings of such objectives, upon which the executive officers' bonuses will be based. Performance criteria selected by the Committee may include, but is not limited to, revenue, net income, contribution profit margin, product line revenue, accounts receivable management, customer satisfaction, cost management, employee turnover, new business initiatives and leadership. Measured achievement of such goals may be formulaic based on specific quantifiable results and pre-determined payout matrices, or may require subjective evaluation. The Committee may establish common performance objectives that apply to all executive officers or it may establish performance criteria specific to each executive officer. -1- 2 BONUS DETERMINATION AND PAYMENT Annual - Performance objectives shall be established for each fiscal year. At the end of each fiscal year, achievement against those pre-established objectives shall be measured and a final bonus determination made. The Board and Committee retain discretion to adjust, upward or downward, the bonus payment amounts. Payment of cash bonus awards will be made as soon as practicable following the end of the fiscal year and will be reduced for any payments made during the year as described below. Quarterly - Although the performance objectives are established on an annual basis and the final payout determined based on achievement of those annual objectives, achievement is measured at the end of each quarter and the results communicated to the executive officers to reinforce the relationship between pay and performance throughout the year. The Board may, in its discretion, authorize quarterly payments of cash bonus awards based on each executive officer's pro-rated target bonus and his or her year-to-date performance as measured through the end of the applicable quarter, provided, however, that the cash bonus amount paid to an executive officer at the end of any quarter (other than at the end of the fiscal year) may not exceed 50% of the projected total cash bonus as determined through the end of the applicable quarter. The Board has authorized quarterly payments to be made beginning with the 2000 fiscal year. In the event the aggregate quarterly bonus payments exceed the annual cash bonus award determined upon completion of the fiscal year, no additional amount shall be paid to the executive officer for such fiscal year and the executive officer shall not be required to reimburse the Company for any excess payments received. Executive officers must be employed by the Company on the date of payment in order to receive a payment under the program. Awards are not accrued, earned or vested at any time and are payable at the sole discretion of the Company. -2- EX-10.21 9 c60662ex10-21.txt PROMISSORY NOTE BY KELLY D CONWAY 1 EXHIBIT 10.21 PROMISSORY NOTE U.S. $125,000.00 December 15, 1999 FOR VALUE RECEIVED, the undersigned, Kelly D. Conway, 950 Woodbine Place, Lake Forest, Illinois 60045 ("Borrower"), hereby unconditionally promises to pay to the order of TECHNOLOGY SOLUTIONS COMPANY, a Delaware Corporation ("Lender"), having its principal office at 205 North Michigan Avenue, Chicago, Illinois 60601, in lawful money of the United States of America and in immediately available funds, the principal sum of ONE HUNDRED TWENTY FIVE THOUSAND DOLLARS AND NO CENTS ($125,000.00), together with interest on the principal balance from time to time outstanding at the rate of five and seventy-four one hundredths percent (5.74%) per annum from the date hereof until payment in full thereof in accordance with the immediately succeeding paragraph. The principal indebtedness evidenced hereby, together with interest as aforesaid, shall be payable on March 1, 2000 (the "Payment Date"). Borrower reserves the right to prepay this Note, in whole or in part, at any time without penalty. In the event of such prepayment, the amount so prepaid will be applied to principal due and interest will be adjusted accordingly. Payments received by Lender from Borrower on this Note shall be applied first to the payment of interest which is due and payable and only thereafter to the outstanding principal balance. In addition to any permissive prepayments made hereunder, Borrower agrees that the portion of Borrower's annual bonus for fiscal year 1999 that is necessary to prepay the full outstanding balance of principal and interest due hereunder will on February 29, 2000, the date on which Lender anticipates paying bonuses to its employees, automatically be applied by Lender as a mandatory prepayment hereunder without the necessity of further action by Borrower. If the net after tax amount of Borrower's bonus for fiscal year 1999 is insufficient to prepay the full outstanding balance of principal and interest due hereunder, then the remaining balance will be due and payable on the Payment Date. All payments of principal and interest under this Note shall be made by Borrower to Lender, at Lender's principal place of business as set forth above, or at such other place as Lender may from time to time designate in writing. The occurrence or existence of one or more of the following events shall constitute an event of default ("Default") under this Note: (i) the failure of Borrower to pay when due any principal or interest due hereunder; or (ii) (a) Borrower shall become generally unable to pay his debts as they become due, or (b) Borrower shall make an assignment for the benefit of creditors, or (c) Borrower shall call a meeting of creditors 2 for the composition of debts, or (d) a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed by or against Borrower, or a custodian, receiver or agent is appointed or authorized to take charge of any of Borrower's properties, or Borrower takes any action to authorize any of the foregoing; or (iii) Borrower shall no longer remain, for any reason, an employee of Lender, or a parent or subsidiary company of Lender; or (iv) there shall be entered against Borrower any judgment or judgments in an aggregate amount in excess of $25,000, unless the amounts of such judgment or judgments are covered by insurance and liability under such insurance has been admitted by the issuer thereof. In an event of Default, Lender may, by notice to Borrower, declare all the indebtedness evidenced by this Note to be, and thereupon such indebtedness shall become, immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Borrower; provided, however, that if the Default specified in clause (ii)(d) in the immediately preceding paragraph occurs, the indebtedness evidenced by this Note shall automatically become due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by Borrower. If payment hereunder becomes due and payable on a day which is not a "Business Day" (as defined below), the due date thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon during such extension at the rate specified above. "Business Day" shall mean a day on which banks in Chicago, Illinois are open for the transaction of banking business. In no case or event whatsoever shall interest charged hereunder, however such interest may be characterized or computed, exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that Lender has received interest hereunder in excess of the highest rate applicable hereto, Lender shall (i) apply such excess to any unpaid principal balance due and payable by Borrower hereunder to Lender; and (ii) if the amount of such excess exceeds the unpaid principal and other liabilities due and payable by Borrower hereunder, Lender shall remit such excess to Borrower. Any notice hereunder shall be sufficiently given if in writing and delivered in person or mailed by first class mail addressed as follows: IF TO BORROWER: Kelly D. Conway 950 Woodbine Place Lake Forest, Illinois 60045 -2- 3 IF TO LENDER: Technology Solutions Company 205 North Michigan Avenue, Suite 1500 Chicago, Illinois 60601 Attention: Vice President and Chief Financial Officer Borrower and Lender may each designate additional or different addresses by notice to the other party as provided herein. Lender shall be under no obligation to marshal any assets in favor of Borrower in payment of any or all of Borrower's liabilities hereunder. To the extent that Borrower makes a payment or payments to Lender, and such payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, provincial, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part hereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. Any dispute between Lender and Borrower arising out of, connected with, related to, or incidental to the relationship established between them in connection with this Note, and whether arising in contract, tort, equity, or otherwise, shall be resolved in accordance with the internal laws and not the conflicts of law provisions of the State of Illinois. Except as provided in the immediately succeeding paragraph, Lender and Borrower each agree that all disputes between them arising out of, connected with, related to, or incidental to the relationship established between them in connection with this Note and whether arising in contract, tort, equity, or otherwise, shall be resolved only by state or federal courts located in Cook County, Illinois, but Lender and Borrower acknowledge that any appeals from those courts may have to be heard by a court located outside of Cook County, Illinois. Borrower waives any and all objections that he may have to the location of the court considering the dispute. Borrower agrees that Lender shall have the right to proceed against Borrower or his property in a court in any location to enable Lender to enforce a judgment or other court order entered in favor of Lender. Borrower agrees that he will not assert any permissive counterclaims in any proceeding brought by Lender to enforce a judgment or other court order in favor of Lender. Borrower waives any objection that he may have to the location of the court in which Lender has commenced a proceeding described in this paragraph. Borrower waives personal service of any process upon him and consents that all such service of process be made by registered mail directed to Borrower at the address stated herein. -3- 4 Borrower waives the posting of any bond otherwise required of Lender to enforce any judgment or other court order entered in favor of Lender, or to enforce this note by specific performance, temporary restraining order, preliminary or permanent injunction. Whenever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. Whenever in this Note reference is made to Lender or Borrower, such reference shall be deemed to include, as applicable, a reference to their respective successors and assigns, and the provisions of this Note shall be binding upon and shall inure to the benefit of said successors and assigns. Borrower's successors and assigns shall include, without limitation, a receiver, receiver and manager, trustee or debtor-in-possession of or for Borrower. By: /s/ KELLY D. CONWAY ------------------------------ Kelly D. Conway Borrower -4- EX-10.24 10 c60662ex10-24.txt PROMISSORY NOTE OF TIMOTHY J CUNNINGHAM 1 Exhibit 10.24 PROMISSORY NOTE U.S. $200,000 November 19, 1999 FOR VALUE RECEIVED, the undersigned, Timothy Cunningham 950 Havenwood Lane Lake Forest, IL 60045 ("Borrower"), hereby unconditionally promises to pay to the order of TECHNOLOGY SOLUTIONS COMPANY, a Delaware Corporation ("Lender"), having its principal office at 205 North Michigan Avenue, Chicago, Illinois 60601, in lawful money of the United States of America and in immediately available funds, the principal sum of TWO HUNDRED THOUSAND DOLLARS AND NO CENTS ($200,000) together with interest on the principal balance from time to time outstanding at the rate of FIVE AND FIFTY SEVEN HUNDREDTHS percent (5.57%) per annum from the date hereof until payment in full thereof in accordance with the immediately succeeding paragraph. The principal indebtedness evidenced hereby, together with interest as aforesaid, shall be payable on November 19, 2002 (the "Payment Date"), whereby Borrower shall pay to Lender the sum of TWO HUNDRED THIRTY FIVE THOUSAND THREE HUNDRED SIXTEEN Dollars and SIX CENTS ($235,316.06) such sum comprised of TWO HUNDRED THOUSAND Dollars ($200,000) of principal repayment and THIRTY FIVE THOUSAND THREE HUNDRED SIXTEEN Dollars and SIX CENTS ($35,316.06) of interest payment; provided, however, that if Borrower has been employed by Lender, or any parent or subsidiary company of Lender, from the date hereof through and including the Payment Date, then such principal indebtedness and interest shall be discharged and forgiven by Lender and shall no longer be due and, accordingly, Borrower shall have no further obligation to Lender hereunder. In the event that Borrower terminates his employment with Lender of Borrower's own accord, or if Borrower's employment with Lender is terminated for "Serious Misconduct," then the full amount of outstanding principal and accrued interest shall immediately become due and payable. In the event that Borrower's employment with Lender terminates for any reason other than Serious Misconduct or of Borrower's own accord, then such principal indebtedness and interest shall be discharged and forgiven by Lender and shall no longer be due and, accordingly, Borrower shall have no further obligation to Lender hereunder. Borrower, however, shall in all cases be responsible for income tax on the principal plus interest, if and when they are recognized as income, which may be withheld by Lender. For purposes of this Promissory Note, "Serious Misconduct" means embezzlement or misappropriation of corporate funds, other acts of dishonesty, significant activities materially harmful to Lender's reputation, willful refusal to perform or substantial disregard of Borrower'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 Lender. Borrower reserves the right to prepay this Note, in whole or in part, at any time without penalty. In the event of such prepayment, the amount so prepaid will be applied to principal due and interest will be adjusted accordingly. Payments received by 2 Lender from Borrower on this Note shall be applied first to the payment of interest, which is due and payable and only thereafter to the outstanding principal balance. All payments of principal and interest under this Note shall be made by Borrower to Lender, at Lender's principal place of business as set forth above, or at such other place as Lender may from time to time designate in writing. The occurrence or existence of one or more of the following events shall constitute an event of default ("Default") under this Note: (i) the failure of Borrower to pay when due any principal or interest due hereunder; or (ii) (a) Borrower shall become generally unable to pay his debts as they become due, or (b) Borrower shall make an assignment for the benefit of creditors, or (c) Borrower shall call a meeting of creditors for the composition of debts, or (d) a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed by or against Borrower, or a custodian, receiver or agent is appointed or authorized to take charge of any of Borrower's properties, or Borrower takes any action to authorize any of the foregoing; or (iii) Borrower shall no longer remain an employee of Lender, or a parent or subsidiary company of Lender because of termination due to Serious Misconduct or because of Borrower's own accord; or (iv) there shall be entered against Borrower any judgment or judgments in an aggregate amount in excess of $25,000, unless the amounts of such judgment or judgments are covered by insurance and liability under such insurance has been admitted by the issuer thereof. In an event of Default, Lender may, by notice to Borrower, declare all the indebtedness evidenced by this Note to be, and thereupon such indebtedness shall become, immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Borrower; provided, however, that if the Default specified in clause (ii) (d) in the immediately preceding paragraph occurs, the indebtedness evidenced by this Note shall automatically become due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by Borrower. If payment hereunder becomes due and payable on a day which is not a "Business Day" (as defined below), the due date thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon during such extension at the rate specified above. ",Business Day" shall mean a day on which banks in Chicago, Illinois are open for the transaction of banking business. In no case or event whatsoever shall interest charged hereunder, however such interest may be characterized or computed, exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that Lender has received interest hereunder in excess of the highest rate applicable hereto, Lender shall (i) apply such excess to any unpaid principal balance due and payable by Borrower hereunder to Lender; and (ii) if the amount of such excess exceeds the unpaid principal and other liabilities due and payable by Borrower hereunder, Lender shall remit such excess to Borrower. -2- 3 Any notice hereunder shall be sufficiently given if in writing and delivered in person or mailed by first class mail addressed as follows: IF TO BORROWER: Timothy Cunningham 954 Havenwood Lane Lake Forest, IL 60045 IF TO LENDER: Technology Solutions Company 205 North Michigan Avenue, Suite 1500 Chicago, Illinois 60601. Attention: Vice President and Chief Financial Officer Borrower and Lender may each designate additional or different addresses by notice to the other party as provided herein. Lender shall be under no obligation to marshal any assets in favor of Borrower in payment of any or all of Borrower's liabilities hereunder. To the extent that Borrower makes a payment or payments to Lender and such payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, provincial, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part hereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. Any dispute between Leader and Borrower arising out of, connected with, related to, or incidental to the relationship established between them in connection with this Note, and whether arising in