-----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, VcJE+53LHKeSA7Tr61M/qkQtJPofvRB+YypaSvQzrPWfyuXYFcyu4vL4H/xdM3Mr a9uhnEdyhn2qL0EGc/431g== 0000950131-00-001950.txt : 20000324 0000950131-00-001950.hdr.sgml : 20000324 ACCESSION NUMBER: 0000950131-00-001950 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECHNOLOGY SOLUTIONS COMPANY CENTRAL INDEX KEY: 0000877645 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 363584201 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19433 FILM NUMBER: 576566 BUSINESS ADDRESS: STREET 1: 205 N MICHIGAN AVE STREET 2: SUITE 1500 CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3122284500 MAIL ADDRESS: STREET 1: 205 NORTH MICHIGAN AVE STREET 2: SUITE 1500 CITY: CHICAGO STATE: IL ZIP: 60601 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-K --------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1999 Commission file number 0 - 19433 [LOGO] Technology Solutions Company Incorporated in the State of Delaware Employer Identification No. 36-3584201 205 North Michigan Avenue, Suite 1500, Chicago, Illinois 60601 (312) 228-4500 Securities Registered Pursuant To Section 12(G) Of The Act: Common Stock, $.01 par value per share Preferred Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the registrant's voting stock held by nonaffiliates of the registrant (based upon the per share closing price of $9.0625 on March 10, 2000, and, for the purpose of this calculation only, the assumption that all of registrant's directors and executive officers are affiliates) was approximately $394 million. The number of shares outstanding of the registrant's Common Stock, $.01 par value per share, as of March 10, 2000 was 43,930,018. Documents Incorporated by Reference: Information required by Part III (Items 10, 11, 12 and 13) of this document is incorporated by reference to certain portions of registrant's definitive Proxy Statement distributed in connection with its 2000 Annual Meeting of Stockholders. ================================================================================ Technology Solutions Company PART I. ================================================================================ ITEM 1. BUSINESS General Technology Solutions Company (TSC or the Company) offers end-to-end eBusiness solutions to major corporations as well as mid-size firms and eBusiness start- ups. These solutions encompass electronic commerce, electronic procurement, electronic learning and knowledge management, supply chain management, web- enabled Enterprise Resource Planning (ERP), core ERP and extended application service provider services (ASP+). These services help clients in the manufacturing, technology, health care, telecommunications, financial services, and other industries transform their businesses, their internal business processes and their relationships with customers, suppliers, distributors and employees and help these organizations realize the full benefits of information technology throughout the enterprise. As used herein, the terms "TSC" or the "Company," unless the context otherwise clearly requires, refer to Technology Solutions Company and its subsidiaries. This report discusses the twelve months ended December 31, 1999. On February 15, 2000 TSC successfully completed the spin-off of its eLoyalty division into a separate publicly traded company, eLoyalty Corporation. Prior to the spin-off TSC was organized into two business segments which each had its own business focus and service offering - Enterprise Solutions (E-Solutions) and eLoyalty. eLoyalty is a global information technology services company focused on providing enterprise-wide solutions across all customer access channels, including the Internet. eLoyalty Corporation trades on the Nasdaq Stock Market(R) under the symbol "ELOY". In recognition of the spin-off, this report discusses the continuing operations of TSC: the E-Solutions business. For discussion of certain forward-looking statements, refer to Assumptions Underlying Certain Forward-Looking Statements and Factors That May Affect Future Results. TSC services span a wide range of eBusiness consulting and systems integration services. TSC provides a full spectrum of eBusiness services, either in an end- to-end integrated solution that cross functional boundaries in the client's organization or as a point solution addressing a single functional area. These services involve a full assessment of clients' eBusiness strategy and relevant integrated needs. The Company will perform feasibility studies, value analysis, business process redesign and reengineering, benchmarking and best practices, project management, architecture, logical and physical systems design, hardware and software selection, programming, package software implementation, systems integration, change management, education, training, and support services. Enterprise business processes that are automated with core ERP solutions provide the foundation that allow companies to integrate their front-end web sites with their core business processes ================================================================================ Page 1 (e.g., order entry, order fulfillment, and delivery), allowing them to increase the benefits of eBusiness. TSC provides system integration services for core ERP solutions from SAP, Oracle, PeopleSoft/Vantive and Baan. Historically, core ERP solutions have been TSC's main offerings and currently represent over 75 percent of the business by revenue. Since January 1999, TSC has performed project work for over 250 corporations, including 15 of the Fortune 50 companies and 25 of the Fortune 100 companies. TSC is a corporation formed under the laws of the state of Delaware. Its principal executive offices are located in Chicago, Illinois. In addition to its Chicago office, the Company maintains domestic offices in Atlanta, Georgia; Dallas, Texas; New York, New York; and San Francisco, Soquel and Irvine, California. International offices are located in Bogota, Colombia; London, England; and Mexico City, Mexico. Strategy TSC's business strategy is to use core ERP systems as a "backbone" to develop and integrate end-to-end eBusiness solutions that connect all phases of a customer's business, from supplier order processing to customer delivery. The Company will deliver all or part of an eBusiness solution to a client, but emphasizes the advantage of a seamlessly integrated system with no manual or paper processes to act as bottlenecks or opportunities to lose or inaccurately enter data. The Company's goal is to anticipate market needs and apply proven but leading-edge information technologies to deliver these eBusiness solutions. TSC's clients are typically firms that range in size from $500 million to $5 billion in annual revenue. TSC also performs work at larger firms, often at larger divisions or subsidiaries that fall into this market segment. TSC's eBusiness solutions projects often begin with one or more eBusiness assessments, basically a high-end consulting project. Examples of TSC's high-end consulting work include: the development of an eProcurement strategy for a client; the review of the client's current IT strategy and its consistency with the business strategy of the firm; the assessment of the client's Internet strategy; and the assessment of the client's computer network, computer architecture and operations management capabilities. Subsequent to the assessment stage, TSC typically develops an eBusiness strategy with the client, assists in the selection of the appropriate platform and architecture, plans the phases of the project and then moves into the implementation stage. The implementation stage generally involves integrating eBusiness infrastructure, web site content, business-to-business (B2B) applications, business-to-consumer (B2C) applications, back office systems, supply chain management systems and customer support systems. Post- implementation, TSC can provide ongoing hosting and support for systems and applications through its ASP+ services. An increasing number of TSC's projects have an eBusiness component that extends the enterprise beyond core ERP. TSC is placing significant emphasis on growing these offerings and expects them to contribute an increasing percentage of total Company revenue. TSC's strategy is to focus on developing and maintaining relationships with its customers within the client organization. With high-level sponsorship of its projects, TSC believes that there is a ================================================================================ Page 2 higher level of commitment to complete the project and an increased opportunity to expand the working relationship with the client to more extensive eBusiness projects. Business TSC provides eBusiness services on a client-specific basis and is primarily organized along geographically based regional lines. This organization allows the Company to focus on each client's needs as well as to offer superior application and industry expertise in high-growth markets such as financial services and telecom and in high-growth application areas such as Supply Chain Management, ASP+, and Knowledge Management. TSC concentrates on large corporate projects because it believes that such projects offer maximum profit potential and represent one of the fastest growing areas of the eBusiness market. TSC has implemented major new systems within manufacturing, distribution, retail, transportation, telecommunications, banking, insurance, health care and financial services firms. Competitive Differentiation Important factors in TSC's project work are project management as well as industry-specific and application knowledge. TSC dedicates an experienced, senior level project manager (often a Vice President who averages 20 years of experience) to manage the typical large project. TSC's professional staff (which averages 13 years of experience) has specialized application skills and industry knowledge. This knowledge and experience is important not only to the successful development and implementation of the solution, but also to the redesign and the restructuring of the business processes utilizing the affected systems. TSC's project model is based on providing its clients with more experienced personnel and less personnel per client than might be provided by other firms. TSC's goal is to operate with a ratio of Vice President/Project Manager to professional staff ranging from 1 Vice President to 5 professional staff to 1 Vice President to 15 professional staff. This compares to ratios of 1 partner (Vice President equivalent) to 30 professional staff in many of the Big 5 consulting/accounting firms. TSC believes that its project staffing model reduces the risk of project failure and increases the consultants' ability to successfully address the clients' needs by having a knowledgeable and experienced project workforce. The project work undertaken by TSC is generally performed on a time-and- materials basis. The size of the team of TSC's professional staff assigned to a particular project varies depending on the size of the project and the stage of implementation. TSC's professional staff assigned to a project are billed out at various rates, depending upon the level of expertise of each individual. TSC's business is focused on the commercial market. TSC does not currently have significant activity in the local, state, and federal government segments of the domestic systems integration market. TSC works in close conjunction with client personnel, at the client site, on projects. This partnering with the client results in TSC providing the project management and other higher-end skills that might not be available in the client organization and the client providing business and functional expertise, as well as the programmers and lower level technical resources. TSC ================================================================================ Page 3 endeavors to help each of its clients increase the knowledge and skills of its IT organization and provides the necessary knowledge transfer so that the client is better able to maintain its new system. In each of its areas of business, TSC has developed methodologies, software, tools, templates, project management plans, best practice and benchmark information and other intellectual property which are used by TSC consultants to help improve the quality of the work performed by TSC, as well as lower the cost of the implementation and reduce the time required to perform the work. These methodologies, software, tools, templates, project management plans and best practice and benchmark information are maintained, along with proposals, project plans and other information, in knowledge databases that can be accessed by our personnel working on projects throughout TSC. TSC's professionals bring to each client engagement technical skills, experience, industry-specific and functional experience, significant consulting project experience and expertise in the following areas: Systems Integration and Project Management -- TSC works with the client to design and develop an appropriate solution to meet the client's needs. TSC's Project Manager typically assumes overall project management responsibility during the development and implementation phases, overseeing the team assembled by TSC (which normally consists of a combination of TSC, client, and vendor personnel) to implement the project and coordinate the various hardware, software, networking, and other components. Software Products Expertise -- Application software and other software products are increasingly used to reduce development time and cut costs. TSC is familiar with many third-party software products for the industries it serves. Reusable Tools and Methodologies -- TSC has developed a number of methodologies, templates and tools which are used in various areas of the strategic planning, market analysis, business case, systems integration, project management, and software package integration/implementation aspects of TSC's project work. These methodologies, templates, and tools decrease the time required to implement a system, as well as increase reliability and reduce client risk associated with a particular project phase. Change Management and Training -- TSC embeds a change management component in its delivery of solutions, recognizing that the ability and speed of the people in a client organization to adapt to new systems is a critical success factor. Whether it is a package implementation or a large complex systems integration project, employees at all levels of the client are affected. The failure of the users to properly utilize the system can prevent the client from obtaining the benefits originally specified for the project. TSC's change management programs are designed to ensure the project's successful implementation by reducing resistance, along with expanding the client's understanding and commitment to the change necessitated by the project. TSC offers its clients a variety of training options in its project work. TSC's training programs can range from basic "train the trainer" programs for a new client system to sophisticated multi- ================================================================================ Page 4 media computer-based and web-based training programs that can be used for training the users of the system, as well as detailed process and system education. Practice Areas TSC currently manages its business in one reportable segment, named E-Solutions. However, E-Solutions is comprised of three practice areas: Digital Enterprise Consulting; Knowledge Management; and ASP+. Each serves TSC customers in the U.S. and international markets. TSC believes that offering these three bands of services allows the company to serve clients in all aspects of their information technology and eBusiness needs. This structure also allows its employees the flexibility and opportunity to grow and develop. The three areas work in an integrated manner that develops, shares and cross references methodologies, tools, project management plans, benchmark information, templates and best practices overall. All information related to client projects--including proposals and project plans--is in knowledge databases that can be accessed by TSC personnel working on projects throughout TSC. TSC believes that within each of its practice areas, it competes primarily on the basis of the experience and expertise of its project managers, its proven track record in applying new technologies and innovative business solutions, its use of methodologies and implementation tools and the creativity of its proposals and delivered work product. Price has not typically been the primary factor in these major systems projects. More price-sensitive projects have generally tended to be performed by low-cost providers, such as contract programmers. Digital Enterprise Consulting The Digital Enterprise Consulting (DEC) practice area provides IT consulting and business consulting services that help clients in developing and implementing all aspects of their electronic business capabilities. Historically, TSC has focused on implementing third-party application software packages, primarily in the ERP area. TSC believes that those services provide a "backbone" for additional eBusiness services that are more focused on external customers and vendors, and the Company is now offering and providing those additional services to both existing and new customers. The DEC practice area represented the majority of TSC'S 1999 revenues. For the back-end (or traditional) aspects of the DEC practice, TSC implements the human resources, financial and manufacturing systems supplied by PeopleSoft, Inc.; the integrated client/server product family R/3 supplied by SAP AG and its U.S. subsidiary SAP America, Inc.; the Oracle Applications suite of client/server products developed by Oracle Corporation; and the Baan IV and Baan V integrated client/server product supplied by Baan Company N.V. and its U.S. subsidiary Baan U.S.A., Inc. Within DEC, customers can take advantage of areas of expertise and resources that fall under the following business elements: Core ERP develops "backbone" automated structures that help businesses automate and streamline human resources, manufacturing and financial processes and systems. In addition to its consulting services associated with the ERP software products offered by PeopleSoft, SAP, Oracle, and Baan, TSC is a "solution assembler." TSC customers are adding specialized best-of- ================================================================================ Page 5 breed software applications to their existing ERP installations through the use of TSC's Solution Assembly and Architecture services. eBusiness Strategy and Planning provides consulting strategy, architecture and system design services along with rapid eBusiness solution delivery capabilities. Clients receive a rapid assessment of their Internet strategy by benchmarking against industry best practices. Additionally, competitor capabilities are evaluated to identify potential Internet-based opportunities, and TSC makes process recommendations for the future. TSC utilizes its extensive experience in designing and building systems that operate across multiple computing platforms and communications technologies to develop state-of-the-art E-commerce solutions. eProcurement Solutions involves developing and implementing customized software that brings buyers and sellers together in the electronic marketplace. Oftentimes, TSC interfaces these solutions with existing customer systems. This requires expertise in various third-party software packages that serve multiple areas of a customer's business. Supply Chain Management Solutions involves developing and implementing customized software for our clients that create dynamic links between the clients and their suppliers. This requires expertise in multiple third-party software packages that serve numerous areas of a customer's business. Change and Learning assists organizations in managing the human side of implementing strategic change in a corporate environment through change management services, customized educational programs, and multi-media resources that help organizations achieve the greatest benefits from their strategic investments. TSC consultants and training specialists deliver change management, education and training, and multi-media services specifically tailored to each client environment. In all areas, TSC customizes the deliverables to the project and the business and the culture of the client. In the area of change management, the services provided by TSC include: Strategic Visioning; leadership of the change process; development and training of the teams; development and deployment of a communications plan to ensure consistent and clear messages about the project; and development of objectives by employees that can be measured and attained. ================================================================================ Page 6 TSC's services in the education and training area include: the analysis of the audience to be trained; the development of executive education programs, including the linkage of performance measures to project goals; development of customized education courses; development of specific educational courses that highlight the business processes being implemented and explain their benefits; development of customized skills training programs; and development of new policies and procedures and the incorporation of these into training programs. Knowledge Management The Knowledge Management practice area is focused on harnessing the intellectual capital of client companies. To do this, TSC employs knowledge management tools and technologies ranging from sophisticated knowledge-based business processes and web-based training to business intelligence. In October 1999, TSC announced that it had acquired CourseNet Systems, Inc. (CourseNet) an e-learning solutions delivery company. CourseNet expanded the Knowledge Management practice to meet growing demand from clients. CourseNet's XML-based software allows users to create and reuse "learning objects," which can be integrated into multiple training programs with minimal effort. With this software, TSC's Knowledge Management offering includes a suite of tools to author, deliver, and administer online training, allowing companies to identify experts, take online courses, collaborate in the development of new knowledge, and share knowledge with the entire organization and even the entire supply chain. TSC itself is using the solution and several other major companies are implementing CourseNet programs. ASP+ The Company has recently developed an ASP+ practice area. The ASP+ practice area provides clients comprehensive hosting services for integrated eBusiness solutions that include multiple applications and legacy systems. TSC's ASP+ services include solutions and development support, network services and data centers, network operations support and help desk services. Some of these services are provided directly by TSC while other services are provided by TSC's ASP partners. ASP+ can support single or multiple applications ranging from back-office ERP systems to Web site front ends. ASP+ support is priced on a monthly fee and/or fee per use basis. Sales TSC utilizes a high-end relationship-selling model in most of its business areas. The critical component in this selling model is TSC's Vice President/Project Manager. The Project Managers are responsible for growing and enhancing the relationship between TSC and its current clients. By developing a thorough knowledge of the client's business, along with a close working relationship with the most senior members of the client's management team, TSC's Project Managers are able to establish TSC as a business partner with the client. By having a detailed knowledge of the mission, vision and strategy of the client, TSC strives to be the preferred supplier of IT and business consulting services to each client. The Company has a relatively small dedicated sales organization (approximately 30 people). This sales organization is responsible for developing and qualifying leads which come from a variety of sources. These sources include referrals from current and former clients; leads from employees; ================================================================================ Page 7 contacts from industry research organizations; leads generated by attendance at conferences and trade shows; and leads from marketing efforts, including TSC's web site, telemarketing and advertising. Additionally, all senior personnel are encouraged to work their own network of contacts to develop potential new business sources. As the potential client becomes more serious about a proposed project that would involve TSC, the salesperson brings a TSC Project Manager into the process to develop a proposal and/or respond to the client RFP (request for proposal). At this time, the Project Manager becomes TSC's primary interface with the potential client. The extensive experience of the TSC Project Manager is used to evaluate the potential project and develop an insightful proposal, which will address the specific project request of the potential client. The TSC Project Manager is often able to provide in the proposal insight and ideas that result from TSC's focus on delivering business benefits through technology. TSC's practice areas participate in a number of software vendor and industry conferences and trade shows each year. These events serve to broaden TSC's exposure as its senior technical and management personnel participate in speaking engagements and other conference events. ================================================================================ Page 8 International TSC's international operations have been focused in Latin America and Europe. In each of these areas, ERP is the primary focus. The Company's international operations accounted for 6 percent of revenues for the year ended December 31, 1999, 4 percent of revenues for the seven month transition period ended December 31, 1998, 5 percent of revenues for fiscal 1998 and 6 percent of revenues for fiscal 1997. Total staffing at the Company's international operations was 68 as of December 31, 1999. For discussion of certain risks related to the Company's International Operations, See Risks of Conducting International Operations. Clients The Company's five largest clients during the year ended December 31, 1999 accounted for 4 percent, 4 percent, 4 percent, 4 percent and 3 percent of total revenues respectively; in the seven month transition period ended December 31, 1998 the five largest clients accounted for 5 percent, 5 percent, 3 percent, 3 percent, and 3 percent of total revenues, respectively; in fiscal 1998, the five largest clients accounted for 6 percent, 4 percent, 3 percent, 3 percent, and 3 percent of total revenues, respectively; in fiscal 1997, they accounted for 11 percent, 5 percent, 5 percent, 5 percent and 5 percent of total revenues, respectively. No client accounted for 10 percent or more of revenues during the year ended December 31, 1999, the seven month transition period ended December 31, 1998 or fiscal 1998. In fiscal 1997, The Prudential accounted for 11 percent of revenues. TSC views its current clients as a valuable source of additional work once a project has commenced. TSC's Project Managers and relationship managers are responsible for establishing the high-level client management contact and relationships that will allow TSC to be considered for additional project work at the particular client, regardless of the specific business group or practice area that may be performing work at that client. TSC's client focus is on global 2000 accounts and includes the middle-market segment that the Company defines as firms having annual revenues of between $500 million and $5 billion. TSC does perform work at larger firms, often at large divisions or subsidiaries that fall into this market segment. During the year ended December 31, 1999, TSC performed work at 15 of the Fortune 50 companies and 25 of the Fortune 100 companies. ================================================================================ Page 9 Personnel As of December 31, 1999, TSC had a total staff of 599 (excluding Global Core Services). The following table summarizes, as of December 31, 1999, the experience levels of TSC's professional staff.
Average Relevant Experience (Years) --------------------------------------- % of Level Total Consulting Industry Total ----------- ----- ---------- -------- ----- Vice Presidents 11% 10 10 20 Senior Principals 19% 7 11 18 Principals 26% 6 10 16 Senior Consultants 22% 4 7 11 Consultants 18% 2 4 6 Associate Consultants 4% 1 2 3
In order to accommodate typical project development lead times, TSC has found that, from time to time, it must recruit and hire additional Project Managers on the basis of anticipated demand for their services. There can be no assurance that demand for TSC's services will materialize as anticipated. Global Core Services As of December 31, 1999, TSC had a staff of 99 individuals who comprised the Global Core Services (GCS) support function. The objective of the GCS function is to facilitate local decision-making and support the autonomy of the practice areas and project managers, while maintaining the internal structure necessary to support TSC's goals. The functional areas within this area include: senior corporate management; accounting; financial reporting; finance; tax; legal; treasury; human resources; employee benefits; marketing; public and investor relations; office operations; recruiting; training; internal communications; internal technology applications; planning; quality assurance; and insurance. Intellectual Property Rights Many of the Company's clients have required that the Company grant to them all proprietary and intellectual property rights with respect to the work product resulting from the Company's performance of services, including the intellectual property rights to any custom software developed by the Company for them. Each grant of proprietary and intellectual property rights limits the Company's ability to reuse work product components and work product solutions with other clients. In a limited number of such situations, the Company has obtained, and in the future may attempt to obtain, an ownership interest or a license from its clients to permit the Company to market custom software for the joint benefit of the client and the Company. These arrangements may be nonexclusive or exclusive, and licensors to the Company may retain the right to sell products and services that compete with those of the Company. There can be no assurance, however, that the Company will be able to negotiate future software licenses upon terms acceptable to the Company. ================================================================================ Page 10 The Company also develops certain foundation and application software tools, methodologies and products that are owned by the Company and licensed to its clients. The Company regards these software tools, methodologies and products as proprietary and intends to protect its rights, where appropriate, with registered copyrights, patents, registered trademarks, trade secret laws and contractual restrictions on disclosure and transferring title. There can be no assurance that any of these steps taken by the Company will be adequate to deter misappropriation of its proprietary rights or independent third party development of functionally equivalent products. "TSC" is a registered service mark of the Company. In addition, the Company's success is dependent upon its specialized expertise and methodologies. To protect its proprietary information, the Company relies upon a combination of trade secret and common law, employee nondisclosure policies and third-party confidentiality agreements. However, there can be no assurance that any of these steps taken by the Company will be adequate to deter misappropriation of its specialized expertise and methodologies. Although the Company believes that its services and products do not infringe on the intellectual property rights of others, there can be no assurance that infringement claims will not be asserted against the Company in the future. Competition The eBusiness consulting and systems integration markets are highly competitive and include participants from a variety of market segments. Participants include systems consulting and implementation firms, contract programming companies, application software firms, the service groups of computer equipment companies, facilities management companies, "Big Five" accounting firms, and general management consulting firms. Thousands of firms fall into these categories. Among the more recognizable participants in the eBusiness consulting and systems integration business are Andersen Consulting; Booz, Allen & Hamilton Inc.; Cambridge Technology Partners, Inc.; Computer Sciences Corporation; Arthur Andersen LLP; Deloitte & Touche LLP; Electronic Data Systems Corporation; Ernst & Young LLP; IBM; KPMG Peat Marwick LLP; PricewaterhouseCoopers LLP; and Sapient Corporation. TSC believes that its ability to compete depends in part on a number of factors outside its control. These factors include the ability of its competitors to hire, retain, train and motivate a significant number of senior project managers, the ownership by competitors of software used by potential clients, the development by others of software that is competitive with TSC's tools and services, and the price at which others offer comparable services. Participants in the eBusiness consulting and systems integration business also face potential competition from in-house systems staff. In-house systems staffs are often considered to be a lower cost alternative to outside systems firms. In addition, the use of in-house staff permits the client to build skills for maintaining and enhancing the system, as well as skills to implement future systems. On the other hand, use of an in-house staff for a major systems project often requires hiring a significant number of additional people with no assurances that the new hires will be able to perform as needed. Furthermore, the increased staff must often be re-deployed at the end of the project. Finally, clients often have difficulty attracting highly skilled individuals because of salary constraints. ================================================================================ Page 11 Many participants in the eBusiness consulting and systems integration business have significantly greater financial, technical, and marketing resources and generate greater systems consulting and implementation revenues than does TSC. TSC competes more frequently with Andersen Consulting for major systems integration projects than with any other participant in the market. Andersen Consulting has substantially greater revenues, employee headcount, and market share than does TSC. Executive Officers of the Registrant The executive officers of TSC as of March 23, 2000 are as follows: William H. Waltrip Chairman Jack N. Hayden President and CEO Timothy P. Dimond Senior Vice President and Chief Financial Officer Paul R. Peterson Senior Vice President, General Counsel and Corporate Secretary
William H. Waltrip, age 62, has been a Director of the Company since December 1992 and Chairman of the Board since June 1993. Mr. Waltrip also served as Chief Executive Officer from June 1993 to June 1995. From 1996 to 1998, he served as the Chairman of the Board of Directors and, during 1996, he served as Chief Executive Officer of Bausch & Lomb, Inc. From 1991 to 1993, he was Vice Chairman of Unifax, Inc., a broad-line food service distributor. From 1985 to 1988, he was President, Chief Operating Officer and a Director of IU International, a diversified services company with major interests in transportation, environmental services and distribution. From 1982 to 1985, he was President, Chief Executive Officer and a Director of Purolator Courier Corporation. From 1972 to 1982, he was President, Chief Operating Officer and Director of Pan American World Airways, Inc. He is also currently serving as a Director of Bausch & Lomb, Inc., the Teachers Insurance and Annuity Association and Thomas & Betts Corporation. Jack N. Hayden, age 52, has been President and Chief Executive Officer of the Company since February 2000. He joined TSC in April 1992 as Senior Vice President, served as interim Chief Financial Officer during late 1992 and early 1993, and assumed the role of Executive Vice President in July 1995. Mr. Hayden served as Chief Executive Officer of Coleman Consulting Group, Inc., from September 1998 to March 1999. He rejoined the TSC executive team in March 1999 as Group President of the E-Solutions business. Prior to coming to TSC, Mr. Hayden held the position of Vice President - Operations, Commercial Transport Division of McDonnell Douglas Corporation from 1990 to 1992. From 1989 to 1990, he served as Vice President-Finance of McDonnell Douglas Corporation. From 1971 to 1989, he served in numerous manufacturing and procurement positions at McDonnell Douglas Corporation. ================================================================================ Page 12 Timothy P. Dimond, age 40, joined TSC in 1994 as Corporate Controller and in April 1999 assumed the role of Chief Financial Officer. In August 1998, he assumed the role of Vice President of Finance and Chief Accounting Officer after serving as the Vice President of Latin America Operations from 1996 to 1998. From 1990 to 1994, he was Director of Financial Reporting for The Marmon Group, Inc. From 1981 to 1990, he worked in the audit department of Ernst and Young most recently as an audit manager. Paul R. Peterson, age 58, joined TSC in September 1992 as Vice President and General Counsel and was appointed Corporate Secretary in October 1992. In June 1996, he was made a Senior Vice President of the Company. Prior to coming to TSC, he worked for Bridgestone/Firestone, Inc. during the periods 1981 to 1984 and 1987 to 1992--where he held several positions including Divisional General Counsel. From 1984 to 1987, he was a corporate executive with Block Management Corporation, an H&R Block subsidiary which managed Hyatt Legal Services. He also served at the Federal Trade Commission as a senior executive from 1974 to 1981, and as a trial attorney from 1971 to 1974. ITEM 2. PROPERTIES TSC's principal executive offices are located at 205 North Michigan Avenue, Suite 1500, Chicago, Illinois 60601. TSC's lease on these premises expires July 31, 2004. TSC also leases facilities in Atlanta, GA; Dallas, TX; New York, NY; and San Francisco, Soquel and Irvine, CA. Additionally, TSC leases or shares office premises in Bogota, Colombia; London, England; and Mexico City, Mexico. TSC believes that these facilities are adequate for its current business needs and that it will be able to obtain suitable space as needed. ITEM 3. LEGAL PROCEEDINGS The Company is party to lawsuits arising out of the normal course of business. Management believes the final outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter ended December 31, 1999. ================================================================================ Page 13 Technology Solutions Company PART II. - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on The Nasdaq Stock Market(R) under the symbol "TSCC." As of March 10, 2000, there were approximately 800 holders of record of the Company's Common Stock. That number does not include beneficial owners of Common Stock whose shares are held in the name of banks, brokers, nominees or other fiduciaries. The following table sets forth the range of high and low trade prices on The Nasdaq Stock Market(R) for the Company's Common Stock for each quarter period in the years ended December 31, 1999 and 1998. Quarter Ended High Low ------------- ---- --- March 31, 1998 $22.667 $13.834 June 30, 1998 $23.667 $16.834 September 30, 1998 $21.500 $ 9.000 December 31, 1998 $13.938 $ 6.125 March 31, 1999 $11.250 $ 6.375 June 30, 1999 $11.563 $ 6.500 September 30, 1999 $15.500 $ 9.625 December 31, 1999 $39.250 $13.813 On March 10, 2000, the last reported sale price on The Nasdaq Stock Market(R) for the Company's Common Stock was $9.0625. This price reflects the effect of the February 15, 2000 eLoyalty spin-off into a separate publicly traded company. The market price for the Common Stock may be significantly affected by factors such as the announcement of new products or services by the Company or its competitors, technological innovation by the Company, its competitors or other vendors, quarterly variations in the Company's operating results or the operating results of the Company's competitors, general conditions in the Company's and its customers' markets, changes in the earnings estimates by analysts or reported results that vary materially from such estimates. In addition, the stock market ================================================================================ Page 14 has experienced significant price fluctuations that have particularly affected the market prices of equity securities of many high technology and emerging growth companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations may materially and adversely affect the market price of the Company's Common Stock. Following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company and its officers and directors. Any such litigation against the Company could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on the Company's business, financial condition, operating results and cash flows. The Company has never paid dividends on its Common Stock and currently intends to retain all earnings for use in the expansion of its business and other corporate purposes. The Company does not anticipate paying any dividends on its Common Stock in the foreseeable future. The declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors. All per share data has been adjusted to reflect all of the Company's prior stock splits as of December 31, 1999. ================================================================================ Page 15 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain selected financial data that is derived from the Company's audited financial statements. All the information should be read in conjunction with the Company's audited financial statements and notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this filing. The Company's audited statements of operations for the year ended December 31, 1999, for the seven month transition period ended December 31, 1998 and for the years ended May 31, 1998 and 1997 and the audited balance sheets as of December 31, 1999 and 1998 are included elsewhere in this filing, and the corresponding selected financial data set forth below is qualified by reference to such audited financial statements. All amounts are in thousands, except for (loss) earnings per common share and (loss) earnings per common share assuming dilution.