contract, tort, equity, or otherwise, shall be resolved in accordance with the internal laws and not the conflicts of law provisions of the State of Illinois. Except as provided in the immediately succeeding paragraph, Lender and Borrower each agree that all disputes between them arising out of, connected with, related to, or incidental to the relationship established between them in connection with this Note and whether arising in contract, tort, equity, or otherwise, shall be resolved only by state or federal courts located in Cook County, Illinois, but Lender and Borrower acknowledge that any appeals from those courts may have to be heard by a court located outside of Cook County, Illinois. Borrower waives any and all objections that he may have to the location of the court considering the dispute. Borrower agrees that Lender shall have the right to proceed against Borrower or his property in a court in any location to enable Lender to enforce a judgment or other court order entered in favor of Lender. Borrower agrees that he will not assert any -3- 4 permissive counterclaims in any proceeding brought by Lender to enforce a judgment or other court order in favor of Lender. Borrower waives any objection that he may have to the location of the court in which Lender has commenced a proceeding described in this paragraph. Borrower waives personal service of any process upon him and consents that all such service of process be made by registered mail directed to Borrower at the address stated herein. Borrower waives the posting of any bond otherwise required of Lender to enforce any judgment or other court order entered in favor of Lender, or to enforce this note by specific performance, temporary restraining order, preliminary or permanent injunction. Whenever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. Whenever in this Note reference is made to Lender or Borrower, such reference shall be deemed to include, as applicable, a reference to their respective successors and assigns, and the provisions of this Note shall be binding upon and shall inure to the benefit of said successors and assigns. Borrower's successors and assigns shall include, without limitation, a receiver, receiver and manager, trustee or debtor-in-possession of or for Borrower. By: /s/ Timothy J. Cunningham ---------------------------- Timothy Cunningham Borrower -4- EX-10.27 11 c60662ex10-27.txt EMPLOYMENT AGRMT BETWEEN CHRISTOPHER J DANSON 1 Exhibit 10.27 EMPLOYMENT AGREEMENT Technology Solutions Company, a Delaware corporation doing business as TSC, and CHRISTOPHER J. DANSON ("Employee") enter into this Employment Agreement ("Agreement") as of June 1, 1995. In consideration of the agreements and covenants contained in this Agreement, TSC and Employee agree as follows: 1. EMPLOYMENT DUTIES: TSC shall employ Employee as a Senior Principal. Employee shall have the normal responsibilities, duties and authority of a Senior Principal of TSC and shall, at the direction of TSC's Management, participate in the administration and execution of TSC's policies, business affairs, and operations. TSC's Board of Directors or management may, however, from time to time expand or contract such duties and responsibilities and may change Employee's title or position to reflect any change in duties and responsibilities. Employee shall perform faithfully the duties assigned to him to the best of his ability and shall devote his full and undivided business time and attention to the transaction of TSC's business. 2. TERM OF EMPLOYMENT: The term of employment ("Term of Employment") covered by this Agreement shall commence as of the effective date of this Agreement and continue until the following July 31, subject to the provisions of paragraph 3 below. Upon expiration of the initial Term of Employment, or any subsequent term, this Agreement shall be renewed automatically for successive terms of one year each, unless TSC notifies Employee of its intention not to renew at least 30 days prior to the expiration of the term. 3. TERMINATION: Notwithstanding the provisions of paragraph 2 of this Agreement, upon giving Employee 30 days notice, TSC may terminate Employee's employment for any reason. TSC may make the termination effective at any time within the 30 day notice period. TSC must, however, continue Employee's normal salary and health insurance benefits until the end of the 30 day notice period unless Employee begins employment with another employer during such time, in which case the Employee will receive no further payments. In addition, TSC may terminate Employee's employment and this Agreement immediately without notice and with no salary and benefit continuation if Employee engages in "Serious Misconduct." For purposes of this Agreement, "Serious Misconduct" means embezzlement or misappropriation of corporate funds, other acts of dishonesty, activities materially harmful to TSC's reputation, willful refusal to perform or substantial disregard of Employee's assigned duties or TSC's policies; (including, but not limited to, refusal to travel or work the requested hours or inappropriate use of Company credit cards), or any significant violation of any statutory or common law duty of loyalty to TSC. Employee may terminate employment upon giving TSC 30 days notice. Upon receiving notice, TSC may waive its rights under this paragraph and make Employee's resignation effective immediately or anytime before the 30 day notice period ends, with no salary or benefit continuation. 4. SALARY: As compensation for his services, TSC shall pay Employee a base salary in the amount listed in Exhibit A to this Agreement. Employee's base salary shall be subject to annual review and may, at the discretion of TSC's management, be adjusted from that listed in Exhibit A according to Employee's responsibilities, capabilities and performance during the preceding year. 2 5. BONUS: 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 generally to Senior Principals. 7. BUSINESS EXPENSES: TSC shall reimburse Employee for all reasonable and necessary business expenses incurred by Employee in performing his duties. Employee shall provide TSC with supporting documentation sufficient to satisfy reporting requirements of the Internal Revenue Service and TSC. TSC's determination as to reasonableness and necessary shall be final. 8. NON COMPETITION AND NON DISCLOSURE: Employee acknowledges that the successful marketing development 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, its clients and prospects, includes, but is not limited to, the following: business strategies; plans; proposals; deliverables; prospect and customer lists; methodologies; training materials; and computer software. Employee acknowledges that during the Term of Employment, he will obtain knowledge of such Confidential Information. Accordingly, Employee agrees to undertake the following obligations, which he acknowledges to be reasonably designed to protect TSC's legitimate business interests without unnecessarily or unreasonably restricting Employee's post-employment opportunities: (a) Upon termination of 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 for any reason, 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 of employment for any reason, for himself, or as agent, partner or employee of any person, firm or corporation, engage in the practice of consulting or related services, for any client of TSC for whom Employee performed services, or prospective TSC client to whom Employee submitted, or assisted in the submission, of a proposal during the one year period preceding his termination; (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; 3 (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 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 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 Term of Employment, Employee shall disclose to TSC all ideas, inventions and business plans which he develops during the Term of 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 are necessary to secure a patent or copyright. 11. ASSIGNMENT: Employee acknowledges that the services to be rendered pursuant to this Agreement are unique and personal. Accordingly, Employee may not assign any of his rights or delegate any of his duties or obligations under this Agreement. TSC may assign its rights, duties, or obligations under this Agreement to a subsidiary or affiliated company of TSC or purchaser or transferee of a majority of TSC's outstanding capital stock or a purchaser of all, or substantially all, of the assets of TSC. 12. NOTICES: All notices shall be in writing, except for notice of termination of employment, which may be oral if confirmed in writing within 14 days. Notices intended for TSC shall be sent by registered or certified mail addressed to TSC at 205 North Michigan Avenue, 15th Floor, Chicago, Illinois, 60601, or its current principal office, and notices intended for Employee shall be either delivered personally to him or sent by registered or certified mail addressed to his last known address. 13. ENTIRE AGREEMENT: This Agreement 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. TSC and Employee agree that any litigation relating to the enforcement of this Agreement shall be brought in the Circuit Court for Cook County, Illinois. 15. RESOLUTION OF DISPUTES REGARDING TERMINATION: Employee shall not initiate legal proceedings against TSC challenging any termination of Employee's employment until 30 days after TSC receives written notice from Employee of the specific nature of any purported claim against TSC and the amount of any purported damages. Employee further agrees that in the event that TSC submits Employee's claim to the Center for Public Resources, 680 Fifth Avenue, New York, New York 10019 for nonbinding mediation prior to the expiration of such 30 day period, Employee may not institute legal proceedings against TSC until the earlier of: a) the completion of 4 nonbinding mediation efforts, or b) 90 days after the date on which TSC received written notice of Employee's claim. 16. 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. 17. Employee acknowledges that he has read, understood, and accepts the provisions of this Agreement. TECHNOLOGY SOLUTIONS COMPANY CHRISTOPHER J. DANSON By: /s/ J.A. Stanton /s/ Christopher J. Danson ----------------------------- --------------------------- Position: Sr. V.P. ----------------------- Date: 8/21/95 Date: July 1, 1995 ----------------------- ---------------------- EX-10.28 12 c60662ex10-28.txt PROMISSORY NOTE OF CHRISTOPHER J DANSON 1 Exhibit 10.28 PROMISSORY NOTE U.S. $100,000.00 September 13, 1999 FOR VALUE RECEIVED, the undersigned, Christopher Danson, 12320 Alameda Trace Circle, Apartment 1502, Austin, Texas 78727 ("Borrower"), hereby unconditionally promises to pay to the order of TECHNOLOGY SOLUTIONS COMPANY, a Delaware Corporation ("Lender"), having its principal office at 205 North Michigan Avenue, Chicago, Illinois 60601, in lawful money of the United States of America and in immediately available funds, the principal sum of ONE HUNDRED THOUSAND DOLLARS AND NO CENTS ($ 100,000.00), together with interest on the principal balance from time to time outstanding at the rate of five and forty-two one hundredths percent (5.42%) per annum from the date hereof until payment in full on September 13, 2002 (the "Payment Date") in accordance with this Promissory Note; provided, however, that: (i) if Borrower has been employed by Lender, or any parent or subsidiary company of Lender, from the date hereof through and including September 13, 2000, then the amount of thirty-three thousand three hundred thirty-three dollars and thirty-three cents ($33,333.33) of outstanding principal indebtedness, plus interest accrued on such amount, shall be discharged and forgiven by Lender and shall no longer be due and, accordingly, Borrower shall have no further obligation to Lender hereunder; and (ii) if Borrower has been employed by Lender, or any parent or subsidiary company of Lender, from the date hereof through and including September 13, 2001, then the amount of thirty-three thousand three hundred thirty-three dollars and thirty-three cents ($33,333.33) of outstanding principal indebtedness, plus interest accrued on such amount, shall be discharged and forgiven by Lender and shall no longer be due and, accordingly, Borrower shall have no further obligation to Lender hereunder; and (iii) if Borrower has been employed by Lender, or any parent or subsidiary company of Lender, from the date hereof through and including September 13, 2002, then the amount of thirty-three thousand three hundred thirty-three dollars and thirty-four cents ($33,333.34) of outstanding principal indebtedness, plus all remaining interest accrued, shall be discharged and forgiven by Lender and shall no longer be due and, accordingly, Borrower shall have no further obligation to Lender hereunder. Borrower, however, shall be responsible for income tax on the principal plus interest, if and when they are recognized as income, which shall be withheld by Lender. Borrower reserves the right to prepay this Note, in whole or in part, at any time without penalty. In the event of such prepayment, the amount so prepaid will be applied to principal due and interest will be adjusted accordingly. Payments received by 2 Lender from Borrower on this Note shall be applied first to the payment of interest which is due and payable and only thereafter to the outstanding principal balance. All payments of principal and interest under this Note shall be made by Borrower to Lender, at Lender's principal place of business as set forth above, or at such other place as Lender may from time to time designate in writing. The occurrence or existence of one or more of the following events shall constitute an event of default ("Default") under this Note: (i) the failure of Borrower to pay when due any principal or interest due hereunder; or (ii) (a) Borrower shall become generally unable to pay his debts as they become due, or (b) Borrower shall make an assignment for the benefit of creditors, or (c) Borrower shall call a meeting of creditors for the composition of debts, or (d) a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed by or against Borrower, or a custodian, receiver or agent is appointed or authorized to take charge of any of Borrower's properties, or Borrower takes any action to authorize any of the foregoing; or (iii) Borrower shall no longer remain, for any reason, employee of Lender, or a parent or subsidiary company of Lender; or (iv) there shall be entered against Borrower any judgment or judgments in an aggregate amount in excess of $25,000, unless the amounts of such judgment or judgments are covered by insurance and liability under such insurance has been admitted by the issuer thereof. In an event of Default, Lender may, by notice to Borrower, declare all the indebtedness evidenced by this Note to be, and thereupon such indebtedness shall become, immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Borrower; provided, however, that if the Default specified in clause (ii)(d) in the immediately preceding paragraph occurs, the indebtedness evidenced by this Note shall automatically become due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by Borrower. If payment hereunder becomes due and payable on a day which is not a "Business Day" (as defined below), the due date thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon during such extension at the rate specified above. "Business Day" shall mean a day on which banks in Chicago, Illinois are open for the transaction of banking business. In no case or event whatsoever shall interest charged hereunder, however such interest may be characterized or computed, exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that Lender has received interest hereunder in excess of the highest rate applicable hereto, Lender shall (i) apply such excess to any unpaid principal balance due and payable by Borrower hereunder to Lender; and (ii) if the amount of such excess exceeds the unpaid principal and other liabilities due and payable by Borrower hereunder, Lender shall remit such excess to Borrower. -2- 3 Any notice hereunder shall be sufficiently given if in writing and delivered in person or mailed by first class mail addressed as follows: IF TO BORROWER: Christopher Danson 12320 Alameda Trace Circle, No. 1502 Austin, Texas 78727 IF TO LENDER: Technology Solutions Company 205 North Michigan Avenue, Suite 1500 Chicago, Illinois 60601 Attention: Senior Vice President and Chief Financial Officer Borrower and Lender may each designate additional or different addresses by notice to the other party as provided herein. Lender shall be under no obligation to marshal any assets in favor of Borrower in payment of any or all of Borrower's liabilities hereunder. To the extent that Borrower makes a payment or payments to Lender, and such payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, provincial, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part hereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. Any dispute between Lender and Borrower arising out of, connected with, related to, or incidental to the relationship established between them connection with this Note, and whether arising in contract, tort, equity, or otherwise, shall be resolved in accordance with the internal laws and not the conflicts of law provisions of the State of Illinois. Except as provided in the immediately succeeding paragraph, Lender and Borrower each agree that all disputes between them arising out of, connected with, related to, or incidental to the relationship established between them in connection with this Note and whether arising in contract, tort, equity, or otherwise, shall be resolved only by state or federal courts located in Cook County, Illinois, but Lender and Borrower acknowledge that any appeals from those courts may have to be heard by a court located outside of Cook County, Illinois. Borrower waives any and all objections that he may have to the location of the court considering the dispute. Borrower agrees that Lender shall have the right to proceed against Borrower or his property in a court in any location to enable Lender to enforce a judgment or other -3- 4 court order entered in favor of Lender. Borrower agrees that he will not assert any permissive counterclaims in any proceeding brought by Lender to enforce a judgment or other court order in favor of Lender. Borrower waives any objection that he may have to the location of the court in which Lender has commenced a proceeding described in this paragraph. Borrower waives personal service of any process upon him and consents that all such service of process be made by registered mail directed to Borrower at the address stated herein. Borrower waives the posting of any bond otherwise required of Lender to enforce any judgment or other court order entered in favor of Lender, or to enforce this note by specific performance, temporary restraining order, preliminary or permanent injunction. Whenever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. Whenever in this Note reference is made to Lender or Borrower, such reference shall be deemed to include, as applicable, a reference to their respective successors and assigns, and the provisions of this Note shall be binding upon and shall inure to the benefit of said successors and assigns. Borrower's successors and assigns shall include, without limitation, a receiver, receiver and manager, trustee or debtor-in-possession of or for Borrower. By: /s/ Christopher J. Danson ---------------------------------- Christopher Danson Borrower -4- 5 AMENDMENT OF PROMISSORY NOTE This Amendment of Promissory Note is entered into this 31 day of August, 1999 and made retroactive to July 30, 1999 by and between Christopher Danson ("Borrower") and Technology Solutions Company ("Lender"). WHEREAS, reference is made to that certain Promissory Note (the "Note) dated February 23, 1998 in the principal amount of $100,000 signed by Borrower in favor of Lender, a copy of which is attached hereto as Exhibit A. WHEREAS, the Note provides that on each of July 30, 1998, July 30, 1999, and July 30, 2000 Borrower shall make mandatory payments of one third (1/3)of the face amount of the principal indebtedness plus interest. WHEREAS, on July 30, 1998 Borrower made the first mandatory payment in the amount of $35,275. WHEREAS, the mandatory payment date of July 30 was intended to coincide with the approximate date upon which Lender paid bonuses to its Vice Presidents. WHEREAS, Lender has changed the date upon which bonuses are paid to its Vice Presidents from the end of July to the end of January of each year, and it is therefore necessary to amend the Note to change the mandatory payment dates to coincide with the payment of bonuses. NOW THEREFORE, Borrower and Lender hereby agree as follows: 1. AMENDMENT OF PARAGRAPH 1 OF NOTE. Paragraph 1 of the Note is hereby amended to read as follows: "On each of July 30, 1998, January 31, 2000, and January 31, 2001, Borrower shall pay to Lender one third (1/3) of the face amount of the principal indebtedness evidenced hereby, plus interest as aforesaid." 2. CONTINUATION OF OTHER TERMS. All other terms of the Note shall continue in full force and effect without interruption or amendment. IN WITNESS WHEREOF, Borrower and Lender have executed this Amendment of Promissory Note as of the date first written above, effective retroactive to July 30, 1999. TECHNOLOGY SOLUTIONS COMPANY BORROWER By: /s/ illegible signature /s/ Christopher J. Danson ------------------------------- --------------------------------- Christopher Danson Its: Senior VP and CFO ------------------------------- EX-10.29 13 c60662ex10-29.txt PROMISSORY NOTE OF CHRISTOPHER J DANSON 1 Exhibit 10.29 PROMISSORY NOTE U.S. $100,000.00 February 23, 1998 FOR VALUE RECEIVED, the undersigned, Christopher Danson, 12320 Alameda Trace Circle, Apartment 1502, Austin, Texas 78727 ("Borrower"), hereby unconditionally promises to pay to the order of TECHNOLOGY SOLUTIONS COMPANY, a Delaware Corporation ("Lender"), having its principal office at 205 North Michigan Avenue, Chicago, Illinois 60601, in lawful money of the United States of America and in immediately available funds, the principal sum of ONE HUNDRED THOUSAND DOLLARS AND NO CENTS ($100,000.00), together with interest on the principal balance from time to time outstanding at the rate of five and sixty-nine one-hundredths percent (5.69%) per annum from the date hereof until payment in full thereof in accordance with the terms hereof. Borrower reserves the right to prepay this Note, in whole or in part, at any time without penalty. In the event of such prepayment, the amount so prepaid will be applied to principal due and interest will be adjusted accordingly. Payments received by Lender from Borrower on this Note shall be applied first to the payment of interest which is due and payable and only thereafter to the outstanding principal balance. In addition to any permissive prepayments made hereunder, the Borrower shall make mandatory payments as follows: 1. On each of July 30, 1998, July 30, 1999, and July 30, 2000, Borrower shall pay to Lender one third (1/3) of the face amount of the principal indebtedness evidenced hereby, plus interest as aforesaid. 2. In the event that Borrower, at any time during the term of this Note, exercises any stock options held by Borrower pursuant to the Technology Solutions Company 1992 Stock Incentive Plan, then Borrower shall promptly pay to Lender, as a mandatory prepayment hereunder, one-half (1/2) of the amount of the net after tax proceeds that Borrower receives as a result of the exercise of such options. All payments of principal and interest under this Note shall be made by Borrower to Lender, at Lender's principal place of business as set forth above, or at such other place as Lender may from time to time designate in writing. The occurrence or existence of one or more of the following events shall constitute an event of default ("Default") under this Note: (i) the failure of Borrower to pay when due any principal or interest due hereunder; or (ii)(a) Borrower shall become generally unable to pay his debts as they become due, or (b) Borrower shall make an assignment for the benefit of creditors, or 2 (c) Borrower shall call a meeting of creditors for the composition of debts, or (d) a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed by or against Borrower, or a custodian, receiver or agent is appointed or authorized to take charge of any of Borrower's properties, or Borrower takes any action to authorize any of the foregoing; or (iii) Borrower shall no longer remain, for any reason, an employee of Lender, or a parent or subsidiary company of Lender; or (iv) there shall be entered against Borrower any judgment or judgments in an aggregate amount in excess of $25,000, unless the amounts of such judgment or judgments are covered by insurance and liability under such insurance has been admitted by the issuer thereof. In an event of Default, Lender may, by notice to Borrower, declare all the indebtedness evidenced by this Note to be, and thereupon such indebtedness shall become, immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Borrower; provided however, that if the Default specified in clause (ii)(d) in the immediately preceding paragraph occurs, the indebtedness evidenced by this Note shall automatically become due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by Borrower. If payment hereunder becomes due and payable on a day which is not a "Business Day" (as defined below), the due date thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon during such extension at the rate specified above. "Business Day" shall mean a day on which banks in Chicago, Illinois are open for the transaction of banking business. In no case or event whatsoever shall interest charged hereunder, however such interest may be characterized or computed, exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that Lender has received interest hereunder in excess of the highest rate applicable hereto, Lender shall (i) apply such excess to any unpaid principal balance due and payable by Borrower hereunder to Lender; and (ii) if the amount of such excess exceeds the unpaid principal and other liabilities due and payable by Borrower hereunder, Lender shall remit such excess to Borrower. Any notice hereunder shall be sufficiently given if in writing and delivered in person or mailed by first class mail addressed as follows: IF TO BORROWER: Christopher Danson 12320 Alameda Trace Circle, No. 1502 Austin, Texas 78727 -2- 3 IF TO LENDER: Technology Solutions Company 205 North Michigan Avenue, Suite 1500 Chicago, Illinois 60601 Attention: Senior Vice President and Chief Financial Officer Borrower and Lender may each designate additional or different addresses by notice to the other party as provided herein. Lender shall be under no obligation to marshal any assets in favor of Borrower in payment of any or all of Borrower's liabilities hereunder. To the extent that Borrower makes a payment or payments to Lender, and such payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, provincial, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part hereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. Any dispute between Lender and Borrower arising out of, connected with, related to, or incidental to the relationship established between them in connection with this Note, and whether arising in contract, tort, equity, or otherwise, shall be resolved in accordance with the internal laws and not the conflicts of law provisions of the State of Illinois. Except as provided in the immediately succeeding paragraph, Lender and Borrower each agree that all disputes between them arising out of, connected with, related to, or incidental to the relationship established between them in connection with this Note and whether arising in contract, tort, equity, or otherwise, shall be resolved only by state or federal courts located in Cook County, Illinois, but Lender and Borrower acknowledge that any appeals from those courts may have to be heard by a court located outside of Cook County, Illinois. Borrower waives any and all objections that he may have to the location of the court considering the dispute. Borrower agrees that Lender shall have the right to proceed against Borrower or his property in a court in any location to enable Lender to enforce a judgment or other court order entered in favor of Lender. Borrower agrees that he will not assert any permissive counterclaims in any proceeding brought by Lender to enforce a judgment or other court order in favor of Lender. Borrower waives any objection that he may have to the location of the court in which Lender has commenced a proceeding described in this paragraph. Borrower waives personal service of any process upon him and consents that all such service of process be made by registered mail directed to Borrower at the address stated herein. -3- 4 Borrower waives the posting of any bond otherwise required of Lender to enforce any judgment or other court order entered in favor of Lender, or to enforce this note by specific performance, temporary restraining order, preliminary or permanent injunction. Whenever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Note. Whenever in this Note reference is made to Lender or Borrower, such reference shall be deemed to include, as applicable, a reference to their respective successors and assigns, and the provisions of this Note shall be binding upon and shall inure to the benefit of said successors and assigns. Borrower's successors and assigns shall include, without limitation, a receiver, receiver and manager, trustee or debtor-in-possession of or for Borrower. By: /s/ Christopher J. Danson ----------------------------------- Christopher Danson Borrower -4- EX-13.1 14 c60662ex13-1.txt EXCERPTED PORTIONS OF 2000 ANNUAL REPORT 1 EXHIBIT 13.1 SELECTED FINANCIAL DATA The following tables summarize selected financial data of eLoyalty(TM). This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and the financial statements and notes thereto, which are included elsewhere in this Annual Report. The statements of operations data for the years ended December 30, 2000 and December 31, 1999, for the seven month period ended December 31, 1998 and for each of the years ended May 31, 1998, 1997 and 1996, and the balance sheet data as of December 30, 2000, December 31, 1999 and 1998, and May 31, 1998 and 1997, below are derived from the audited financial statements. The statements of operations data for the year ended December 31, 1998, for the seven month period ended December 31, 1997 and for the year ended May 31, 1995, and the balance sheet data as of May 31, 1996 and 1995 are derived from the unaudited financial statements. In the opinion of management, the unaudited financial statements discussed above reflect all adjustments, consisting of normal adjustments, necessary to present fairly eLoyalty's results of operations for the year ended December 31, 1998, for the seven month period ended December 31, 1997 and for the year ended May 31, 1995, and its financial position as of May 31, 1996 and 1995. The financial information for periods prior to February 15, 2000 reflect eLoyalty's results of operations and financial position as it operated within Technology Solutions Company ("TSC"), and the financial information for periods subsequent to February 15, 2000 reflect eLoyalty's results of operations and financial position as it operated as a separate, stand-alone publicly traded company. The financial information for periods prior to February 15, 2000 may not necessarily reflect what the financial position and results of operations of eLoyalty would have been had eLoyalty operated as a separate, stand-alone publicly traded entity during such periods presented. STATEMENTS OF OPERATIONS DATA eLoyalty Corporation
FOR THE SEVEN MONTH PERIOD ENDED FOR THE YEARS ENDED DECEMBER DECEMBER FOR THE YEARS ENDED MAY ---------------------------- -------------- ---------------------------------- (In thousands, except per share data) 2000 1999 1998 1998 1997 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ (unaudited) (unaudited) (unaudited) Revenues $211,603 $146,003 $105,235 $64,415 $43,668 $84,488 $43,181 $26,516 $6,132 Project personnel costs 104,203 68,483 47,764 29,562 21,149 39,049 16,908 10,954 2,967 -------- -------- -------- ------- ------- ------- ------- ------- ------ Gross profit 107,400 77,520 57,471 34,853 22,519 45,439 26,273 15,562 3,165 -------- -------- -------- ------- ------- ------- ------- ------- ------ Other costs and expenses: Selling, general and administrative 96,875 58,395 46,665 29,132 18,269 35,436 19,290 10,609 3,344 Research and development 9,322 5,624 3,882 3,089 1,483 2,543 1,799 46 -- Goodwill amortization 4,972 4,996 3,794 2,450 1,856 3,201 376 -- -- -------- -------- -------- ------- ------- ------- ------- ------- ------ Total other expenses 111,169 69,015 54,341 34,671 21,608 41,180 21,465 10,655 3,344 -------- -------- -------- ------- ------- ------- ------- ------- ------ Operating (loss) income (3,769) 8,505 3,130 182 911 4,259 4,808 4,907 (179) -------- -------- -------- ------- ------- ------- ------- ------- ------ Other income (loss) 2,921 (408) (391) (327) (14) (24) 15 -- -- -------- -------- -------- ------- ------- ------- ------- ------- ------ (Loss) income before income taxes (848) 8,097 2,739 (145) 897 4,235 4,823 4,907 (179) Income tax (benefit) provision (424) 4,039 1,672 398 562 2,022 1,897 1,857 (51) -------- -------- -------- ------- ------- ------- ------- ------- ------ Net (loss) income $ (424) $ 4,058 $ 1,067 $ (543) $ 335 $ 2,213 $ 2,926 $ 3,050 $ (128) ======== ======== ======== ======= ======= ======= ======= ======= ====== Basic net (loss) income per common share(1) $ (0.01) $ 0.10 $ 0.03 $ (0.01) $ 0.01 $ 0.05 $ 0.07 $ 0.07 $(0.00) Diluted net (loss) income per common share(1)(2) $ (0.01) $ 0.09 $ 0.02 $ (0.01) $ 0.01 $ 0.05 $ 0.06 $ 0.07 $(0.00) (In millions) Basic weighted average shares outstanding(1) 48.2 41.4 41.4 41.4 41.4 41.4 41.4 41.4 41.4 Dilutive weighted average shares outstanding(2) 53.7 44.2 43.1 NA(3) 45.8 46.8 46.6 45.5 NA(3)
(1) In December 1999, eLoyalty issued 41.4 million shares to Technology Solutions Company. For periods prior to February 15, 2000, basic earnings per share has been computed based on the 41.4 million shares and diluted earnings per share has been computed based on the 41.4 million shares plus the estimated dilutive effect of common stock equivalents using the "treasury stock" method. For periods subsequent to February 15, 2000, basic earnings per share has been computed based on actual weighted shares outstanding and dilutive earnings per share has been computed based on the actual weighted shares outstanding plus the dilutive effect of common stock equivalents using the "treasury stock" method. (2) In periods of a loss, common stock equivalents were not included in the calculation as they are antidilutive. (3) Dilutive share information is not available for these periods (see Note Thirteen to the Financial Statements). 22 2 SELECTED FINANCIAL DATA (CONT.) BALANCE SHEET DATA
AS OF DECEMBER 30, AS OF DECEMBER 31, AS OF MAY 31, ------------------ ------------------ -------------------------------------------------- (In thousands) 2000 1999 1998 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- (unaudited) (unaudited) Cash $ 41,138 $ 13,462 $ 4,411 $ 4,726 $ 4,130 $ 321 $ -- Working capital $109,934 $ 54,927 $ 26,231 $ 23,840 $ 13,506 $ 6,249 $ 3,130 Total assets $184,618 $ 96,603 $ 63,904 $ 54,118 $ 24,188 $ 14,008 $ 4,351 Stockholders' equity $140,856 $ 73,615 $ 47,888 $ 40,893 $ 17,147 $ 9,312 $ 3,169
COMMON STOCK INFORMATION eLoyalty completed its 100% spin-off from Technology Solutions Company and began public trading on February 16, 2000. The common stock is traded on the National Market System under the NASDAQ symbol ELOY. The following table sets forth, for the periods indicated, the quarterly high and low prices of the common stock on the NASDAQ Stock Market.