Seven Month For the Transition Year Ended Period Ended December 31, December 31, For the Year Ended May 31, -------------- -------------- ----------------------------------------------------- 1999 1998 1998 1997 1996 1995 ---- ---- ---- ---- ---- ---- Consolidated Statement of Operations Data: Revenues $156,320 $126,839 $189,603 $122,063 $71,224 $59,686 Operating (loss) income $(20,697) $ 1,844 $ 22,471 $ 14,094 $(4,279) $ 1,391 (Loss) income from continuing operations $(11,578) $ 1,954 $ 14,233 $ 9,758 $(1,018) $ 2,379 Income from discontinued operations $ 5,133 $ 2,521 $ 6,787 $ 5,309 $ 5,592 $ 988 Loss on distribution of discontinued operations $ (6,789) -- -- -- -- -- Net (loss) income $(13,234) $ 4,475 $ 21,020 $ 15,067 $ 4,574 $ 3,367 ======== ======== ======== ======== ======= ======= (Loss) income per common share from continuing operations $ (0.27) $ 0.05 $ 0.37 $ 0.28 $ (0.03) $ 0.08 (Loss) income from discontinued operations $ (0.04) $ 0.06 $ 0.17 $ 0.15 $ 0.18 $ 0.03 -------- -------- -------- -------- ------- ------- Net (loss) earnings per common share* $ (0.31) $ 0.11 $ 0.54 $ 0.43 $ 0.15 $ 0.11 ======== ======== ======== ======== ======= ======= (Loss) income per common share from continuing operations assuming dilution $ (0.27) $ 0.04 $ 0.33 $ 0.25 $ (0.02) $ 0.06 (Loss) income from discontinued operations assuming dilution $ (0.04) $ 0.06 $ 0.16 $ 0.13 $ 0.15 $ 0.03 -------- -------- -------- -------- ------- ------- Net (loss) earnings per common share assuming dilution* $ (0.31) $ 0.10 $ 0.49 $ 0.38 $ 0.13 $ 0.09 ======== ======== ======== ======== ======= =======
*Earnings per common share data have been restated to reflect all of the Company's prior stock splits. ================================================================================ Page 16
December 31, May 31, ----------------------------- ---------------------------------------------------------- 1999 1998 1998 1997 1996 1995 ---- ---- ---- ---- ---- ---- Consolidated Balance Sheet Data: Total assets.................. $223,309 $219,099 $197,148 $133,866 $89,437 $65,222 Long-term debt................ __ __ __ __ __ __
================================================================================ Page 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CALENDAR 1999 COMPARED WITH CALENDAR 1998 On February 15, 2000 TSC successfully completed the spin-off of its eLoyalty division into a separate publicly traded company. Previously on January 27, 2000, TSC received a favorable ruling from the Internal Revenue Service that the spin-off of its eLoyalty division would be a tax free distribution of all of the Company's eLoyalty shares to TSC's shareholders. Accordingly, this report discusses the TSC consolidated statements of operations with eLoyalty's operations presented on a discontinued operations basis. Consolidated net revenues for the year ended December 31, 1999 decreased 27 percent to $156.3 million compared with $215.1 million for the same period last year. This decrease was mainly due to a decline in the demand for certain TSC services as a result of clients facing budgetary restraints as they focused on Year 2000 issues. This has been evidenced by a reduction in new license sales by package software vendors such as PeopleSoft and Baan. Historically, TSC's main revenues consisted mainly of core Enterprise Resource Planning (ERP) solutions. Prospectively, the Company expects its other eBusiness solution offerings to experience greater future growth rates than core ERP. Project personnel costs, which represent mainly professional salaries and benefits, decreased to $81.6 million for the year ended December 31, 1999 from $102.0 million for the same period last year, a decrease of 20 percent. The decrease was mainly due to a decrease in professional headcount. Project personnel costs as a percentage of net revenues increased to 52 percent for the year ended December 31, 1999 from 47 percent for the same period last year due to the decline in revenues and lower staff utilization in the first half of the year. To reduce these costs and improve utilization, the Company streamlined and refocused its business, which resulted in restructuring and other charges of $17.5 million (as discussed further in this section). Other project expenses consist of nonbillable expenses directly incurred for client projects and business development. These expenses include recruiting fees, sales and marketing expenses, personnel training and provisions for valuation allowances and reserves for potential losses on continuing projects. Other project expenses for the year ended December 31, 1999 were $25.3 million, compared with $32.5 million in the comparable period last year, a decrease of $7.2 million, or 22 percent. The decrease in other project expenses primarily included the following: a decrease of $4.6 million in domestic practice area development including marketing, business development, travel and sales commissions; a decrease of $5.1 million in domestic hiring, training, communication and computer expenses due to a decrease in average headcount; and a decrease in various other costs of $0.6 million, which include items such as depreciation expense, new employee costs and various other costs. These decreases were offset by increases of $3.1 million in the provision for valuation allowances and reserves for potential losses and international costs. Other project expenses as a percentage of net revenues increased slightly to 16 percent for the year ended December 31, 1999 from 15 percent for the same period last year. Management and administrative support costs decreased $15.5 million to $42.5 million for the year ended December 31, 1999 from $58.0 million for the same period last year, a decrease of ================================================================================ Page 18 27 percent. Approximately $4.8 million of this decrease is attributable to reduced practice area management and administrative costs. This decrease primarily resulted from a decline in travel and hiring costs of $1.5 million, a decrease in international expenses of $1.4 million, a decrease in practice area support personnel of $0.2 million and a decrease in various other domestic management and administrative expenses of $1.7 million, which include items such as practice area sales, amortization of software costs and other expenses. The Company also had a decrease of $5.4 million in Global Core Service (GCS) costs over last year. The decrease in GCS costs versus the same period last year included the following: a decrease in the internal systems and human resources areas of $1.3 million and a decrease in corporate recruiting expenses of $2.2 million as a result of a reduction in headcount; a decrease in international expenses of $0.4 million; a decrease in domestic office costs of $1.0 million due to the closing of several offices; and a decrease in legal expenses of $0.8 million, slightly offset by an increase in various other costs of $0.3 million. In addition, the Company recorded expenses of $5.3 million during the year ended December 31, 1998 resulting from decisions made to abandon an investment in an Internet-based commerce software tool of $3.3 million and expenses to sever certain management and administrative employees of $2.0 million. Goodwill amortization decreased to $0.2 million for the year ended December 31, 1999 compared to $0.4 million for the same period last year. This decrease mainly results from the goodwill relating to the McLaughlin & Associates acquisition being written off at the end of the first quarter of 1999. On March 30, 1999, the Company announced that it was making a number of changes to its business operations and, as a result, the Company recorded a restructuring charge of $10.5 million associated with those changes and the severance of approximately 300 people, primarily consulting personnel. The restructuring charge was determined based on a plan prepared at the time the restructuring actions were approved by management and the Board of Directors. During the year ended December 31, 1999, the Company used $9.3 million of the restructuring accrual as a result of cash paid during the year of $7.8 million associated with the severance of approximately 270 employees and $1.5 million in asset write-offs and other costs. In addition, during the quarter ended December 31, 1999, the Company recorded $7.0 million in restructuring and other costs associated with lease terminations of $3.0 million, former executive severance costs of $1.8 million, CourseNet Systems, Inc. (CourseNet) costs of $1.3 million and write-offs of other assets of $0.9 million. The restructuring accrual balance is considered adequate to cover the remaining committed restructuring actions. Incentive compensation of $9.9 million was accrued during the year ended December 31, 1999 compared to $8.3 million for the same period last year. Incentive compensation as a percentage of net revenues increased to 6 percent for the year ended December 31, 1999 compared to 4 percent for the same period last year. The increase was primarily due to an increase in the bonus accrual for non-vice president personnel. The Company expects to continue to accrue incentive compensation throughout the 2000 calendar year. Consolidated operating loss from continuing operations was $20.7 million for the year ended December 31, 1999 compared with consolidated operating income of $13.9 million in the prior period, due to the reasons outlined above. Excluding the restructuring and other charges, consolidated operating loss was $3.2 million during the year ended December 31, 1999. This ================================================================================ Page 19 decrease was mainly due to a decrease in the demand for certain TSC services and resulting lower utilization rates. Other income and expense for the year ended December 31, 1999 was $3.6 million compared to $2.9 million for the same period a year ago. The increase is a result of higher cash and cash equivalent balances for the year ended December 31, 1999 compared to the same period a year ago. The Company's effective tax rate for the year ended December 31, 1999 was a 32 percent benefit compared to a 42 percent provision for the same period a year ago. The tax rate for the year ended December 31, 1999 was lower than in the previous year because certain amounts related to the CourseNet acquisition, as well as the goodwill amortization related to this acquisition, were not tax deductible. Income from discontinued operations from the eLoyalty division was $5.1 million for the year ended December 31, 1999 compared with $6.7 million for the same period last year. Excluding fees and other costs related to the eLoyalty transaction of $4.4 million, income from discontinued operations for the year ended December 31, 1999 was $9.5 million, an increase of 41 percent over the prior period. This increase was primarily due to the increased demand for eLoyalty services. Weighted average number of common shares outstanding increased due to the exercise of stock options, the issuance of shares under the Company's employee stock purchase plan and the investment by the venture capital firms (see Note 12), partially offset by the repurchase of some outstanding shares. Weighted average number of common and common equivalent shares outstanding decreased because there were no adjustments for the effect of stock options as the adjustment would have been anti-dilutive for the year. THE SEVEN MONTH TRANSITION PERIOD ENDED DECEMBER 31, 1998 COMPARED WITH THE PRIOR PERIOD ENDED DECEMBER 31, 1997 This report discusses the seven month transition period ended December 31, 1998, due to the Company changing from a May 31 fiscal year-end to a fiscal year aligned with the calendar year beginning January 1, 1999. In addition, on February 15, 2000 TSC successfully completed the spin-off of its eLoyalty division into a separate publicly traded company. Accordingly, this report discusses the TSC consolidated statements of operations with eLoyalty's operations presented on a discontinued operations basis. Consolidated net revenues for the seven month transition period ended December 31, 1998 increased 25 percent to $126.8 million compared with $101.4 million for the same period in the prior year. This increase was primarily due to continued demand for consulting services that implement third-party application software packages. Domestic revenue grew 27 percent due to the Company's ability to generate additional revenue through an increased consulting staff, as well as an overall 4 percent increase in average domestic billing rates compared to the same period a year ago. These increases were slightly offset by international revenues which declined approximately six percent. Project personnel costs for the seven month transition period ended December 31, 1998, which represent mainly professional salaries and benefits, increased to $61.5 million from $47.0 million ================================================================================ Page 20 for the same period in the prior year, an increase of 31 percent. The increase was partially due to an increase in professional headcount and was consistent with the higher revenues reported during the seven month transition period ended December 31, 1998. Project personnel costs as a percentage of net revenues increased to 48 percent for the seven month transition period ended December 31, 1998 from 46 percent for the same period in the prior year due to lower staff utilization. Other project expenses consist of nonbillable expenses directly incurred for client projects and business development including recruiting fees, sales and marketing expenses, personnel training and provisions for valuation allowances and reserves for potential losses on continuing projects. Other project expenses for the seven month transition period ended December 31, 1998 were $19.8 million, compared with $14.2 million in the comparable period in the prior year, an increase of $5.6 million, or 39 percent. The increase in other project expenses primarily included the following: an increase of $2.5 million in domestic hiring, training, communication and computer expenses associated with increased headcount; an increase of $1.1 million associated with domestic practice area development including marketing, business development, travel and sales commissions; an increase in international costs of $1.2 million associated with travel, marketing and business development expenses; and a net increase of $0.8 million in various other costs which includes termination costs, depreciation expense and various other costs. Other project expenses as a percentage of net revenues increased to 16 percent in the seven month transition period ended December 31, 1998 from 14 percent for the same period in the prior year due mainly as a result of the items mentioned above. Management and administrative support costs increased $13.4 million to $36.9 million for the seven month transition period ended December 31, 1998 from $23.5 million for the same period in the prior year, an increase of 57 percent. Approximately $5.0 million of this increase was attributable to the increase in Global Core Service (GCS) costs over the same period in the prior year, which was necessary to support the growth in business. The increase in these costs versus the same period in the prior year included: increased expenses in the internal systems and human resources areas of $3.5 million; higher expenses of $0.6 million related to the expansion of the Company's corporate recruiting organization; higher marketing expenses of $0.8 million as a result of increased corporate marketing efforts; and a net increase in various other costs of $0.1 million including corporate legal, accounting, finance and investor relations costs. The Company also incurred an additional $3.1 million of practice area management and administrative costs. These costs primarily included additional domestic regional management and practice area support personnel of $1.0 million; international growth of $0.7 million; and various other domestic management and administrative expenses of $1.4 million, which include items such as practice area marketing, recruiting, sales and other expenses. In addition, the Company recorded expenses of $5.3 million during the seven month transition period ended December 31, 1998. This results from decisions made during the seven month transition period to abandon an investment in an Internet-based commerce software tool of $3.3 million and expenses to sever certain management and administrative employees of $2.0 million. Goodwill amortization remained unchanged for the seven month transition period ended December 31, 1998 compared to the same period in the prior year at $0.2 million. ================================================================================ Page 21 Incentive compensation of $6.7 million was accrued during the seven month transition period ended December 31, 1998 compared to $5.6 million for the same period in the prior year. The increase is due to increased headcount, at both the consulting staff and the project manager levels. Incentive compensation as a percentage of net revenues remained virtually unchanged between years at approximately 5 percent. Consolidated operating income from continuing operations was $1.8 million during the seven month transition period ended December 31, 1998 compared with $10.8 million in the same period in the prior year. This decrease was mainly due to increased practice area overhead as a result of various investments and higher- than-average management turnover, offset in part by higher staff utilization and higher billing rates compared to the prior period. Also contributing to this decrease was higher GCS costs and expenses to sever certain management and administrative employees and amortization expenses, as described above. Net investment income for the seven month transition period ended December 31, 1998 was $1.7 million compared to $0.9 million for the same period a year ago. The increase is a result of higher cash and cash equivalent balances for the seven month transition period ended December 31, 1998 compared to the same period a year ago. The Company's effective tax rate increased slightly to 45 percent for the seven month transition period ended December 31, 1998 compared to 43 percent in the prior period. Income from discontinued operations from the eLoyalty division increased to $2.5 million for the seven month transition period ended December 31, 1998 compared to $2.3 million in the prior period, an increase of 9 percent. This increase was due to the increased demand in eLoyalty services and an increase in revenues, offset in part by investments in product development, expansion into Australia and further investment spending in Europe. Weighted average number of common shares outstanding and weighted average number of common and common equivalent shares outstanding increased primarily due to the exercise of stock options and the issuance of shares under the Company's employee stock purchase plan. ================================================================================ Page 22 FISCAL 1998 COMPARED WITH FISCAL 1997 On February 15, 2000 TSC successfully completed the spin-off of its eLoyalty division into a separate publicly traded company. Accordingly, this report discusses the TSC consolidated statements of operations with eLoyalty's operations presented on a discontinued operations basis. Consolidated net revenues for the year ended May 31, 1998 increased 55 percent to $189.6 million compared with $122.1 million in fiscal 1997. This increase was primarily due to continued demand for consulting services that implement third- party application software packages. The Company's domestic revenue grew 58 percent and international revenue grew 18 percent. The Company's ability to generate additional revenue was due to the Company's increased consulting staff from heightened recruiting efforts and the additional staff that joined the Company in previously reported business combinations. The additional hours billed by the increased consulting staff, combined with an increase in average domestic billing rates, were the primary factors in revenue growth compared to fiscal 1997. Project personnel costs for the year ended May 31, 1998, which represent mainly professional salaries and benefits, increased to $87.6 million from $58.6 million in fiscal 1997, an increase of 50 percent. The increase was primarily due to an increase in professional headcount and was consistent with the higher revenues reported in fiscal 1998. Project personnel costs as a percentage of net revenues decreased to 46 percent for fiscal year 1998 compared to 48 percent in fiscal 1997. The Company charges most of its project expenses directly to the client. Other project expenses consist of nonbillable expenses directly incurred for client projects and business development efforts including recruiting fees, sales and marketing expenses, personnel training and provisions for valuation allowances and reserves for potential losses on continuing projects. Other project expenses for fiscal 1998 were $27.0 million, compared with $15.9 million for fiscal 1997. This change was partially due to increases in hiring, training, practice area development and nonbillable travel expenses of $7.9 million as a result of increased headcount and business development. Other project expenses as a percentage of net revenues increased to 14 percent for fiscal 1998 compared to 13 percent in fiscal 1997. Management and administrative support costs increased $19.0 million to $44.6 million for the year ended May 31, 1998 from $25.6 million for the year ended May 31, 1997, an increase of 74 percent. Approximately $11.6 million of this increase was attributable to the investment made in Global Core Services (GCS) over the prior fiscal year, which was necessary to support the growth in business. The increase in costs included: the opening and expansion of several domestic and international offices of $2.6 million; increased expenses in the internal systems and human resources areas of $3.9 million; higher expenses of $1.4 million related to the expansion of the Company's corporate recruiting organization; and higher marketing expenses of $0.9 million as a result of increased corporate marketing efforts. The Company also incurred an additional $7.4 million of practice area management and administrative costs. These costs primarily included international growth of $1.1 million; additional domestic regional management and practice area support personnel of $3.3 million; and various other management and administrative expenses of ================================================================================ Page 23 $3.0 million which include items such as practice area marketing, recruiting, sales and other expenses. Goodwill amortization remained unchanged for fiscal year 1998 compared to fiscal year 1997 at $0.4 million. Incentive compensation of $7.5 million was accrued for the year ended May 31, 1998 compared to $7.4 million for the same period the prior year. This amount reflects the Company's annual bonus payout for fiscal 1998 made shortly after the end of the fiscal year. Consolidated operating income from continuing operations increased 59 percent to $22.5 million in fiscal 1998 compared with $14.1 million in fiscal 1997. This increase was due to higher staff utilization and higher billing rates compared to the prior period and were consistent with the increase in revenues. This increase was partially offset by higher GCS costs, as described above. Net investment income in fiscal 1998 was $2.0 million compared to $2.1 million a year earlier. The Company's effective tax rate for the year ended May 31, 1998 was 42 percent compared to 40 percent for the year ended May 31, 1997. The increase in the effective tax rate in fiscal 1998 was the result of the increased non-deductible expenses for U.S. tax purposes and the increase in the percentage of the Company's income from taxable investment income. Income from discontinued operations from the eLoyalty division increased to $6.8 million for fiscal year 1998 compared to $5.3 million in the prior period, an increase of 28 percent. This increase was primarily due to the increased demand in eLoyalty services and an increase in eLoyalty revenues, offset in part by investment programs and geographic expansion. Weighted average number of common shares outstanding and weighted average number of common and common equivalent shares outstanding increased primarily due to the exercise of stock options and the issuance of shares under the Company's employee stock purchase plan. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $27.1 million for the year ended December 31, 1999 compared to net cash provided by operating activities of $18.3 million in the prior year. Operating cash flow for the year ended December 31, 1999 included the restructuring and other charges and other favorable working capital activities, such as depreciation and amortization expense, accrued compensation and related costs and other current liabilities, offset by lower net income. Net cash used in investing activities was $18.8 million for the year ended December 31, 1999 and reflects $13.5 million of cash held by discontinued operations as of December 31, 1999. The Company purchased $1.5 million of available-for-sale securities and received $2.8 million from the sale of available-for-sale securities. The proceeds from available-for-sale securities were transferred to cash and cash equivalents and reinvested in ongoing business activities. Capital expenditures for the year ended December 31, 1999 were $2.5 million. Capital expenditures may continue at the current rate throughout the 2000 calendar year. The Company currently has no material commitments for capital expenditures. ================================================================================ Page 24 Net cash outlays related to net assets of acquired businesses and other assets were $4.2 million for the year ended December 31, 1999. This represents the October 29, 1999 acquisition of CourseNet. The Company has a $10.0 million unsecured line of credit facility (the "Facility") with Bank of America National Trust and Savings Association (Bank of America). The agreement expires December 30, 2000. At the Company's election, loans made under the Facility bear interest at either the Bank of America reference rate or the applicable Eurodollar interest rate plus 0.75 percent. The unused line fee is 0.125 percent of the unused portion of the commitment. The Facility requires, among other things, the Company to maintain certain financial ratios. As of December 31, 1999, the Company was in compliance with these financial ratio requirements. As of December 31, 1999, no borrowings had been made under the Facility. Subsequent to December 31, 1999 and in connection with the eLoyalty spin-off, the Company contributed an additional $20.0 million of cash to eLoyalty Corporation. In light of this recent transaction, the Company still retains significant amounts of cash and cash equivalents and marketable securities to provide ample liquidity to handle the Company's current cash requirements. IMPACT OF INFLATION AND BACKLOG Inflation should not have a significant impact on the Company's income to the extent the Company is able to raise its consulting rates commensurate with its staff compensation rates, which it has done successfully in the past. Because the majority of the Company's contracts may be terminated on relatively short notice, the Company does not consider backlog to be meaningful. NEW ACCOUNTING STANDARDS On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended is effective for financial statements issued for periods ending after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company anticipates that, due to its limited use of derivative instruments, the adoption of SFAS No. 133 will not have a significant effect on the Company's results of operations or its financial position. ================================================================================ Page 25 ASSUMPTIONS UNDERLYING CERTAIN FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS This Form 10-K includes or may include certain forward-looking statements that involve risks and uncertainties. This Form 10-K contains certain forward-looking statements concerning the Company's financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," and other similar expressions. Although the Company believes its expectations reflected in such forward-looking statements are based on reasonable assumptions, readers are cautioned that no assurance can be given that such expectations will prove correct and that actual results and developments may differ materially from those conveyed in such forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements in this Form 10-K include, among others, the pace of technological change, the Company's ability to manage growth and attract and retain employees, general business and economic conditions in the Company's operating regions, and competitive and other factors, all as more fully described below. Such forward-looking statements speak only as of the date on which they are made and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-K. If the Company does update or correct one or more forward- looking statements, investors and others should not conclude that the Company will make additional updates or corrections with respect thereto or with respect to other forward-looking statements. The cautionary statements provided below are being made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995 (the PSLRA) and with the intention of obtaining the benefits of the "safe harbor" provisions of the PSLRA for any such forward-looking information. Many of the factors discussed below, as well as other factors, have also been discussed in prior filings made by the Company. Factors which could cause the Company's actual financial and other results to differ materially from any results that might be projected, forecast, estimated or budgeted by the Company in the forward-looking statements include, but are not limited to, the following: Year 2000 Issue The Year 2000 issue is a general term used to address a class of problems which are caused by the inability of some computer programs to recognize various date values around January 1, 2000. This class of problems could result in a system failure or miscalculations causing disruptions of operations such as, among others, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has not experienced any significant Year 2000 disruptions and none of the Company's suppliers or vendors have experienced Year 2000 disruptions that have had a significant impact on the Company. The Company has conducted an assessment of its computer information systems by inventorying related hardware and software systems and has determined the nature and extent of the work required to ensure that its internal systems are Year 2000 compliant. The Company's internal systems can be grouped into three principal categories - its accounting and human resources software, its legacy systems that perform a variety of processes, and its office automation software products. With respect to the suite of software products licensed by the Company and ================================================================================ Page 26 relied upon in the administration of accounting and human resources functions, which was licensed by the Company in the first quarter of its 1997 fiscal year, the licensor has indicated that the version previously employed by the Company was not Year 2000 compliant and, therefore, the Company has replaced the production and development versions with newer ones that are Year 2000 compliant. The Company plans to apply future patches to address the Year 2000 issue as they are made available. Based on currently available information, the Company believes the expense associated with these efforts will not be material. Other important internal business processes of the Company, such as time and expense reporting and labor distribution (and their associated back-office functions), are performed by legacy systems that have been re-written to be Year 2000 compliant. The remaining office automation products have been inventoried and each vendor has been contacted for the product's Year 2000 status. All identified products have either been upgraded with patches, entirely replaced, determined to be Year 2000 compliant, or shown to possess no date-associated functions within the product. The Company believes it has completed the compliance project effort, and all of the identified systems were compliant as of December 31, 1999. To date, the cost associated with replacing/upgrading these systems, excluding labor costs, is less than $0.3 million, and the cost for replacement of these systems was included in its operating and capital budgets for calendar year 1999. Vendors of the standard office automation software packages have been contacted and patches and/or newer versions of the applications have been secured. Distribution of the patches and newer versions of the software occurred during the third and fourth quarters of the calendar year 1999. Based on presently available information, the Company believes that any necessary additional compliance efforts concerning its internal systems will not have a material adverse effect on its business, operating results and financial condition. However, if compliance efforts of which the Company is not currently aware are required and are not completed on time, or if the cost of any required updating, modification or replacement of the Company's information systems exceeds the Company's estimates, the Year 2000 issue could have a material adverse impact on the Company's business, operating results and financial condition. In addition to the Company's internal systems, the Company relies on third party vendors in the conduct of its business. The Company has sought and received assurances from its material vendors and suppliers that there will be no interruption of service as a result of the Year 2000 issue. The Company has generally refrained from performing Year 2000 remediation services for its clients. It is possible, however, that former, present and future clients could assert that certain services performed by the Company from time to time involve, or are related to, the Year 2000 issue. The Company has recommended, implemented and customized various third party software packages for its clients, and to the extent that such software programs may not be Year 2000 compliant, the Company could be subjected to claims as a result thereof. Since the Company's inception in 1988, it also has designed and developed software and systems for its clients. Due to the large number of such engagements undertaken by the Company over the years, there can be ================================================================================ Page 27 no assurance that all such software programs and systems will be Year 2000 compliant, which could also result in the assertion of claims against the Company. The Company's policy has been to endeavor to secure provisions in its client contracts that, among other things, disclaim implied warranties, limit the duration of the Company's express warranties, relate the Company's liability to the amount of fees paid by the client to the Company in connection with the project, and disclaim any liability arising from third party software that is implemented, customized or installed by the Company. There can be no assurance that the Company will be able to secure contractual protections in agreements concerning future projects, or that any contractual protections secured by the Company in agreements governing pending and completed projects will dissuade the other party thereto from asserting claims against the Company with respect to the Year 2000 issue. Due to the complexity of the Year 2000 issue, upon any failure of critical client systems or processes that may be directly or indirectly connected or related to systems or software designed, developed, customized or implemented by the Company as described above, the Company may be subjected to claims, regardless of whether the failure is related to the services provided by the Company. There can be no assurance that the Company would be able to establish that it did not cause or contribute to the failure of a critical client system or process. There also can be no assurance that the contractual protections, if any, secured by the Company in connection with any past, present or future clients will operate to insulate the Company from, or limit the amount of, any liability arising from claims asserted against the Company. If asserted, the resolution of such claims (and the associated defense costs) could have a material adverse effect on the Company's business, operating results and financial condition. Rapid Technological Change The systems consulting and implementation market has experienced rapid technological advances and developments in recent years. Failure of the Company to stay abreast of such advances and developments could materially adversely affect its business. The Company additionally utilizes a number of different technologies in developing and providing IT solutions for its customers. The technologies used by the Company are developing rapidly and are characterized by evolving industry standards in a wide variety of areas. While the Company evaluates technologies on an ongoing basis and endeavors to utilize those that are most effective in developing IT solutions for its customers, there can be no assurance that the technologies utilized by the Company and the expertise gained in those technologies will continue to be applicable in the future. There can be no assurance that new technologies will be made available to the Company or that such technologies can be economically applied by the Company. The inability to apply existing technologies and expertise to subsequent projects could have a material adverse effect on the Company's business, operating results and financial condition. ================================================================================ Page 28 Management of Growth The Company's business has experienced periods of significant growth since its inception, and the Company anticipates future growth. The growth of the Company's business and the expansion of its customer base have resulted in a corresponding growth in the demands on the Company's management and other personnel and its operating systems and internal controls. Any future growth may further strain existing management resources and operational, financial, human resources and management information systems and controls, which may not be adequate to support the Company's operations. The Company is currently increasing its expense levels as a result of a number of factors, including increases in the number of employees, investments in equipment, training of employees and the development of methodologies, tools, etc. An unexpected decline in revenues without a corresponding and timely reduction in staffing and other expenses, or a staffing increase that is not accompanied by a corresponding increase in revenues, could have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to manage its recent or future growth successfully. In addition, there can be no assurance that the Company will continue to grow or achieve the rates of growth it has experienced in the past. The Company expects that it will need to further develop its financial and management controls, reporting systems and procedures to accommodate future growth. There can be no assurance that the Company will be able to develop such