PRICE RANGE: High Low -------------------------- First Quarter (beginning February 16, 2000) $ 40.50 $ 18.44 Second Quarter $ 24.00 $ 10.50 Third Quarter $ 18.13 $ 9.88 Fourth Quarter $ 12.88 $ 3.19
Dividends Historically, eLoyalty has not paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. 23 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and other parts of this Annual Report contain forward-looking statements that are based on current management expectations, forecasts and assumptions. These include, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," "plans," "intends," "projects," "future" and similar expressions, references to plans, strategies, objectives and anticipated future performance, and other statements that are not strictly historical in nature. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. Such risks, uncertainties and other factors that might cause such a difference include, without limitation, those noted under Factors That May Affect Future Results or Market Price of Stock included elsewhere in this Annual Report. Readers should also carefully review the risk factors described in other documents eLoyalty(TM) files from time to time with the SEC, including eLoyalty's Annual Report on Form 10-K for the fiscal year ended December 30, 2000. Readers are cautioned not to place undue reliance on forward-looking statements. They reflect opinions, assumptions and estimations only as of the date they are made, and eLoyalty undertakes no obligation to publicly update or revise any forward-looking statements in this report, whether as a result of new information, future events or circumstances, or otherwise. OVERVIEW eLoyalty is a global management consulting and systems integration organization focused exclusively on building customer loyalty. eLoyalty has a broad range of customer relationship management ("CRM") related services including business strategy, technical architecture, selecting, implementing and integrating appropriate CRM software applications and providing ongoing support for multi-vendor systems. eLoyalty was spun off from Technology Solutions Company ("TSC") into a separate, publicly traded company on February 15, 2000 (the "spin-off"). Accordingly, the statements of operations for periods subsequent to the spin-off reflect eLoyalty's results as a stand-alone company. The statements of operations for periods prior to the spin-off are presented as if eLoyalty operated as a separate entity, and includes a cost allocation of certain TSC general corporate expenses that were not directly related to eLoyalty's operations. These costs were allocated proportionately to eLoyalty based on revenues and headcount. Certain reclassifications have been made in the statements of operations for the years ended December 31, 1999 and 1998, the seven month periods ended December 31, 1998 and 1997, and the fiscal years ended May 31, 1998 and 1997 to conform to the 2000 presentation. In December 2000, eLoyalty changed its fiscal year from a calendar year to a fiscal year ending on the Saturday closest to the end of December. The fiscal year-end for 2000 is December 30. eLoyalty had previously changed its fiscal year-end from May 31 to December 31, effective December 31, 1998. For comparative purposes, eLoyalty has included discussions of the statements of operations data for the year ended December 31, 1998 and the seven month period ended December 31, 1997 which have been derived from unaudited financial statements. In the opinion of management, the unaudited financial statements for these periods reflect all adjustments, consisting of normal adjustments, necessary to present fairly eLoyalty's results of operations for the year ended December 31, 1998 and the seven month period ended December 31, 1997. eLoyalty's revenues are generated primarily from professional services, which are billed principally on a time and materials basis. eLoyalty has, on occasion, contracted projects on a fixed fee basis. Revenues are recognized for time and material engagements as services are rendered. 24 4 Other growing revenue contributors include fees generated from Managed Services (including Loyalty Support(TM) services, purpose-built hosted solutions and e-PROFILE(TM)) and the licensing of proprietary software. These revenues comprised 6% and 3% of revenues in 2000 and 1999, respectively. Our revenues from international operations represent revenues in Canada, Europe and Australia. International operations represented 17% and 22% of revenues for the years ended December 30, 2000 and December 31, 1999, respectively. We typically experience seasonal fluctuations in our revenues and earnings on a global basis in the fourth quarter because of the reduced number of billing days due to holidays. In addition, we have historically experienced decreases in revenues from our European operations in the third quarter because of extended vacation periods. Although those decreases in revenues have not been significant in the past, they may increase in the future, especially as we expand internationally. eLoyalty's most significant operating cost is project personnel costs, which are comprised of labor costs including salaries, fringe benefits and incentive compensation of engageable consultants, as well as fees paid to subcontractors for work performed on an engagement. Gross profit represents our revenues less project personnel costs. We anticipate that to the extent we have additional software and Managed Services revenues, our gross margins will increase. Gross profit margins, which have declined as a percent of revenue over the last three years, are negatively impacted by several factors, including the use of subcontractors and non-billable time incurred by project personnel. Selling, general and administrative expenses consist primarily of salaries, incentive compensation and employee benefits for business development, marketing, managerial and administrative personnel, plus provisions for doubtful receivables. Other overhead expenses consist of employee costs for training, travel expenses, laptop computer leases and other non-billable expenses not directly related to projects or research and development. This would also include expenses relating to administrative and technical support services provided by TSC, which continued to be provided after the spin-off in 2000 as part of a shared services agreement. Research and development expenses consist primarily of salaries, incentive compensation and employee benefits for dedicated personnel, staff recruiting costs, administrative costs, travel expenses and depreciation expenses. Our Loyalty Lab(TM) is the center for our research and development activities, and we believe it improves the effectiveness of our loyalty solutions, allows us to work closely with emerging technology and serves as a demonstration center for our clients' senior executives. Historically, our effective tax rate has fluctuated significantly. For some periods, our effective tax rate was unusually high. The high effective tax rates were due primarily to the generation of pre-tax losses in low tax-rate jurisdictions and pre-tax earnings in high tax-rate jurisdictions. During 2000, we began implementing an organizational structure, which we expect to lower our effective tax rate in future years. YEAR ENDED DECEMBER 30, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999 REVENUES Our revenues increased $65.6 million, or 45%, to $211.6 million in 2000 from $146.0 million in 1999. Revenues from professional fees increased $57.3 million, or 41%, to $198.3 million in 2000 from $141.0 million in 1999. The increase in revenues is due to the combined effect of strong demand for the CRM services provided by eLoyalty and higher average billing rates in the period-over-period comparison. Revenues from Managed Services increased $5.9 million to $7.8 million in 2000 from $1.9 million in 1999. Managed Services revenues represented 4% and 1% of total revenues for the years ended December 30, 2000 and December 31, 1999, respectively. Revenues from software increased $2.4 million to $5.5 million in 2000 from $3.1 million in 1999. Revenues from international operations decreased to approximately 17% of total revenues in 2000, compared to 22% in 1999. 25 5 PROJECT PERSONNEL COSTS Project personnel costs increased $35.7 million, or 52%, to $104.2 million in 2000 from $68.5 million in 1999. This is due to an increase in the number of our engageable consultants to 768 as of December 30, 2000, or 37%, from 561 for 1999. Project personnel costs as a percentage of revenues increased to 49% in 2000 compared to 47% in 1999. This was due, in part, to the approximately $5.9 million of incremental project personnel costs incurred in 2000 as part of the expansion of our Managed Services. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased $38.5 million, or 66%, to $96.9 million in 2000 from $58.4 million in 1999. This increase is the result of the growth of eLoyalty and the build-out of eLoyalty's standalone infrastructure, including finance, treasury, legal, human resources and technical systems support, while also making payments to TSC for similar services as part of the shared services agreement during the build-out process. The increase is also due to the continued expansion of our business development group, establishment of the eLoyalty brand in the marketplace and increased uncollectable amounts due from clients, including a $2.8 million incremental charge in the fourth quarter of 2000. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses increased $3.7 million, or 66%, to $9.3 million in 2000 from $5.6 million in 1999. This increase is primarily due to an increased investment in the Loyalty Lab, including the addition of developers. GOODWILL AMORTIZATION Goodwill amortization expenses were $5.0 million for both 2000 and 1999. Goodwill amortization is primarily attributable to the acquisition of The Bentley Group in 1997. OTHER INCOME (LOSS) eLoyalty recognized non-operating other income of $2.9 million in 2000 compared to a non-operating other loss of $0.4 million in 1999. The $3.3 million increase in non-operating other income is primarily due to incremental interest income earned as a result of higher average cash and cash equivalent balances in 2000 versus 1999. The increase in the average cash balance is due to the cash generated by financing activities, most of which were completed during the first half of 2000. INCOME TAX (BENEFIT) PROVISION Income tax (benefit) provision represents combined federal, state and foreign taxes. Due to a pre-tax loss of $0.8 million in 2000, a $0.4 million tax benefit was recognized compared to $4.0 million tax provision recognized in 1999. The effective tax rate remained flat year-over-year. NET (LOSS) INCOME eLoyalty reported a net loss of $0.4 million, or $0.01 per share on a diluted basis, for fiscal year 2000 as compared with net income of $4.1 million, or $0.09 per share on a diluted basis, for 1999. The 2000 results are reflective of the $3.8 million operating loss for the fiscal year (as compared to operating income of $8.5 million in 1999), offset in substantial part by the non-operating interest income from investment of increased cash balances obtained through financing activities. YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) REVENUES Revenues increased $40.8 million, or 39%, to $146.0 million in 1999 from $105.2 million in 1998. Revenues from professional services increased $36.8 million, or 35%, to $141.0 million in 1999 from $104.2 million in 1998. The increase in our revenues reflected increases in both the size and number of client projects, as well as higher average billing rates. 26 6 Revenues from software were $3.1 million in 1999 compared to $1.0 million in 1998. Revenues from Loyalty Support increased to $1.9 million in 1999 from $0.0 million in 1998, as we launched our Loyalty Support services during 1999. Revenues from international operations remained consistent, at approximately 22% of total revenues, in both 1999 and 1998. PROJECT PERSONNEL COSTS Project personnel costs increased $20.7 million, or 43%, to $68.5 million in 1999 from $47.8 million in 1998. The number of our engageable consultants increased to 561 as of December 31, 1999, or 40%, from 402 at year-end 1998. The increase in project personnel costs in 1999 was also due to an increase in the use of subcontractors, which have a higher average cost, that were required to meet demand. Project personnel costs as a percentage of revenues increased to 47% in 1999 compared to 45% in 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased $11.7 million, or 25%, to $58.4 million in 1999 from $46.7 million in 1998. Selling and marketing expenses increased primarily as a result of our decision to invest in brand building with respect to the launch of our new identity as eLoyalty and to formalize our business development group. We also increased our sales and marketing staff with the launch of our solutions marketing group. General and administrative support expenses increased due to the continued growth of eLoyalty. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses increased $1.7 million, or 44%, to $5.6 million in 1999 from $3.9 million in 1998. In 1999 we substantially increased our investment in our Loyalty Lab by hiring additional developers and purchasing additional software and hardware. GOODWILL AMORTIZATION Goodwill amortization expense increased $1.2 million, or 32%, to $5.0 million in 1999 from $3.8 million in 1998 related to the acquisition of The Bentley Group. INCOME TAX (BENEFIT) PROVISION Income tax (benefit) provision represents combined federal, state and foreign taxes. Our income tax provision increased to $4.0 million on pre-tax profits of $8.1 million in 1999, compared to $1.7 million on pre-tax profits of $2.7 million in 1998. Our effective tax rate was 50% for 1999 and 61% for 1998. This decrease in the effective tax rate was primarily the result of a lower proportion of pre-tax earnings being generated in foreign high tax rate jurisdictions. NET (LOSS) INCOME eLoyalty reported net income of $4.1 million, or $0.09 per share on a diluted basis, for fiscal year 1999 as compared with net income of $1.1 million, or $0.02 per share on a diluted basis, for 1998. SEVEN MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED WITH THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 (UNAUDITED) REVENUES Revenues increased $20.7 million, or 47%, to $64.4 million in the seven month period ended December 31, 1998 from $43.7 million in the seven month period ended December 31, 1997. The increase in our revenues of $20.7 million reflected increases in both the size and number of client projects, as well as higher average billing rates. Revenues from sales of software were $1.0 million in the seven month period ended December 31, 1998 compared to revenues of $0.2 million from sales of software in the seven month period ended December 31, 1997. Revenues from our international operations also significantly contributed to this increase in revenue. In addition, The Bentley Group acquisition contributed approximately $7.8 million of revenues in the seven month period ended December 31, 1997. 27 7 PROJECT PERSONNEL COSTS Project personnel costs increased $8.5 million, or 40%, to $29.6 million in the seven month period ended December 31, 1998 from $21.1 million in the prior year period. The increase in project personnel costs was primarily due to an increase in engageable consultants, as well as higher salaries. Project personnel costs as a percentage of revenues decreased to 46% in the seven month period ended December 31, 1998 compared to 48% in the prior period, principally due to higher utilization of project personnel. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased $10.8 million, or 59%, to $29.1 million in the seven month period ended December 31, 1998 from $18.3 million in the comparable period in the prior year. Selling and marketing expenses increased primarily as a result of establishing our business development group in North America and beginning our sales activities in Europe and Australia. In addition, we established a $2.7 million provision for uncollectable accounts receivable related to revenues generated during the seven month period, largely from clients of The Bentley Group. General and administrative support expenses increased as eLoyalty launched our operations group to manage utilization, hourly billing rate, revenue per billable employee, employee turnover and day-to-day project pipeline development. During this period, we also increased the support level for our operations in Europe and Australia. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses increased $1.6 million, or 108%, to $3.1 million in the seven month period ended December 31, 1998 from $1.5 million in the comparable period in the prior year. This increase resulted from the significant expansion of the scope and operations of our Loyalty Lab. GOODWILL AMORTIZATION Goodwill amortization expenses increased $0.6 million, or 32%, to $2.5 million in the seven month period ended December 31, 1998 from $1.9 million in the comparable period in the prior year. This increase was attributable to the contingent purchase price payments related to the acquisitions of The Bentley Group and Aspen Consultancy Ltd. INCOME TAX (BENEFIT) PROVISION Income tax provision decreased to $0.4 million on a pre-tax loss of $0.1 million at the end of the seven month period ended December 31, 1998 compared to $0.6 million on pre-tax profits of $0.9 million at the end of the comparable period in the prior year. This unusual income tax provision for the seven month period ended December 31, 1998 resulted from the impact of nondeductible goodwill and expenses, as well as foreign tax rate differences. During the seven months ended December 31, 1998, operations in some foreign jurisdictions incurred taxable losses while other foreign jurisdictions had taxable income. Since deferred tax assets are based on the individual tax jurisdictions in which eLoyalty operates, net operating losses were generated during the period. NET (LOSS) INCOME eLoyalty reported a net loss of $0.5 million, or $0.01 per share on a diluted basis, for the seven month period ended December 31, 1998 as compared with net income of $0.3 million, or $0.01 per share on a diluted basis, for the comparable period in the prior year. FISCAL YEAR ENDED MAY 31, 1998 COMPARED WITH FISCAL YEAR ENDED MAY 31, 1997 REVENUES Revenues increased $41.3 million, or 96%, to $84.5 million in the fiscal year ended May 31, 1998 from $43.2 million in the fiscal year ended May 31, 1997. The increase in our revenues reflected increases in both the size and number of client projects. The Bentley Group acquisition contributed $16.4 million of revenues in fiscal year 1998. 28 8 PROJECT PERSONNEL COSTS Project personnel costs increased $22.1 million, or 131%, to $39.0 million in fiscal 1998 from $16.9 million in fiscal 1997. The increase in project personnel costs in fiscal 1998 was primarily due to an increase in engageable consultants, as well as higher salaries. Project personnel costs as a percentage of revenues increased to 46% in fiscal 1998 compared to 39% in fiscal 1997. This was due to a substantial increase in our available engageable consultants who we were not able to immediately deploy. The increase in available billable resources was necessary to respond to the growing demand in our North American business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased $16.1 million, or 84%, to $35.4 million in fiscal 1998 from $19.4 million in fiscal 1997. Selling and marketing expenses increased primarily as a result of our decision to expand our sales and marketing effort in North America while general and administrative support expenses increased due to the continued growth of eLoyalty. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses increased $0.7 million, or 41%, to approximately $2.5 million in fiscal 1998 from $1.8 million in fiscal 1997. Research and development expenses decreased as a percentage of total revenues to 3% in fiscal 1998 from 4% in fiscal 1997. This percentage decrease resulted from our significant revenue growth in fiscal 1998 and the redeployment of our development staff as engageable consultants to meet the demands of our expanding North American business. GOODWILL AMORTIZATION Goodwill amortization expenses increased $2.8 million to $3.2 million in fiscal 1998 from $0.4 million in fiscal 1997. The increase in goodwill amortization was primarily a result of The Bentley Group acquisition in June 1997. NET (LOSS) INCOME eLoyalty reported a net income of $2.2 million, or $0.05 per share on a diluted basis, for fiscal year 1998 as compared with net income of $2.9 million, or $0.06 per share on a diluted basis, for fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES eLoyalty's principal capital requirements are to fund working capital needs, capital expenditures and other investments in support of revenue generation and growth. Since the spin-off and the associated cessation of operational funding and cash management support from TSC, eLoyalty has been dependent on its own ability to generate capital resources sufficient to meet its ongoing needs for cash. At December 30, 2000, eLoyalty had cash and cash equivalents of $41.1 million. Although this represented an increase of approximately $27.7 million in cash and cash equivalents from December 31, 1999, the increase was attributable entirely to the $68.3 million cash generated from financing activities, as described below. Both operating activities and investing activities (in capital expenditures) negatively impacted eLoyalty's available 2000 cash resources, with a combined use of such cash resources aggregating nearly $41 million. eLoyalty's operating activities used net cash of approximately $22.4 million during fiscal 2000 compared to $11.0 million during 1999. In addition to the negative $0.4 million impact of its net loss for fiscal 2000 and increased needs for cash due to its revenue growth, eLoyalty experienced a $32.9 million (excluding currency effects), or 72%, increase in its net receivables balance compared to that at the prior year-end. This increase is primarily due to the increase in revenues of 50% in the fourth quarter of 2000. Cash used by eLoyalty in investing activities consisted of capital expenditures of $18.6 million during fiscal 2000 as compared to capital expenditures of $2.2 million for 1999. The substantial increase in capital expenditures for 2000 primarily related to eLoyalty's build-out of its own infrastructure as a stand-alone company, including investments in computer hardware and software, furniture, equipment and leasehold improvements for separate facilities. eLoyalty expects that its capital expenditures for 2001 will be between $12 and $17 million. 29 9 eLoyalty has made an additional commitment to invest up to $14.7 million, through another newly formed entity, in eLoyalty Ventures, L.L.C. ("eLoyalty Ventures"). eLoyalty Ventures is a $30 million venture capital fund formed in 2000 by eLoyalty, together with entities associated with Bain Capital, Sutter Hill Ventures and Technology Crossover Ventures, to focus on investing in early-stage CRM technology companies. eLoyalty has not yet been requested to contribute any of its eLoyalty Ventures commitment and so remains subject to capital calls against that commitment on 10 business days' prior written notice. Cash flows provided by financing activities increased $46.4 million to $68.3 million for fiscal 2000 from $21.9 million in 1999. Cash from such activities increased during fiscal 2000 primarily as a result of two financing events: the issuance of 4.5 million shares of eLoyalty's common stock to venture capital investors for aggregate net proceeds of $34.9 million and a $20 million cash contribution from TSC in connection with the spin-off. Additional cash flows from financing activities were provided by cash proceeds of $8.6 million from the exercise of employee stock options and purchases under eLoyalty's employee stock purchase plan, and $4.8 million in net transfers from TSC in connection with the spin-off, relating to the period from January 1, 2000 to its February 15, 2000 effective date. eLoyalty's near-term capital resources consist of its current cash balances, together with anticipated future cash flows from operations and availability under an external credit line. eLoyalty's balance of cash and cash equivalents was $41.1 million as of December 30, 2000. eLoyalty has experienced delays during the first quarter of 2001 in closing both new client engagements and extensions of existing engagements in its North American operations. These delays are expected to contribute to an operating loss and a net loss for the first quarter of 2001. Although eLoyalty does not believe that these delays or the anticipated first quarter net loss is indicative of a material adverse trend in its competitive position or fundamental business, continuing net losses or adverse impacts on its accounts receivable collection activities could require eLoyalty to accelerate use of its existing cash balances to fund operations during 2001 and limit eLoyalty's ability to fund discretionary capital and other expenditures. In response to these economic uncertainties, eLoyalty is assessing various cost reduction actions and on March 5, 2001 announced that it expected in its first quarter of 2001 to recognize a pre-tax charge of approximately $7 million, or $0.08 per share on a diluted basis, related primarily to severance and associated costs. eLoyalty entered into a business loan agreement with Bank of America, N.A. (the "Bank"), effective as of December 30, 2000, providing for an unsecured revolving line of credit in a maximum principal amount of $10 million through December 30, 2001 (the "Facility"). The Facility in effect extended and superseded eLoyalty's prior March 2000 revolving credit agreement with the Bank, which had been guaranteed by TSC and expired on December 30, 2000. eLoyalty's only borrowings under the prior line of credit related to letters of credit required for operational commitments and aggregated $0.7 million at year-end 2000; this aggregate outstanding letter of credit amount was carried forward as outstanding under the Facility. Loans under the Facility bear interest at the Bank's prime rate or, at eLoyalty's election, an alternate rate of IBOR (an offshore U.S. dollar interbank interest rate) plus 0.75%. Under the Facility, eLoyalty agreed to pay a commitment fee of 0.125% of the unused portion of the $10 million commitment and certain other loan fees and expenses. The Facility requires eLoyalty to comply with various affirmative and negative covenants, including ones relating to the maintenance of consolidated tangible net worth of at least $70 million, limitations on other liabilities, liens and investments and limitations on aggregate annual lease payments. In addition, eLoyalty agreed to maintain unencumbered liquid assets with an aggregate market value of from 100% to 150% (depending on the nature of such assets and their location) of the total commitment. Accordingly, eLoyalty will be required to maintain at least $10 million in liquid asset coverage throughout 2001 to be in compliance with these covenants and to have credit availability under the Facility. eLoyalty anticipates that its current cash resources, together with other expected internal and external sources of liquidity, should be sufficient to satisfy eLoyalty's working capital and capital expenditure needs for the balance of the fiscal year. If, however, eLoyalty's operating activities or net cash needs for the year were to differ 30 10 materially from current expectations, there could be no assurance, given current capital market, credit and general economic uncertainties, that eLoyalty would have access to additional external capital resources on acceptable terms. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK We provide our solutions to clients in a number of countries including the United States, Canada, United Kingdom, Germany, France and Australia. For the years ended December 2000 and 1999, 17% and 22%, respectively, of our revenues were denominated in foreign currencies. Historically, we have not experienced material fluctuations in our results of operations due to foreign currency exchange rate changes. However, we believe that an increasing portion of our revenues and costs will be denominated in foreign currencies in the future. As a result of our exposure to foreign currencies, our future financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in those foreign markets. RECENT ACCOUNTING PRONOUNCEMENTS On June 15, 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.133, as amended, is effective for fiscal years beginning after June 15, 2000 (2001 for eLoyalty). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet as assets or liabilities at their fair value. It also requires entities to reflect the gains or losses associated with changes in the fair value of derivatives each period, either in current earnings or as a separate component of other comprehensive income, depending on the nature of the underlying contract or transaction. eLoyalty anticipates that the adoption of SFAS No. 133 will not have a material effect on its results of operations, financial position or cash flows. Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), provides guidance in applying generally accepted accounting principles to selected revenue recognition issues in financial statements. On June 26, 2000, the SEC issued SAB 101B, an amendment to SAB 101 which delayed the implementation of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15,1999. The implementation of SAB 101 had no material effect on eLoyalty. YEAR 2000 CONSIDERATIONS eLoyalty knows of no significant Year 2000 related failures which have affected eLoyalty-provided software or services or internal eLoyalty systems. Due to the large number of software and systems solutions engagements eLoyalty has undertaken over the years, there can be no assurance that all such software and systems will be Year 2000 compliant or that eLoyalty may not be subject to future claims as a result. FACTORS THAT MAY AFFECT FUTURE RESULTS OR MARKET PRICE OF STOCK Some of the factors that may affect eLoyalty's future results or the market price of its stock and cause or contribute to material differences between actual results and those reflected in forward-looking statements contained in this report include the following: - uncertainties associated with the attraction of new clients, the continuation of existing and new engagements with existing clients and the timing of related client commitments, including potential client delays or deferrals of new engagements or existing project extensions in light of prevailing general economic conditions and uncertainties; - reliance on major clients and suppliers, and maintenance of good relations with key business partners; - management of the risks associated with increasingly complex client projects in general as well as new services offerings, including risks relating to the variability and predictability of the number, size, scope, cost and duration of, and revenues from, client engagements, unanticipated cancellations or deferrals of client projects or follow-on phases of engagements in process, collection of billed amounts, shifts from time and materials-based engagements to alternative pricing or value-based models and variable employee utilization rates, project personnel costs and project requirements; 31 11 - management of growth, expansion into new geographic and market areas and development and introduction of new services offerings, including the timely and cost-effective implementation of enhanced operating, financial and other infrastructure systems and procedures; - challenges in attracting, training, motivating and retaining highly skilled management, strategic, technical, product development and other professional employees in a competitive information technology labor market; - continuing intense competition in the information technology services industry generally and, in particular, among those focusing on the provision of CRM services and software, including both firms with significantly greater financial and technical resources than eLoyalty and new entrants; - the rapid pace of technological innovation in the information technology services industry, including frequent technological advances and new product introductions and enhancements, and the ability to create innovative and adaptable solutions that are consistent with evolving standards and responsive to client needs, preferences and expectations; - access in tightening capital and credit markets to sufficient debt and/or equity capital to meet eLoyalty's future operating and financial needs; - protection of eLoyalty's technology, proprietary information and other intellectual property rights or challenges to eLoyalty's intellectual property by third parties; - future legislative or regulatory actions relating to the information technology or information technology services industries; - risks associated with global operations, including those relating to the economic conditions in each country, potential currency exchange and credit volatility, compliance with a variety of foreign laws and regulations and management of a geographically dispersed organization; - the overall demand for CRM services and software and information technology generally; and - the continued impact of the current economic slowdown, as well as other future general business, capital market and economic conditions and volatility. 32 12 RESPONSIBILITY FOR FINANCIAL STATEMENTS The consolidated financial statements of eLoyalty Corporation have been prepared by eLoyalty in conformity with generally accepted accounting principles. Management is responsible for all information and representations contained in the financial statements and other sections of the Annual Report. In preparing the financial statements, management uses its judgment to make necessary estimates. Management maintains and relies on a system of internal controls in fulfilling its financial reporting responsibilities. The system is designed to provide reasonable assurance at a reasonable cost that assets are safeguarded and transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. The internal control systems include written policies and procedures, an organizational structure which provides for division of responsibilities and a development of qualified managers in all areas. In addition, management continually monitors its internal control systems in response to changes in business conditions and operations. The Audit Committee of the Board of Directors, composed solely of directors who are not officers or employees of eLoyalty Corporation, meets with corporate financial management and the independent accountants to review their activities and to satisfy itself that each is properly discharging its responsibility. The independent accountants have met periodically with the Committee, without the presence of management, to discuss the results of their audit work, the adequacy of internal financial controls and the quality of financial reporting. /s/ Kelly D. Conway /s/ Timothy J. Cunningham - ------------------- ------------------------- Kelly D. Conway Timothy J. Cunningham President and Chief Executive Officer Senior Vice President, Chief Financial Officer and Corporate Secretary REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of eLoyalty Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows, and of changes in stockholders' equity and comprehensive income (loss) present fairly, in all material respects, the financial position of eLoyalty Corporation and subsidiaries (the "Company") as of December 30, 2000 and December 31, 1999, and the results of their operations and their cash flows for the years ended December 30, 2000 and December 31, 1999, for the seven month period from June 1, 1998 to December 31, 1998 and for the year ended May 31, 1998, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 our opinion. /s/ PricewaterhouseCoopers LLP - ------------------------------ PricewaterhouseCoopers LLP Chicago, Illinois January 30, 2001 33 13 CONSOLIDATED BALANCE SHEETS eLoyalty Corporation
ASSETS DECEMBER 30, DECEMBER 31, (In thousands, except share and per share data) 2000 1999 - ------------------------------------------------------------------------------------------------------------------ Current Assets: Cash and cash equivalents $ 41,138 $ 13,462 Marketable securities 9,902 7,175 Receivables, net 75,886 44,056 Deferred income taxes 16,301 9,057 Prepaid expenses 2,935 3,093 Other current assets 7,534 1,072 --------- --------- Total current assets 153,696 77,915 Equipment and leasehold improvements, net 18,784 2,284 Goodwill, net 6,990 12,129 Deferred income taxes 2,664 2,387 Long-term receivables and other 2,484 1,888 --------- --------- Total assets $ 184,618 $ 96,603 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 6,880 $ 640 Accrued compensation and related costs 19,964 11,687 Deferred compensation 9,897 7,175 Other current liabilities 7,021 3,486 --------- --------- Total current liabilities 43,762 22,988 --------- --------- Commitments and contingencies -- -- Stockholders' Equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued and outstanding -- -- Common stock, $.01 par value; 100,000,000 shares authorized; 49,925,702 and 41,400,000 shares issued and outstanding, respectively 499 414 Additional paid-in capital 144,860 963 Net advances from Technology Solutions Company -- 74,048 Retained earnings 2,171 -- Accumulated other comprehensive loss (1,970) (847) Unearned compensation (4,704) (963) --------- --------- Total stockholders' equity 140,856 73,615 --------- --------- Total liabilities and stockholders' equity $ 184,618 $ 96,603 --------- ---------
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. 34 14 CONSOLIDATED STATEMENTS OF OPERATIONS eLoyalty Corporation
FOR THE SEVEN MONTH FOR THE FISCAL FOR THE YEARS PERIOD FROM JUNE 1 TO YEAR ENDED ENDED DECEMBER DECEMBER 31, MAY 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 1999 1998 1998 - --------------------------------------------------------------------------------------------------------------------------- Revenues $ 211,603 $ 146,003 $ 64,415 $ 84,488 Project personnel costs 104,203 68,483 29,562 39,049 --------- --------- --------- --------- Gross profit 107,400 77,520 34,853 45,439 --------- --------- --------- --------- Other costs and expenses: Selling, general and administrative 96,875 58,395 29,132 35,436 Research and development 9,322 5,624 3,089 2,543 Goodwill amortization 4,972 4,996 2,450 3,201 --------- --------- --------- --------- Total other expenses 111,169 69,015 34,671 41,180 --------- --------- --------- --------- Operating (loss) income (3,769) 8,505 182 4,259 --------- --------- --------- --------- Other income (loss) 2,921 (408) (327) (24) --------- --------- --------- --------- (Loss) income before income taxes (848) 8,097 (145) 4,235 Income tax (benefit) provision (424) 4,039 398 2,022 --------- --------- --------- --------- Net (loss) income $ (424) $ 4,058 $ (543) $ 2,213 ========= ========= ========= ========= Basic net (loss) income per common share $ (0.01) $ 0.10 $ (0.01) $ 0.05 Diluted net (loss) income per common share $ (0.01) $ 0.09 $ (0.01) $ 0.05 Shares used to calculate basic net (loss) income per share (in millions) 48.2 41.4 41.4 41.4 ========= ========= ========= ========= Shares used to calculate diluted net (loss) income per share (in millions) 48.2 44.2 41.4 46.8 ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. 35 15 CONSOLIDATED STATEMENTS OF CASH FLOWS eLoyalty Corporation
FOR THE SEVEN MONTH FOR THE FISCAL FOR THE YEARS PERIOD FROM JUNE 1 TO YEAR ENDED ENDED DECEMBER DECEMBER 31, MAY 31, (IN THOUSANDS) 2000 1999 1998 1998 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (424) $ 4,058 $ (543) $ 2,213 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 7,549 6,355 3,509 3,874 Provisions for doubtful receivables 4,064 2,059 2,652 531 Deferred income taxes (7,950) (5,763) (3,432) (2,118) Other -- 463 412 -- Changes in assets and liabilities: Receivables (36,932) (21,496) (4,197) (10,217) Purchases of trading securities related to deferred compensation program (2,727) (2,689) (830) (2,096) Other current assets (6,407) (1,038) 278 (1,079) Accounts payable 6,281 (313) 647 (1,184) Accrued compensation and related costs 8,565 4,517 776 2,674 Deferred compensation funds from employees 2,722 2,689 830 2,096 Other current liabilities 3,523 653 538 (2,383) Other long-term assets (613) (536) (11) (815) -------- -------- -------- -------- Net cash (used in) provided by operating activities (22,349) (11,041) 629 (8,504) -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (18,633) (2,175) (570) (1,065) Investment in unconsolidated investee -- -- (875) -- Acquired businesses -- -- (6,625) (10,741) -------- -------- -------- -------- Net cash used in investing activities (18,633) (2,175) (8,070) (11,806) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 34,914 -- -- -- Proceeds from stock compensation plans 8,552 -- -- -- Capital contribution from Technology Solutions Company 20,000 -- -- -- Net advances from Technology Solutions Company 4,802 21,929 7,777 21,608 -------- -------- -------- -------- Net cash provided by financing activities 68,268 21,929 7,777 21,608 -------- -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents 390 338 (651) (702) -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents 27,676 9,051 (315) 596 Cash and cash equivalents, beginning of period 13,462 4,411 4,726 4,130 -------- -------- -------- -------- Cash and cash equivalents, end of period $ 41,138 $ 13,462 $ 4,411 $ 4,726 ======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. 36 16 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) eLoyalty Corporation