controls, systems or procedures effectively or on a timely basis, and the failure to do so could have a material adverse effect on the Company's business, operating results and financial condition. Ability to Attract and Retain Employees The Company's business consists mainly of professional services and is inherently labor intensive. The Company's success depends in large part upon its ability to attract, retain and motivate highly skilled employees, particularly project managers and other senior personnel, for its domestic and international operations. Qualified project managers within and outside the United States are in particularly great demand and are likely to remain a limited resource for the foreseeable future. Several attributes of the Company's work environment pose challenges to the Company's ability to attract and retain employees, including (i) extensive travel requirements, (ii) the Company's intense work environment and culture, (iii) the Company's standards for employee technical skills and job performance, and (iv) the Company's practice of adjusting the number of technical personnel to reflect active project levels. Although the Company expects to continue to attract sufficient numbers of highly skilled employees and to retain its existing project managers and other senior personnel for the foreseeable future, there can be no assurance that the Company will be able to do so. Failure to attract and retain key personnel could have a material adverse effect upon the Company's business, operating results and financial condition. ================================================================================ Page 29 Growth by Acquisition The Company may grow in part by acquiring existing businesses. The success of any such acquisition will depend upon, among other things, the ability of the Company and its management to integrate acquired personnel, operations, products and technologies into its organization effectively, to retain and motivate key personnel of acquired businesses and to retain customers of acquired firms. There can be no assurance that the Company will be able to identify suitable acquisition opportunities, consummate acquisitions or successfully integrate acquired personnel and operations into the Company. In addition, acquisitions by the Company may involve certain other risks, including potentially dilutive issuances of equity securities and the diversion of management's attention from other business concerns. Dependence on Key Personnel Although the Company does not believe that the loss of any particular individual would have a material adverse impact on the Company, the loss of some or all of the Company's project managers could have a material adverse impact on the Company, including its ability to secure and complete engagements. The Company has employment agreements with its President, executive officers and Vice Presidents that contain noncompetition, nondisclosure and nonsolicitation covenants. The employment agreements with the President and executive officers do not have fixed expiration dates and may be terminated by either the Company or the employee on 90 days written notice. The employment agreements with the other Vice Presidents generally have a fixed initial term but are automatically renewed for successive one-year periods unless terminated by either the Company or the employee on 90 days written notice. Other senior employees also have employment agreements that are generally terminable by the Company or the employee upon 30 to 90 days written notice. Unassigned Labor Costs The Company's unassigned labor costs, which represent salaries and other expenses allocated to systems professionals not assigned to a specific project, can vary as a percentage of revenues over time. The Company attempts to reassign employees who meet its performance requirements to other active projects when they are no longer needed on a particular project. However, since the Company generally recruits personnel in advance of the commencement of certain projects in order to meet the needs of such projects, any cancellation or delays in the anticipated projects could increase the unassigned labor costs and might cause a material adverse effect upon the Company's business, operating results and financial condition. Cyclicality Certain of the Company's customers and potential customers are in industries that experience cyclical variations in profitability, which may in turn affect their willingness or ability to fund systems projects such as those for which the Company may be engaged. The Company's experience indicates, however, that competitive pressures in cyclical industries sometimes compel businesses to undertake systems projects even during periods of losses or reduced profitability. ================================================================================ Page 30 Quarterly Results May Fluctuate The Company's results may fluctuate from quarter to quarter as a result of various factors such as differences in the number of billing days and/or holidays between quarters, the number of vacation days and sick days taken by the Company's employees in a particular quarter, and varying weather conditions. These and other factors can reduce revenues in a given quarter with a corresponding adverse impact on the Company's margins. Project Risks Because of the project-based nature of the Company's work and the fact that many of the projects undertaken by the Company are large projects, there is a risk of a material adverse impact on operating results because of the unanticipated suspension or cancellation of a large project or the financial difficulties of a client. The suspension or cancellation of a project or the financial difficulties of a client could result in a decrease in revenues, the need to reassign staff, a potential dispute with a client regarding monies owed for consulting work and expenses, and damage to TSC's reputation. In addition, because many of the Company's projects are high profile, mission critical projects for major clients, a failure or inability to meet a client's expectations with respect to a major project undertaken by the Company could damage its reputation and affect its ability to attract new business. Third party products and services are integral to the success of certain Company projects. To the extent that third parties do not deliver effective products and services on a timely basis, the Company's project results could be negatively impacted. Although the Company attempts to limit this risk in its engagement arrangements with clients and maintains errors and omissions insurance, the failure of a project could also result in significant financial exposure to the Company. Competition The systems consulting and implementation market comprises a large number of participants, is subject to rapid changes and is highly competitive. The Company competes with and faces potential competition from a number of companies that have significantly greater financial, technical and marketing resources and greater name recognition than the Company. The Company also competes with smaller service providers whose specific, more narrowly focused service offerings may be more attractive to potential clients than the Company's multi- dimensional approach. The Company may also compete for certain clients and engagements with eLoyalty, which may have the benefit of contact relationships established and client information procured while that business was still a division of TSC. The Company's clients primarily consist of Fortune 1000 and other large corporations and there are an increasing number of professional services firms seeking systems consulting and implementation engagements from that client base. The Company believes that its ability to compete depends in part on a number of factors outside its control, including the ability of its competitors to hire, retain and motivate a significant number of senior project managers, the ownership by competitors of software used by potential clients, the development by others of software that is competitive with the Company's products and services, and the price at which others offer comparable services. ================================================================================ Page 31 In addition, the Company's clients could develop or acquire in-house expertise in services similar to those provided by the Company, which would significantly reduce demand for the Company's services. No assurance can be given that the Company will be able to maintain its existing client base, maintain or increase the level of revenue generated by its existing clients or be able to attract new clients. Susceptibility to General Economic Conditions The Company's revenues and results of operations will be subject to fluctuations based on the general economic conditions of the United States as well as the foreign countries in which it operates. If there were to be a general economic downturn or a recession in the United States or the foreign countries in which it operates, then the Company expects that business enterprises would cut back their spending on, or reduce their budget for, IT services. In the event of such an economic downturn, there can be no assurance that the Company's business, operating results and financial condition would not be materially adversely affected. Cost Overruns Although the Company's engagements are generally on a time-and-materials basis, some of its projects are on a "not-to-exceed" or fixed-price basis. The failure of the Company to complete a project to the client's satisfaction within the "not-to-exceed" or fixed fee exposes the Company to unrecoverable cost overruns, which could have a material adverse effect on the Company's business, operating results and financial condition. Intellectual Property Rights Many of the Company's clients have required that the Company grant to them all proprietary and intellectual property rights with respect to the work product resulting from the Company's performance of services, including the intellectual property rights to any custom software developed by the Company for them. Each grant of proprietary and intellectual property rights limits the Company's ability to reuse work product components and work product solutions with other clients. In a limited number of such situations, the Company has obtained, and in the future may attempt to obtain, ownership interest or a license from its clients to permit the Company to market custom software for the joint benefit of the client and the Company. These arrangements may be nonexclusive or exclusive, and licensors to the Company may retain the right to sell products and services that compete with those of the Company. There can be no assurance, however, that the Company will be able to negotiate future software licenses upon terms acceptable to the Company. The Company also develops certain foundation and application software tools, methodologies and products that are owned by the Company and licensed to its clients. The Company regards these software tools, methodologies and products as proprietary and intends to protect its rights, where appropriate, with registered copyrights, patents, registered trademarks, trade secret laws and contractual restrictions on disclosure and transferring title. There can be no assurance that any of these steps taken by the Company will be adequate to deter misappropriation of its proprietary rights or independent third party development of functionally equivalent products. "TSC" is a registered service mark of the Company. ================================================================================ Page 32 In addition, the Company's success is dependent upon its specialized expertise and methodologies. To protect its proprietary information, the Company relies upon a combination of trade secret and common law, employee nondisclosure policies and third-party confidentiality agreements. However, there can be no assurance that any of these steps taken by the Company will be adequate to deter misappropriation of its specialized expertise and methodologies. Although the Company believes that its services and products do not infringe on the intellectual property rights of others, there can be no assurance that infringement claims will not be asserted against the Company in the future. Risks of Conducting International Operations The Company engages in international operations. Because the cost of doing business abroad is typically higher for U.S. businesses than the cost of doing business domestically, the Company could experience a decline in its operating margins as the significance of its international operations increases. International operations and the provision of services in foreign markets are subject to a number of special risks, including currency exchange rate fluctuations, trade barriers, exchange controls, national and regional labor strikes, political risks, additional security concerns and risks of increases in duties, taxes and governmental royalties, as well as changes in laws and policies governing operations of foreign-based companies. In addition, the Company's growth internationally will depend upon its ability to attract, develop and retain a sufficient number of highly skilled, motivated local professional employees in each of those foreign countries where it conducts operations. Competition for such local personnel qualified to deliver most of the Company's services is intense, and there can be no assurance that the Company will be able to recruit, develop and retain a sufficient number of highly skilled, motivated local professional employees to successfully compete internationally. ================================================================================ Page 33 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required with respect to this Item 8 are listed in Item 14(a)(1) and (a)(2) in this filing. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ================================================================================ Page 34 Technology Solutions Company PART III. ================================================================================ ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the headings "Election of Directors," "Nominees for Director," "Members of Board of Directors Continuing in Office" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement for the Company's 2000 Annual Meeting of Stockholders (the "Proxy Statement") and the information contained under the heading "Executive Officers of the Registrant" in Item 1 hereof is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Except for the information relating to Item 13 hereof and except for the information referred to in Item 402(a)(8) of Regulation S-K, the information contained under the headings "Executive Officer Compensation" and "Other Transactions" in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the headings "Security Ownership of Directors and Management" and "Additional Information Relating to Voting Securities" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Except for the information relating to Item 11 hereof and except for the information referred to in Item 402(a)(8) of Regulation S-K, the information contained under the headings "Executive Officer Compensation" and "Other Transactions" in the Proxy Statement is incorporated herein by reference. ================================================================================ Page 35 Technology Solutions Company PART IV. ================================================================================ ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K TECHNOLOGY SOLUTIONS COMPANY ---------------------------- CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- AND FINANCIAL STATEMENT SCHEDULE -------------------------------- TABLE OF CONTENTS Report of Independent Accountants............................................ 37 - --------------------------------- Financial Statements (Item 14(a)(1)) - ------------------------------------ Consolidated Balance Sheets as of December 31, 1999 and 1998............. 38 Consolidated Statements of Operations for the years ended December 31, 1999 and 1998 (unaudited), for the seven month transition period ended December 31, 1998 and for each of the two years in the period ended May 31, 1998................................................ 39 Consolidated Statements of Changes in Stockholders' Equity for the year ended December 31, 1999, for the seven month transition period ended December 31, 1998 and for each of the two years in the period ended May 31, 1998....................................................... 41 Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998 (unaudited), for the seven month transition period ended December 31, 1998 and for each of the two years in the period ended May 31, 1998....................................................... 43 Notes to Consolidated Financial Statements............................... 44 Financial Statement Schedule (Item 14(a)(2)) - -------------------------------------------- Schedule II Valuation and Qualifying Accounts........................... 72
All other schedules have been omitted because the required information is included in the financial statements or notes thereto or because they are not required. ================================================================================ Page 36 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors and Stockholders of Technology Solutions Company In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a)(1) present fairly, in all material respects, the financial position of Technology Solutions Company and its subsidiaries (the "Company") at December 31, 1999 and 1998, and the results of their operations and their cash flows for the year ended December 31, 1999, for the seven month transition period ended December 31, 1998, and for each of the two years in the period ended May 31, 1998, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14 (a)(2), presents fairly in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP February 15, 2000 Chicago, Illinois ================================================================================ Page 37 Technology Solutions Company CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) ASSETS ------
December 31, December 31, 1999 1998 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents............................................... $ 81,002 $ 59,473 Marketable securities................................................... 17,826 25,269 Receivables, less allowance for doubtful receivables of $3,715 and $4,845................................................. 24,036 69,212 Deferred income taxes................................................... 9,969 15,297 Other current assets.................................................... 4,664 13,764 -------- -------- Total current assets............................................... 137,497 183,015 COMPUTERS, FURNITURE AND EQUIPMENT, NET.................................. 4,116 9,372 GOODWILL................................................................. 4,446 17,901 LONG-TERM RECEIVABLES AND OTHER.......................................... 2,788 8,811 NET ASSETS OF DISCONTINUED OPERATIONS.................................... 74,462 -- -------- -------- Total assets....................................................... $223,309 $219,099 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable........................................................ $ 2,995 $ 3,263 Accrued compensation and related costs.................................. 18,453 25,184 Deferred compensation................................................... 10,322 16,494 Restructuring and other accruals........................................ 12,708 -- Other current liabilities............................................... 5,220 5,913 -------- -------- Total current liabilities.......................................... 49,698 50,854 -------- -------- COMMITMENTS AND CONTINGENCIES............................................ -- -- STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; shares authorized -- 10,000,000; none issued........................................... -- -- Common stock, $.01 par value; shares authorized -- 100,000,000; shares issued -- 43,354,725 and 41,242,886............ 434 412 Capital in excess of par value.......................................... 110,455 94,886 Retained earnings....................................................... 63,704 76,938 Treasury stock, at cost, 0 and 275,911 shares........................... -- (2,646) Accumulated Other Comprehensive Loss: Unrealized holding loss, net....................................... (131) (9) Cumulative translation adjustment.................................. (851) (1,336) -------- -------- Total stockholders' equity......................................... 173,611 168,245 -------- -------- Total liabilities and stockholders' equity......................... $223,309 $219,099 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. ================================================================================ 38 Technology Solutions Company CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Seven Month For the Transition Years Ended Period Ended For the Years December 31, December 31, Ended May 31, ----------------------- ------------- -------------------- 1999 1998 1998 1998 1997 ---------- ----------- ------------- --------- --------- (unaudited) REVENUES................................. $156,320 $215,141 $126,839 $189,603 $122,063 -------- -------- -------- -------- -------- COSTS AND EXPENSES: Project personnel...................... 81,575 101,978 61,459 87,582 58,561 Other project expenses................. 25,347 32,528 19,777 26,996 15,959 Management and administrative support.. 42,473 57,996 36,884 44,615 25,653 Goodwill amortization.................. 225 406 221 402 435 Restructuring and other charges........ 17,489 -- -- -- -- Incentive compensation................. 9,908 8,320 6,654 7,537 7,361 -------- -------- -------- -------- -------- 177,017 201,228 124,995 167,132 107,969 -------- -------- -------- -------- -------- OPERATING (LOSS) INCOME.................. (20,697) 13,913 1,844 22,471 14,094 -------- -------- -------- -------- -------- OTHER INCOME (EXPENSE): Net investment income.................. 3,705 2,967 1,710 2,041 2,280 Interest expense....................... (139) (60) (13) (21) (191) -------- -------- -------- -------- -------- 3,566 2,907 1,697 2,020 2,089 -------- -------- -------- -------- -------- (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES........ (17,131) 16,820 3,541 24,491 16,183 INCOME TAX (BENEFIT) PROVISION........... (5,553) 6,986 1,587 10,258 6,425 -------- -------- -------- -------- -------- (LOSS) INCOME FROM CONTINUING OPERATIONS................. (11,578) 9,834 1,954 14,233 9,758 DISCONTINUED OPERATIONS: Income from discontinued operations (net of income taxes).... 5,133 6,732 2,521 6,787 5,309 Loss on distribution of discontinued operations (net of income taxes).... (6,789) -- -- -- -- -------- -------- -------- -------- -------- (LOSS) INCOME FROM DISCONTINUED OPERATIONS (net of income taxes).... (1,656) 6,732 2,521 6,787 5,309 -------- -------- -------- -------- -------- NET (LOSS) INCOME........................ $(13,234) $ 16,566 $ 4,475 $ 21,020 $ 15,067 ======== ======== ======== ======== ========
================================================================================ 39 Technology Solutions Company CONSOLIDATED STATEMENTS OF OPERATIONS (Continued) (In thousands, except per share data)
Seven Month For the Transition Years Ended Period Ended For the Years December 31, December 31, Ended May 31, --------------------- ------------ ---------------- 1999 1998 1998 1998 1997 -------- ----------- ------------ ------- ------- (unaudited) NET (LOSS) EARNINGS PER COMMON SHARE: (LOSS) INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS.......... $ (0.27) $ 0.24 $ 0.05 $ 0.37 $ 0.28 (LOSS) INCOME FROM DISCONTINUED OPERATIONS............. (0.04) 0.17 0.06 0.17 0.15 ------- ------- ------- ------- ------- NET (LOSS) EARNINGS PER COMMON SHARE.................... $ (0.31) $ 0.41 $ 0.11 $ 0.54 $ 0.43 ======= ======= ======= ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............ 42,044 40,190 40,668 38,887 35,333 ======= ======= ======= ======= ======= (LOSS) INCOME PER COMMON SHARE FROM CONTINUING OPERATIONS ASSUMING DILUTION................... $ (0.27) $ 0.23 $ 0.04 $ 0.33 $ 0.25 (LOSS) INCOME FROM DISCONTINUED OPERATIONS ASSUMING DILUTION........ (0.04) 0.15 0.06 0.16 0.13 ------- ------- ------- ------- ------- NET (LOSS) EARNINGS PER COMMON SHARE ASSUMING DILUTION................ $ (0.31) $ 0.38 $ 0.10 $ 0.49 $ 0.38 ======= ======= ======= ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING................... 42,044 43,263 43,409 42,781 39,869 ======= ======= ======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. ================================================================================ 40 Technology Solutions Company CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the year ended December 31, 1999, for the seven month transition period ended December 31, 1998 and for the years ended May 31, 1998 and 1997 -- (In thousands, except share data)
Accumulated Common Stock Issued Capital in Other -------------------- Excess of Retained Treasury Comprehensive Comprehensive Shares Amount Par Value Earnings Stock Loss Total Income (Loss) ---------- -------- ---------- --------- ----------- ------------- -------- ------------- Balance as of May 31, 1996........... 40,282,454 $403 $50,120 $35,983 $(15,835) $ (642) $ 70,029 $ 4,785 ======= Issuance of 2,565,747 treasury shares from exercise of stock options..... -- -- 12,140 -- 6,001 -- 18,141 Issuance of 179,165 treasury shares from employee stock purchase plan.. -- -- 1,396 -- 418 -- 1,814 Change in net unrealized holding loss on available-for-sale securities......................... -- -- -- -- -- 323 323 $ 323 Net income........................... -- -- -- 15,067 -- -- 15,067 15,067 Cumulative translation adjustment.... -- -- -- -- -- (318) (318) (318) Issuance of 851,199 treasury shares for business combinations.......... -- -- (1,832) 577 1,986 -- 731 ---------- ------- -------- -------- ---------- -------- -------- ------- Balance as of May 31, 1997........... 40,282,454 403 61,824 51,627 (7,430) (637) 105,787 $15,072 ======= Issuance of 2,429,116 treasury shares from exercise of stock options..... -- -- 15,993 -- 5,660 -- 21,653 Issuance of 269,347 treasury shares from employee stock purchase plan.. -- -- 3,070 -- 625 -- 3,695 Change in net unrealized holding loss on available-for-sale securities......................... -- -- -- -- -- 277 277 $ 277 Net income........................... -- -- -- 21,020 -- -- 21,020 21,020 Cumulative translation adjustment.... -- -- -- -- -- (891) (891) (891) Issuance of 105,841 treasury shares for business combinations.......... -- -- 4,202 (184) 247 -- 4,265 ---------- ------- -------- -------- ---------- -------- -------- ------- Balance as of May 31, 1998........... 40,282,454 $403 $85,089 $72,463 $ (898) $(1,251) $155,806 $20,406 ---------- ------- -------- -------- ---------- -------- -------- =======
================================================================================ Page 41 Technology Solutions Company CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED) For the year ended December 31, 1999, for the seven month transition period ended December 31, 1998 and for the years ended May 31, 1998 and 1997 -- (In thousands, except share data)
Accumulated Common Stock Issued Capital in Other --------------------- Excess of Retained Treasury Comprehensive Comprehensive Shares Amount Par Value Earnings Stock Loss Total Income (Loss) ----------- -------- ---------- --------- ----------- -------- --------- ------------- Issuance of 779,161 common stock shares and 401,575 treasury shares from exercise of stock options........ 779,161 $ 8 $ 7,567 $ -- $ 1,094 $ -- $ 8,669 Issuance of 181,271 common stock shares from employee stock purchase plan.................................. 181,271 1 2,230 -- -- -- 2,231 Purchase of 296,300 treasury shares..... -- -- -- -- (2,842) -- (2,842) Change in net unrealized holding loss on available-for-sale securities. -- -- -- -- -- 33 33 $ 33 Net income.............................. -- -- -- 4,475 -- -- 4,475 4,475 Cumulative translation adjustment....... -- -- -- -- -- (127) (127) (127) ----------- ------- -------- --------- --------- -------- --------- ---------- Balance as of December 31, 1998......... 41,242,886 412 94,886 76,938 (2,646) (1,345) 168,245 $ 4,381 ======== Purchase of 480,000 treasury shares..... -- -- -- -- (4,930) -- (4,930) Issuance of 1,258,702 common stock shares and 597,146 treasury shares from exercise of stock options........ 1,258,702 13 8,814 -- 5,990 -- 14,817 Issuance of 353,137 common stock shares and 158,765 treasury shares from employee stock purchase plan..... 353,137 4 2,254 -- 1,586 -- 3,844 Issuance of 500,000 common stock shares to venture capital firms....... 500,000 5 4,501 -- -- -- 4,506 Change in net unrealized holding loss on available-for-sale securities. -- -- -- -- -- (122) (122) $ (122) Net loss................................ -- -- -- (13,234) -- -- (13,234) (13,234) Cumulative translation adjustment....... -- -- -- -- -- 485 485 485 ----------- ------- -------- -------- --------- -------- --------- ---------- Balance as of December 31, 1999......... 43,354,725 $434 $110,455 $ 63,704 $ -- $ (982) $173,611 $(12,871) =========== ======= ======== ======== ========= ======== ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. ================================================================================ Page 42 Technology Solutions Company CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Seven Month Transition For the Years Period Ended For the Years Ended December 31, December 31, Ended May 31, ---------------------- ------------- -------------------- 1999 1998 1998 1998 1997 --------- ----------- ------------- --------- --------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income........................................... $(13,234) $ 16,566 $ 4,475 $ 21,020 $ 15,067 Restructuring and other charges............................. 17,489 -- -- -- -- Adjustments to reconcile net (loss) income to net cash from operating activities: Depreciation and amortization............................ 10,154 14,076 10,725 7,107 4,442 Provisions for receivable valuation allowances and reserves for possible losses........................... 5,909 2,748 2,913 1,897 2,712 (Gain) loss on sale of investments....................... (102) 19 13 (43) (17) Deferred income taxes.................................... (6,216) (5,948) (7,837) (225) (2,692) Changes in assets and liabilities: Receivables............................................ (5,786) (22,953) 138 (28,031) (21,533) Purchases of trading securities related to deferred compensation program........................ (1,003) (5,397) (2,928) (6,724) (4,182) Other current assets................................... 3,120 (2,151) 970 (95) (4,884) Accounts payable....................................... 338 1,943 1,334 352 (73) Accrued compensation and related costs................. 5,125 8,176 4,187 3,914 5,260 Deferred compensation.................................. 1,003 5,397 2,928 6,724 4,182 Other current liabilities.............................. 8,470 8,636 5,753 11,592 11,687 Other assets........................................... 1,849 (2,765) (502) (4,369) (3,456) -------- -------- ------- -------- -------- Net cash provided by operating activities............ 27,116 18,347 22,169 13,119 6,513 -------- -------- ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of available-for-sale securities................... (1,500) (7,675) (1,725) (10,250) (1,000) Proceeds from available-for-sale securities................. 2,820 10,090 7,260 5,337 1,314 Proceeds from held-to-maturity investments.................. -- 2,520 1,200 6,910 8,890 Capital expenditures........................................ (2,464) (4,731) (2,499) (5,745) (6,057) Net assets of acquired businesses and other assets.......... (4,166) (8,999) (8,618) (10,741) (1,127) Cash held by discontinued operations........................ (13,462) -- -- -- -- -------- -------- ------- -------- -------- Net cash (used in) provided by investing activities.. (18,772) (8,795) (4,382) (14,489) 2,020 -------- -------- ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options..................... 9,214 5,827 3,903 8,721 6,445 Proceeds from employee stock purchase plan.................. 3,844 4,476 2,231 3,688 1,805 Purchase of treasury shares................................. (4,930) (2,842) (2,842) -- -- Sale of common stock........................................ 4,506 -- -- -- -- Capitalized lease obligation................................ -- (70) (79) 71 (1,311) -------- -------- ------- -------- -------- Net cash provided by financing activities............... 12,634 7,391 3,213 12,480 6,939 -------- -------- ------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS........................................ 551 (192) 15 (603) (511) -------- -------- ------- -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS.......................... 21,529 16,751 21,015 10,507 14,961 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................. 59,473 42,722 38,458 27,951 12,990 -------- -------- ------- -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD....................... $ 81,002 $ 59,473 $59,473 $ 38,458 $ 27,951 ======== ======== ======= ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information. ================================================================================ Page 43 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) ================================================================================ NOTE 1 -- THE COMPANY TSC delivers business benefits through eBusiness consulting and systems integration services that help clients transform their businesses, their internal business processes and their relationships with customers, suppliers, distributors and employees and help these organizations realize the full benefits of information technology throughout the enterprise. The Company's clients generally are located throughout the United States and in Latin America and Europe. On February 15, 2000 TSC successfully completed its spin-off of its eLoyalty division into a separate publicly traded company. Accordingly the consolidated balance sheet as of December 31, 1999 and the consolidated statements of operations for the years ended December 31, 1999 and 1998, the seven month transition period ended December 31, 1998 and for the fiscal years ended May 31, 1998 and 1997 have been reclassified to report these operations as discontinued operations. The consolidated balance sheet as of December 31, 1998 and consolidated statements of cash flows have not been restated on a discontinued operations basis. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany transactions have been eliminated. Acquired businesses, accounted for using the purchase method, are included in the results of operations since their acquisition dates. FISCAL YEAR CHANGE -- The Consolidated Financial Statements and Notes to the Consolidated Financial Statements for the year ended December 31, 1999 represent the first full calendar year since the Company changed from a May 31 fiscal year end. The unaudited financial information for the year ended December 31, 1998 is presented for comparative purposes and includes any adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary for a fair presentation. REVENUE RECOGNITION -- The Company derives its revenues from information technology, strategic business and management consulting, systems integration, programming, and packaged software integration and implementation services. The Company recognizes revenue on contracts as work is performed primarily based on hourly billing rates. Out-of-pocket expenses are presented net of amounts billed to clients in the accompanying consolidated statements of operations. Contracts are performed in phases. Losses on contracts, if any, are reserved in full when determined. ================================================================================ Page 44 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid investments readily convertible into cash (with original maturities of three months or less) to be cash equivalents. These short-term investments are carried at cost plus accrued interest, which approximates market. MARKETABLE SECURITIES -- The Company's marketable securities primarily consist of preferred stocks and trading securities. The preferred stocks, all of which are classified as available-for-sale, are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a net after- tax amount in a separate component of stockholders' equity until realized. The Company's investments related to the executive deferred compensation plan (see Note 10) are classified as trading securities, with unrealized gains and losses included in the Company's consolidated statements of operations. Realized gains or losses are determined on the specific identification method. COMPUTERS, FURNITURE AND EQUIPMENT -- Computers, furniture and equipment are carried at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives generally are five years or less. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the underlying lease term. Normal maintenance and repair costs are expensed as incurred. The costs and related accumulated depreciation or amortization of the assets sold or disposed of are moved from the account and resulting gain or loss is included in operations. The carrying value of computers, furniture and equipment is periodically reviewed to assess recoverability based on undiscounted future cash flows. GOODWILL -- Goodwill (the excess of cost over the fair market value of the net identifiable tangible and intangible assets of businesses acquired) is amortized on a straight-line basis, typically over a five-year period. Accumulated amortization of goodwill as of December 31, 1999 and 1998 was $153 and $7,085, respectively. The carrying value of goodwill is periodically reviewed to assess recoverability based on undiscounted cash flows. SOFTWARE DEVELOPMENT COSTS -- The Company capitalizes certain software development costs incurred subsequent to the achievement of technological feasibility and prior to the general release of the product for sale. Amortization of software costs is the greater of the amount computed using the (a) ratio of current revenues to the total current and anticipated future revenues or (b) the straight-line method over the estimated economic life of the product. ================================================================================ Page 45 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ (LOSS) EARNINGS PER COMMON SHARE -- The Company discloses basic and diluted (loss) earnings per share in the consolidated statements of operations under the provisions of SFAS No. 128, "Earnings Per Share." (Loss) earnings per common share assuming dilution is computed by dividing net (loss) income by the weighted average number of common shares outstanding during each period presented, plus the dilutive effect of common equivalent shares arising from the assumed exercise of stock options using the treasury stock method. For 1999, common equivalent shares of 2,277 were not included in the diluted loss per share calculation as they were antidilutive. (Loss) earnings per common share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during each period presented. All share and per share amounts have been adjusted to reflect all of the Company's prior stock splits as of December 31, 1999.
Reconciliation of Basic and Diluted (Loss) Earnings Per Share for the Year Ended - -------------------------------------------------------------------------------------------------------------- December 31, 1999 December 31, 1998 ------------------------------------------- ----------------------------------------- (unaudited) Per Per Net Common Net Common (Loss) Shares Share Income Shares Share -------- -------- -------- -------- -------- -------- Basic (loss) Earning Per Share $(13,234) 42,044 $(0.31) $16,566 40,190 $0.41 ====== ===== Effect of Stock Options -- -- -- 3,073 -------- ------ ------- ------ Diluted (Loss) Earnings Per Share $(13,234) 42,044 $(0.31) $16,566 43,263 $0.38 ======== ====== ====== ======= ====== =====
Reconciliation of Basic and Diluted Earnings Per Share for the Seven Month Transition Period Ended December 31, 1998 - ------------------------------------------------------- Per Net Common Income Shares Share ------ ------ ------ Basic EPS $4,475 40,668 $0.11 ===== Effect of Stock Options -- 2,741 ------ ------ Diluted EPS $4,475 43,409 $0.10 ====== ====== =====
================================================================================ Page 46 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================
Reconciliation of Basic and Diluted Earnings Per Share for the Fiscal Year Ended - --------------------------------------------------------------------------------------------------------- May 31, 1998 May 31, 1997 ---------------------------------------- ---------------------------------------- Per Per Net Common Net Common Income Shares Share Income Shares Share ----------- ------------ ------------ ----------- ------------ ------------ Basic EPS $21,020 38,887 $0.54 $15,067 35,333 $0.43 ===== ===== Effect of Stock Options -- 3,894 -- 4,536 ------- ------ ------- ------ Diluted EPS $21,020 42,781 $0.49 $15,067 39,869 $0.38 ======= ====== ===== ======= ====== =====
FOREIGN CURRENCY TRANSLATION -- The functional currencies for the Company's foreign subsidiaries are their local currencies. All assets and liabilities of foreign subsidiaries are translated to U.S. dollars at end of period exchange rates. The resulting translation adjustments are recorded as a component of stockholders' equity. Income and expense items are translated at average exchange rates prevailing during the period. Gains and losses from foreign currency transactions of these subsidiaries are included in the consolidated statements of operations. FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying values of current assets, including marketable securities, and liabilities and long-term receivables approximated their fair values at December 31, 1999 and 1998, respectively. Investments in companies accounted for under the equity method for which fair value are not readily available are believed to approximate their carrying amount. STOCK-BASED COMPENSATION -- The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Compensation costs for employee stock options is measured as the excess, if any, of the quoted market price of the Company's common stock at the date of grant over the amount an employee must pay to acquire the stock. NEW ACCOUNTING STANDARDS -- On June 15, 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended is effective for financial statements issued for periods ending after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company anticipates that, due to its limited use of derivative instruments, the adoption of SFAS No. 133 will not have a significant effect on the Company's results of operations or its financial position. ================================================================================ Page 47 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ INCOME TAXES -- The Company uses an asset and liability approach to financial accounting and reporting for income taxes. Deferred income taxes are provided when tax laws and financial accounting standards differ with respect to the amount of income for a year and the basis of assets and liabilities. The Company does not provide U.S. deferred income taxes on earnings of foreign subsidiaries which are expected to be indefinitely reinvested. EMPLOYEE BENEFIT PLAN -- The Company has a 401(K) Savings Plan (the " 401(K) Plan"). The 401(K) Plan allows employees to contribute up to 15 percent of their annual compensation, subject to Internal Revenue Service statutory limitations. Company contributions to the 401(K) Plan are discretionary. The Company contributed $2,301, $1,806 and $1,234 to the 401(K) Plan in the year ended December 31, 1999 and in fiscal 1998 and 1997, respectively. There were no Company contributions during the seven month transition period ended December 31, 1998, although the Company accrued amounts during the seven month transition period for the contribution made during the year ended December 31, 1999. ESTIMATES AND ASSUMPTIONS -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS -- Certain reclassifications have been made to prior periods to conform to the current period classification. These reclassifications had no impact on net (loss) income or shareholders' equity. NOTE 3 -- ACQUISITIONS The following acquisitions are part of TSC's continuing operations. On October 29, 1999, the Company acquired CourseNet Systems, Inc. (CourseNet) a leader in the delivery of e-learning solutions. Total consideration was approximately $5.2 million which consisted of $4.2 million in cash and the Company's $1.0 million previous investment in CourseNet. Goodwill of approximately $4.6 million resulted from the CourseNet acquisition and is being amortized over a five year period. In March 1997, the Company combined with HRM Resources, Inc. (HRM) through the exchange of the Company's Common Stock for all the issued and outstanding shares of HRM. The Common Stock exchanged included 865,135 shares of unregistered treasury stock. HRM was a technology implementation firm based in New York that specialized in large-scale financial and human resources software packages. This combination was accounted for as a pooling of interests. The operations of HRM were not material to the Company's consolidated operations. ================================================================================ Page 48 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ On February 15, 2000, TSC successfully completed the spin-off of its eLoyalty division. The following acquisitions are part of the eLoyalty transaction and are not considered part of TSC's continuing operations. In June 1997, the Company acquired The Bentley Company, Inc. (Bentley). Bentley specialized in business and operations consulting in the eLoyalty division of the Company's business. Total consideration aggregated $17.5 million, including cash of $12.0 million (which includes $4.8 million of earn-out payments), 44,303 shares of the Company's Common Stock and stock options. Goodwill of approximately $18.1 million resulted from the Bentley acquisition and is being amortized over five years. In February 1997, the Company acquired Geising International, a German-based business consulting firm in the eLoyalty division of the Company's business. Total consideration included cash of $1.0 million and 37,962 shares of the Company's Common Stock. Goodwill of approximately $1.0 million resulted from the Geising International acquisition and is being amortized over five years. These acquisitions, except for the HRM combination, have been accounted for under the purchase method and accordingly their results have been included in the Company's results since the date of acquisition. Consolidated pro forma information for these acquisitions has not been presented, as pro forma results would not have been materially different from the Company's reported results. NOTE 4 -- RECEIVABLES Receivables consist of the following:
December 31, December 31, ------------- ------------- 1999 1998 ------------- ------------- Amounts billed to clients............ $27,136 $70,662 Contracts in process................. 615 3,395 ------- ------- 27,751 74,057 Receivable valuation allowances and reserves for possible losses........ (3,715) (4,845) ------- ------- $24,036 $69,212 ======= =======
Amounts billed to clients represent professional fees and reimbursable project- related expenses. Contracts in process represent unbilled professional fees, project costs such as out-of-pocket expense, materials and subcontractor costs. The amounts above are expected to be collected within one year from the balance sheet date. Amounts billed to clients are unsecured and generally due within 30 days. ================================================================================ Page 49 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ NOTE 5 -- MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS Marketable securities are reported at fair value. The marketable securities consist of preferred stocks of $7,504 classified as available-for-sale and securities related to the Company's executive deferred compensation plan of $10,322 classified as trading securities (see Note 10). As of December 31, 1999 and 1998, the gross unrealized holding gain relative to the preferred stocks was $43 and $192 and the gross unrealized holding loss was $242 and $203, respectively, and are presented net and after-tax in a separate component of stockholders' equity. The Company recognized gains of $521, $134, $129 and $189 in its Statements of Operations for the year ended December 31, 1999, the seven month transition period ended December 31, 1998 and for the fiscal years ended May 31, 1998 and 1997, respectively, related to the trading securities. Since the trading securities are related to the Company's executive deferred compensation plan, a corresponding charge to earnings is included in the Statements of Operations to recognize the Company's increased liability for the deferred compensation plan. Municipal bonds, included in long-term investments are presented at cost, net of accumulated amortized premiums and discounts. All of these bonds reached maturity during the seven month transition period ended December 31, 1998. NOTE 6 -- COMPUTERS, FURNITURE AND EQUIPMENT Computers, furniture and equipment consist of the following:
December 31, December 31, ------------- ------------- 1999 1998 ------------- ------------- Computers................. $ 13,183 $ 14,877 Furniture and equipment... 4,760 7,030 -------- -------- 17,943 21,907 Accumulated depreciation.. (13,827) (12,535) -------- -------- $ 4,116 $ 9,372 ======== ========
Depreciation and amortization expense was $3,305, $2,215, $3,344, and $3,361 for the year ended December 31, 1999, the seven month transition period ended December 31, 1998 and for the fiscal years ended May 31, 1998 and 1997, respectively. ================================================================================ Page 50 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ NOTE 7 -- LONG-TERM RECEIVABLES AND OTHER Long-term receivables and other consist of the following:
December 31, December 31, ------------ ------------ 1999 1998 ------------ ------------ Customer receivables........ $2,016 $2,016 Employee receivables........ 116 807 Capitalized software costs.. -- 132 Investments................. 450 5,010 Other....................... 206 846 ------ ------ $2,788 $8,811 ====== ======
Amortization expense associated with capitalized software available for resale was $132, $4,158, $364 and $344 for the year ended December 31, 1999, the seven month transition period ended December 31, 1998 and the fiscal years ended May 31, 1998 and 1997, respectively. Included in the amortization expense for the seven month transition period ended December 31, 1998 was a charge to abandon an investment in an Internet-based commerce software tool of $3.3 million. The amounts capitalized for software costs were $139, $4,249 and $273 for the seven month transition period ended December 31, 1998 and the fiscal years ended May 31, 1998 and 1997, respectively. No amounts were capitalized during the year ended December 31, 1999. NOTE 8 -- INCOME TAXES The (benefit) provision for income taxes consists of the following:
Seven Month For the Transition Year Ended Period Ended For the Years December 31, December 31, Ended May 31, ------------- ------------- ------------------ 1999 1998 1998 1997 ------------- ------------- -------- -------- Current: Federal............ $(1,764) $ 8,923 $ 9,235 $ 7,498 State.............. (420) 1,972 2,238 2,512 Foreign............ 306 1,868 1,291 49 ------- -------- ------- ------- Total current..... (1,878) 12,763 12,764 10,059 ------- -------- ------- ------- Deferred: Federal............ (986) (6,712) (843) (3,317) State.............. (198) (1,385) (71) (577) Foreign............ (2,491) (3,079) (1,592) 260 ------- -------- ------- ------- Total deferred.... (3,675) (11,176) (2,506) (3,634) ------- -------- ------- ------- (Benefit) provision for income taxes.... $(5,553) $ 1,587 $10,258 $ 6,425 ======= ======== ======= =======
================================================================================ Page 51 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ Total income tax (benefit) provision differed from the amount computed by applying the federal statutory income tax rate to income from continuing operations due to the following:
Seven Month For the Transition Year Ended Period Ended For the Years December 31, December 31, Ended May 31, ------------- ------------- ---------------------- 1999 1998 1998 1997 ------------- ------------- ---------- ---------- Federal tax (benefit) provision, at statutory rate.................. $ (5,996) $ 1,239 $ 8,572 $ 5,664 State tax (benefit) provision, net of Federal benefit............. (857) 257 1,242 1,151 Effect of foreign tax rate differences........................ 509 6 29 (33) Nontaxable investment income.......... (232) (144) (160) (532) Nondeductible goodwill and other acquisition related charges........................... 581 21 47 (99) Other................................. 442 208 528 274 -------- ------- -------- -------- Income tax (benefit) provision........ $ (5,553) $ 1,587 $ 10,258 $ 6,425 ======== ======= ======== ========
Total income tax was allocated as follows:
Seven Month For the Transition Year Ended Period Ended For the Years December 31, December 31, Ended May 31, ------------ ------------ --------------------- 1999 1998 1998 1997 -------- ------- -------- -------- (Loss) income from continuing operations.................... $ (5,553) $ 1,587 $ 10,258 $ 6,425 Items charged directly to stockholders' equity..................... (5,860) (4,956) (13,493) (11,605) -------- ------- -------- -------- Total income tax...................... $(11,413) $(3,369) $ (3,235) $ (5,180) ======== ======= ======== ========
================================================================================ Page 52 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ Deferred tax assets and liabilities were comprised of the following:
For the Years Ended December 31, -------------------------------- 1999 1998 ---- ---- Deferred tax assets: Deferred compensation and bonuses.......................... $ 4,129 $ 6,925 Net operating loss and credits............................. 1,305 3,011 Receivable valuation allowances and reserves for possible losses....................................... 1,736 2,061 Legal and other accruals................................... 1,666 3,100 Depreciation and amortization.............................. 184 1,523 Goodwill................................................... -- 1,221 Restructuring and other charges............................ 1,980 -- Other...................................................... 226 21 ------- ------- Total deferred tax assets................................. 11,226 17,862 ------- ------- Deferred tax liabilities: Prepaid expenses........................................... (882) (2,296) Capitalized software development costs..................... -- (53) Other...................................................... (375) (216) ------- ------- Total deferred tax liabilities............................ (1,257) (2,565) ------- ------- Net deferred tax asset....................................... $ 9,969 $15,297 ======= =======
(Loss) income before income taxes consisted of the following:
Seven Month For the Transition Year Ended Period Ended For the Years December 31, December 31, Ended May 31, ------------ ------------ ----------------- 1999 1998 1998 1997 ---- ---- ---- ---- United States................................................ $ (9,854) $ 7,134 $25,355 $15,413 Foreign...................................................... (7,277) (3,593) (864) 770 -------- ------- ------- ------- Total........................................................ $(17,131) $ 3,541 $24,491 $16,183 ======== ======= ======= =======
Income taxes paid during the year ended December 31, 1999, the seven month transition period ended December 31, 1998 and for the fiscal years ended May 31, 1998 and 1997 were $1,192, $6,907, $1,864 and $135, respectively. ================================================================================ Page 53 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ NOTE 9 -- LINE OF CREDIT The Company has a $10.0 million unsecured line of credit facility (the "Facility") with Bank of America. The agreement expires December 30, 2000. At the Company's election, loans made under the Facility bear interest at either the Bank of America reference rate or the applicable Eurodollar interest rate plus 0.75 percent. The unused line fee is 0.125 percent of the unused portion of the commitment. The Facility requires, among other things, the Company to maintain certain financial ratios. As of December 31, 1999, the Company was in compliance with these financial ratio requirements. There was no borrowing under the line of credit during the year ended December 31, 1999. NOTE 10 -- EXECUTIVE DEFERRED COMPENSATION PLAN Effective July 1, 1995, the Company instituted a nonqualified executive deferred compensation plan. All Company executives (defined as Vice Presidents and above) are eligible to participate in this voluntary program which permits participants to elect to defer receipt of a portion of their compensation. Deferred contributions and investment earnings are payable to participants upon various specified events, including retirement, disability or termination. The accompanying consolidated balance sheets include the deferred compensation liability, including investment earnings thereon, owed to participants. The accompanying consolidated balance sheets also include the investments, classified as trading securities, purchased by the Company with the deferred funds. These investments remain assets of the Company and are available to the general creditors of the Company in the event of the Company's insolvency. NOTE 11 -- EMPLOYEE STOCK PURCHASE PLAN The Company instituted the Technology Solutions Company 1995 Employee Stock Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan qualifies as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The Stock Purchase Plan is administered by the Compensation Committee of the Board of Directors. The Stock Purchase Plan permits eligible employees to purchase an aggregate of 1,687,500 shares of the Company's Common Stock. Shares are purchased for the benefit of the participants at the end of each three month purchase period. The number of shares of the Company's Common Stock purchased under the Stock Purchase Plan during the year ended December 31, 1999, the seven month transition period ended December 31, 1998 and fiscal 1998 and 1997 were 511,902, 181,271, 269,347 and 179,165, respectively. ================================================================================ Page 54 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ NOTE 12 -- CAPITAL STOCK During June 1999, the Company entered into an agreement with two venture capital firms whereby these venture capital firms agreed to purchase 500,000 shares of the Company's common stock. On August 13, 1999, Technology Crossover Ventures and Sutter Hill Ventures funded to the Company cash proceeds of approximately $4.5 million and the Company delivered 500,000 shares of Common Stock (the "Company Shares") to the venture capital firms. The purchase price of $9.013 per share was equal to the average last reported sales price for the ten consecutive trading days ended June 25, 1999 (the date of the agreement). Both venture capital firms have a single demand registration right with respect to the Company Shares, which expires twelve months after the date of the purchase. In November 1998, the Company announced a 2,000,000 share repurchase program. During the year ended December 31, 1999 and during the seven month transition period ended December 31, 1998 the Company repurchased 480,000 shares for $4,930 and 296,300 shares for $2,842, respectively under this plan. On October 29, 1998, the Board of Directors declared a dividend distribution of one Right for each outstanding share of the Company's Common Stock. The description and terms of the Rights are set forth in a Rights Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (see Note 17). On October 1, 1998, the Company's shareholders approved an increase in the authorized number of shares of Common Stock of the Company from 50,000,000 shares to 100,000,000 shares. On June 29, 1998, the Board of Directors declared a three-for-two stock split to be effected as a 50 percent stock dividend for stockholders of record on July 16, 1998. The stock split was effected August 10, 1998. The financial statements and the relevant share and per share data included herein have been adjusted to reflect the stock split. ================================================================================ Page 55 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ NOTE 13 -- STOCK OPTIONS On September 26, 1996, the Company's stockholders approved the Technology Solutions Company 1996 Stock Incentive Plan (the "1996 Plan"). The 1996 Plan replaced each of the Technology Solutions Company's Stock Option Plan (the "Original Plan"), the Technology Solutions Company 1992 Stock Incentive Plan (the "1992 Plan") and the Technology Solutions Company 1993 Outside Directors Stock Option Plan (the "1993 Plan" and together with the Original Plan and the 1992 Plan, the "Predecessor Plans"). With the approval of the 1996 Plan, no future awards will be made under the Predecessor Plans. Previous awards made under the Predecessor Plans are not affected. Shares subject to awards made under any of the Predecessor Plans will be available under the 1996 Plan, under certain circumstances, to the extent that such shares are not issued or delivered in connection with such awards. A total of 2,370,239 shares of the Company's Common Stock were available for grant on September 26, 1996 under the Predecessor Plans. With the approval of the 1996 Plan, these shares became available for grant under the 1996 Plan. On September 26, 1996, the stockholders also approved the addition of 2,250,000 shares to the 1996 Plan. The 1996 Plan and the Predecessor Plans authorize the grant of a variety of stock options and other awards if authorized by the Company's Board of Directors at prices not less than the fair market value at the date of grant. Options granted under the Predecessor Plans are generally exercisable beginning one year after the date of grant and are fully exercisable in three to four years from date of grant. Options granted under the 1996 Plan are generally exercisable beginning twelve months after date of grant and are fully exercisable within forty-two months from date of grant. Options available for grant were 573,220 and 1,583,934 as of December 31, 1999 and 1998, respectively. On September 4, 1998, the Compensation Committee of the Board of Directors approved the repricing of stock options issued under the 1996 Plan that had an exercise price above $10.875, the closing price of the Company's Common Stock on September 4, 1998. The repriced options have a grant date of September 4, 1998, an exercise price of $10.875 and expire ten years from the date of grant. The repriced options vest beginning one year from the date of grant and are fully exercisable in three years from the date of grant. The Company has elected to disclose the pro forma effects of SFAS No. 123, "Accounting for Stock-Based Compensation." As allowed under the provisions of this statement, the Company will continue to apply APB Opinion No. 25 and related interpretations in accounting for the stock options awarded under the Company's 1996 Plan. Accordingly, no compensation expense has been recognized for these stock options. Had compensation expense for the Company's 1996 ================================================================================ Page 56 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ Plan and Employee Stock Purchase Plan been determined consistent with SFAS No. 123, the Company's net (loss) income and (loss) earnings per share would have been reduced to the pro forma amounts indicated below:
Seven Month For the Transition Year Ended Period Ended For the Years December 31, December 31, Ended May 31, ------------- ------------- ---------------- 1999 1998 1998 1997 ------------- ------------- ------- ------- Net (loss) income: As reported: Continuing Operations.... $(11,578) $ 1,954 $14,233 $ 9,758 Discontinued Operations.. $ (1,656) $ 2,521 $ 6,787 $ 5,309 -------- ------- ------- ------- Total.................. $(13,234) $ 4,475 $21,020 $15,067 ======== ======= ======= ======= Pro forma: Continuing Operations.... $(15,214) $(1,609) $ 8,966 $ 6,984 Discontinued Operations.. $ (3,783) $ 490 $ 4,074 $ 4,034 -------- ------- ------- ------- Total.................. $(18,997) $(1,119) $13,040 $11,018 ======== ======= ======= ======= (Loss) earnings per share: As reported: Continuing Operations.... $ (0.27) $ 0.05 $ 0.37 $ 0.28 Discontinued Operations.. $ (0.04) $ 0.06 $ 0.17 $ 0.15 -------- ------- ------- ------- Total.................. $ (0.31) $ 0.11 $ 0.54 $ 0.43 ======== ======= ======= ======= Pro forma: Continuing Operations.... $ (0.36) $ (0.04) $ 0.23 $ 0.20 Discontinued Operations.. $ (0.09) $ 0.01 $ 0.11 $ 0.11 -------- ------- ------- ------- Total.................. $ (0.45) $ (0.03) $ 0.34 $ 0.31 ======== ======= ======= ======= (Loss) earnings per share assuming dilution: As reported: Continuing Operations.... $ (0.27) $ 0.04 $ 0.33 $ 0.25 Discontinued Operations.. $ (0.04) $ 0.06 $ 0.16 $ 0.13 -------- ------- ------- ------- Total.................. $ (0.31) $ 0.10 $ 0.49 $ 0.38 ======== ======= ======= ======= Pro forma: Continuing Operations.... $ (0.36) $ (0.04) $ 0.21 $ 0.18 Discontinued Operations.. $ (0.09) $ 0.01 $ 0.09 $ 0.10 -------- ------- ------- ------- Total.................. $ (0.45) $ (0.03) $ 0.30 $ 0.28 ======== ======= ======= =======
================================================================================ Page 57 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
Seven Month For the Transition Year Ended Period Ended For the Years December 31, December 31, Ended May 31, ------------- ------------- ------------------------ 1999 1998 1998 1997 ------------- ------------- ----------- ----------- Expected volatility....... 49.7%-54.2% 43.6%-49.8% 41.9%-44.1% 40.9%-51.4% Risk-free interest rates.. 4.6%-6.3% 4.1%-5.6% 5.3%-6.5% 5.3%-6.8% Expected lives............ 4.5 years 4.5 years 4.5 years 4.5 years
The Company has not paid and does not anticipate paying dividends; therefore, the expected dividend yield is assumed to be zero. ================================================================================ Page 58 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ A summary of the status of the Company's option plans is presented below:
For the Year Ended Seven Month Transition Period December 31, Ended December 31, For the Years Ended May 31, ---------------------------- ------------------------------- ------------------------------------------- 1999 1999 1998 1998 1998 1998 1997 1997 ---- ---- ---- ---- ---- ---- ---- ---- Weighted- Weighted- Weighted- Weighted- Average Average Average Average Exercise Exercise Exercise Exercise Shares Prices Shares Prices Shares Prices Shares Prices ---------- --------- ---------- --------- --------- --------- ---------- --------- Outstanding at beginning of year 9,483,316 $ 8.05 9,845,695 $ 7.71 10,157,024 $ 5.03 10,450,710 $ 3.01 Granted 2,130,863 $10.65 1,349,922 $18.58 2,466,222 $18.27 2,865,929 $10.93 Exercised (1,855,848) $ 4.96 (1,180,736) $ 3.31 (2,429,116) $18.85 (2,565,747) $15.02 Forfeited (1,120,149) $12.29 (531,565) $13.88 (348,435) $ 9.72 (593,868) $ 8.50 ---------- ---------- ---------- ---------- Outstanding at end of year 8,638,182 $ 8.87 9,483,316 $ 8.05 9,845,695 $ 7.71 10,157,024 $ 5.03 ========== ========== ========== ========== Exercisable at end of year 5,508,918 $ 7.36 6,211,300 $ 5.70 4,815,339 $ 4.81 4,288,095 $ 3.01 ========== ============ ========== ==========
================================================================================ Page 59 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ Weighted-average grant date fair value of options granted during the year:
Seven Month For the Transition Year Ended Period Ended For the December 31, December 31, Years Ended May 31, ----------- ------------ ------------------- 1999 1998 1998 1997 ---- ---- ---- ---- $5.08 $8.15 $7.90 $5.24
The following summarizes information about options outstanding as of December 31, 1999:
Options Outstanding Options Exercisable ------------------------------------- --------------------- Average Weighted- Weighted- Range of Remaining Average Average Exercise Contractual Exercise Exercise Prices Shares Life Prices Shares Prices - --------------- --------- ---------- ---------- --------- --------- $ 0.01-$ 3.00 2,335,867 9 years $ 2.27 2,335,867 $ 2.27 $ 3.01-$ 8.00 566,896 10 years $ 5.62 400,899 $ 5.06 $ 8.01-$10.00 3,090,022 8 years $ 9.06 1,446,538 $ 9.36 $10.01-$12.00 1,222,271 9 years $10.86 471,514 $10.86 $12.01-$15.00 104,495 8 years $13.90 37,938 $14.46 $15.01-$18.00 770,981 7 years $15.88 639,471 $15.88 $18.01-$23.00 407,425 9 years $21.51 176,691 $21.95 $23.01-$36.00 140,225 10 years $31.19 -- $ -- --------- --------- 8,638,182 9 years $ 8.87 5,508,918 $ 7.36 ========= =========
================================================================================ Page 60 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ IMPACT OF THE FEBRUARY 15, 2000 SPIN-OFF ON TSC OPTIONS -- At the time of the eLoyalty spin-off, TSC options were appropriately adjusted to reflect the impact of the spin-off. TSC option holders (excluding eLoyalty employees and directors) with options granted prior to June 22, 1999 had each of their options converted into both an adjusted TSC option and an eLoyalty Corporation option on a one- for-one basis. The original strike price of the TSC option was split into a strike price for (1) the adjusted TSC option and (2) the eLoyalty Corporation option based on the relative trading values of the two companies' common stock immediately after the spin. Immediately after the spin-off, TSC stock traded at 16.5278 percent of the combined value of one share of TSC stock and one share of eLoyalty stock. Accordingly, the strike price for the adjusted TSC option was set at 16.5278 percent of the original TSC option strike price while the eLoyalty option strike price was set at 83.4722 percent of the original TSC option strike price. TSC option holders (excluding eLoyalty employees and directors) with options granted subsequent to June 21, 1999 did not receive any eLoyalty Corporation options but did have their TSC options adjusted by reducing the strike price and increasing the number of options. The adjustments were calculated based on the relative trading values of TSC and eLoyalty Common Stock immediately after the spin. The adjusted strike price was determined by multiplying the original strike price by 16.5278 percent. The adjusted number of options was determined by dividing the original number of options by 16.5278 percent. eLoyalty employees and directors who held TSC options forfeited their TSC options at the time of the spin-off and, in return, received additional eLoyalty options. In all cases, the TSC and eLoyalty option adjustments described above were calculated to (1) preserve the intrinsic value of the option as well as (2) preserve the ratio of the exercise price to the fair market value of the stock subject to the option. As a net result of these adjustments, the number of TSC options outstanding increased by approximately 2.9 million at the time of the spin-off. The option share and price information contained in this footnote have not been adjusted for the effects of the February 15, 2000 spin-off. ================================================================================ Page 61 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ NOTE 14 -- BUSINESS SEGMENTS Prior to the spin-off of the eLoyalty division of TSC, the Company was organized into two business segments which each had its own business focus and service offering -- Enterprise Solutions (E-Solutions) and eLoyalty. Each served the Company's customers in the U.S. and international markets. The Company believed that a structure based on these focused business segments addressed its clients' needs for very specialized industry and systems knowledge and allowed its employees the flexibility and opportunity to grow and develop. Each business segment developed its own specific methodologies, tools, project management plans, best practice and benchmark information and templates. The E-Solutions business segment now represents TSC's continuing operations and it has specialized expertise in helping organizations access the ability of their current systems to meet the changing and often increasing demands of business. E-Solutions is a recognized leader in packaged software implementation and integration, supply chain management, e-business and knowledge management. The eLoyalty division is not a part of TSC's continuing operations. eLoyalty is a global information technology services company focused on providing enterprise- wide solutions across all customer access channels, including the Internet. Prior to the spin-off of eLoyalty, the Company evaluated the performance of its segments and allocated resources to them based partially on receivables. The receivable balances before allowance for doubtful receivables for the E- Solutions business segment was $27.8 million and $46.5 million at December 31, 1999 and 1998, respectively. Receivable balances for the eLoyalty division were $46.1 million and $27.6 million at December 31, 1999 and 1998, respectively. ================================================================================ Page 62 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ The following is revenue and long-lived asset information by geographic area (in thousands):
Net Assets of For the year ended United Foreign Discontinued December 31, 1999 States Subsidiaries Operations Total - ----------------------- -------- ------------ ------------- -------- Revenues $147,377 $ 8,943 $ -- $156,320 Identifiable assets $143,030 $ 4,996 $75,283 $223,309 Seven month transition Net Assets of period ended United Foreign Discontinued December 31, 1998 States Subsidiaries Operations Total - ----------------------- -------- ------------ ------------- -------- Revenues $121,385 $ 5,454 $ -- $126,839 Identifiable assets $190,738 $28,361 $ -- $219,099 Net Assets of For the year ended United Foreign Discontinued May 31, 1998 States Subsidiaries Operations Total - ----------------------- -------- ------------ ------------- -------- Revenues $180,890 $ 8,713 $ -- $189,603 Identifiable assets $176,949 $20,199 $ -- $197,148 Net Assets of For the year ended United Foreign Discontinued May 31, 1997 States Subsidiaries Operations Total - ----------------------- -------- ------------ ------------- -------- Revenues $114,672 $ 7,391 $ -- $122,063 Identifiable assets $117,110 $16,756 $ -- $133,866