ADVANCES from ACCUMULATED COMMON STOCK ADDITIONAL TECHNOLOGY OTHER TOTAL (In thousands, ------------------- PAID-IN SOLUTIONS RETAINED COMPREHENSIVE UNEARNED STOCKHOLDERS' except share data) SHARES AMOUNT CAPITAL COMPANY EARNINGS INCOME (LOSS) COMPENSATION EQUITY - ----------------------------------------------------------------------------------------------------------------------------------- Balance, May 31, 1997 -- $ -- $ -- $ 17,420 $ -- $ (273) $ -- $ 17,147 ---------- ---- -------- -------- ------ ------- ------- -------- Net income 2,213 2,213 Foreign currency translation (75) (75) -------- Comprehensive income 2,138 Net transfers from TSC 21,608 21,608 ---------- ---- -------- -------- ------ ------- ------- -------- Balance, May 31, 1998 -- -- -- 41,241 -- (348) -- 40,893 ---------- ---- -------- -------- ------ ------- ------- -------- Net loss (543) (543) Foreign currency translation (239) (239) -------- Comprehensive loss (782) Net transfers from TSC 7,777 7,777 ---------- ---- -------- -------- ------ ------- ------- -------- Balance, December 31,1998 -- -- -- 48,475 -- (587) -- 47,888 ---------- ---- -------- -------- ------ ------- ------- -------- Net income 4,058 4,058 Foreign currency translation (260) (260) -------- Comprehensive income 3,798 Net transfers from TSC 21,929 21,929 Issuance of common stock 41,400,000 414 (414) -- Issuance of compensatory stock options 963 (963) -- ---------- ---- -------- -------- ------ ------- ------- -------- Balance, December 31, 1999 41,400,000 414 963 74,048 -- (847) (963) 73,615 ---------- ---- -------- -------- ------ ------- ------- -------- Net (loss) income (2,595) 2,171 (424) Foreign currency translation (1,123) (1,123) -------- Comprehensive loss (1,547) Net transfers and capital contribution from TSC 24,802 24,802 Spin-off from Technology Solutions Company 2,529,029 25 96,230 (96,255) -- Issuance of common stock pursuant to stock-based awards 1,163,568 12 8,540 8,552 Issuance of common stock to venture capital firms 4,539,980 45 34,869 34,914 Issuance of compensatory stock options 524 (524) -- Issuance of restricted common stock pursuant to cancellation of certain stock options 293,125 3 3,734 (3,737) -- Amortization of unearned compensation 520 520 ---------- ---- -------- -------- ------ ------- ------- -------- Balance, December 30, 2000 49,925,702 $499 $144,860 $ -- $2,171 $(1,970) $(4,704) $140,856 ========== ==== ======== ======== ====== ======= ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. 37 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS eLoyalty Corporation (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE ONE--DESCRIPTION OF BUSINESS eLoyalty is a global management consulting and systems integration organization focused exclusively on building customer loyalty. eLoyalty has a broad range of Customer Relationship Management ("CRM") related services including business strategy, technical architecture, selecting, implementing and integrating appropriate CRM software applications and providing ongoing support for multi-vendor systems. eLoyalty was spun off from Technology Solutions Company ("TSC") into a separate, publicly traded company on February 15, 2000 (the "spin-off"). The spin-off, which was approved by the TSC Board of Directors on February 9, 2000, was accomplished by distributing to TSC stockholders, as a dividend, all of the outstanding common stock of eLoyalty owned by TSC. In the spin-off, TSC stockholders received one share of eLoyalty common stock, par value $0.01 per share, for every one share of TSC common stock they owned of record as of February 9, 2000. NOTE TWO--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation--The financial statements for periods subsequent to the spin-off reflect eLoyalty's results of operations and financial position as it operates as a separate, publicly traded company. The consolidated financial statements for periods prior to the spin-off reflect eLoyalty's results of operations and financial position as it operated within TSC, and have been prepared using the historical basis in the assets, liabilities and results of operations. The consolidated statements of operations for the periods prior to February 15, 2000 reflect all of the related costs of doing business including an allocation of certain general corporate expenses of TSC not directly related to eLoyalty's operations, including legal, information systems, finance, insurance, human resources, benefits administration, stockholders' services and corporate management services. These costs were allocated to eLoyalty primarily on a proportional cost allocation method based on revenues and headcount. Management believes these allocations were made on a reasonable basis. The financial information for periods prior to February 15, 2000 may not necessarily reflect what the financial position and results of operations of eLoyalty would have been had eLoyalty operated as a separate, stand-alone publicly traded entity during such periods. Certain reclassifications have been made to the 1999 and 1998 statements of operations to conform to the 2000 presentation. Change in Fiscal Year-End--In connection with implementing new business systems and processes in December 2000, eLoyalty changed from a calendar year- end to a fiscal year ending with the Saturday closest to the end of December. The fiscal year-end for 2000 is December 30. Also, on November 22, 1998, TSC's Board of Directors voted to change the fiscal year of TSC from a fiscal year ending on May 31 to a calendar year ending on December 31 in each year. The seven month period of June 1, 1998 through December 31, 1998 preceded the start of the new December 31 fiscal year. Consolidation--The consolidated financial statements include the accounts of eLoyalty and all of its subsidiaries. All significant intercompany transactions have been eliminated. Revenue Recognition--eLoyalty derives substantially all of its revenues from professional services. eLoyalty provides professional services primarily on a time and materials basis. Although eLoyalty occasionally performs projects on a fixed fee basis, the total portion of revenues derived from fixed fee engagements is not significant. eLoyalty recognizes revenues on the percentage of completion method as services are performed, based on hourly billing rates. Percentage of completion estimates are based on the ratio of costs incurred to total estimated costs. From time to time, eLoyalty uses subcontractors to supplement its resources in client engagements. Revenues generated through subcontractors are recognized as the service is performed, and the related subcontractor costs 38 18 are included in project personnel costs as incurred. Out-of-pocket expenses (travel, lodging, etc.) charged on client engagements are presented net of amounts billed to clients as general and administrative expense in the statements of operations. Losses on engagements, if any, are recognized when determined. eLoyalty also derives revenues from in-house developed software. Software license fee revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the license fee is fixed and determinable and the collection of the fee is probable. Fees from licenses sold together with consulting services are generally recognized upon delivery, provided that the above criteria have been met and payment of the license fees is not dependent upon the performance of the consulting services. In those instances when it is determined that the payment of the license fee is dependent upon the performance of consulting services, both the license and consulting fees are recognized under the percentage of completion method of contract accounting. Revenues from post-contract Loyalty Support(TM) are recognized ratably over the term of the maintenance contract on a straight-line basis. Revenues from purpose-built hosted solutions and e-PROFILE(TM) are recognized ratably over the contract term. Project Personnel Costs--eLoyalty expenses the cost of project personnel as incurred. Project personnel costs consist primarily of salaries, incentive compensation and employee benefits for eLoyalty personnel available for client assignments, and fees paid to subcontractors for work performed on client projects. Cash and Cash Equivalents--eLoyalty considers all highly liquid investments readily convertible into cash (with original maturities of three months or less) to be cash equivalents. These short-term investments are carried at cost plus accrued interest, which approximates market. Marketable Securities--eLoyalty's marketable securities consist of investments related to eLoyalty's executive deferred compensation plan (see Note Nine) and are classified as trading securities, with unrealized gains and losses included in eLoyalty's statements of operations. Realized gains or losses are determined based on the specific identification method. eLoyalty recognized a net loss of $89 for the year ended December 30, 2000 and net gains of $730, $167 and $823 for the year ended December 31, 1999, the seven month period ended December 31, 1998 and the fiscal year ended May 31, 1998, respectively. Since trading securities relate to eLoyalty's executive deferred compensation plan, a corresponding adjustment is included in the statements of operations to recognize eLoyalty's increased/decreased liability for the deferred compensation plan. Equipment and Leasehold Improvements--Computers, software, furniture and equipment are carried at cost and depreciated on a straight-line basis over their estimated useful lives. Leasehold improvements are amortized over the lesser of the useful life or the lease term. Useful lives generally are five years or less. Maintenance and repair costs are expensed as incurred. The cost and related accumulated depreciation of assets sold or disposed of are moved from the account and resulting gain or loss is included in the statements of operations. The carrying value of equipment and leasehold improvements is periodically reviewed to assess recoverability based on future undiscounted cash flows. eLoyalty accounts for software developed for internal use in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." As such, costs incurred that relate to the planning and post-implementation phases of development are expensed. Costs incurred in the development phase are capitalized and amortized over the asset's estimated useful life, generally three to five years. Goodwill--Goodwill is amortized on a straight-line basis, generally over a five-year period. Accumulated amortization of goodwill as of December 30, 2000 and December 31, 1999 was $16,477 and $11,518, respectively. The carrying value of goodwill is periodically reviewed to assess recoverability based on future undiscounted cash flows. Research and Development Costs--Research and development costs are expensed as incurred. Research and development expenses relate primarily to the dedicated research and development facility maintained by eLoyalty, and consist primarily of salaries, incentive compensation and employee benefits costs for dedicated personnel, occupancy costs, staff recruiting costs, administrative costs, travel expenses and depreciation. Software Development Costs--eLoyalty capitalizes software development costs once technological feasibility is established and prior to general release. Amortization is computed as the greater of the amount computed using the (a) ratio of current revenues to the total current and anticipated future revenues or (b) the straight-line method over the estimated economic life of the product. There are no capitalized software development costs included on 39 19 eLoyalty's balance sheets as of December 30, 2000 and December 31, 1999. Amortization expense associated with software development costs was $447 and $354 for the seven month period ended December 31, 1998 and the fiscal year ended May 31, 1998, respectively. There was no amortization expense of software development costs during the year ended December 30, 2000 or December 31, 1999. Stockholders' Equity--Stockholders' equity includes common stock issued, retained earnings, accumulated other comprehensive income (loss) related to foreign currency translation and unearned compensation related to stock-based compensation. Net advances from TSC represent transfers to eLoyalty primarily for operations and working capital requirements, offset by cash collected by TSC for the periods prior to the spin-off. In connection with the spin-off, net advances from TSC were recorded as common stock and additional paid-in capital (see Note Three). Following the spin-off, eLoyalty no longer received operational funding from TSC and no longer participated in the TSC cash management program. Earnings (Loss) Per Common Share--eLoyalty calculates earnings (loss) per share in accordance with SFAS No. 128. Basic earnings per share have been computed by dividing the net earnings for each period presented by the weighted average shares outstanding. Diluted earnings per share has been computed by dividing the net earnings by the weighted average shares outstanding plus the dilutive effect of common stock equivalents using the "treasury stock" method. In periods in which there was a loss, the dilutive effect of common stock equivalents was not included in the dilutive earnings per share calculation as they were antidilutive. Foreign Currency Translation--The functional currencies for eLoyalty's foreign subsidiaries are their local currencies. All assets and liabilities of foreign subsidiaries are translated to U.S. dollars at end of period exchange rates. The resulting translation adjustments are recorded as a component of 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 statements of operations. Fair Value of Financial Instruments--The carrying values of current assets and liabilities and long-term receivables approximated their fair values as of December 30, 2000 and December 31, 1999. Concentration of Credit Risk--eLoyalty had one client, Agilent Technologies, Inc., accounting for 15% of revenues for the year ended December 30, 2000. No client accounted for 10% or more of revenues during the year ended December 31, 1999, the seven month period ended December 31, 1998 or the year ended May 31, 1998. No client accounted for 10% or more of accounts receivables as of December 30, 2000 or December 31, 1999. Stock-Based Compensation--eLoyalty accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Compensation costs for employee stock options is measured as the excess, if any, of the fair value of common stock at the date of grant over the amount an employee must pay to acquire the stock, providing that all other requirements for fixed plan accounting are satisfied. In the event stock options are granted at a price lower than the fair value on the date of grant, the difference is recorded as unearned compensation. Cancelled and reissued stock options are accounted for under variable plan accounting with the related unearned compensation subject to adjustment in future periods based on the fluctuations of the fair value of the common stock. Unearned compensation is amortized over the vesting period of the stock options. The unearned compensation recorded at December 30, 2000 and December 31, 1999 relates solely to eLoyalty stock-based awards. Income Taxes--eLoyalty uses an asset and liability approach, as required under SFAS No. 109, to financial accounting and reporting for income taxes. Deferred income taxes are provided when tax laws and financial accounting standards differ with respect to the amount of income for a year and the basis of assets and liabilities and for tax loss carryforwards. eLoyalty does not provide U.S. deferred income taxes on earnings of foreign subsidiaries which are expected to be indefinitely reinvested. Prior to the spin-off, eLoyalty's results have been included in TSC's consolidated federal and state income tax returns. The income tax provision for such periods is calculated, and deferred tax assets and liabilities are recorded, as if eLoyalty had operated as an independent entity. 40 20 New Accounting Standards--On June 15, 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, is effective for fiscal years beginning after June 15, 2000 (2001 for eLoyalty). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. eLoyalty anticipates that the adoption of SFAS No. 133 will not have a significant effect on eLoyalty's results of operations, cash flows or financial position. Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), provides guidance in applying generally accepted accounting principles to selected revenue recognition issues in financial statements. On June 26, 2000, the SEC issued SAB 101B, an amendment to SAB 101, which delayed the implementation of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. The implementation of SAB 101 had no material effect on eLoyalty. NOTE THREE--ELOYALTY SPIN-OFF FROM TECHNOLOGY SOLUTIONS COMPANY eLoyalty was spun off from TSC into a separate, publicly traded company on February 15, 2000. In connection with the spin-off, TSC's net advances to eLoyalty were recorded as common stock and additional paid-in capital. The net assets distributed to eLoyalty were as follows:
(In 000's) FEBRUARY 15, 2000 - ----------------------------------------------------------------------- Cash $30,794 Receivables, net 50,056 Other current assets 23,603 Goodwill 11,342 Other long-term assets 7,379 Accounts payable 1,238 Other current liabilities 26,784
NOTE FOUR--RELATED PARTY TRANSACTIONS Pursuant to the spin-off, on February 15, 2000, eLoyalty entered into contractual arrangements with TSC whereby TSC provided eLoyalty with certain administrative support through 2000. The total charges from TSC for the years ended December 30, 2000 and December 31, 1999, the seven month period ended December 31, 1998 and the fiscal year ended May 31, 1998 were $5,036, $14,173, $8,429 and $11,643 respectively. eLoyalty periodically provides employee loans as part of employment agreements. These loans have interest rates ranging from 4.5% to 7.5%. The loans are generally forgiven over one to three years at various rates, depending on the value of the loan and the terms of the employment agreement, based on continued employment with eLoyalty. The unforgiven loan balances and related accrued interest are due and payable in full if an employee terminates employment before the end of the loan term. The total value of outstanding employee loans, including certain loans to officers, was $3.4 million and $2.1 million, respectively, as of December 30, 2000 and December 31, 1999. 41 21 NOTE FIVE--RECEIVABLES Receivables consist of the following:
AS OF DECEMBER ------------------------------ 2000 1999 - ------------------------------------------------------------------------------ Amounts billed to clients $ 62,501 $ 39,552 Unbilled revenues 14,990 6,588 -------- -------- 77,491 46,140 Receivable allowances (1,605) (2,084) -------- -------- Receivables $ 75,886 $ 44,056 ======== ========
Amounts billed to clients represent professional fees and reimbursable project-related expenses. Unbilled revenues represent professional fees, project-related expenses, materials and subcontractor costs performed in advance of billings in accordance with contract terms. A substantial amount of unbilled revenues at the end of any reporting period is billed in the month following the reporting period. Amounts billed to clients are unsecured and primarily due within 30 days. NOTE SIX--EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements consist of the following:
AS OF DECEMBER ------------------------------ 2000 1999 - ------------------------------------------------------------------------------ Computers and software $ 15,840 $ 3,636 Furniture and equipment 4,750 1,006 Leasehold improvements 3,338 729 -------- -------- 23,928 5,371 Accumulated depreciation and amortization (5,144) (3,087) -------- -------- Equipment and leasehold improvements $ 18,784 $ 2,284 ======== ========
Depreciation expense was $2,057, $1,502, $421 and $308 for the years ended December 30, 2000 and December 31, 1999, the seven month period ended December 31, 1998 and the fiscal year ended May 31, 1998, respectively. NOTE SEVEN--INCOME TAXES The income tax (benefit) provision consists of the following:
FOR THE SEVEN MONTH FOR THE YEAR ENDED FOR THE YEAR ENDED PERIOD FROM JUNE 1 FOR THE YEAR ENDED DECEMBER 30, DECEMBER 31, TO DECEMBER 31, MAY 31, 2000 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------- Current: Federal $ 6,950 $ 4,546 $(1,929) $ 115 State 859 1,059 (275) 16 Foreign (712) 1,876 (830) (227) ------- ------- ------- ------- Total current 7,097 7,481 (3,034) (96) ------- ------- ------- ------- Deferred: Federal (1,923) (2,008) 1,941 1,357 State 204 (478) 277 194 Foreign (5,802) (956) 1,214 567 ------- ------- ------- ------- Total deferred (7,521) (3,442) 3,432 2,118 ------- ------- ------- ------- Income tax (benefit) provision $ (424) $ 4,039 $ 398 $ 2,022 ======= ======= ======= =======
42 22 Total income tax (benefit) provision differed from the amount computed by applying the federal statutory income tax rate due to the following:
FOR THE SEVEN MONTH FOR THE YEAR ENDED FOR THE YEAR ENDED PERIOD FROM JUNE 1 FOR THE YEAR ENDED DECEMBER 30, DECEMBER 31, TO DECEMBER 31, MAY 31, 2000 1999 1998 1998 - ----------------------------------------------------------------------------------------------------------------------- Federal tax provision (benefit), at statutory rate $ (297) $ 2,834 $ (50) $ 1,475 State tax provision (benefit), net of Federal benefit 539 405 (6) 211 Effect of foreign tax rate differences (1,205) 406 303 34 Nondeductible expenses 208 134 61 96 Nondeductible goodwill 235 279 170 172 Other 96 (19) (80) 34 ------- ------- ------- ------- Income tax (benefit) provision $ (424) $ 4,039 $ 398 $ 2,022 ======= ======= ======= =======
Deferred tax assets and liabilities were comprised of the following:
AS OF DECEMBER --------------------------- 2000 1999 - ---------------------------------------------------------------------------------- Deferred tax assets: Deferred compensation and bonuses $ 3,753 $ 2,870 Equity losses of unconsolidated investee 341 341 Receivable allowances 448 918 Other accruals 2,061 936 Net operating loss carryforwards 10,798 4,996 Depreciation and amortization 2,680 2,387 -------- -------- Total deferred tax assets 20,081 12,448 -------- -------- Deferred tax liabilities: Prepaid expenses (1,116) (1,004) -------- -------- Total deferred tax liabilities (1,116) (1,004) -------- -------- Net deferred tax asset $ 18,965 $ 11,444 ======== ========
Net operating loss carryforwards relate primarily to eLoyalty's UK operations and have an indefinite carryforward period. Pursuant to the Tax Sharing and Disaffiliation Agreement between TSC and eLoyalty, TSC will generally be liable to eLoyalty for any income tax benefits realized by TSC related to the exercise of eLoyalty stock options by TSC employees (see Note Twelve). With respect to the realizability of these tax benefits, if any, eLoyalty is dependent on TSC's ability to realize the benefits, and accordingly, eLoyalty does not recognize these benefits until realized by TSC. Income (loss) before income taxes consisted of the following:
FOR THE SEVEN MONTH FOR THE YEAR ENDED FOR THE YEAR ENDED PERIOD FROM JUNE 1 FOR THE YEAR ENDED DECEMBER 30, DECEMBER 31, TO DECEMBER 31, MAY 31, 2000 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------ United States $ 18,602 $ 7,447 $ (164) $ 3,781 Foreign (19,450) 650 19 454 -------- -------- -------- -------- Total $ (848) $ 8,097 $ (145) $ 4,235 ======== ======== ======== ========
43 23 NOTE EIGHT--LINE OF CREDIT eLoyalty entered into a business loan agreement with Bank of America, N.A. (the "Bank") effective as of December 30, 2000, providing for an unsecured revolving line of credit in a maximum principal amount of $10 million through December 30, 2001 (the "Facility"). The Facility in effect extended and superseded eLoyalty's prior March 2000 revolving credit agreement with the Bank, which had been guaranteed by TSC and expired on December 30, 2000. eLoyalty's only borrowings under the prior line of credit related to letters of credit required for operational commitments and aggregated $0.7 million at year-end 2000; this aggregate outstanding letter of credit amount was carried forward as outstanding under the Facility. Loans under the Facility bear interest at the Bank's prime rate or, at eLoyalty's election, an alternate rate of IBOR (an offshore U.S. dollar interbank interest rate) plus 0.75%. Under the Facility, eLoyalty agreed to pay a commitment fee of 0.125% of the unused portion of the $10 million commitment and certain other loan fees and expenses. The Facility requires eLoyalty to comply with various affirmative and negative covenants, including ones relating to the maintenance of consolidated tangible net worth of at least $70 million, limitations on other liabilities, liens and investments and limitations on aggregate annual lease payments. In addition, eLoyalty agreed to maintain unencumbered liquid assets with an aggregate market value of from 100% to 150% (depending on the nature of such assets and their location) of the total commitment. Accordingly, eLoyalty will be required to maintain at least $10 million in liquid asset coverage throughout 2001 to be in compliance with these covenants and to have credit availability under the Facility. NOTE NINE--EXECUTIVE DEFERRED COMPENSATION PLAN All eLoyalty executives (defined for this purpose as Vice Presidents and above) are eligible to participate in the eLoyalty Executive Deferred Compensation Plan (the "EDCP"). The EDCP is a nonqualified deferred compensation plan that 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 eLoyalty with the deferred funds. These investments remain assets of eLoyalty and are available to the general creditors of eLoyalty in the event of eLoyalty's insolvency. Prior to the spin-off from TSC, eLoyalty executives participated in the TSC non-qualified executive deferred compensation plan. NOTE TEN--EMPLOYEE BENEFIT PLANS eLoyalty 401(k) Savings Plan--eLoyalty employees are eligible to participate in the eLoyalty Corporation 401(k) Savings Plan (the "401(k) Plan") on the first day of the month coinciding with or following their date of hire. The 401(k) Plan allows employees to contribute up to 15% of their annual compensation, subject to Internal Revenue Service statutory limits. Company contributions are made annually to the 401(k) Plan at the discretion of the Board of Directors. Prior to the spin-off from TSC, eLoyalty employees participated in the TSC 401(k) Plan. eLoyalty recognized expenses related to these 401(k) plans of $1,697 and $1,131 for the years ended December 30, 2000 and December 31, 1999, $487 for the seven month period ended December 31, 1998 and $470 in the fiscal year ended May 31, 1998. eLoyalty Employee Stock Purchase Plan--eLoyalty employees are eligible to participate in the eLoyalty employee stock purchase plan (the "Stock Purchase Plan") after meeting certain minimum eligibility service requirements. The Stock Purchase Plan qualifies under section 423 of the Internal Revenue Code ("IRC") and is administered by the Compensation Committee of the Board of Directors. The Stock Purchase Plan permits eligible employees to purchase an aggregate of 500,000 shares of eLoyalty's common stock. Shares are purchased by the plan for the benefit of the participants at the end of each three month purchase period. The Stock Purchase Plan purchased 250,281 shares of eLoyalty common stock for the year ended December 30, 2000. 44 24 NOTE ELEVEN--CAPITAL STOCK eLoyalty was spun off from TSC into a separately, publicly traded company on February 15, 2000. In connection with establishing eLoyalty as a separate entity, 100,000,000 shares of common stock, $0.01 par value, were authorized, of which 43,929,029 common stock shares were issued. eLoyalty also has authorized 10,000,000 shares of preferred stock, $0.01 par value, of which none has been issued. Pursuant to the spin-off, eLoyalty also received $8.4 million from the sale of 2.5 million shares of common stock to Technology Crossover Ventures (TCV) and Sutter Hill Ventures. On May 26, 2000, eLoyalty also closed its common stock purchase agreement with TCV entities and issued 2 million shares of common stock at $13.50 per share, the closing market price on April 18, 2000, the signing date of the initial letter of intent, for proceeds of $26.5 million, net of issuance costs. On March 17, 2000, the Board of Directors adopted a Stockholder Rights Plan (the "Rights Plan"). The Rights Plan is intended to assure fair and equal treatment for all of eLoyalty's stockholders in the event of a hostile takeover attempt. Under the terms of the Rights Plan, each share of eLoyalty's common stock has associated with it one Right. Each Right entitles the registered holder to purchase from eLoyalty one one-hundredth of a share of Series A junior participating preferred stock, without par value, at an exercise price of $160 (subject to adjustment). The Rights become exercisable under certain circumstances: 10 days after the first public announcement that any person has acquired 15% or more of eLoyalty's common stock or the announcement that any person has commenced a tender offer for 15% or more of eLoyalty's common stock. In general, eLoyalty may redeem the Rights in whole, but not in part, at a price of $0.01 per Right at any time until 10 days after any person has acquired 15% or more of eLoyalty's common stock. The Rights will expire on March 17, 2010, unless earlier redeemed by eLoyalty or exchanged for other shares of eLoyalty's common stock. Under specified conditions, each Right will entitle the holder to purchase eLoyalty's common stock at the exercise price (or if eLoyalty 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 eLoyalty's Board of Directors. NOTE TWELVE--STOCK INCENTIVE PLANS eLoyalty maintains two stock incentive plans: the eLoyalty Corporation 1999 Stock Incentive Plan (the "1999 Plan") and the eLoyalty Corporation 2000 Stock Incentive Plan (the "2000 Plan"). Under the 1999 Plan, awards of stock options, stock appreciation rights, bonus and restricted stock and performance share may be granted to directors, officers, employees, consultants, independent contractors and agents of eLoyalty and its subsidiaries. Stock option awards may be in the form of incentive or non-statutory options, provided that incentive stock options may only be granted to officers and employees of eLoyalty. All awards made under the 1999 Plan to date have been in the form of non-statutory stock options or restricted stock. An aggregate of 5,340,000 shares of eLoyalty common stock was initially reserved for issuance under the 1999 Plan for all awards other than those issued in connection with the spin-off as discussed below. On the first day of each fiscal year, beginning in 2000, the aggregate number of shares available for issuance under the 1999 Plan is automatically increased by an amount equal to 5% of the total number of shares of common stock that are outstanding as of the time of the increase. In addition, 7,387,561 shares were reserved for issuance under the 1999 Plan in connection with the spin-off in substitution of previously granted options to purchase shares of TSC common stock. These substitute options are not subject to the limit on shares reserved set forth above. On May 12, 2000, the Board of Directors approved the eLoyalty Corporation 2000 Stock Incentive Plan. Under the 2000 Plan, non-statutory stock option awards may be granted to officers, employees and certain consultants and independent contractors of eLoyalty and its subsidiaries. An aggregate of 2,800,000 shares of eLoyalty common stock has been reserved for issuance under the 2000 Plan. 45 25 If options or shares awarded under the 1999 Plan and the 2000 Plan are not issued due to forfeiture or other reason, then those options or shares will again become available for issuance under the plans. As of December 30, 2000, there were a total of 1,419,742 shares available for future grants under the 1999 and 2000 Plans. Stock options granted under the 1999 Plan and 2000 Plan are made at the discretion of the Compensation Committee of eLoyalty's Board of Directors or another duly constituted Committee of the Board to the extent authorized by such plans and the Board (the "Compensation Committee"). Most employees are eligible to receive a grant of non-statutory stock options periodically with the number of shares generally determined by the employee's position grade, performance level and the size of the award pool as determined by the Compensation Committee. In addition, full-time employees normally receive a grant of non-statutory stock options upon hire. Stock options are generally granted with an exercise price per share equal to the fair market value of a share of eLoyalty common stock on the date of grant and a maximum term of 10 years. Although the Compensation Committee has the authority to set other terms, the options generally become exercisable over a period of four years. The initial vesting may occur after a one or two-year period, with the balance of the shares vesting in equal monthly installments over the remainder of the four-year period, or the entire award may vest in equal monthly increments over the four-year period. The 1999 Plan was amended in December 2000 to increase the number of option shares automatically awarded to non-employee directors. The 1999 Plan, as amended, provides that each non-employee director will receive a non-statutory stock option to purchase 50,000 shares of eLoyalty common stock when he or she commences service as a director. In addition, on the day following the date of each annual shareholders' meeting, each non-employee director will receive a non-statutory stock option to purchase 12,000 shares of eLoyalty common stock. Stock options granted to non-employee directors have an exercise price per share equal to the fair market value of a share of eLoyalty common stock on the grant date and a maximum term of 10 years. Stock options granted to non-employee directors upon commencement of services vest ratably over a period of 48 months. Stock options granted to non-employee directors following an annual shareholders' meeting vest ratably over a period of 12 months. At the time of the spin-off, each outstanding option to purchase TSC common stock held by a person who was an employee or director of eLoyalty immediately after the spin-off (and who was not also a director of TSC) was converted into a substitute option to purchase eLoyalty common stock. Furthermore, each outstanding TSC option granted before June 22, 1999 to a person who was an employee or director of TSC after the spin-off, or who was neither an employee or director of eLoyalty or TSC after the spin-off, was converted into both an adjusted TSC option and a substitute eLoyalty option. The conversion of the options was done in a manner such that (1) the aggregate intrinsic value of the options immediately before and after the exchange were the same, (2) the ratio of the exercise price per option to the market value per option was not reduced, and (3) the vesting provisions and option period of the replacement options are the same as the original vesting terms and option period. The substitute option will take into account all employment with both TSC and eLoyalty for purposes of determining when the option becomes exercisable and when it terminates. All other terms of the substitute option are the same as the terms of the TSC option to which it relates. Of the 7,387,561 substitute option shares issued in connection with the spin-off, 3,557,823 were issued to persons who were employees or directors of eLoyalty immediately after the spin-off. Under the 1999 Stock Incentive Plan, eLoyalty granted 293,125 shares of restricted stock to certain executives during the year ending December 30, 2000. During the restricted period, the holders of such shares have the same rights as stockholders of eLoyalty, except that the shares may not be sold, assigned, pledged or otherwise encumbered. Restrictions on such shares lapse ratably over a period of 60 months. As of December 30, 2000, a total of 268,670 shares continued to be subject to restrictions. 46 26 Option activity was as follows for the years ending December 31, 1999 and December 30, 2000:
OPTION WEIGHTED-AVERAGE OPTIONS SHARES EXERCISE PRICE EXERCISABLE - -------------------------------------------------------------------------------------------------------------- Outstanding as of December 31, 1998 -- -- -- Granted 5,447,250 $ 3.88 Exercised -- -- Forfeited (107,250) $ 3.50 ----------- ------ ----------- Outstanding as of December 31, 1999 5,340,000 $ 3.89 -- Granted 5,066,914 $20.91 Granted in connection with the spin-off(1) 7,387,561 $ 6.85 Exercised (913,287) $ 6.24 Forfeited (1,908,386) $18.65 ----------- ------ ----------- Outstanding as of December 30, 2000 14,972,802 $ 9.09 5,941,429 =========== ====== ===========
(1) Includes options issued in connection with the spin-off in substitution of previously granted TSC options. The following table summarizes the status of stock options outstanding and exercisable as of December 30, 2000 by range of exercise price:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------------- ------------------------ RANGE OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISE NUMBER NUMBER REMAINING CONTRACTUAL EXERCISE PRICE NUMBER PRICE PER EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PER SHARE EXERCISABLE SHARE - -------------------------------------------------------------------------------------------------------- $ 0.27-$ 4.99 6,772,844 8.7 $ 3.04 2,335,432 $ 2.15 $ 5.00-$ 9.99 3,437,144 7.7 $ 7.88 2,342,282 $ 7.96 $10.00-$14.99 3,306,278 9.0 $ 13.51 760,184 $ 13.31 $15.00-$24.99 541,252 8.8 $ 18.96 326,824 $ 18.37 $25.00-$36.63 915,284 9.1 $ 36.60 176,707 $ 36.60 ---------- --- ------- --------- ------- Total 14,972,802 8.6 $ 9.09 5,941,429 $ 7.79 ========== === ======= ========= =======
eLoyalty has elected to disclose the pro forma effects of SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") and, as permitted under SFAS 123, applies Accounting Principles Board Opinion No. 25 ("APB 25") and related interpretations in accounting for its plans. Under APB 25, compensation costs for employee stock options is measured as the excess, if any, of the fair value of eLoyalty stock at the date of grant over the option exercise price, providing all other requirements for fixed plan accounting are satisfied. Some option shares with exercise prices below fair value were issued by eLoyalty in 1999 and 2000, thus resulting in eLoyalty recording related compensation expense. During 2000 eLoyalty cancelled and reissued options for 112,000 shares at a lower exercise price. The cancellation and reissuance of these shares was necessary to meet commitments made to newly hired employees. These replacement options are accounted for under variable plan accounting and the related compensation will be subject to adjustment in the future periods based on the fluctuation of the fair value of a share of eLoyalty's common stock. No compensation expense was recognized for these reissued options during 2000 based on the fair value of eLoyalty's common stock during 2000. In addition, options for 586,250 shares were cancelled and replaced through the issuance of the restricted common stock discussed above. Under APB No. 25, the fair value of restricted shares at the date of grant is amortized to expense ratably over the restriction period. eLoyalty recorded compensation expense related to stock-based awards of approximately $520,000 for the year ended December 30, 2000. 47 27 eLoyalty is required under SFAS 123 to disclose pro forma information regarding option grants made to its directors, officers and employees based on specified valuation techniques that produce estimated compensation charges. The fair value of eLoyalty options, including substitute options issued in connection with the spin-off, were estimated at grant date using the Black-Scholes option pricing model. The weighted average grant date fair value and the assumptions used in the Black-Scholes model to calculate such fair values are shown below:
FOR THE SEVEN MONTH FOR THE YEAR ENDED FOR THE YEAR ENDED PERIOD ENDED FOR THE YEAR ENDED DECEMBER 30, DECEMBER 31, DECEMBER 31, MAY 31, OPTIONS 2000 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------------------------ Substitute TSC Options(1) Expected volatility -- 49.7%-54.2% 43.6%-49.8% 41.9%-44.1% Risk-free interest rates -- 4.6%-6.3% 4.1%-5.6% 5.3%-6.5% Expected lives -- 4.5 years 4.5 years 4.5 years Dividends -- -- -- -- Weighted average grant date fair value -- $ 5.08 $ 8.15 $ 7.90 eLoyalty Options Expected volatility 50% 50% Risk-free interest rates 5.6%-6.8% 5.7%-6.3% Expected lives 4.5 years 4.5 years Dividends -- -- Weighted average grant date fair value Issued above market prices $ 12.62 -- Issued at market prices $ 5.31 $ 1.79 Issued below market prices $ 8.54 $ 8.62
(1) eLoyalty stock options issued in connection with the spin-off in substitution of previously granted TSC options. Had compensation costs for eLoyalty's stock option plans been determined using the fair value method under SFAS No. 123, eLoyalty's net (loss) income and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
FOR THE SEVEN MONTH FOR THE YEAR ENDED FOR THE YEAR ENDED PERIOD ENDED FOR THE YEAR ENDED DECEMBER 30, DECEMBER 31, DECEMBER 31, MAY 31, 2000 1999 1998 1998 - ------------------------------------------------------------------------------------------------------------------- Net (loss) income: As reported $ (424) $4,058 $ (543) $2,213 Pro forma $(12,381) $1,219 $(2,574) $ (500) Basic net (loss) income per share: As reported $ (0.01) $ 0.10 $ (0.01) $ 0.05 Pro forma $ (0.26) $ 0.03 $ (0.06) $(0.01) Diluted net (loss) income per share: As reported $ (0.01) $ 0.09 $ (0.01) $ 0.05 Pro forma $ (0.26) $ 0.03 $ (0.06) $(0.01)
48 28 NOTE THIRTEEN--EARNINGS PER SHARE The following table sets forth the computation of the shares used in the calculation of basic and diluted earnings per share:
FOR THE SEVEN MONTH FOR THE FISCAL FOR THE YEARS ENDED PERIOD FROM JUNE 1 YEAR ENDED DECEMBER TO DECEMBER 31, MAY 31, 2000 1999 1998 1998 - ----------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 48,231 41,400 41,400 41,400 Common stock equivalents(1) 5,491 2,800 NA (2) 5,400 ------ ------ ------ ------ Total weighted average shares and common stock equivalents 53,722 44,200 41,400 46,800 ====== ====== ====== ======
(1) In December 1999 eLoyalty issued 41.4 million shares to TSC. For periods prior to February 15, 2000 the weighted average shares outstanding is based on the 41.4 million shares. (2) Common stock equivalent information was not previously calculated for this period when eLoyalty was part of TSC as they were antidilutive. Subsequent to the spin-off eLoyalty does not maintain the information to calculate common stock equivalents for this period. NOTE FOURTEEN--SEGMENT INFORMATION eLoyalty operates as a single reportable segment. The following is revenue and long-lived asset information by geographic area as of and for the years ended December 30, 2000 and December 31, 1999, the seven month period ended December 31, 1998 and the fiscal year ended May 31, 1998.