Foreign revenue is based on the country in which the legal subsidiary is domiciled. No single foreign country's revenue was material as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," to the consolidated revenues of the Company. ================================================================================ Page 63 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ NOTE 15 -- MAJOR CLIENTS The Company's five largest clients in the year ended December 31, 1999 accounted for 4 percent, 4 percent, 4 percent, 4 percent and 3 percent of total revenues, respectively; in the seven month transition period ended December 31, 1998 the five largest clients accounted for 5 percent, 5 percent, 3 percent, 3 percent, and 3 percent of total revenues, respectively; in fiscal 1998, the five largest clients accounted for 6 percent, 4 percent, 3 percent, 3 percent, and 3 percent of total revenues, respectively; in fiscal 1997, they accounted for 11 percent, 5 percent, 5 percent, 5 percent, and 5 percent of total revenues, respectively. No client accounted for 10 percent or more of revenues during the year ended December 31, 1999, the seven month transition period ended December 31, 1998 or fiscal 1998. In fiscal 1997, The Prudential accounted for 11 percent of revenues. NOTE 16 -- LEASES The Company leases various office facilities under operating leases expiring at various dates through July 31, 2004. Additionally, the Company leases various property and office equipment under operating leases expiring at various dates. Rental expense for all operating leases approximated $7,826, $7,927 $9,789 and $3,084 for the year ended December 31, 1999, for the seven month transition period ended December 31, 1998 and for the fiscal years ended May 31, 1998 and 1997, respectively. Future minimum rental commitments under noncancelable operating leases with terms in excess of one year are as follows:
Calendar Year Amount ------------- ------ 2000............................. $3,124 2001............................. 1,116 2002............................. 509 2003............................. 289 2004............................. 168 ------ $5,206 ======
The Company had no capital leases as of December 31, 1999. ================================================================================ Page 64 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ NOTE 17 -- STOCKHOLDER RIGHTS PLAN On October 29, 1998, the Board of Directors adopted a Stockholder Rights Plan (the "Rights Plan"). The Rights Plan is intended to assure fair and equal treatment for all of the Company's stockholders in the event of a hostile takeover attempt. On February 9, 2000, the Rights Plan was amended to remove certain restrictions on the ability of the Company to redeem or amend the Rights following specified changes in the composition of the Board of Directors. Under the terms of the Rights Plan, each share of the Company's Common Stock has associated with it one Right. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share, at an exercise price of $100 (subject to adjustment). The Rights become exercisable under certain circumstances following the announcement that any person has acquired 15 percent or more of the Company's Common Stock or the announcement that any person has commenced a tender offer for 15 percent or more of the Company's Common Stock. In general, the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right at any time until ten days after any person has acquired 15 percent or more of the Company's Common Stock. The Rights will expire on October 29, 2008, unless earlier redeemed by the Company or exchanged for other shares of the Company's Common Stock. Under specified conditions, each Right will entitle the holder to purchase the Company's Common Stock at the exercise price (or if the Company is acquired in a merger or other business combination, common stock of the acquiror) having a current market value of two times the exercise price. The terms of the Rights may be amended by the Company's Board of Directors. ================================================================================ Page 65 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ NOTE 18 -- COMPREHENSIVE INCOME The Company's comprehensive income and related tax effects were as follows:
For the Year Ended Before-Tax Tax (Expense) Net-of-Tax December 31, 1999 Amount Benefit Amount - ----------------------- ----------- ------------- ----------- Change in unrealized holding loss on available-for-sale securities: Unrealized holding losses arising during the period.................. $ (86) $ 30 $ (56) Less: adjustment for gain realized in net loss............... (102) 36 (66) ----- ---- ----- Net unrealized loss................... (188) 66 (122) Cumulative translation adjustment..... 485 -- 485 ----- ---- ----- Other comprehensive income............ $ 297 $ 66 $ 363 ===== ==== =====
Seven Month Transition Period Ended Before-Tax Tax (Expense) Net-of-Tax December 31, 1998 Amount Benefit Amount - ----------------------- ----------- ------------- ----------- Change in unrealized holding loss on available-for-sale securities: Unrealized holding gains arising during the period.................. $ 38 $(14) $ 24 Less: adjustment for loss realized in net income............. 13 (4) 9 ----- ---- ----- Net unrealized gain................... 51 (18) 33 Cumulative translation adjustment..... (127) -- (127) ----- ---- ----- Other comprehensive loss.............. $ (76) $(18) $ (94) ===== ==== =====
================================================================================ Page 66 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================
For the Year Ended Before-Tax Tax (Expense) Net-of-Tax May 31, 1998 Amount Benefit Amount - ------------------ ----------- ------------- ----------- Change in unrealized holding loss on available-for-sale securities: Unrealized holding gains arising during the period.................. $ 453 $(158) $ 295 Less: adjustment for gain realized in net income............. (27) 9 (18) ----- ----- ----- Net unrealized gain................... 426 (149) 277 Cumulative translation adjustment..... (891) -- (891) ----- ----- ----- Other comprehensive loss.............. $(465) $(149) $(614) ===== ===== =====
For the Year Ended Before-Tax Tax (Expense) Net-of-Tax May 31, 1997 Amount Benefit Amount - ------------------ ----------- ------------- ----------- Change in unrealized holding loss on available-for-sale securities: Unrealized holding gains arising during the period.................. $ 505 $(178) $ 327 Less: adjustment for gain realized in net income............. (6) 2 (4) ----- ----- ----- Net unrealized gain................... 499 (176) 323 Cumulative translation adjustment..... (318) -- (318) ----- ----- ----- Other comprehensive income............ $ 181 $(176) $ 5 ===== ===== =====
NOTE 19 -- LITIGATION The Company is party to lawsuits arising out of the normal course of business. Management believes the final outcome of such litigation will not have a material adverse effect on the Company's consolidated financial position, results of operations or cashflows. ================================================================================ Page 67 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ NOTE 20 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
March 31, June 30, September 30, December 31, Quarter Ended 1999/(b)/ 1999 1999 1999/(c)/ - ------------- --------- -------- ------------- ------------- Revenues $ 46,204 $43,777 $36,278 $ 30,061 Operating (loss) income $(15,423) $ 1,170 $ 950 $ (7,394) (Loss) income from continuing operations $ (9,278) $ 1,080 $ 994 $ (4,374) Income (loss) from discontinued operations $ 2,608 $ 2,839 $ 2,358 $ (2,672) Loss on distribution of discontinued operations $ -- $ -- $ -- $ (6,789) Net (loss) income $ (6,670) $ 3,919 $ 3,352 $(13,835) ======== ======= ======= ======== (Loss) income per common share from continuing operations/(a)/ $ (0.22) $ 0.02 $ 0.03 $ (0.10) Income (loss) from discontinued operations/(a)/ $ 0.06 $ 0.07 $ 0.05 $ (0.22) -------- ------- ------- -------- Net (loss) earnings per common share/(a)/ $ (0.16) $ 0.09 $ 0.08 $ (0.32) ======== ======= ======= ======== (Loss) income per common share from continuing operations assuming dilution/(a)/ $ (0.22) $ 0.02 $ 0.03 $ (0.10) Income (loss) from discontinued operations assuming dilution/(a)/ $ 0.06 $ 0.07 $ 0.05 $ (0.22) -------- ------- ------- -------- Net (loss) earnings per common share assuming dilution/(a)/ $ (0.16) $ 0.09 $ 0.08 $ (0.32) ======== ======= ======= ========
________________ (a) All earnings per share data have been restated to reflect all of the Company's prior stock splits as of December 31, 1999. (b) Includes a restructuring charge of $10.5 million. (c) Includes restructuring and other charges of $7.0 million. ================================================================================ Page 68 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================
March 31, June 30, September 30, December 31, Quarter Ended 1998 1998 1998 1998 - ------------- --------- -------- ------------- ------------- Revenues $50,376 $57,938 $57,260 $49,567 Operating income (loss) $ 6,902 $ 7,342 $ 5,253 $(5,584) Income (loss) from continuing operations $ 4,213 $ 4,923 $ 3,682 $(2,984) Income (loss) from discontinued operations $ 2,222 $ 2,499 $ 1,427 $ 584 Net income (loss) $ 6,435 $ 7,422 $ 5,109 $(2,400) ======= ======= ======= ======= Income (loss) per common share from continuing operations/(a)/ $ 0.11 $ 0.12 $ 0.09 $ (0.08) Income from discontinued operations/(a)/ $ 0.05 $ 0.07 $ 0.04 $ 0.01 ------- ------- ------- ------- Net earnings (loss) per common share/(a)/ $ 0.16 $ 0.19 $ 0.13 $ (0.07) ======= ======= ======= ======= Income (loss) per common share from continuing operations assuming dilution/(a)/ $ 0.10 $ 0.11 $ 0.09 $ (0.08) Income per common share from discontinued operations assuming dilution/(a)/ $ 0.05 $ 0.06 $ 0.03 $ 0.01 ------- ------- ------- ------- Net earnings (loss) per common share assuming dilution/(a)/ $ 0.15 $ 0.17 $ 0.12 $ (0.07) ======= ======= ======= =======
________________ (a) All earnings per share data have been restated to reflect all of the Company's prior stock splits as of December 31, 1999. ================================================================================ Page 69 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ NOTE 21 -- OTHER EVENTS On March 30, 1999, the Company announced that it was making a number of changes to its business operations and, as a result, the Company recorded a restructuring charge of $10.5 million associated with those changes and the severance of approximately 300 people, primarily consulting personnel. The restructuring charge was determined based on a plan prepared at the time the restructuring actions were approved by management and the Board of Directors. During the year ended December 31, 1999, the Company used $9.3 million of the restructuring accrual as a result of cash paid during the year of $7.8 million associated with the severance of approximately 270 employees and $1.5 million in asset write-offs and other costs. In addition, during the quarter ended December 31, 1999 the Company recorded $7.0 million in restructuring and other costs associated with lease terminations of $3.0 million, former executive severance costs of $1.8 million, CourseNet Systems, Inc. (CourseNet) costs of $1.3 million and write-offs of other assets of $0.9 million. The restructuring accrual balance is considered adequate to cover the remaining committed restructuring actions. NOTE 22 -- SUBSEQUENT EVENTS On February 15, 2000 TSC successfully completed the spin-off of its eLoyalty division into a separate publicly traded company. Previously on January 27, 2000, TSC received a favorable ruling from the Internal Revenue Service that the spin-off of its eLoyalty division would be a tax free distribution of all of the Company's eLoyalty shares to TSC's shareholders. Operating results from eLoyalty were as follows:
Seven Month For the Transition Year Ended Period Ended For the Years December 31, December 31, Ended May 31, ------------- ------------ ---------------- 1999 1998 1998 1997 ---- ---- ---- ---- Revenues.............................. $140,465 $62,600 $82,272 $43,024 -------- ------- ------- ------- Income before income taxes............ $ 12,954 $ 5,042 $11,891 $ 8,795 Income tax provision.................. 7,821 2,521 5,104 3,486 -------- ------- ------- ------- Income from discontinued operations............ 5,133 2,521 6,787 5,309 Loss on distribution of discontinued operations before income taxes..... (7,336) -- -- -- Income tax benefit.................... (547) -- -- -- -------- ------- ------- ------- Loss on distribution of discontinued operations............ (6,789) -- -- -- -------- ------- ------- ------- Total (loss) income from discontinued operations............ $ (1,656) $ 2,521 $ 6,787 $ 5,309 ======== ======= ======= =======
================================================================================ Page 70 Technology Solutions Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) ================================================================================ The $6.8 million loss on distribution of discontinued operations represents fees and other costs related to the eLoyalty transaction and the net loss incurred by eLoyalty from January 1, 2000 through February 15, 2000. The net assets of discontinued operations of $74,462 as of December 31, 1999 consists of current assets of $77,915, non-current assets of $18,688, current liabilities of $22,988 and accumulated other comprehensive loss of $847. In addition in connection with the spin-off, on February 15, 2000, Technology Crossover Ventures and Sutter Hill Ventures purchased from eLoyalty Corporation 2.5 million common shares for $8.4 million. TSC also has provided a short-term guarantee for a $10.0 million revolving credit facility entered into by eLoyalty with Bank of America. TSC received a fee from eLoyalty. The guarantee will terminate on December 30, 2000. ================================================================================ Page 71 Technology Solutions Company ================================================================================ Schedule II - Valuation and Qualifying Accounts For the Year Ended December 31, 1999, the Seven Month Transition Period Ended December 31, 1998 and for the Years Ended May 31, 1998 and 1997 (In thousands)
Balance at Net Assets of Balance at Description of beginning Discontinued end of Allowance and Reserves of year Operations Additions Deductions year - ---------------------- ---------- ---------- --------- ---------- ---------- May 31, 1997 - ------------ Valuation allowances and receivable reserves for potential losses $1,870 -- $2,712 $(1,236) $3,346 ====== ====== ======= ====== May 31, 1998 - ------------ Valuation allowances and receivable reserves for potential losses $3,346 -- $1,897 $(1,997) $3,246 ====== ====== ======= ====== December 31, 1998 - ----------------- Valuation allowances and receivable reserves for potential losses $3,246 -- $2,913 $(1,314) $4,845 ====== ====== ======= ====== December 31, 1999 - ----------------- Valuation allowances and receivable reserves for potential losses $4,845 $(2,084) $5,909 $(4,955) $3,715 ====== ======= ====== ======= ======
================================================================================ Page 72 Technology Solutions Company PART IV. (CONTINUED) ================================================================================ ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) Item 14(a)(3) Exhibits - ----------------------- The following documents are filed herewith or incorporated by reference and made a part of this Report. Exhibit # Description of Document - --------- ----------------------- 2.1* Reorganization Agreement with eLoyalty Corporation. 3(i) Restated Certificate of Incorporation of Technology Solutions Company, filed as Exhibit 3(i) to TSC's Quarterly Report on Form 10-Q for the quarter ended November 30, 1998, is hereby incorporated by reference. 3(ii) Bylaws of TSC, as amended, filed as Exhibit 3 to TSC's Current Report on Form 8-K dated November 22, 1998, is hereby incorporated by reference. 4.1* Certificate of Designation of Series A Junior Participating Preferred Stock. 4.2 Rights Agreement with ChaseMellon Shareholder Services, L.L.C., filed as exhibit 4 to TSC's current report on Form 8-K dated October 29, 1998, is hereby incorporated by reference. 4.3* First Amendment to Rights agreement with ChaseMellon Shareholder Services, L.L.C. 10.01 Technology Solutions Company Original Option Plan, as amended, filed as Exhibit 10.02 to TSC's Annual Report on Form 10-K for the fiscal year ended May 31, 1992, is hereby incorporated by reference. 10.02 Technology Solutions Company 1992 Stock Incentive Plan, filed as Exhibit 10.03 to TSC's Annual Report on Form 10-K for the fiscal year ended May 31, 1992, is hereby incorporated by reference. ______________ *Filed herewith ================================================================================ Page 73 Technology Solutions Company PART IV. (CONTINUED) ================================================================================ ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) Item 14(a)(3) Exhibits (Continued) - ---------------------------------- 10.03 1993 Outside Directors Stock Option Plan, as amended, filed as Exhibit 10.05 to TSC's Annual Report on Form 10-K for the fiscal year ended May 31, 1994, is hereby incorporated by reference. 10.04 The Bentley Company Stock Option Plan, as amended, filed as Exhibits 4.4 and 4.5 to TSC's Registration Statement on Form S-8 filed July 16, 1997, is hereby incorporated by reference. 10.05 Technology Solutions Company 1996 Stock Incentive Plan, as amended, filed as Exhibit 4.3 to TSC's Registration Statement on Form S-8 filed July 16, 1997, is hereby incorporated by reference. 10.06 Employment Agreement of William H. Waltrip, filed as Exhibit 10.06 to TSC's Annual Report on Form 10-K for the fiscal year ended May 31, 1996, is hereby incorporated by reference. 10.07 Employment Agreement of John T. Kohler, filed as Exhibit 10.07 to TSC's Annual Report on Form 10-K for the fiscal year ended May 31, 1996, is hereby incorporated by reference. 10.08 Employment Agreement of Paul R. Peterson, filed as Exhibit 10.11 to TSC's Annual Report on Form 10-K for the fiscal year ended May 31, 1998, is hereby incorporated by reference. 10.09 Extension of Promissory Note of John T. Kohler, filed as Exhibit 10.13 to TSC's Transition Report on Form 10-K for the seven month transition period ended December 31, 1998, is hereby incorporated by reference. 10.10 Employment Agreement of Jack N. Hayden, filed as Exhibit 10.09 to TSC's Annual Report on Form 10-K for the fiscal year ended May 31, 1996, is hereby incorporated by reference. 10.11 Letter of Understanding with Jack N. Hayden, filed as Exhibit 10.14 to TSC's Annual Report on Form 10-K for the fiscal year ended May 31, 1998, is hereby incorporated by reference. ================================================================================ Page 74 Technology Solutions Company PART IV. (CONTINUED) ================================================================================ ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (Continued) Item 14(a)(3) Exhibits (Continued) - ---------------------------------- 10.12* Separation Agreement and Limited Mutual Release from Employment Agreement with John T. Kohler. 10.13* Letter Agreement with Jack N. Hayden. 10.14* Employment Agreement Amendment with Jack N. Hayden. 10.15* Employment Agreement Amendment with Paul R. Peterson. 10.16* Employment Agreement with Timothy P. Dimond. 10.17* Employment Agreement Amendment with Timothy P. Dimond. 10.18* Shared Services Agreement with Eloyalty Corporation. 21* Subsidiaries of the Company. 23* Consent of PricewaterhouseCoopers LLP. 27* Financial Data Schedule Exhibits 10.01 through 10.17 listed above are the management contracts and compensatory plans or arrangements required to be filed as exhibits hereto pursuant to the requirements of Item 601 of Regulation S-K. Item 14(b) Reports on Form 8-K - -------------------------------- During the quarter ended December 31, 1999, the Company did not file any reports on Form 8-K. ______________ *Filed herewith ================================================================================ Page 75 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 23rd day of March 2000. TECHNOLOGY SOLUTIONS COMPANY By: /s/ TIMOTHY P. DIMOND ----------------------- Timothy P. Dimond Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant, in the capacities and on the date indicated. Signature --------- /s/ WILLIAM H. WALTRIP (March 23, 2000) Chairman, - ----------------------------------------------- William H. Waltrip Officer and Director /s/ JACK N. HAYDEN (March 23, 2000) President, Chief Executive - ----------------------------------------------- Jack N. Hayden Officer and Director /s/ TIMOTHY P. DIMOND (March 23, 2000) Chief Financial Officer and - ----------------------------------------------- Timothy P. Dimond Principal Accounting Officer /s/ RAYMOND P. CALDIERO (March 23, 2000) Director - ----------------------------------------------- Raymond P. Caldiero /s/ STEPHEN B. ORESMAN (March 23, 2000) Director - ----------------------------------------------- Stephen B. Oresman /s/ MICHAEL R. ZUCCHINI (March 23, 2000) Director - ----------------------------------------------- Michael R. Zucchini (Being the principal executive officers, the principal financial and accounting officers and a majority of the directors of Technology Solutions Company). ================================================================================ Page 76 EX-2.1 2 REORGANIZATION AGREEMENT EXHIBIT 2.1 ----------- REORGANIZATION AGREEMENT Dated as of February 15, 2000 by and between TECHNOLOGY SOLUTIONS COMPANY and eLOYALTY CORPORATION TABLE OF CONTENTS ----------------- Page ---- ARTICLE I - DEFINITIONS AND INTERPRETATION................................. 2 1.1. Definitions................................................... 2 1.2. Interpretation................................................ 9 ARTICLE II - THE DISTRIBUTION.............................................. 10 2.1. Issuance and Delivery of eLoyalty Shares...................... 10 2.2. Distribution of eLoyalty Shares............................... 10 2.3. TSC Board Action.............................................. 11 2.4. Additional Approvals.......................................... 11 ARTICLE III - FORMATION OF ELOYALTY/CORPORATE GOVERNANCE................... 11 3.1. Certificate of Incorporation of eLoyalty...................... 11 3.2. By-laws....................................................... 11 3.3. Election of Board of Directors................................ 11 3.4. Appointment of Officers....................................... 12 3.5. Capital Stock of eLoyalty..................................... 12 3.6. Name Reservations and Registrations........................... 12 3.7. Foreign Qualifications........................................ 12 3.8. Corporate Seal................................................ 12 3.9. Adoption of Stockholders Rights Plan.......................... 12 ARTICLE IV - ASSET SEPARATION.............................................. 13 4.1. Transfer of Assets............................................ 13 4.2. Assumption of Liabilities..................................... 16 4.3. Retained Assets............................................... 17 4.4. Retained Liabilities.......................................... 18 4.5. Termination of Existing Intercompany Agreements............... 18 4.6. Shared Contracts.............................................. 18 ARTICLE V - ASSET SEPARATION CLOSING MATTERS............................... 19 5.1. Delivery of Instruments of Conveyance......................... 19 5.2. Delivery of Other Agreements.................................. 19 5.3. Provision of Corporate Records................................ 19 ARTICLE VI - NO REPRESENTATIONS AND WARRANTIES............................. 19 ARTICLE VII - CERTAIN COVENANTS............................................ 20 7.1. Third Party Consents.......................................... 20 7.2. Material Governmental Approvals and Consents.................. 20 -i- 7.3. Non-Assignable Contracts...................................... 20 7.4. Novation of Assumed Liabilities............................... 21 7.5. Further Assurances............................................ 22 7.6. Nominee Shares................................................ 22 7.7. Collection of Accounts Receivable............................. 23 7.8. Election of eLoyalty Board of Directors....................... 23 7.9. Late Payments................................................. 23 7.10. Registration and Listing...................................... 24 7.11. No Noncompetition; Nonhiring; Nonsolicitation................. 24 7.12. Litigation.................................................... 25 7.13. eLoyalty Bank Accounts........................................ 25 7.14. Signs; Use of Company Name.................................... 25 7.15. Reasonable Efforts............................................ 26 7.16. Use of Transferred Intellectual Property...................... 26 ARTICLE VIII - CONDITIONS TO THE DISTRIBUTION.............................. 26 8.1. Approval by TSC Board of Directors............................ 26 8.2. Receipt of IRS Private Letter Tax Ruling...................... 26 8.3. Compliance with State and Foreign Securities and.............. 27 8.4. SEC Filings and Approvals..................................... 27 8.5. Filing and Effectiveness of Registration Statement; No Stop Order.................................................... 27 8.6. Dissemination of Information to TSC Stockholders.............. 27 8.7. Approval of NASDAQ Listing Application........................ 27 8.8. Receipt of Viability and Fairness Opinion of Financial Advisor....................................................... 27 8.9. Operating Agreements.......................................... 27 8.10. Resignations.................................................. 27 8.11. Consents...................................................... 27 8.12. No Actions.................................................... 28 8.13. Consummation of Pre-Distribution Transactions................. 28 8.14. No Other Events............................................... 28 8.15. Satisfaction of Conditions.................................... 28 ARTICLE IX - EMPLOYEES AND EMPLOYEE BENEFIT MATTERS........................ 28 9.1. Employment of eLoyalty Employees.............................. 28 9.2. Severance..................................................... 29 9.3. Withdrawal from Participation in TSC Plans and Establishment of eLoyalty Plans............................... 29 9.4. Transfer of Savings Plan Account Balances..................... 29 9.5. Welfare Benefits Provided Under eLoyalty Plans................ 29 9.6. Stock Purchase Plans.......................................... 30 9.7. Deferred Compensation Plan.................................... 30 9.8. Stock Options................................................. 31 9.9. Workers' Compensation......................................... 32 -ii- 9.10. WARN Act...................................................... 32 9.11. Information to be Provided to TSC............................. 32 ARTICLE X - INSURANCE MATTERS.............................................. 32 10.1. Insurance Prior to the Distribution Date...................... 32 10.2. Ownership of Existing Policies and Programs................... 33 10.3. Procurement of Insurance for eLoyalty......................... 33 10.4. Acquisition and Maintenance of Post-Distribution eLoyalty Insurance Policies and Programs...................... 33 10.5. eLoyalty Directors' and Officers' Insurance................... 34 10.6. Post-Distribution Insurance Claims Administration............. 34 10.7. Certain Adjustments........................................... 35 10.8. Non-Waiver of Rights to Coverage.............................. 35 10.9. Scope of Affected Policies of Insurance....................... 36 ARTICLE XI - EXPENSES...................................................... 36 11.1. Allocation of Expenses........................................ 36 ARTICLE XII - INDEMNIFICATION.............................................. 37 12.1. Release of Pre-Distribution Claims............................ 37 12.2. Indemnification by eLoyalty................................... 38 12.3. Indemnification by TSC........................................ 39 12.4. Applicability of and Limitation on Indemnification............ 40 12.5. Adjustment of Indemnifiable Losses............................ 40 12.6. Procedures for Indemnification of Third Party Claims.......... 42 12.7. Procedures for Indemnification of Direct Claims............... 44 12.8. Contribution.................................................. 44 12.9. Remedies Cumulative........................................... 44 12.10. Survival...................................................... 45 ARTICLE XIII - DISPUTE RESOLUTION.......................................... 45 13.1. Agreement to Arbitrate........................................ 45 13.2. Escalation and Mediation...................................... 45 13.3. Procedures for Arbitration.................................... 46 13.4. Selection of Arbitrator....................................... 47 13.5. Hearings...................................................... 47 13.6. Discovery and Certain Other Matters........................... 47 13.7. Certain Additional Matters.................................... 48 13.8. Continuity of Service and Performance......................... 49 13.9. Law Governing Arbitration Procedures.......................... 49 13.10. Choice of Forum............................................... 49 -iii- ARTICLE XIV - ACCESS TO INFORMATION AND SERVICES........................... 49 14.1. Agreement for Exchange of Information......................... 49 14.2. Ownership of Information...................................... 50 14.3. Compensation for Providing Information........................ 50 14.4. Retention of Records.......................................... 50 14.5. Limitation of Liability....................................... 51 14.6. Production of Witnesses....................................... 51 14.7. Confidentiality............................................... 51 14.8. Privileged Matters............................................ 52 ARTICLE XV - MISCELLANEOUS................................................. 53 15.1. Entire Agreement.............................................. 53 15.2. Choice of Law and Forum....................................... 53 15.3. Amendment..................................................... 53 15.4. Waiver........................................................ 53 15.5. Partial Invalidity............................................ 54 15.6. Execution in Counterparts..................................... 54 15.7. Successors and Assigns........................................ 54 15.8. Third Party Beneficiaries..................................... 54 15.9. Notices....................................................... 54 15.10. Performance................................................... 55 15.11. Force Majeure................................................. 55 15.12. No Public Announcement........................................ 55 15.13. Termination................................................... 56 -iv- EXHIBITS - -------- Exhibit A - eLoyalty Business Exhibit B-1 - Form of TSC Intellectual Property License Agreement Exhibit B-2 - Form of eLoyalty Intellectual Property License Agreement Exhibit C - Form of Shared Services Agreement Exhibit D - Form of Tax Sharing and Disaffiliation Agreement Exhibit E - Form of Stockholder Rights Plan Exhibit F - Balance Sheet Assets Exhibit G - eLoyalty Board of Directors Exhibit H - List of Mediators SCHEDULES - --------- Schedule 4.1(d) - Real Estate Leases Schedule 4.1(e) - Personal Property Leases Schedule 4.1(f) - Intellectual Property Schedule 4.1(g)(i) - Contracts Related to Acquisitions or Divestitures Schedule 4.1(g)(ii) - Service, License, Maintenance and Support Contracts Schedule 4.1(g)(iii) - Supplier Contracts Schedule 4.1(g)(iv) - Joint Development and Alliance Contracts Schedule 4.1(g)(v) - Third-Party Service Contracts Schedule 4.1(g)(vi) - Telecommunications Contracts Schedule 4.1(j) - Subsidiaries, Joint Ventures and Minority Interests Schedule 4.1(m) - Trademarks Schedule 4.1(n) - Loans to Transferred Employees Schedule 4.1(o) - Industry Awards Schedule 4.5 - Surviving Intercompany Agreements Schedule 7.13 - eLoyalty Bank Accounts Schedule 9.1 - Transferred Employees -v- REORGANIZATION AGREEMENT ------------------------- REORGANIZATION AGREEMENT, dated as of February 15, 2000, by and between Technology Solutions Company, a Delaware corporation ("TSC"), and --- eLoyalty Corporation, a Delaware corporation ("eLoyalty") and, as of the date -------- hereof, a wholly-owned Subsidiary (as hereinafter defined) of TSC. WHEREAS, TSC provides, inter alia, information technology consulting ----- ---- and strategic business consulting services that help clients improve operations, transform customer relationships and build and enhance customer loyalty (as more fully described in Exhibit A hereto, the "eLoyalty Business"); --------- ----------------- WHEREAS, the Board of Directors of TSC has determined that it would be advisable and in the best interests of TSC and its stockholders for TSC to transfer to eLoyalty the business, operations, assets and liabilities related to the eLoyalty Business; WHEREAS, TSC has agreed to transfer and assign, or cause to be transferred and assigned, to eLoyalty substantially all of the assets and properties of the eLoyalty Business held by TSC and/or one or more of its Subsidiaries, and eLoyalty has agreed to assume, or cause to be assumed by one or more of its Subsidiaries, certain liabilities and obligations arising out of or relating to the eLoyalty Business (collectively, the "Contribution"); ------------ WHEREAS, the Board of Directors of TSC has determined that it would be advisable and in the best interests of TSC and its stockholders for TSC to distribute on a pro-rata basis to the holders of record of TSC common stock, par value $.01 per share (the "TSC Common Stock"), without any consideration being ---------------- paid by such holders, all of the outstanding shares of eLoyalty common stock, par value $.01 per share (the "eLoyalty Common Stock") owned directly and --------------------- indirectly by TSC (the "Distribution"); ------------ WHEREAS, for federal income tax purposes, the Contribution and Distribution are intended to qualify for tax-free treatment under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code"); ---- and WHEREAS, it is appropriate and desirable to set forth the principal corporate transactions required to effect the Contribution and Distribution and certain other agreements that will govern the relationship of TSC and eLoyalty following the Distribution; NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, TSC and eLoyalty agree as follows: ARTICLE I DEFINITIONS AND INTERPRETATION ------------------------------ 1.1. Definitions. In this Agreement, the following terms have the ----------- meanings specified or referred to in this Section 1.1: ----------- "Action" means any action, claim, suit, arbitration, inquiry, ------ subpoena, discovery request, proceeding or investigation by or before any court or grand jury, any governmental or other regulatory or administrative entity, agency or commission or any arbitration tribunal. "Affiliate" means, with respect to any Person, any other Person that --------- directly or indirectly controls, is controlled by or is under common control with such Person. For the purpose of this definition, the term "control" means the power to direct the management of an entity, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the term "controlled" has the meaning correlative to the foregoing. After the Distribution Date, eLoyalty and TSC shall not be deemed to be under common control for purposes hereof due solely to the fact that eLoyalty and TSC have common stockholders. "Applicable Deadline" has the meaning specified in Section 13.3(b). ------------------- --------------- "Arbitration Act" means the United States Arbitration Act, 9 U.S.C. --------------- (S)(S)1-16, as the same may be amended from time to time. "Arbitration Demand Date" has the meaning specified in Section ----------------------- ------- 13.3(a). "Arbitration Demand Notice" has the meaning specified in Section ------------------------- ------- 13.3(a). - ------- "Asset Transfer Date" means the date determined by the Board of ------------------- Directors of TSC as the date on which the Transferred Assets are transferred to eLoyalty. "Assumed Actions" has the meaning specified in Section 7.12(a). --------------- --------------- "Assumed Liabilities" has the meaning specified in Section 4.2. ------------------- ----------- "Balance Sheet" has the meaning specified in Section 4.1(a). ------------- -------------- "Board of Directors" means the board of directors of the referenced ------------------ corporation or any duly authorized committee thereof. "Code" has the meaning specified in the sixth paragraph of this ---- Agreement. "Combined Value" has the meaning specified in Section 9.8(a). -------------- -------------- -2- "Contracts" has the meaning specified in Section 4.1(g). --------- -------------- "Contribution" has the meaning specified in the fourth paragraph of ------------ this Agreement. "Conveyancing Instruments" has the meaning specified in Section 5.1. ------------------------ ----------- "Copyrights" means United States and foreign copyrights, both ---------- registered and unregistered, along with the registrations and applications to register any such copyrights. "Distribution" has the meaning specified in the fifth paragraph of ------------ this Agreement. "Distribution Date" means the date determined by the Board of ----------------- Directors of TSC as the date on which the eLoyalty Shares are distributable to holders of record of TSC Common Stock as of the Record Date. "eLoyalty" has the meaning specified in the first paragraph of this -------- Agreement. "eLoyalty Business" has the meaning specified in the second paragraph ----------------- of this Agreement. "eLoyalty Common Stock" has the meaning specified in the fifth --------------------- paragraph of this Agreement. "eLoyalty Deferred Compensation Plan" has the meaning specified in ----------------------------------- Section 9.3(b). - -------------- "eLoyalty Distributable Share" means one (1) eLoyalty Share. ---------------------------- "eLoyalty Indemnified Parties" has the meaning specified in Section ---------------------------- ------- 12.3. - ---- "eLoyalty Savings Plan" has the meaning specified in Section 9.3(b). --------------------- -------------- "eLoyalty Share" means one share of eLoyalty Common Stock. -------------- "eLoyalty Value" has the meaning specified in Section 9.8(a). -------------- -------------- "Escalation Notice" has the meaning specified in Section 13.2(a). ----------------- --------------- "Exchange Act" means the Securities Exchange Act of 1934, as amended ------------ (together with the rules and regulations promulgated thereunder). -3- "Expenses" means any and all expenses incurred in connection with -------- investigating, defending or asserting any claim, action, suit or proceeding incident to any matter indemnified against hereunder (including court filing fees, court costs, arbitration fees or costs, witness fees, and reasonable fees and disbursements of legal counsel, investigators, expert witnesses, consultants, accountants and other professionals). "Foreign Exchange Rate" means, with respect to any currency other than --------------------- United States dollars, as of any date of determination, the average of the opening bid and asked rates on such date at which such currency may be exchanged for United States dollars as quoted by Bank of America, N.A. "Governmental Authority" means any foreign, federal, state, local or ---------------------- other government, governmental, statutory or administrative authority, regulatory body or commission or any court, tribunal or judicial or arbitral body. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of ------- 1976, as amended, and the regulations promulgated thereunder. "Indemnified Party" has the meaning specified in Section 12.5(a). ----------------- --------------- "Indemnifying Party" has the meaning specified in Section 12.5(a). ------------------ --------------- "Indemnity Payment" has the meaning specified in Section 12.5(a). ----------------- --------------- "Information" has the meaning specified in Section 14.1(a). ----------- --------------- "Information Statement" has the meaning specified in Section 7.10(a). --------------------- --------------- "Insurance Amount" has the meaning specified in Section 10.5. ---------------- ------------ "Insurance Charges" has the meaning specified in Section 10.6. ----------------- ------------ "Insurance Policies" means the insurance policies written by insurance ------------------ carriers unaffiliated with TSC pursuant to which eLoyalty or one or more of its Subsidiaries (or their respective officers or directors) will be insured parties after the Distribution Date. "Insurance Proceeds" means those monies (i) received by an insured ------------------ from an insurance carrier, (ii) paid by an insurance carrier on behalf of the insured or (iii) received from any third Person in the nature of insurance, contribution or indemnification in respect of any Liability, in each such case net of any applicable premium adjustments (including reserves and retrospectively-rated premium adjustments) and net of any costs or expenses (including allocated costs of in-house counsel and other personnel) incurred in the collection thereof. -4- "Insured Claims" means those Liabilities that, individually or in the -------------- aggregate, are covered within the terms and conditions of any of the TSC Policies, whether or not subject to deductibles, co-insurance, uncollectability, premium adjustments (including reserves), retrospectively-rated premium adjustments or retentions, but only to the extent that such Liabilities are within applicable TSC Policy limits, including aggregates and deductibles. "Intellectual Property License Agreements" means the TSC and eLoyalty ---------------------------------------- intellectual property license agreements in substantially the forms of Exhibits -------- B-1 and B-2 hereto. - --- --- "Intercompany Agreements" means any Contract between TSC and eLoyalty ----------------------- entered into prior to the Distribution Date. "Interfaces" means software that creates interfaces between the ---------- Software and third-party software programs. "Investors" has the meaning specified in Section 3.3. --------- ----------- "IRS" means the Internal Revenue Service. --- "Liability" means any and all debts, liabilities and obligations, --------- absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising (unless otherwise specified in this Agreement), including all costs and expenses relating thereto, and including, without limitation, those debts, liabilities and obligations arising under any law, rule, regulation, Action, threatened Action, order or consent decree of any Governmental Authority or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. "Losses" means any and all losses, costs, obligations, liabilities, ------ settlement payments, awards, judgments, fines, penalties, damages, fees, expenses, deficiencies, claims or other charges, absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown (including, without limitation, the costs and expenses of any and all Actions, threatened Actions, demands, assessments, judgments, settlements and compromises relating thereto and attorneys' fees and any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any such Actions or threatened Actions). "Material Governmental Approvals and Consents" means any material -------------------------------------------- notices, reports or other filings to be made with or to, or any consents, registrations, approvals, permits, clearances or authorizations to be obtained from, any Governmental Authority. "Methodologies" means methodologies, architectures, processes, ------------- algorithms and technologies, including, without limitation, all related trade secrets and know-how. -5- "NASDAQ" means The NASDAQ Stock Market's National Market System or any ------ successor thereto. "Non-Permitted Names" has the meaning specified in Section 7.14. ------------------- ------------ "Operating Agreements" means the Intellectual Property License -------------------- Agreements, the Tax Sharing Agreement, the Shared Services Agreement and any other agreement regarding the ongoing business and service relationships between TSC and eLoyalty and their respective Subsidiaries and Affiliates following the Distribution. "Party" means TSC or eLoyalty. ----- "Patents" means United States and foreign patents and applications for ------- patents, including any continuations, continuations-in-part, divisions, renewals, reissues and extensions thereof. "Person" means any individual, corporation, partnership, joint ------ venture, limited liability company, association, joint-stock company, trust, unincorporated organization or Governmental Authority. "Personal Property Leases" has the meaning specified in Section ------------------------ ------- 4.1(e). "Prime Rate" means the rate that Bank of America, N.A. (or any ---------- successor thereto or other major money center commercial bank agreed to by the Parties) announces from time to time as its prime lending rate, as in effect from time to time. "Privilege" or "Privileges" has the meaning specified in Section --------- ---------- ------- 14.8(a). - ------- "Privileged Information" has the meaning specified in Section 14.8(a). ---------------------- --------------- "Purchase Agreement" has the meaning specified in Section 3.3. ------------------ ----------- "Real Estate Leases" has the meaning specified in Section 4.1(d). ------------------ -------------- "Receivables" has the meaning specified in Section 4.1(b)(i). ----------- ----------------- "Record Date" means the date determined by the Board of Directors of ----------- TSC as the record date for determining stockholders of TSC entitled to receive shares of eLoyalty Common Stock in the Distribution. "Registration Statement" has the meaning specified in Section 7.10(a). ---------------------- --------------- "Retained Assets" has the meaning specified in Section 4.3. --------------- ----------- -6- "Retained Business" means those portions of the business of TSC and ----------------- its current Subsidiaries that are not part of the eLoyalty Business. "Retained Liabilities" has the meaning specified in Section 4.4. -------------------- ----------- "Rights Plan" has the meaning specified in Section 3.9. ----------- ----------- "SEC" means the United States Securities and Exchange Commission. --- "Securities Act" means the Securities Act of 1933, as amended -------------- (together with the rules and regulations promulgated thereunder). "Security Interest" means any mortgage, security interest, pledge, ----------------- lien, charge, claim, option, right to acquire, voting or other restriction, right-of-way, covenant, condition, easement, encroachment, restriction on transfer or other encumbrance of any nature whatsoever. "Shared Contract" means a Contract with a third Person that directly --------------- benefits both TSC and eLoyalty. "Shared Contractual Liabilities" mean Liabilities in respect of Shared ------------------------------ Contracts. "Shared Services Agreement" means the shared services agreement in ------------------------- substantially the form of Exhibit C hereto. --------- "Software" means computer software programs, in source code and object -------- code form, including, without limitation, all related source diagrams, flow charts, specifications, documentation and all other materials and documentation necessary to allow a reasonably skilled third-party programmer or technician to maintain, support or enhance the Software. "Subsidiary" means, when used with reference to any Person, any ---------- corporation or other organization whether incorporated or unincorporated of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however, that no Person that is not -------- ------- directly or indirectly wholly-owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person. "Tax" (and, with correlative meaning, "Taxes" and "Taxable") means: --- ----- ------- (i) any federal, state, local or foreign net income, gross income, gross receipts, windfall profit, severance, property, production, sales, use, license, -7- excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, value-added, transfer, stamp, or environmental tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, addition to tax or additional amount imposed by any Governmental Authority; and (ii) any Liability of either Party for the payment of amounts with respect to payments of a type described in clause (i) as a result of being a member of an affiliated, consolidated, combined or unitary group, or as a result of any obligation of either Party under any Tax sharing arrangement or Tax indemnity arrangement. "Tax Sharing Agreement" means the Tax Sharing and Disaffiliation --------------------- Agreement in substantially the form of Exhibit D hereto. --------- "Third Party Claim" has the meaning specified in Section 12.6(a). ----------------- --------------- "Third Party Consents" has the meaning specified in Section 7.1. -------------------- ----------- "Trademarks" has the meaning specified in Section 4.1(m). ---------- -------------- "Transfer Agent" means ChaseMellon Shareholder Services, L.L.C., the -------------- transfer agent appointed by TSC to distribute shares of eLoyalty Common Stock pursuant to the Distribution. "Transferred Actions" has the meaning specified in Section 7.12(b). ------------------- --------------- "Transferred Assets" has the meaning specified in Section 4.1. ------------------ ----------- "Transferred Employees" has the meaning specified in Section 9.1. --------------------- ----------- "Transferred Intellectual Property" has the meaning specified in --------------------------------- Section 4.1(f). - -------------- "TSC" has the meaning specified in the first paragraph of this --- Agreement. "TSC Common Stock" has the meaning specified in the fifth paragraph of ---------------- this Agreement. "TSC Deferred Compensation Plan" has the meaning specified in Section ------------------------------ ------- 9.7. - --- "TSC Indemnified Parties" has the meaning specified in Section ----------------------- ------- 12.2(a). "TSC Plans" has the meaning specified in Section 9.3(a). --------- -------------- -8- "TSC Policy" and "TSC Policies" have the meanings specified in Section ---------- ------------ ------- 10.2. - ---- "TSC Savings Plan" has the meaning specified in Section 9.4. ---------------- ----------- "TSC Value" has the meaning specified in Section 9.8(b). --------- -------------- "Voting Stock" means all of the capital stock of eLoyalty entitled to ------------ vote generally in the election of directors but excluding any class or series of capital stock entitled to vote only in the event of dividend arrearages thereon, whether or not at the time of determination there are any such dividend arrearages. "WARN Act" has the meaning specified in Section 9.10. -------- ------------ 1.2. Interpretation. (a) In this Agreement, unless the context -------------- clearly indicates otherwise: (i) words used in the singular include the plural and words in the plural include the singular; (ii) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement; (iii) reference to any gender includes the other gender; (iv) the word "including" means "including but not limited to"; (v) reference to any Article, Section, Exhibit or Schedule means such Article or Section of, or such Exhibit or Schedule to, this Agreement, as the case may be, and references in any Section or definition to any clause means such clause of such Section or definition; (vi) the words "herein," "hereunder," "hereof," "hereto" and words of similar import shall be deemed references to this Agreement as a whole and not to any particular Section or other provision hereof; (vii) reference to any agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and by this Agreement; (viii) reference to any law (including statutes and ordinances) means such law (including all rules and regulations promulgated thereunder) as amended, modified, codified or reenacted, in whole or in part, and in effect at the time of determining compliance or applicability; -9- (ix) relative to the determination of any period of time, "from" means "from and including," "to" means "to but excluding" and "through" means "through and including"; (x) accounting terms used herein shall have the meanings historically ascribed to them by TSC and its Subsidiaries based upon TSC's internal financial policies and procedures in effect prior to the date of this Agreement; (xi) in the event of any conflict between the provisions of the body of this Agreement and the Exhibits or Schedules hereto, the provisions of the body of this Agreement shall control; and (xii) the titles to Articles and headings of Sections contained in this Agreement have been inserted for convenience of reference only and shall not be deemed to be a part of or to affect the meaning or interpretation of this Agreement. (b) This Agreement was negotiated by the Parties with the benefit of legal representation, and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against either Party shall not apply to any construction or interpretation hereof. ARTICLE II THE DISTRIBUTION ---------------- 2.1. Issuance and Delivery of eLoyalty Shares. eLoyalty shall issue ---------------------------------------- to TSC the number of eLoyalty Shares required so that the total number of eLoyalty Shares held by TSC on the Distribution Date is equal to the total number of eLoyalty Shares distributable pursuant to Section 2.2. TSC shall ----------- deliver to the Transfer Agent one or more stock certificates representing all of the eLoyalty Shares held by TSC, together with one or more stock power(s) duly endorsed in blank. The Transfer Agent will then transfer and distribute such shares in the manner described in Section 2.2 below. ----------- 2.2. Distribution of eLoyalty Shares. eLoyalty shall provide to the ------------------------------- Transfer Agent sufficient certificates in such denominations as the Transfer Agent may request in order to effect the Distribution. TSC shall instruct the Transfer Agent (i) to distribute to all holders of record of TSC Common Stock as of the Record Date the eLoyalty Distributable Share for each share of TSC Common Stock outstanding and held of record by such holder as of the Record Date, and (ii) to deliver to eLoyalty, as a contribution to eLoyalty, all of the remaining eLoyalty Shares, if any, then held by the Transfer Agent. Any such returned eLoyalty Shares shall be canceled immediately by eLoyalty, and the Board of Directors of eLoyalty shall take appropriate action so that such returned shares shall not constitute treasury shares. All of the distributed -10- eLoyalty Shares shall be validly issued, fully paid and nonassessable and shall be free of any preemptive rights. 2.3. TSC Board Action. The Board of Directors of TSC shall, in its ---------------- sole discretion, determine the Record Date and the Distribution Date and all appropriate procedures in connection with the Distribution. The Board of Directors of TSC also shall have the right to adjust at any time prior to the Distribution Date the eLoyalty Distributable Share. The consummation of the transactions provided for in this Article II shall be effected only after the ---------- Distribution has been declared by the Board of Directors of TSC and after all of the conditions set forth in Article VIII hereof shall have been satisfied or ------------ waived by TSC. 2.4. Additional Approvals. TSC shall cooperate with eLoyalty in -------------------- effecting, and if so requested by eLoyalty, TSC shall, as the majority stockholder of eLoyalty prior to the Distribution, ratify all actions that are reasonably necessary or desirable to be taken by eLoyalty to effectuate, the transactions referenced in or contemplated by this Agreement in a manner consistent with the terms of this Agreement. ARTICLE III FORMATION OF ELOYALTY/CORPORATE GOVERNANCE ------------------------------------------ 3.1. Certificate of Incorporation of eLoyalty. The original ---------------------------------------- Certificate of Incorporation of eLoyalty was filed with the Secretary of State of the State of Delaware on May 11, 1999. On July 9, 1999 an amendment to the Certificate of Incorporation was filed that (i) changed the name of the company from TSC/ECM Inc. to eLoyalty Corporation and (ii) increased the number of authorized shares of capital stock to 110,000,000, consisting of 10,000,000 shares of eLoyalty preferred stock, par value $.01 per share, and 100,000,000 shares of eLoyalty Common Stock. On January 20, 2000 an additional amendment to the Certificate of Incorporation was filed whereby eLoyalty elected to be governed by Section 203 of the General Corporation Law of the State of Delaware. 3.2. By-laws. The original By-laws of eLoyalty were adopted on June ------- 21, 1999 by written action of the sole incorporator of eLoyalty. 3.3. Election of Board of Directors. The initial Board of Directors ------------------------------ of eLoyalty, consisting of Messrs. Conway, Kohler and Waltrip, was elected on June 22, 1999 by written action of TSC in its capacity as the sole stockholder of eLoyalty. On June 25, 1999 the Board of Directors of eLoyalty, by written action, increased the size of the Board from three to six and elected Messrs. Murray, Purcell and Zucchini as additional directors. On August 13, 1999 TSC and eLoyalty entered into a Common Stock Purchase and Sale Agreement (the "Purchase -------- Agreement") that, among other things, grants each of Sutter Hill Ventures and - --------- Technology Crossover Management III, L.L.C. (together, the "Investors") the --------- right to designate a nominee to -11- the Board of Directors of eLoyalty. The Investors' nominees are Messrs. Coxe and Hoag. On January 3, 2000 the Board of Directors of eLoyalty, by written action, accepted the resignations of Messrs. Waltrip and Kohler from the Board and reduced the size of the Board from six to five. Messrs. Kohler and Purcell were elected as additional directors on January 3, 2000 by written action of TSC in its capacity as the sole stockholder of eLoyalty. 3.4. Appointment of Officers. On June 22, 1999 the Board of Directors ----------------------- of eLoyalty, by written action, appointed Kelly D. Conway as the President and Chief Executive Officer, Paul R. Peterson as the Secretary and Timothy P. Dimond as the Treasurer of eLoyalty. On December 16, 1999, the Board of Directors of eLoyalty, by written action, appointed Timothy J. Cunningham as the Assistant Treasurer and Chief Financial Officer. On January 3, 2000 Messrs. Peterson and Dimond resigned from their respective positions as officers of eLoyalty, and the Board of Directors of eLoyalty, by written action, appointed John R. Purcell as the Interim Chairman, Kelly D. Conway as the President and Chief Executive Officer, and Timothy J. Cunningham as the Chief Financial Officer, Secretary and Treasurer. 3.5. Capital Stock of eLoyalty. On June 22, 1999 the Board of ------------------------- Directors of eLoyalty, by written action, approved the issuance and delivery to TSC of a stock certificate evidencing TSC's ownership of 100 shares of eLoyalty Common Stock. On December 16, 1999 the Board of Directors of eLoyalty issued 41,399,900 additional shares of eLoyalty Common Stock to TSC in exchange for a cash payment of $413,999. The Purchase Agreement provides, among other things, for the sale of 1,200,000 shares of eLoyalty Common Stock to Sutter Hill Ventures and an aggregate of 1,200,000 shares of eLoyalty Common Stock to four entities controlled by Technology Crossover Management III, L.L.C. The number of shares of eLoyalty Common Stock actually sold to those investors is subject to adjustment. As of December 31, 1999, options to acquire 5,340,000 shares of eLoyalty Common Stock have been issued under eLoyalty's 1999 Stock Incentive Plan. 3.6. Name Reservations and Registrations. eLoyalty has reserved the ----------------------------------- name "eLoyalty Corporation" in all states except for Florida, which does not allow such a reservation. eLoyalty has registered the name "eLoyalty Corporation" in South Dakota and New Mexico. 3.7. Foreign Qualifications. eLoyalty has qualified or will qualify ---------------------- in all jurisdictions (other than its place of incorporation) in which it intends to conduct business. 3.8. Corporate Seal. On June 22, 1999 the Board of Directors of -------------- eLoyalty, by written action, approved the form of the corporate seal. Inscribed thereon is the name "eLoyalty Corporation" and the words "Corporate Seal, Delaware." 3.9. Adoption of Stockholders Rights Plan. On December 16, 1999 the ------------------------------------ Board of Directors of eLoyalty met to discuss, among other things, the desirability of adopting a stockholder rights plan. In connection with that meeting, a presentation was made to the Board of Directors of eLoyalty to assist them with their analysis of the merits of taking such action. On -12- January 20, 2000 the Board of Directors of eLoyalty adopted the Stockholders Rights Plan (the "Rights Plan") in substantially the form attached as Exhibit E ----------- --------- hereto, and established a committee of the Board of Directors of eLoyalty to set the strike price under the Rights Plan. ARTICLE IV ASSET SEPARATION ---------------- 4.1. Transfer of Assets. Subject to the terms and conditions of ------------------ this Agreement, on or prior to the Distribution Date, TSC shall convey, assign, transfer, contribute and set over, or cause to be conveyed, assigned, transferred, contributed and set over, to eLoyalty, and eLoyalty shall accept and receive, all right, title and interest of TSC in and to the tangible and intangible assets of the eLoyalty Business (all of such assets being hereinafter referred to as the "Transferred Assets"), including the following: ------------------ (a) Balance Sheet Assets. All assets reflected or disclosed on the -------------------- unaudited balance sheet of the eLoyalty Business as of December 31, 1999 attached as Exhibit F hereto (the "Balance Sheet"), including all --------- ------------- machinery, equipment, furniture and other tangible personal property, whether owned or leased, used primarily in the operation of the eLoyalty Business, subject to acquisitions, dispositions and adjustments in the ordinary course of the eLoyalty Business, consistent with past practice, after such date; (b) Receivables. ----------- (i) All accounts receivable, notes receivable, lease receivables, prepayments (other than prepaid insurance), advances and other receivables arising out of or produced by the eLoyalty Business and owing by any Persons (the "Receivables"); ----------- (ii) all cash payments received after the Distribution Date on account of the Receivables; (iii) all manufacturers' warranties or guarantees related to the Transferred Assets or related to any of the Assumed Liabilities; and (iv) any and all manufacturers' or third party service or replacement programs relating to the Transferred Assets; (c) Inventories. All supplies, packaging and other inventories ----------- related to the eLoyalty Business; (d) Real Property Leases. Those certain real estate leases set forth -------------------- on Schedule 4.1(d) hereto (the "Real Estate Leases") and any and all --------------- ------------------ improvements, fixtures, -13- machinery, equipment and other property located on the premises demised under such Real Estate Leases; (e) Personal Property Leases. Those certain machinery, equipment or ------------------------ other tangible personal property leases (the "Personal Property Leases") ------------------------ set forth on Schedule 4.1(e) hereto; --------------- (f) Intellectual Property. All Copyrights, Interfaces, Methodologies, --------------------- Patents and Software to the extent the foregoing are used primarily in connection with the eLoyalty Business, including (i) those set forth on Schedule 4.1(f) hereto; (ii) all business and technical information, --------------- nonpatented inventions, discoveries, processes, formulations, trade secrets, know-how and technical data used primarily in connection with the eLoyalty Business made or conceived by employees, consultants or contractors of TSC or its Subsidiaries as to which TSC or its Subsidiaries have rights under any agreement or otherwise relating to the foregoing; (iii) all business and technical information, nonpatented inventions, discoveries, processes, formulations, trade secrets, know-how and technical data used primarily in connection with the eLoyalty Business made or conceived by third parties as to which TSC or its Subsidiaries have rights pursuant to executory agreements with said third parties relating to the foregoing; and (iv) all permits, grants, contracts, agreements and licenses running to or from TSC or its Subsidiaries relating to the foregoing; and all rights that are associated with the foregoing (collectively, the "Transferred Intellectual Property"); --------------------------------- (g) Contracts. All of the following contracts, agreements, --------- arrangements, leases (other than Real Estate Leases and Personal Property Leases), manufacturers' warranties, memoranda, understandings and offers open for acceptance of any nature, whether written or oral (the "Contracts"): --------- (i) all Contracts related to acquisitions or divestitures of assets or stock related primarily to the eLoyalty Business, including Contracts related to the transactions set forth on Schedule 4.1(g)(i) ------------------ hereto, except to the extent any such Contracts relate to the Retained Business and except to the extent indicated on Schedule 4.1(g)(i); ------------------ (ii) all service, license, maintenance and support Contracts with customers related primarily to the eLoyalty Business, including those set forth on Schedule 4.1(g)(ii) hereto; ------------------- (iii) all supplier Contracts related primarily to the eLoyalty Business relating either to raw materials or distributed products, including those set forth on Schedule 4.1(g)(iii) hereto; -------------------- -14- (iv) all joint development and alliance Contracts related primarily to the eLoyalty Business, including those set forth on Schedule 4.1(g)(iv) hereto; ------------------- (v) all Contracts with third-parties related primarily to the eLoyalty Business relating to services provided to, or for the benefit of, eLoyalty, including those set forth on Schedule 4.1(g)(v) hereto; ------------------ (vi) the telecommunications Contracts related primarily to the eLoyalty Business, including those set forth on Schedule 4.1(g)(vi) ------------------- hereto; (vii) the Shared Contracts that are designated as being assigned to eLoyalty; and (viii) all other Contracts related primarily to the eLoyalty Business; (h) Permits and Licenses. All permits, approvals, licenses, -------------------- franchises, authorizations or other rights granted by any Governmental Authority held or applied for by TSC and its Subsidiaries and that are used primarily in the eLoyalty Business or that relate primarily to the Transferred Assets, and all other consents, grants and other rights that are used primarily for the lawful ownership of the Transferred Assets or the operation of the eLoyalty Business and that are legally transferable to eLoyalty; (i) Claims and Indemnities. All rights, claims, demands, causes of ---------------------- action, judgments, decrees and rights to indemnity or contribution, whether absolute or contingent, contractual or otherwise, in favor of TSC relating primarily to the eLoyalty Business, including the right to sue, recover and retain such recoveries and the right to continue in the name of TSC and its Subsidiaries any pending actions relating to the foregoing, and to recover and retain any damages therefrom; (j) Subsidiaries, Joint Ventures and Minority Interests. All shares --------------------------------------------------- of capital stock or equity or debt or other interests owned by TSC or its Subsidiaries in the Subsidiaries, joint ventures and minority investments set forth on Schedule 4.1(j) hereto; --------------- (k) Books And Records. All books and records (including all records ----------------- pertaining to customers, suppliers and personnel), wherever located, that relate primarily to the operation of the eLoyalty Business; (l) Supplies. All office supplies, production supplies, spare parts, -------- purchase orders, forms, labels, shipping material, art work, catalogues, sales brochures, operating manuals and advertising and promotional material and all other printed or written material that relate primarily to the operation of the eLoyalty Business; -15- (m) Trademarks. All United States, state and foreign trademarks, ---------- service marks, logos, trade dress and trade names (including all assumed or fictitious names under which TSC is conducting the eLoyalty Business), whether registered or unregistered, including all goodwill associated with the foregoing, and all registrations and pending applications to register the foregoing to the extent the foregoing are used or intended to be used primarily in connection with the eLoyalty Business, including those set forth on Schedule 4.1(m) hereto (collectively, the "Trademarks"); --------------- ---------- (n) Loans to Transferred Employees. All loans, notes or other debts ------------------------------ owed to TSC and its Subsidiaries by any Transferred Employees (as hereinafter defined), including those set forth on Schedule 4.1(n) hereto; --------------- (o) Industry Awards. All industry awards that are sponsored primarily --------------- by the eLoyalty Business, including those set forth on Schedule 4.1(o) --------------- hereto; (p) Tax Credits. Any right, title or interest in any tax refund, ----------- credit or benefit to which eLoyalty or any of its Subsidiaries is entitled in accordance with the terms of the Tax Sharing Agreement; and (q) Other Assets. All other assets, tangible or intangible, including ------------ all goodwill, that are used primarily in or relate primarily to the operations of the eLoyalty Business, including, without limitation, e-mail addresses, domain names and websites. 