UNITED EUROPE AND FOR THE YEAR ENDED DECEMBER 30, 2000 STATES CANADA AUSTRALIA TOTAL - --------------------------------------------------------------------------------------------------- Revenues $176,012 $ 9,432 $ 26,159 $211,603 Identifiable Assets $147,219 $ 6,616 $ 30,783 $184,618 UNITED EUROPE AND For the Year Ended December 31, 1999 STATES CANADA AUSTRALIA TOTAL - --------------------------------------------------------------------------------------------------- Revenues $113,504 $ 7,577 $ 24,922 $146,003 Identifiable Assets $ 63,770 $ 3,874 $ 28,959 $ 96,603 For the Seven Month Period UNITED EUROPE AND Ended December 31, 1998 STATES CANADA AUSTRALIA TOTAL - --------------------------------------------------------------------------------------------------- Revenues $50,139 $ 3,729 $10,547 $64,415 Identifiable Assets $42,715 $ 3,300 $17,889 $63,904 UNITED EUROPE AND For the Year Ended May 31, 1998 STATES CANADA AUSTRALIA TOTAL - --------------------------------------------------------------------------------------------------- Revenues $61,882 $ 6,296 $16,310 $84,488 Identifiable Assets $34,711 $ 3,008 $16,399 $54,118
NOTE FIFTEEN--LEASES eLoyalty leases various office facilities under operating leases expiring at various dates through September 30, 2007. Additionally, eLoyalty leases various property and office equipment under operating leases expiring at various dates. Rental expense for all operating leases approximated $6,659, $1,436, $469 and $738 for the years ended December 30, 2000 and December 31, 1999, the seven month period ended December 31, 1998 and for the fiscal year ended May 31, 1998, respectively. Future minimum rental commitments under noncancelable operating leases with terms in excess of one year are as follows:
YEAR AMOUNT 2001 $ 6,804 2002 5,976 2003 3,570 2004 2,720 2005 1,622 Thereafter 756 ------- $21,448 =======
49 29 NOTE SIXTEEN--QUARTERLY DATA (UNAUDITED)
(In thousands, except per share data) 1st 2nd 3rd 4th Year - ------------------------------------------------------------------------------------------------------------------ For the Year Ended December 2000 Revenues $ 46,179 $ 50,960 $ 56,818 $ 57,646 $ 211,603 Gross profit $ 24,998 $ 26,052 $ 28,171 $ 28,179 $ 107,400 Net (loss) income $ 156 $ 406 $ 348 $ (1,334)(1) $ (424) Basic net (loss) income per share $ 0.00 $ 0.01 $ 0.01 $ (0.03) $ (0.01) Diluted net (loss) income per share $ 0.00 $ 0.01 $ 0.01 $ (0.03) $ (0.01) Shares used to calculate basic net (loss) income per share (in millions) 44.3 47.9 49.7 49.8 48.2 Shares used to calculate diluted net (loss) income per share (in millions) 49.9 53.1 54.4 49.8 48.2 For the Year Ended December 1999 Revenues $ 31,491 $ 36,145 $ 40,016 $ 38,351 $ 146,003 Gross profit $ 17,430 $ 19,191 $ 21,355 $ 19,544 $ 77,520 Net (loss) income $ 727 $ 1,480 $ 1,879 $ (28) $ 4,058 Basic net (loss) income per share $ 0.02 $ 0.04 $ 0.05 $ (0.01) $ 0.10 Diluted net (loss) income per share $ 0.02 $ 0.03 $ 0.04 $ (0.01) $ 0.09 Shares used to calculate basic net (loss) income per share (in millions) 41.4 41.4 41.4 41.4 41.4 Shares used to calculate diluted net (loss) income per share (in millions) 42.4 42.4 44.6 41.4 44.2
(1) The fourth quarter of 2000 includes a $2.8 million incremental charge for uncollectable amounts due from clients. 50 EX-21.1 15 c60662ex21-1.txt SUBSIDIARIES OF ELOYALTY CORPORATION 1 Exhibit 21.1 eLOYALTY SUBSIDIARIES Name of Company Jurisdiction of Incorporation --------------- ----------------------------- eLoyalty Europe Holding Corporation Delaware eLoyalty International Holding, Inc. Illinois Geising International, Ltd. New York eLoyalty (Netherlands) B.V. Netherlands eLoyalty (Canada) Corporation Canada eLoyalty de Venezuela, C.A. Venezuela eLoyalty de Mexico, S. de R.L. de C.V. Mexico eLoyalty Do Brasil Ltda. Brazil eLoyalty (Switzerland) Ltd. Switzerland eLoyalty (Deutschland) GmbH Germany eLoyalty (UK) Limited England & Wales eLoyalty (France) S.A.R.L. France eLoyalty Corporation (Australia) Pty. Ltd. Australia EX-23.1 16 c60662ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements of eLoyalty Corporation on Form S-8 (File Nos. 333-96473, 333-30374 and 333-42284) of our report dated January 30, 2001 relating to the consolidated financial statements, which appears in the 2000 Annual Report to Stockholders of eLoyalty Corporation, which is incorporated by reference in eLoyalty's Annual Report on Form 10-K for the year ended December 30, 2000. We also consent to the incorporation by reference of our report dated January 30, 2001 relating to the financial statement schedule, which appears in eLoyalty's Annual Report on Form 10-K. PricewaterhouseCoopers LLP Chicago, Illinois March 19, 2001 EX-24.1 17 c60662ex24-1.txt POWER OF ATTORNEY FROM TENCH COXE, DIRECTOR 1 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of eLoyalty Corporation, a Delaware corporation (the "Company"), hereby constitutes and appoints each of Kelly D. Conway and Timothy J. Cunningham, signing singly, as the undersigned's true and lawful attorney-in-fact, with full power and authority and full power of substitution, re-substitution or revocation, to: (a) execute for, in the name and on behalf of the undersigned, in the undersigned's capacity as a director and/or officer of the Company, the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000, together with any and all amendments thereto on Form 10-K/A deemed necessary, appropriate or desirable (collectively, the "Form 10-K"), pursuant to the Securities Exchange Act of 1934 and the rules thereunder; (b) file the Form 10-K, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission and any stock exchange or market or similar authority on which the Company's Common Stock is listed for trading and any other governmental or regulatory authority, and otherwise to act for him or her and on his or her behalf in connection therewith; and (c) take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be required, appropriate or desirable to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights and powers herein granted. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney as of this 15th day of March, 2001. /s/ Tench Coxe ---------------------------------- Signature Tench Coxe ---------------------------------- Printed Name EX-24.2 18 c60662ex24-2.txt POWER OF ATTORNEY FROM JAY C HOAG, DIRECTOR 1 EXHIBIT 24.2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of eLoyalty Corporation, a Delaware corporation (the "Company"), hereby constitutes and appoints each of Kelly D. Conway and Timothy J. Cunningham, signing singly, as the undersigned's true and lawful attorney-in-fact, with full power and authority and full power of substitution, re-substitution or revocation, to: (a) execute for, in the name and on behalf of the undersigned, in the undersigned's capacity as a director and/or officer of the Company, the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000, together with any and all amendments thereto on Form 10-K/A deemed necessary, appropriate or desirable (collectively, the "Form 10-K"), pursuant to the Securities Exchange Act of 1934 and the rules thereunder; (b) file the Form 10-K, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission and any stock exchange or market or similar authority on which the Company's Common Stock is listed for trading and any other governmental or regulatory authority, and otherwise to act for him or her and on his or her behalf in connection therewith; and (c) take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be required, appropriate or desirable to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights and powers herein granted. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney as of this 15th day of March, 2001. /s/ Jay C. Hoag ------------------------------------ Signature Jay C. Hoag ------------------------------------ Printed Name EX-24.3 19 c60662ex24-3.txt POWER OF ATTORNEY FROM JOHN T KOHLER, DIRECTOR 1 EXHIBIT 24.3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of eLoyalty Corporation, a Delaware corporation (the "Company"), hereby constitutes and appoints each of Kelly D. Conway and Timothy J. Cunningham, signing singly, as the undersigned's true and lawful attorney-in-fact, with full power and authority and full power of substitution, re-substitution or revocation, to: (a) execute for, in the name and on behalf of the undersigned, in the undersigned's capacity as a director and/or officer of the Company, the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000, together with any and all amendments thereto on Form 10-K/A deemed necessary, appropriate or desirable (collectively, the "Form 10-K"), pursuant to the Securities Exchange Act of 1934 and the rules thereunder; (b) file the Form 10-K, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission and any stock exchange or market or similar authority on which the Company's Common Stock is listed for trading and any other governmental or regulatory authority, and otherwise to act for him or her and on his or her behalf in connection therewith; and (c) take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be required, appropriate or desirable to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights and powers herein granted. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney as of this 15th day of March, 2001. /s/ John T. Kohler ------------------------------- Signature John T. Kohler ------------------------------- Printed Name EX-24.4 20 c60662ex24-4.txt POWER OF ATTORNEY FROM MICHAEL D. MURRAY, DIRECTOR 1 EXHIBIT 24.4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of eLoyalty Corporation, a Delaware corporation (the "Company"), hereby constitutes and appoints each of Kelly D. Conway and Timothy J. Cunningham, signing singly, as the undersigned's true and lawful attorney-in-fact, with full power and authority and full power of substitution, re-substitution or revocation, to: (a) execute for, in the name and on behalf of the undersigned, in the undersigned's capacity as a director and/or officer of the Company, the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000, together with any and all amendments thereto on Form 10-K/A deemed necessary, appropriate or desirable (collectively, the "Form 10-K"), pursuant to the Securities Exchange Act of 1934 and the rules thereunder; (b) file the Form 10-K, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission and any stock exchange or market or similar authority on which the Company's Common Stock is listed for trading and any other governmental or regulatory authority, and otherwise to act for him or her and on his or her behalf in connection therewith; and (c) take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be required, appropriate or desirable to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights and powers herein granted. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney as of this 15th day of March, 2001. /s/ Michael D. Murray ------------------------------- Signature Michael D. Murray ------------------------------- Printed Name EX-24.5 21 c60662ex24-5.txt POWER OF ATTORNEY FROM JOHN R PURCELL, DIRECTOR 1 EXHIBIT 24.5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of eLoyalty Corporation, a Delaware corporation (the "Company"), hereby constitutes and appoints each of Kelly D. Conway and Timothy J. Cunningham, signing singly, as the undersigned's true and lawful attorney-in-fact, with full power and authority and full power of substitution, re-substitution or revocation, to: (a) execute for, in the name and on behalf of the undersigned, in the undersigned's capacity as a director and/or officer of the Company, the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 2000, together with any and all amendments thereto on Form 10-K/A deemed necessary, appropriate or desirable (collectively, the "Form 10-K"), pursuant to the Securities Exchange Act of 1934 and the rules thereunder; (b) file the Form 10-K, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission and any stock exchange or market or similar authority on which the Company's Common Stock is listed for trading and any other governmental or regulatory authority, and otherwise to act for him or her and on his or her behalf in connection therewith; and (c) take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be required, appropriate or desirable to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights and powers herein granted. IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney as of this 15th day of March, 2001. /s/ John R. Purcell ----------------------------------- Signature John R. Purcell ----------------------------------- Printed Name -----END PRIVACY-ENHANCED MESSAGE-----