4.2. Assumption of Liabilities. Except as expressly limited in ------------------------- this Article IV, eLoyalty shall assume, effective on or before the Distribution ---------- Date, and pay, comply with and discharge all contractual and other Liabilities of TSC arising out of or relating to the eLoyalty Business, whether due or to become due, including: (a) All Liabilities of TSC that are reflected, disclosed or reserved for on the Balance Sheet, as such Liabilities may be increased or decreased in the operation of the eLoyalty Business from the date of the Balance Sheet through the Distribution Date in the ordinary course of business consistent with past practice; (b) All Liabilities of TSC under or related to the Real Estate Leases, the Personal Property Leases and the Contracts, such assumption to occur as (i) assignee if such Real Estate Leases, Personal Property Leases and Contracts are assignable and are assigned or otherwise transferred to eLoyalty, or (ii) subcontractor, sublessee or sublicensee as provided in Section 7.3 below if assignment of such Real Estate Leases, Personal ----------- Property Leases and Contracts and/or the proceeds thereof is prohibited by law, by the terms thereof or not permitted by the other contracting party; -16- (c) All warranty, performance and similar obligations entered into or made by TSC prior to the Distribution Date with respect to the products or services of the eLoyalty Business; (d) All Liabilities of TSC in connection with claims of past or current employees of the eLoyalty Business, except as otherwise expressly provided in this Agreement; (e) All Liabilities of TSC related to any and all Actions asserting a violation of any law, rule or regulation related to or arising out of the operations of the eLoyalty Business, whether before or after the Distribution Date and the Liabilities relating to any Assumed Actions (as hereinafter defined); (f) All Liabilities for which eLoyalty is liable in accordance with the terms of the Tax Sharing Agreement; (g) All Liabilities of TSC related to the immigrant and nonimmigrant status of any foreign national employees who are Transferred Employees (as hereinafter defined); and (h) All other Liabilities of TSC relating to the eLoyalty Business, whether existing on the date hereof or arising at any time or from time to time after the date hereof, and whether based on circumstances, events or actions arising heretofore or hereafter, whether or not such Liabilities shall have been disclosed herein, and whether or not reflected on the books and records of TSC or eLoyalty or the Balance Sheet. The Liabilities described in this Section 4.2 are referred to in this ----------- Agreement collectively as the "Assumed Liabilities." ------------------- 4.3. Retained Assets. Notwithstanding anything to the contrary --------------- herein, the following assets (the "Retained Assets") are not, and shall not be --------------- deemed to be, Transferred Assets: (a) Cash and cash equivalents, any cash on hand or in bank accounts, certificates of deposit, commercial paper and similar securities, except for (i) deposits securing bonds, letters of credit, leases and all other obligations related to the eLoyalty Business, (ii) petty cash and impressed funds related to the eLoyalty Business, (iii) cash held in foreign bank accounts and (iv) $20,000,000; (b) Any right, title or interest in any tax refund, credit or benefit to which TSC or any of its Subsidiaries is entitled in accordance with the terms of the Tax Sharing Agreement; (c) Any amounts accrued on the books and records of TSC and its Subsidiaries or the eLoyalty Business with respect to any Retained Liabilities (as hereinafter defined); -17- (d) Except as provided in Sections 9.4 and 9.7, assets relating to ------------ --- the provision of benefits to present or former employees of the eLoyalty Business; (e) Any intellectual property rights in and to the name "TSC" and the related emblem design, and any variants thereof, and the trademarks and trade names used by TSC or its Subsidiaries in relation to the Retained Business, except as provided in the Intellectual Property License Agreements attached as Exhibits B-1 and B-2 hereto; and ------------ --- (f) Any right, title or interest in any prepaid insurance existing at the Distribution Date or any payments received after the Distribution Date with respect thereto. 4.4. Retained Liabilities. Notwithstanding anything to the -------------------- contrary in this Agreement, neither eLoyalty nor any of its Subsidiaries shall assume any of the following Liabilities of TSC or its Subsidiaries (the "Retained Liabilities"): -------------------- (a) Except as provided in Article IX, the Liabilities under all the ---------- TSC Plans; and (b) All Liabilities for which TSC is liable in accordance with the terms of the Tax Sharing Agreement. 4.5. Termination of Existing Intercompany Agreements. Except as ----------------------------------------------- otherwise expressly provided in this Agreement, the Operating Agreements or the agreements set forth on Schedule 4.5, all Intercompany Agreements and all other ------------ intercompany arrangements and course of dealings, whether or not in writing and whether or not binding, in effect immediately prior to the Distribution Date, shall be terminated and be of no further force and effect from and after the Distribution Date. 4.6. Shared Contracts. (a) With respect to Shared Contractual ---------------- Liabilities pursuant to, arising under or relating to any Shared Contract, such Shared Contractual Liabilities shall be allocated between TSC and eLoyalty as follows: (i) First, if a Liability is incurred exclusively in respect of a benefit received by one Party, the Party receiving such benefit shall be responsible for such Liability; and (ii) Second, if a Liability cannot be so allocated under clause (i), such Liability shall be allocated between the Parties based on the relative proportions of total benefit received (over the term of the Shared Contract, measured as of the date of the allocation) under the relevant Shared Contract. Notwithstanding the foregoing, each Party shall be responsible for any and all Liabilities arising out of or resulting from its breach of the relevant Shared Contract. -18- (b) If either TSC or eLoyalty improperly receives any benefit or payment under any Shared Contract that was intended for the other Party, the Party receiving such benefit or payment will use commercially reasonable efforts to deliver, transfer or otherwise afford such benefit or payment (on an after- tax basis) to the other Party. ARTICLE V ASSET SEPARATION CLOSING MATTERS -------------------------------- 5.1. Delivery of Instruments of Conveyance. In order to effectuate ------------------------------------- the transactions contemplated by Article IV, the Parties shall execute and deliver, or cause to be executed and delivered, prior to or as of the Distribution Date such deeds, bills of sale, instruments of assumption, instruments of assignment, stock powers, certificates of title and other instruments of assignment, transfer, assumption and conveyance (collectively, the "Conveyancing Instruments") as the Parties shall reasonably deem necessary ------------------------ or appropriate to effect such transactions. 5.2. Delivery of Other Agreements. Prior to or as of the Distribution ---------------------------- Date, the Parties shall execute and deliver, or shall cause to be executed and delivered, each of the Operating Agreements. 5.3. Provision of Corporate Records. Prior to or as promptly as ------------------------------ practicable after the Distribution Date, TSC shall deliver to eLoyalty all corporate books and records of eLoyalty and copies of all corporate books and records of TSC relating to the eLoyalty business, including in each case all active agreements, litigation files and government filings. From and after the Distribution Date, all books, records and copies so delivered shall be the property of eLoyalty. ARTICLE VI NO REPRESENTATIONS AND WARRANTIES --------------------------------- Except as expressly set forth herein or in any Operating Agreement, TSC does not represent or warrant in any way (i) as to the value or freedom from encumbrance of, or any other matter concerning, any of the Transferred Assets or (ii) as to the legal sufficiency to convey title to any of the Transferred Assets on the execution, delivery and filing of the Conveyancing Instruments. ALL SUCH ASSETS ARE BEING TRANSFERRED ON AN "AS IS, WHERE IS" BASIS WITHOUT ANY REPRESENTATION OR WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, MARKETABILITY, TITLE, VALUE, FREEDOM FROM ENCUMBRANCE OR ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, and eLoyalty shall bear the -19- economic and legal risks that any conveyances of such assets shall prove to be insufficient or that eLoyalty's title to any such assets shall be other than good and marketable and free of encumbrances. Except as expressly set forth in this Agreement or in any Operating Agreement, TSC does not represent or warrant that the obtaining of the consents or approvals, the execution and delivery of any amendatory agreements and the making of the filings and applications contemplated by this Agreement shall satisfy the provisions of all applicable agreements or the requirements of all applicable laws or judgments, and, subject to Section 7.4, eLoyalty shall bear the economic and legal risk that any ----------- necessary consents or approvals are not obtained or that any requirements of law or judgments are not complied with. Notwithstanding the foregoing, the Parties shall fully cooperate and use reasonable efforts to obtain all consents and approvals, to enter into all amendatory agreements and to make all filings and applications that may be required for the consummation of the transactions contemplated by this Agreement. ARTICLE VII CERTAIN COVENANTS ----------------- 7.1. Third Party Consents. To the extent that the transactions -------------------- contemplated by this Agreement require any material consents, approvals or waivers from third parties (the "Third Party Consents"), the Parties will use -------------------- commercially reasonable efforts to obtain any such Third Party Consents. 7.2. Material Governmental Approvals and Consents. To the extent that -------------------------------------------- the transactions contemplated by this Agreement require any approvals or consents of any Governmental Authority, the Parties will use commercially reasonable efforts to obtain any Material Governmental Approvals and Consents. 7.3. Non-Assignable Contracts. In the event and to the extent that ------------------------ TSC is unable to obtain any consent, approval or amendment to any Contract, lease, license or other rights relating to the eLoyalty Business that would otherwise be transferred or assigned to eLoyalty as contemplated by this Agreement or any other agreement or document contemplated hereby, (i) TSC shall continue to be bound thereby and the purported transfer or assignment to eLoyalty shall automatically be deemed deferred until such time as all legal impediments are removed and/or all necessary consents have been obtained, and (ii) unless not permitted by the terms thereof or by law, eLoyalty shall pay, perform and discharge fully all of the obligations of TSC thereunder from and after the Distribution Date, or such earlier date as such transfer or assignment would otherwise have taken place, and indemnify TSC for all indemnifiable Losses arising out of such performance by eLoyalty. TSC shall, without further consideration therefor, pay and remit to eLoyalty promptly all monies, rights and other considerations received in respect of such performance. TSC shall exercise or exploit its rights and options under all such Contracts, leases, licenses and other rights and commitments referred to in this Section 7.3 only ----------- as reasonably directed by eLoyalty and at eLoyalty's expense. If and when any such consent shall be -20- obtained or such Contract, lease, license or other right shall otherwise become assignable or be able to be novated, TSC shall promptly assign and novate (to the extent permissible) all of its rights and obligations thereunder to eLoyalty without payment of further consideration, and eLoyalty shall, without the payment of any further consideration therefor, assume such rights and obligations. To the extent that the assignment of any Contract, lease, license or other right (or the proceeds thereof) pursuant to this Section 7.3 is ----------- prohibited by law, the assignment provisions of this Section 7.3 shall operate ----------- to create a subcontract with eLoyalty to perform each relevant unassignable TSC Contract at a subcontract price equal to the monies, rights and other considerations received by TSC with respect to the performance by eLoyalty under such subcontract. 7.4. Novation of Assumed Liabilities. (a) Except as otherwise ------------------------------- specifically provided in Section 4.6 with respect to Shared Contracts and ----------- elsewhere in this Agreement, it is expressly understood and agreed to by the Parties that upon the assumption by eLoyalty of the Assumed Liabilities, TSC, its Subsidiaries and their respective officers, directors and employees shall be released unconditionally by eLoyalty from any and all Liability, whether joint, several or joint and several, for the discharge, performance or observance of any of the Assumed Liabilities, so that eLoyalty will be solely responsible for such Assumed Liabilities. (b) eLoyalty, at the reasonable request of TSC, shall use commercially reasonable efforts to obtain, or cause to be obtained, any consent, approval, release, substitution or amendment required to novate (including with respect to any federal government contract) or assign all obligations under the Assumed Liabilities, or to obtain in writing the unconditional release of all parties to such arrangements other than eLoyalty; provided, however, that -------- ------- eLoyalty shall not be obligated to pay any consideration therefor to any third party from whom such consents, approvals, releases, substitutions or amendments are requested. (c) If eLoyalty is unable to obtain, or to cause to be obtained, any such required consent, approval, release, substitution or amendment, TSC shall continue to be bound by such Assumed Liability and, unless not permitted by law or the terms thereof, eLoyalty shall, as agent or subcontractor for TSC, pay, perform and discharge fully all of the obligations or other Liabilities of TSC thereunder from and after the date hereof. eLoyalty shall indemnify and hold harmless TSC against any Liabilities arising in connection with such Assumed Liability or with eLoyalty's payment, performance and discharge of such Assumed Liability. Except as otherwise set forth in this Agreement, TSC shall, without further consideration, pay and remit, or cause to be paid or remitted, to eLoyalty promptly the after-tax amount of all money, rights and other consideration received by it in respect of such performance (unless any such consideration is a Retained Asset), increased by any actual tax benefit derived by TSC as a result of such payment or remittance (with such tax benefit determined pursuant to Section 12.5(d)). If and when any such consent, --------------- approval, release, substitution or amendment shall be obtained or such Assumed Liability shall otherwise become assignable or be able to be novated, TSC shall thereafter assign, or cause to be assigned, all of its rights, obligations and other Liabilities thereunder to eLoyalty -21- without payment of further consideration and eLoyalty shall, without the payment of any further consideration, assume such rights and obligations. 7.5. Further Assurances. (a) In addition to the actions specifically ------------------ provided for elsewhere in this Agreement, each of the Parties shall use commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws, regulations and agreements to consummate and make effective the Distribution and the other agreements and documents contemplated hereby. Without limiting the generality of the foregoing, each Party shall cooperate with the other Party to execute and deliver, or use commercially reasonable efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all consents, approvals or authorizations of, any governmental or regulatory authority or any other Person under any permit, license, Contract or other instrument, and to take all such other actions as such Party may reasonably be requested to take by the other Party from time to time, consistent with the terms of this Agreement, in order to confirm the title of eLoyalty to all of the eLoyalty Business, to put eLoyalty in actual possession and operating control thereof and to permit eLoyalty to exercise all rights with respect thereto and to effectuate the provisions and purposes of this Agreement and the other agreements and documents contemplated hereby or thereby. (b) If, as a result of mistake or oversight, any asset reasonably necessary to the conduct of the eLoyalty Business is not transferred to eLoyalty, or any asset reasonably necessary to the conduct of the Retained Business is transferred to eLoyalty, TSC and eLoyalty shall negotiate in good faith after the Distribution Date to determine whether such asset should be transferred to eLoyalty or to TSC, as the case may be, and/or the terms and conditions upon which such asset shall be made available to eLoyalty or to TSC, as the case may be. Unless expressly provided to the contrary in this Agreement or any Operating Agreement, if, as a result of mistake or oversight, any Liability arising out of or relating to the eLoyalty Business is retained by TSC, or any Liability arising out of or relating to the Retained Business is assumed by eLoyalty, TSC and eLoyalty shall negotiate in good faith after the Distribution Date to determine whether such Liability should be transferred to eLoyalty or TSC, as the case may be, and/or the terms and conditions upon which any such Liability shall be transferred. (c) If either Party identifies any commercial or other service that is needed to assure a smooth and orderly transition of the businesses in connection with the consummation of the transactions contemplated hereby or any desired modification to any such service, including any service that is governed by the provisions of any Operating Agreement, the Parties shall give reasonable notice of such service or proposed modification, and shall cooperate in implementing any such service or modification and in determining the mutually acceptable arm's-length basis on which one Party will provide such service to the other Party. 7.6. Nominee Shares. TSC agrees to use commercially reasonable -------------- efforts to cause to be transferred to, or as directed by, eLoyalty all director's qualifying or other shares of -22- capital stock of any of the transferred Subsidiaries held as of the Distribution Date by persons who are not employees of eLoyalty. eLoyalty agrees to use commercially reasonable efforts to cause to be transferred to, or as directed by, TSC all director's qualifying or other shares of capital stock of any TSC Subsidiary other than eLoyalty and the transferred Subsidiaries held as of the Distribution Date by employees of eLoyalty. 7.7. Collection of Accounts Receivable. (a) TSC shall be entitled to --------------------------------- control all collection actions related to the Retained Assets, including the determination of what actions are necessary or appropriate and when and how to take any such action. (b) eLoyalty shall be entitled to control all collection actions related to the Transferred Assets, including the determination of what actions are necessary or appropriate and when and how to take any such action. (c) If, after the Distribution Date, eLoyalty shall receive any remittance from any account debtors with respect to the accounts receivable arising out of the Retained Assets or other amounts due TSC in respect of services rendered by TSC after the Distribution Date, or TSC shall receive any remittance from any account debtors with respect to the accounts receivable arising out of the Transferred Assets or other amounts due eLoyalty in respect of services rendered by eLoyalty after the Distribution Date, such Party shall receive and deposit the after-tax amount of such remittance and deliver cash in an amount equal thereto to the other Party, increased by any actual tax benefit derived by such Party as a result of payment to such other Party (with such tax benefit determined pursuant to Section 12.5(d)) as soon as practicable and, in --------------- any event, within five (5) business days of receiving such remittance. The Parties shall reconcile any amounts due and owed under this Section 7.7 on a ----------- daily basis. (d) Each Party shall deliver to the other such schedules and other information with respect to the accounts receivable included in the Transferred Assets and those not included therein as each shall reasonably request from time to time in order to permit such Parties to reconcile their respective records and to monitor the collection of all accounts receivable (whether or not Transferred Assets). Each Party shall afford the other reasonable access to its books and records relating to any accounts receivable. 7.8. Election of eLoyalty Board of Directors. Prior to the --------------------------------------- Distribution Date, TSC agrees to vote all shares of eLoyalty Common Stock held by it in favor of the nominees to the Board of Directors of eLoyalty, as set forth on Exhibit G hereto. --------- 7.9. Late Payments. Except as expressly provided to the contrary in ------------- this Agreement or in any Operating Agreement, any amount not paid when due pursuant to this Agreement or any Operating Agreement (and any amounts billed or otherwise invoiced or demanded and properly payable that are not paid within thirty (30) days of such bill, invoice or other demand) shall accrue interest at a rate per annum equal to the Prime Rate plus 2%. -23- 7.10. Registration and Listing. Prior to the Distribution Date: ------------------------ (a) TSC and eLoyalty shall prepare a registration statement on Form S-1, including such amendments or supplements thereto as may be necessary (together, the "Registration Statement") to effect the registration of the ---------------------- eLoyalty Common Stock under the Exchange Act, which Registration Statement shall include an information statement/prospectus to be sent by TSC to its stockholders in connection with the Distribution (the "Information ----------- Statement"). eLoyalty shall file the Registration Statement with the SEC --------- and shall use commercially reasonable efforts to cause the Registration Statement to become and remain effective under the Exchange Act as soon as reasonably practicable. After the Registration Statement becomes effective, TSC shall mail the Information Statement to the holders of TSC Common Stock as of the Record Date. (b) The Parties shall use commercially reasonable efforts to take all such action as may be necessary or appropriate under state and foreign securities and "Blue Sky" laws in connection with the transactions contemplated by this Agreement. (c) TSC and eLoyalty shall prepare, and eLoyalty shall file and seek to make effective, an application for the listing of the eLoyalty Common Stock on the NASDAQ, subject to official notice of issuance. (d) The Parties shall cooperate in preparing, filing with the SEC and causing to become effective any registration statements or amendments thereto that are necessary or appropriate in order to effect the transactions contemplated hereby or to reflect the establishment of, or amendments to, any employee benefit plans contemplated hereby. 7.11. No Noncompetition; Nonhiring; Nonsolicitation. (a) After --------------------------------------------- the Distribution Date, neither Party shall have any duty to refrain from (i) engaging in the same or similar activities or lines of business as the other Party, (ii) doing business with any potential or actual supplier or customer of the other Party or (iii) engaging in, or refraining from, any other activities whatsoever relating to any of the potential or actual suppliers or customers of the other Party. (b) During the period beginning on December 1, 1999 and ending eighteen (18) months after such date, neither TSC nor eLoyalty shall, nor shall either Party permit any of its respective Subsidiaries, Affiliates or agents to, directly or indirectly, without the prior written consent of the other, actively solicit or recruit for employment any then current employee of the other Party or of any of the other Party's Subsidiaries or Affiliates. However, nothing contained in this Section 7.11(b) shall (i) prohibit the hiring of any employee --------------- who is seeking employment on his or her own initiative without prior contact initiated by any employee or agent of the company where employment is sought, or any of such company's Affiliates, provided that such employee has obtained authorization from an officer (or a direct report to a current officer) of his or her current employer; or (ii) prohibit TSC or eLoyalty or any of their respective Subsidiaries -24- or Affiliates from hiring any person who has terminated employment with the other Party. The foregoing restriction shall cease to apply on July 1, 2001. 7.12. Litigation. (a) On or as of the Distribution Date, eLoyalty ---------- shall assume and pay all Liabilities that may result from the Assumed Actions (as hereinafter defined) and all fees and costs relating to the defense of the Assumed Actions, including attorneys' fees and costs incurred after the Distribution Date. "Assumed Actions" shall mean those cases, claims and --------------- investigations (on which TSC, its Subsidiaries or its Affiliates, other than eLoyalty, are a defendant or the party against whom the claim or investigation is directed) primarily related to the eLoyalty Business. (b) TSC and its Subsidiaries shall transfer the Transferred Actions (as hereinafter defined) to eLoyalty, and eLoyalty shall receive and have the benefit of all of the proceeds of such Transferred Actions. "Transferred ----------- Actions" shall mean those cases and claims (on which TSC, its Subsidiaries or - ------- its Affiliates are a plaintiff or claimant) primarily relating to the eLoyalty Business. 7.13. eLoyalty Bank Accounts. On or prior to the Distribution Date, ---------------------- TSC and its Subsidiaries shall transfer the bank accounts set forth on Schedule -------- 7.13 hereto to eLoyalty. eLoyalty shall cause any amounts received, by mistake - ---- or otherwise, in such accounts after the Distribution Date on account of the Retained Business to be transferred promptly to TSC and its Subsidiaries, as appropriate. TSC shall cause any amounts received, by mistake or otherwise, after the Distribution Date on account of the eLoyalty Business to be transferred promptly to eLoyalty. 7.14. Signs; Use of Company Name. As soon as practicable, and in any -------------------------- event within sixty (60) days after the Distribution Date, the Parties, at eLoyalty's expense, shall remove (or, if necessary, on an interim basis cover up) any and all exterior and interior signs and identifiers that refer or pertain to TSC or the Retained Business on the Transferred Assets, in the case of eLoyalty, or that refer or pertain to eLoyalty or the Transferred Business on the Retained Assets, in the case of TSC. After such period, (i) eLoyalty shall not use or display the names "TSC," "Technology Solutions Company" or any variations thereof, or other trademarks, tradenames, logos or identifiers using any of such names or otherwise owned by or licensed to TSC that have not been assigned or licensed to eLoyalty, and (ii) TSC shall not use or display the name "eLoyalty," "eLoyalty Corporation" or any variations thereof, or other trademarks, tradenames, logos or identifiers using any of such names or otherwise owned by or licensed to eLoyalty that have not been assigned or licensed to TSC (collectively, the "Non-Permitted Names"), without the prior ------------------- written consent of the other Party; provided, however, that notwithstanding the -------- ------- foregoing, nothing contained in this Agreement shall prevent either Party from using the other's name in public filings with Governmental Authorities, materials intended for distribution to either Party's stockholders or any other communication in any medium that describes the relationship between the Parties. -25- 7.15. Reasonable Efforts. Upon the terms and subject to the ------------------ conditions set forth in this Agreement, each of the Parties agrees to use all commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, and to assist and cooperate with the other Parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement, including (i) the obtaining of all necessary actions or non-actions, waivers, consents and approvals from Governmental Authorities and the making of all necessary registrations and filings (including filings with Governmental Authorities) and the taking of all reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any Governmental Authority (including those in connection with the HSR Act, if any), (ii) the obtaining of all necessary consents, approvals or waivers from third parties, (iii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Authority vacated or reversed and (iv) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by this Agreement. 7.16. Use of Transferred Intellectual Property. As of the ---------------------------------------- Distribution Date, and except as permitted pursuant to the terms and conditions of the Intellectual Property License Agreements, TSC and its Subsidiaries, other than eLoyalty and its Subsidiaries, shall cease all use of the Transferred Intellectual Property, and TSC agrees to terminate any license granted to its Subsidiaries, other than eLoyalty and its Subsidiaries, with respect to the foregoing. ARTICLE VIII CONDITIONS TO THE DISTRIBUTION ------------------------------ The obligation of TSC to effect the Distribution is subject to the satisfaction or the waiver by TSC, at or prior to the Distribution Date, of each of the following conditions: 8.1. Approval by TSC Board of Directors. This Agreement and the ---------------------------------- transactions contemplated hereby, including the declaration of the Distribution, shall have been duly approved by the Board of Directors of TSC in accordance with applicable law and the Certificate of Incorporation, as amended, and By- laws of TSC. 8.2. Receipt of IRS Private Letter Tax Ruling. TSC shall have ---------------------------------------- received a ruling from the IRS or, at TSC's sole discretion, an opinion of its tax counsel Sidley & Austin, substantially to the effect that the Contribution will qualify as a tax-free transaction for federal income tax purposes under Section 368(a)(1)(D) or Section 351 of the Code, that the Distribution will qualify as a tax-free distribution for federal income tax purposes under Section 355 of the Code, and that no income, gain or loss will be recognized by TSC, eLoyalty or their respective stockholders upon the Contribution or the Distribution. -26- 8.3. Compliance with State and Foreign Securities and "Blue Sky" ----------------------------------------------------------- Laws. The Parties shall have taken all such action as may be necessary or - ---- appropriate under state and foreign securities and "blue sky" laws in connection with the Distribution. 8.4. SEC Filings and Approvals. The Parties shall have prepared and ------------------------- eLoyalty shall, to the extent required under applicable law, have filed with the SEC any such documentation and any requisite no action letters that TSC reasonably determines are necessary or desirable to effectuate the Distribution, and each Party shall use commercially reasonable efforts to obtain all necessary approvals from the SEC with respect thereto as soon as practicable. 8.5. Filing and Effectiveness of Registration Statement; No Stop ----------------------------------------------------------- Order. The Registration Statement shall have been filed with and declared - ----- effective by the SEC, and no stop order suspending the effectiveness of the Registration Statement shall have been initiated or, to the knowledge of either of the Parties, threatened by the SEC. 8.6. Dissemination of Information to TSC Stockholders. Prior to the ------------------------------------------------ Distribution Date, the Parties shall have prepared and mailed to the holders of TSC Common Stock such information concerning eLoyalty, its business, operations and management, the Distribution and such other matters as TSC shall reasonably determine and as may be required by law. 8.7. Approval of NASDAQ Listing Application. The eLoyalty Common -------------------------------------- Stock to be distributed in the Distribution shall have been approved for listing on the NASDAQ, subject to official notice of issuance. 8.8. Receipt of Viability and Fairness Opinion of Financial Advisor. -------------------------------------------------------------- The TSC Board of Directors shall have received a written opinion of Credit Suisse First Boston, in form acceptable to TSC, to the effect that (i) the Distribution will not have a material adverse effect on the financial viability of TSC or of eLoyalty through the period ending December 31, 2000, and (ii) the Distribution is fair to the TSC stockholders from a financial point of view, which opinion shall not have been withdrawn or modified. 8.9. Operating Agreements. Each of the Operating Agreements shall -------------------- have been executed and delivered, and each of such agreements shall be in full force and effect. 8.10. Resignations. On or prior to the Distribution Date, TSC shall ------------ cause all of its designees to resign or to be removed as officers and from all Boards of Directors or similar governing bodies of eLoyalty and its Affiliates. 8.11. Consents. (a) All Material Governmental Approvals and Consents -------- required to permit the valid consummation of the Distribution shall have been obtained without any conditions being imposed that would have a material adverse effect on TSC or eLoyalty. -27- (b) TSC shall have obtained the consent, approval or waiver of each Person (other than the Governmental Authorities referred to in Section 8.11(a)) --------------- whose consent, approval or waiver shall be required in connection with the Distribution, except those for which the failure to obtain such consents or approvals would not, in the reasonable opinion of TSC, individually or in the aggregate have a material adverse effect on TSC, eLoyalty or the consummation of the Distribution. 8.12. No Actions. No action, suit or proceeding shall have been ---------- instituted or threatened by or before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator to restrain, enjoin or otherwise prevent the Distribution or the other transactions contemplated this Agreement (including but not limited to a stop order with respect to the effectiveness of the Registration Statement), and no order, injunction, judgment, ruling or decree issued by any court of competent jurisdiction shall be in effect restraining the Distribution or such other transactions. 8.13. Consummation of Pre-Distribution Transactions. The pre- --------------------------------------------- Distribution transactions contemplated by Articles III-V of this Agreement shall -------------- have been consummated in all material respects. 8.14. No Other Events. No other events or developments shall have --------------- occurred that, in the judgment of the TSC Board of Directors, would result in the Distribution having a material adverse effect on TSC or its stockholders. 8.15. Satisfaction of Conditions. The satisfaction of the foregoing -------------------------- conditions are for the sole benefit of TSC and shall not give rise to or create any duty on the part of TSC or the TSC Board of Directors to waive or not waive any such condition, to effect the Distribution or in any way limit TSC's power of termination set forth in Section 15.13. ------------- ARTICLE IX EMPLOYEES AND EMPLOYEE BENEFIT MATTERS -------------------------------------- 9.1. Employment of eLoyalty Employees. On the Asset Transfer Date, -------------------------------- eLoyalty shall, or shall cause its Subsidiaries to, employ each employee of the eLoyalty Business ("Transferred Employees") set forth on Schedule 9.1 hereto, --------------------- ------------ and TSC shall cause all such Transferred Employees to resign from all positions as officers or employees of TSC and its Subsidiaries. eLoyalty and TSC (and their respective Subsidiaries) shall use commercially reasonable efforts to accomplish any transfers of employment required by this Section 9.1 in a timely ----------- manner. As of the Asset Transfer Date, eLoyalty shall assume each employment agreement between TSC and a Transferred Employee and shall be solely responsible for all of the obligations of the employer thereunder. -28- 9.2. Severance. (a) Transferred Employees shall not be eligible --------- for any severance benefits from TSC or its Subsidiaries or Affiliates as a result of either their employment with eLoyalty or its Subsidiaries or Affiliates or their subsequent termination of employment with eLoyalty or its Subsidiaries or Affiliates. (b) eLoyalty (or the applicable eLoyalty Subsidiary) shall have the obligation to pay severance benefits to any employee or former employee of the eLoyalty Business whose employment terminates on or after January 1, 2000. TSC shall continue to have the obligation to pay severance benefits to any employee or former employee of the eLoyalty Business whose employment terminated prior to January 1, 2000. 9.3. Withdrawal from Participation in TSC Plans and Establishment of --------------------------------------------------------------- eLoyalty Plans. (a) No later than the Distribution Date, Transferred Employees - -------------- shall cease to participate in the TSC employee benefit plans and programs (the "TSC Plans"), except as otherwise specifically provided in this Article IX. --------- ---------- (b) No later than the Distribution Date, eLoyalty or an eLoyalty Subsidiary shall establish its own employee benefit plans and programs for the benefit of eligible employees of eLoyalty and its Subsidiaries that shall be substantially similar to the TSC Plans, including but not limited to a 401(k) savings plan (the "eLoyalty Savings Plan"), a nonqualified executive deferred --------------------- compensation plan (the "eLoyalty Deferred Compensation Plan"), a medical and ----------------------------------- dental plan, a group vision care plan, a cafeteria plan, a group term life and accidental death and dismemberment plan, a long-term disability plan and a group legal expense plan. 9.4. Transfer of Savings Plan Account Balances. Subject to applicable ----------------------------------------- law and the provisions of the Technology Solutions Company d.b.a. TSC 401(k) Plan (the "TSC Savings Plan"), as soon as administratively practicable following ---------------- the establishment of the eLoyalty Savings Plan, or effective as of any other date as agreed to in writing by the plan administrator for the TSC Savings Plan and the plan administrator for the eLoyalty Savings Plan, the account balances (including outstanding loans) of all TSC Savings Plan participants who are Transferred Employees shall be transferred from the TSC Savings Plan to the eLoyalty Savings Plan. Each Transferred Employee shall receive credit for all purposes under the eLoyalty Savings Plan for periods of service with TSC or any of its Affiliates. The plan administrator for the eLoyalty Savings Plan shall take any other action reasonably requested by the plan administrator for the TSC Savings Plan that is necessary or advisable, in the opinion of the plan administrator for the TSC Savings Plan, to maintain the tax-qualified status of the TSC Savings Plan or to avoid the imposition of any penalties with respect to such plan. 9.5. Welfare Benefits Provided Under eLoyalty Plans. (a) Each ---------------------------------------------- Transferred Employee who becomes eligible to participate in an eLoyalty welfare benefit plan shall be credited under such plan with (i) any deductibles and copayments paid by such employee during the same plan year under the medical or dental plan maintained by TSC and (ii) periods of service with TSC or any of its Affiliates for all purposes under such plan. Amounts paid under a TSC medical or -29- dental plan that are taken into account for purposes of determining each eLoyalty employee's lifetime maximum benefits under such plan shall be taken into account for purposes of determining such eLoyalty employee's lifetime maximum benefits under the eLoyalty medical or dental plan. (b) eLoyalty (or the applicable eLoyalty Subsidiary) shall pay all costs associated with the provision of disability benefits to any employee or former employee of the eLoyalty Business, other than an employee or former employee whose long-term disability benefits commenced prior to the earlier of (i) the Distribution Date or (ii) the effective date of the eLoyalty long-term disability insurance plan. Any employee or former employee of the eLoyalty Business receiving benefits under the TSC long-term disability insurance plan prior to such date shall continue to receive benefits under the terms of such plan and the insurance contract used to fund such plan, and neither eLoyalty nor any eLoyalty Subsidiary shall be charged for the payment of such benefits. (c) TSC (or the applicable TSC Subsidiary) shall pay all claims under the TSC medical plan (including dental benefits) relating to Transferred Employees that have been incurred but not paid prior to the earlier of (i) the Distribution Date or (ii) the effective date of the eLoyalty medical plan, but only if claims for such costs are submitted in written form to the authorized agents of TSC (or the applicable TSC Subsidiary) during the nine-month period beginning on such date. (d) As of the earlier of (i) the Distribution Date or (ii) the date eLoyalty adopts a cafeteria plan, within the meaning of Section 125 of the Code, for the benefit of its employees, eLoyalty (or the applicable eLoyalty Subsidiary) shall assume all of the obligations of TSC under its cafeteria plan with respect to participants who are Transferred Employees. 9.6. Stock Purchase Plans. No later than the record date of the -------------------- Distribution, Transferred Employees shall cease to be eligible to purchase TSC Common Stock under the terms of the TSC 1995 Employee Stock Purchase Plan, and as of the later of (i) the first business day after the record date of the Distribution or (ii) the first day on which eLoyalty Common Stock is traded on a "when issued" basis, Transferred Employees shall become eligible to participate in the eLoyalty 1999 Employee Stock Purchase Plan. 9.7. Deferred Compensation Plan. No later than the Distribution Date, -------------------------- eLoyalty shall establish the eLoyalty Deferred Compensation Plan, which shall be substantially similar to the TSC Executive Deferred Compensation Plan (the "TSC Deferred Compensation Plan") in effect immediately prior to the date ------------------------------ the eLoyalty Deferred Compensation Plan is established. As of its effective date, the eLoyalty Deferred Compensation Plan shall assume all Liabilities with respect to amounts credited to the accounts of Transferred Employees under the TSC Deferred Compensation Plan, and the TSC Deferred Compensation Plan shall be relieved of all Liabilities for such benefits and payments thereof. On or before the Distribution Date, TSC shall direct the trustee of the trust established by TSC with respect to the TSC Deferred Compensation Plan to transfer to the trust established by eLoyalty with respect to the eLoyalty -30- Deferred Compensation Plan an amount equal to the fair market value (determined as of the date of transfer) of the amount credited to the accounts of Transferred Employees under the TSC Deferred Compensation Plan. 9.8. Stock Options. (a) As of the Distribution, each outstanding ------------- nonqualified option to purchase shares of TSC Common Stock held by a Transferred Employee or a director of eLoyalty (who is not also a director of TSC) shall be converted into a substitute option to purchase shares of eLoyalty Common Stock. The exercise price of each substitute option, and the number of shares of eLoyalty Common Stock subject thereto, shall be equal to the exercise price of the existing TSC option and the number of shares subject thereto, adjusted to reflect the Distribution based on a comparison of (i) the trading price of TSC Common Stock prior to the Distribution (the "Combined Value") and (ii) the -------------- trading price of eLoyalty Common Stock after the Distribution (the "eLoyalty -------- Value"). - ----- (b) As of the Distribution, each outstanding nonqualified option to purchase shares of TSC Common Stock that was granted on or before June 21, 1999 to a person other than a person described in Section 9.8(a) shall be converted -------------- into an adjusted option to purchase TSC Common Stock and a substitute option to purchase shares of eLoyalty Common Stock. Such options shall be converted in a manner that preserves the aggregate exercise price of each option, and allocates the exercise price between the TSC option and the eLoyalty option based on a comparison of (i) the eLoyalty Value and (ii) the trading price of TSC Common Stock after the Distribution (the "TSC Value"). --------- (c) Each nonqualified option to purchase TSC Common Stock granted after June 21, 1999 to a person other than a person described in Section 9.8(a) -------------- and each option to purchase eLoyalty Common Stock (other than an option granted in substitution of an outstanding option to purchase TSC Common Stock) shall continue solely as an option to purchase TSC Common Stock or eLoyalty Common Stock, as the case may be. Each such option to purchase TSC Common Stock shall be adjusted to reflect the Distribution, based on a comparison of (i) the Combined Value and (ii) the TSC Value. Each such option to purchase eLoyalty Common Stock shall not be adjusted. (d) Each option to purchase TSC Common Stock that is an incentive stock option, within the meaning of Section 422 of the Code, shall be converted into an incentive stock option to purchase the stock of the corporation with which the optionee is employed immediately after the Distribution. Such options converted into substitute options to purchase eLoyalty Common Stock shall be adjusted in the manner described in Section 9.8(a) and such options converted -------------- into adjusted options to purchase TSC Common Stock shall be adjusted in the manner described in Section 9.8(c). -------------- (e) TSC and eLoyalty agree to assist each other as appropriate with respect to the ongoing administration of the outstanding options issued to employees of the other Party, or -31- issued by the other Party to its employees, under the TSC stock incentive plans and the eLoyalty stock incentive plans, as applicable. 9.9. Workers' Compensation. eLoyalty shall assume the Liability for --------------------- any workers' compensation or similar workers' protection claims with respect to any employee of the eLoyalty Business, whether incurred prior to, on or after the Distribution Date which are the result of an injury or illness originating prior to or on the Distribution Date. 9.10. WARN Act. eLoyalty and its Subsidiaries agree that they shall -------- not, at any time during the 90-day period following the Distribution Date, (i) effectuate a "plant closing" as defined in the Worker Adjustment and Retraining Notification Act of 1988 (the "WARN Act") affecting any site of employment or -------- operating units within any site of employment of the eLoyalty Business, or (ii) take any action to precipitate a "mass layoff" as defined in the WARN Act affecting any site of employment of the eLoyalty Business, except, in either case, after complying fully with the notice and other requirements of the WARN Act. eLoyalty agrees to indemnify TSC and its Subsidiaries and to defend and hold harmless TSC and its Subsidiaries from and against any and all claims, losses, damages, expenses, obligations and liabilities (including attorney's fees and other costs of defense) that TSC and its Subsidiaries may incur in connection with any suit or claim of violation brought against TSC under the WARN Act, which relates in whole or in part to actions taken by eLoyalty or its Subsidiaries with regard to any site of employment of eLoyalty or operating units within any site of employment of the eLoyalty Business. 9.11. Information to be Provided to TSC. eLoyalty (or the applicable --------------------------------- eLoyalty Subsidiary) shall provide any information that TSC (or any TSC Subsidiary) may reasonably request, including but not limited to information relating to dates of termination of employment, in order to provide benefits to any eligible employee of eLoyalty or any of its Subsidiaries under the terms and conditions described herein or under the applicable TSC Plans. Any information relating to an employee's termination of employment shall be provided by eLoyalty (or the applicable eLoyalty Subsidiary) to TSC as soon as available to eLoyalty or any of its Subsidiaries, but in any event no later than 30 days after such information is made available to eLoyalty or any such Subsidiaries. eLoyalty (or the applicable eLoyalty Subsidiary) shall, as necessary, update the system used to keep such information in such timely manner as is required to administer the TSC Plans. ARTICLE X INSURANCE MATTERS ----------------- 10.1. Insurance Prior to the Distribution Date. eLoyalty does hereby ---------------------------------------- agree that TSC shall not have any Liability whatsoever as a result of the insurance policies and practices of TSC in effect at any time prior to the Distribution Date, including as a result of the level or -32- scope of any such insurance, the creditworthiness of any insurance carrier, the terms and conditions of any policy and the adequacy or timeliness of any notice to any insurance carrier with respect to any claim or potential claim or otherwise. 10.2. Ownership of Existing Policies and Programs. TSC or one or ------------------------------------------- more of its Subsidiaries shall continue to own all property, casualty and liability insurance policies and programs, including, without limitation, primary and excess general liability, errors and omissions, automobile, workers' compensation, property, fire, crime and surety insurance policies, in effect on or before the Distribution Date (collectively, the "TSC Policies" and ------------ individually, a "TSC Policy"). TSC shall use reasonable efforts to maintain the ---------- TSC Policies in full force and effect up to and including the Distribution Date, and, subject to the provisions of this Agreement, TSC and its Subsidiaries shall retain all of their respective rights, benefits and privileges, if any, under the TSC Policies. Nothing contained herein shall be construed to be an attempted assignment of or to change the ownership of the TSC Policies. 10.3. Procurement of Insurance for eLoyalty. To the extent not ------------------------------------- already provided for by the terms of a TSC Policy, TSC shall use reasonable efforts to cause eLoyalty to be named as an additional insured under TSC Policies whose effective policy periods include the Distribution Date, in respect of claims arising out of or relating to periods prior to the Distribution Date; provided, however, that nothing contained herein shall be -------- ------- construed to require TSC or any of its Subsidiaries to pay any additional premium or other charges in respect to, or waive or otherwise limit any of its rights, benefits or privileges under, any TSC Policy in order to effect the naming of eLoyalty as such an additional insured. 10.4. Acquisition and Maintenance of Post-Distribution eLoyalty --------------------------------------------------------- Insurance Policies and Programs. Commencing on and as of the Distribution Date, - ------------------------------- eLoyalty shall establish and maintain separate property, casualty and liability insurance policies and programs (including, without limitation, primary and excess general liability, errors and omissions, automobile, workers' compensation, property, fire, crime, surety and other similar insurance policies) for activities and claims involving eLoyalty or any of its Subsidiaries or Affiliates, in each case with commercially reasonable limits and deductibles. eLoyalty agrees to maintain errors and omissions coverage with limits of at least $35,000,000 for a period of at least five (5) years after the Distribution Date. In addition to the foregoing, eLoyalty shall obtain insurance covering its contractual obligations to indemnify TSC and the TSC Indemnified Parties under this Agreement and shall maintain such coverage for at least five (5) years after the Distribution Date. eLoyalty shall arrange for TSC and the TSC Indemnified Parties to be named insureds under the errors and omissions policies and the contractual indemnity policies described above. All insurance policies required to be maintained by eLoyalty shall be with insurers reasonably acceptable to TSC with respect to financial condition and claims paying ability. eLoyalty will exercise commercially reasonable efforts to secure liability insurance to avoid potential gaps in coverage for claims arising from events prior to the Distribution Date, which gap would not exist had the eLoyalty Business continued to be covered with the same retroactive dates existing in the TSC Policies in effect on the Distribution Date. eLoyalty and each of its Subsidiaries and Affiliates, as -33- appropriate, shall be responsible for all administrative and financial matters relating to insurance policies established and maintained by eLoyalty and its Subsidiaries or Affiliates for claims relating to any period on or after the Distribution Date involving eLoyalty or any of its Subsidiaries or Affiliates. Notwithstanding any other agreement or understanding to the contrary, except as set forth in Section 10.6 with respect to claims administration and financial ------------ administration of the TSC Policies, neither TSC nor any of its Subsidiaries or Affiliates shall have any responsibility for or obligation to eLoyalty or any of its Subsidiaries or Affiliates relating to property and casualty insurance matters for any period, whether prior to, on or after the Distribution Date. 10.5. eLoyalty Directors' and Officers' Insurance. TSC shall use ------------------------------------------- commercially reasonable efforts to cause the persons currently serving as officers and/or directors of TSC or any of its Subsidiaries to be covered for a period of three (3) years from the Distribution Date by the directors' and officers' liability insurance policy maintained by TSC (including corporate reimbursement) (provided that TSC may substitute therefor policies of at least -------- the same coverage and amounts containing terms and conditions that are not less advantageous than such policy) with respect to matters covered under the existing policy occurring prior to the Distribution Date that were committed by such officers and/or directors in their capacity as such; provided, however, -------- ------- that in no event shall TSC be required to expend with respect to any year more than 200% of the current annual premium expended by TSC (the "Insurance Amount") ---------------- to maintain or procure insurance coverage pursuant hereto; and provided, -------- further, that if TSC is unable to maintain or obtain the insurance called for by - ------- this Section 10.5, TSC shall use commercially reasonable efforts to obtain as ------------ much comparable insurance as available for the Insurance Amount. In the event TSC or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any Person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of TSC assume the obligations set forth in this Section ------- 10.5. The provisions of this Section 10.5 are intended to be for the benefit - ---- ------------ of, and shall be enforceable by, each such officer and director and his or her heirs and representatives. As provided in Section 12.5, any amount eLoyalty is ------------ required to pay to TSC as an indemnity under this Agreement is reduced to the extent TSC receives insurance proceeds from the above coverage, but only to the extent such proceeds are actually received by TSC. 10.6. Post-Distribution Insurance Claims Administration. TSC and its ------------------------------------------------- Subsidiaries shall have the primary right, responsibility and authority for claims administration and financial administration of claims that relate to or affect the TSC Policies. Upon notification by eLoyalty or one of its Subsidiaries or Affiliates of a claim relating to eLoyalty or a Subsidiary or Affiliate thereof under one or more of the TSC Policies, TSC shall cooperate with eLoyalty in asserting and pursuing coverage and payment for such claim by the appropriate insurance carrier(s). In asserting and pursuing such coverage and payment, TSC shall have sole power and authority to make binding decisions, determinations, commitments and stipulations on its own behalf and on behalf of eLoyalty and its Subsidiaries and Affiliates, which decisions, -34- determinations, commitments and stipulations shall be final and conclusive if reasonably made to maximize the overall economic benefit of the TSC Policies. eLoyalty and its Subsidiaries and Affiliates shall assume responsibility for, and shall pay to the appropriate insurance carriers or otherwise, any premiums, retrospectively-rated premiums, defense costs, indemnity payments, deductibles, retentions or other charges (collectively, "Insurance Charges") whenever ----------------- arising, which shall become due and payable under the terms and conditions of any applicable TSC Policy in respect of any liabilities, losses, claims, actions or occurrences, whenever arising or becoming known, involving or relating to any of the assets, businesses, operations or liabilities of eLoyalty or any of its Subsidiaries or Affiliates, whether the same relate to the period prior to, on or after the Distribution Date. To the extent that the terms of any applicable TSC Policy provide that TSC or any of its Subsidiaries shall have an obligation to pay or guarantee the payment of any Insurance Charges relating to eLoyalty or any of its Subsidiaries, TSC shall be entitled to demand that eLoyalty make such payment directly to the Person or entity entitled thereto. In connection with any such demand, TSC shall submit to eLoyalty a copy of any invoice received by TSC pertaining to such Insurance Charges together with appropriate supporting documentation, to the extent available. In the event that eLoyalty fails to pay any such Insurance Charges when due and payable, whether at the request of the Person entitled to payment or upon demand by TSC, TSC and its Subsidiaries may (but shall not be required to) pay such insurance charges for and on behalf of eLoyalty and, thereafter, eLoyalty shall forthwith reimburse TSC for such payment. Subject to the other provisions of this Article X, the retention by --------- TSC of the TSC Policies and the responsibility for claims administration and financial administration of such policies are in no way intended to limit, inhibit or preclude any right of eLoyalty, TSC or any other insured to insurance coverage for any Insured Claims under the TSC Policies. 10.7. Certain Adjustments. (a) The Parties acknowledge that prepaid ------------------- insurance and any cash received by TSC with respect to prepaid insurance is not included within the Transferred Assets. Notwithstanding the foregoing, TSC agrees to pay to eLoyalty, promptly upon receipt by TSC, the amount of any cash received by TSC from Arthur J. Gallagher Risk Management Services Inc. as a premium adjustment to reflect the exclusion of eLoyalty and its Subsidiaries from the coverage of the TSC Policies. (b) TSC will enter into a letter agreement with Aon Financial Services Group providing for the provision of certain insurance brokerage and consulting services to TSC. Such letter agreement requires three annual payments by TSC to Aon Financial Services Group, the first of which has been paid. eLoyalty agrees to reimburse TSC, on demand, for 50% of each of the second and third annual payments due under such letter agreement. 10.8. Non-Waiver of Rights to Coverage. An insurance carrier that -------------------------------- would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto, or, solely by virtue of the provisions of this Article X, have any subrogation rights with respect thereto, it being --------- expressly understood and agreed that no insurance carrier or any third party shall be entitled to a windfall (i.e., a benefit they would not be entitled to ---- receive had no -35- Distribution occurred or in the absence of the provisions of this Article X) by --------- virtue of the provisions hereof. 10.9. Scope of Affected Policies of Insurance. The provisions of --------------------------------------- this Article X relate solely to matters involving liability, casualty and --------- workers' compensation insurance, and shall not be construed to affect any obligation of or impose any obligation on the Parties with respect to any life, health and accident, dental or medical insurance policies applicable to any of the officers, directors, employees or other representatives of the Parties or their Affiliates. ARTICLE XI EXPENSES -------- 11.1. Allocation of Expenses. (a) Except as otherwise provided in ---------------------- this Agreement or any other agreement contemplated hereby, or as otherwise agreed to in writing by the Parties, all fees and expenses incurred in connection with the transactions contemplated hereby or thereby shall be paid by TSC. Specifically, (i) TSC shall absorb all of the costs associated with the dedication of internal resources and personnel to such transaction at all times prior to the Distribution Date, and (ii) TSC shall pay all fees and expenses that are related directly to the implementation of the Distribution transactions on or prior to the Distribution Date. (b) Without limiting the generality of the foregoing, TSC shall be solely responsible for the following costs incurred in connection with the transactions contemplated hereby: (i) the reasonable fees and expenses of Sidley & Austin in connection with its representation of TSC; (ii) the reasonable fees and expenses of investment banks relating to their financial advisory services rendered to TSC and eLoyalty in connection with the Distribution; (iii) the reasonable fees and expenses of PricewaterhouseCoopers LLP in connection with its audit and tax services rendered to TSC; (iv) all SEC registration and "blue sky" filing fees associated with the Registration Statement; (v) the printing, mailing and distribution of the Information Statement to TSC's stockholders; (vi) the reasonable fees and expenses of eLoyalty's Transfer Agent and registrar relating to the initial issuance of eLoyalty Shares as a dividend to TSC's stockholders; (vii) the NASDAQ listing fees for the eLoyalty Shares; (viii) the design and initial printing of certificates of the eLoyalty Shares; (ix) the design and initial printing of certificates of eLoyalty Common Stock as a dividend to TSC stockholders; (x) the development, search and registration of the name "eLoyalty"; and (xi) various international professional services related directly to the Distribution. (c) Notwithstanding Section 11.1(a) (i) above, eLoyalty shall be ------------------- solely responsible for all fees, expenses and other costs incurred in connection with the transactions contemplated hereby related to: (i) the reasonable fees and expenses of Sidley & Austin in connection with its representation of eLoyalty related to the creation of benefits plans; (ii) the reasonable fees and expenses relating to the syndication and arrangement of revolving credit facilities for eLoyalty; -36- and (iii) the reasonable fees or expenses of any financial advisors, other than those approved by TSC, retained by eLoyalty in connection with any "road shows" or presentations to investors. ARTICLE XII INDEMNIFICATION --------------- 12.1. Release of Pre-Distribution Claims. (a) Except as provided ---------------------------------- in Section 12.1(b), effective as of the Distribution Date, each Party does --------------- hereby, on behalf of itself and its respective Subsidiaries and Affiliates, successors and assigns and all Persons who at any time prior to the Distribution Date have been shareholders, directors, officers, agents or employees of either Party (in each case, in their respective capacities as such), remise, release and forever discharge the other Party, its respective Subsidiaries and Affiliates, successors and assigns and all Persons who at any time prior to the Distribution Date have been shareholders, directors, officers, agents or employees of such Party (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the Distribution Date, including in connection with the transactions and all other activities to implement the Distribution. (b) Nothing contained in Section 12.1(a) shall impair any right of --------------- any Person to enforce this Agreement, any Operating Agreement or any agreements, arrangements, commitments or understandings that are specified in Section 4.5 or ----------- the applicable Schedules thereto not to terminate as of the Distribution Date, in each case in accordance with its terms. Nothing contained in Section 12.1(a) --------------- shall release any Person from: (i) any Liability provided in or resulting from any agreement of the Parties that is specified in Section 4.5 or the applicable ----------- Schedules thereto as not to terminate as of the Distribution Date, or any other Liability specified in Section 4.5 as not to terminate as of ----------- the Distribution Date; (ii) any Liability, contingent or otherwise, assumed, transferred, assigned, retained or allocated to a Party in accordance with, or any other Liability of any Party under, this Agreement or any Operating Agreement; (iii) any Liability for the sale, lease, construction or receipt of goods, property or services purchased, obtained or used in the ordinary course of business by one Party from the other Party prior to the Distribution Date; -37- (iv) any Liability for unpaid amounts for products or services or refunds owing on products or services due on a value-received basis for work done by one Party at the request or on behalf of the other Party; or (v) any Liability that the Parties may have with respect to indemnification or contribution pursuant to this Agreement for claims brought against the Parties by third Persons, which Liability shall be governed by the provisions of this Article XIII and, if applicable, ------------ the appropriate provisions of the Operating Agreements. (c) Neither Party shall make, nor permit any of its Subsidiaries or Affiliates to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or indemnification, against the other Party, or any other Person released pursuant to Section 12.1(a), with --------------- respect to any Liability released pursuant to Section 12.1(a). --------------- (d) It is the intent of each of the Parties by virtue of the provisions of this Section 12.1 to provide for a full and complete release and ------------ discharge of all Liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or before the Distribution Date, between the Parties (including any contractual agreements or arrangements existing or alleged to exist between the Parties on or before the Distribution Date), except as expressly set forth in Section 12.1(b). At any --------------- time, at the reasonable request of either Party, the other Party shall execute and deliver releases reflecting the provisions hereof. 12.2. Indemnification by eLoyalty. (a) Except as provided in Section --------------------------- ------- 12.5, eLoyalty shall indemnify, defend and hold harmless TSC and each of - ---- its Affiliates, directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "TSC Indemnified Parties"), from and against any and all Expenses or Losses ----------------------- incurred or suffered by TSC (and/or one or more of the TSC Indemnified Parties), in connection with, relating to, arising out of or due to, directly or indirectly, any of the following items: (i) any claim that the information included in the Registration Statement or the Information Statement that relates to the eLoyalty Business or any other information relating to the eLoyalty Business provided to TSC or distributed to third parties by employees of eLoyalty or individuals who were employees of the eLoyalty Business prior to the Distribution Date, is or was false or misleading with respect to any material fact or omits or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, regardless of whether the occurrence, action or other event giving rise to the applicable matter took place prior to or subsequent to the Distribution Date; -38- (ii) the eLoyalty Business as conducted by TSC or its Subsidiaries, Affiliates or predecessors on or at any time prior to the Distribution Date; (iii) the Transferred Assets; (iv) the Assumed Liabilities; (v) the breach by eLoyalty or any of its Subsidiaries of any covenant or agreement set forth in this Agreement, any Operating Agreement or any Conveyancing Instrument, regardless of when or where the loss, claim, accident, occurrence, event or happening giving rise to the Expense or Loss took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, or reported or unreported; (vi) the employee benefits provided or the actions taken or omitted to be taken with respect thereto in connection with this Agreement or otherwise relating to the provision of employee benefits to employees or former employees of eLoyalty (or its Subsidiaries), their beneficiaries, alternate payees or any other person claiming benefits through them (except to the extent such Expenses or Losses are specifically allocated to TSC pursuant to Article IX), including, ---------- without limitation, Expenses or Losses arising in connection with (A) eLoyalty's reduction, elimination or failure to provide any benefit provided prior to or after the Distribution Date to its employees or employees of any of its Subsidiaries or (B) the transfer of account balances from the TSC Savings Plan to the eLoyalty Savings Plan where such Expenses or Losses are incurred as a result of (1) any act or omission by eLoyalty (or eLoyalty's representative) or (2) a determination by the IRS that the eLoyalty Savings Plan is not a tax- qualified plan; or (vii) any use of, access to or reliance upon the technical information or data made available to eLoyalty or its Subsidiaries pursuant to Section 14.1. ------------ (b) In addition, except as provided in Section 12.5, eLoyalty shall ------------ indemnify, defend and hold harmless the TSC Indemnified Parties from and against fifty percent (50%) of any Expenses or Losses incurred or suffered by TSC (and/or one or more of the TSC Indemnified Parties), in connection with, relating to, arising out of or due to, directly or indirectly, any claims of any infrastructure employee of TSC to the extent such claim relates to the period prior to the Distribution Date. 12.3. Indemnification by TSC. Except as provided in Section 12.5, ---------------------- ------------ TSC shall indemnify, defend and hold harmless eLoyalty and each of its Affiliates, directors, officers, employees and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "eLoyalty Indemnified Parties"), from and against any and all Expenses or Losses ---------------------------- incurred or suffered by eLoyalty (and/or one or more of the eLoyalty -39- Indemnified Parties) in connection with, relating to, arising out of or due to, directly or indirectly, any of the following items: (a) the business (other than the eLoyalty Business) conducted by TSC or its Subsidiaries, Affiliates or predecessors on or at any time prior to the Distribution Date; (b) the assets owned by TSC or its Subsidiaries other than the Transferred Assets; (c) the Liabilities (including the Retained Liabilities) of TSC or its Subsidiaries other than the Assumed Liabilities; (d) the breach by TSC or any of its Subsidiaries of any covenant or agreement set forth in this Agreement, any Operating Agreement or any Conveyancing Instrument, regardless of when or where the loss, claim, accident, occurrence, event or happening giving rise to the Expense or Loss took place, or whether any such loss, claim, accident, occurrence, event or happening is known or unknown, or reported or unreported; and (e) TSC's reduction, elimination or failure to provide any benefit provided prior to or after the Distribution Date to its employees (or employees of its Subsidiaries), other than a benefit assumed by eLoyalty pursuant to Article IX, or any act or omission by TSC in connection with ---------- the transfer of assets and liabilities from the TSC Savings Plan to the eLoyalty Savings Plan. 12.4. Applicability of and Limitation on Indemnification. EXCEPT AS -------------------------------------------------- EXPRESSLY PROVIDED HEREIN, THE INDEMNITY OBLIGATION UNDER THIS ARTICLE XII SHALL ----------- APPLY NOTWITHSTANDING ANY INVESTIGATION MADE BY OR ON BEHALF OF ANY INDEMNIFIED PARTY AND SHALL APPLY WITHOUT REGARD TO WHETHER THE LOSS, LIABILITY, CLAIM, DAMAGE, COST OR EXPENSE FOR WHICH INDEMNITY IS CLAIMED HEREUNDER IS BASED ON STRICT LIABILITY, ABSOLUTE LIABILITY OR ARISES AS AN OBLIGATION FOR CONTRIBUTION. 12.5. Adjustment of Indemnifiable Losses. (a) The amount that any ---------------------------------- Party (an "Indemnifying Party") is required to pay to any Person entitled to ------------------ indemnification hereunder (an "Indemnified Party") shall be reduced (including, ----------------- without limitation, retroactively) by any Insurance Proceeds and other amounts actually recovered by or on behalf of such Indemnified Party in reduction of the related Expense or Loss. If an Indemnified Party receives a payment (an "Indemnity Payment") required by this Agreement from an Indemnifying Party in ----------------- respect of any Expense or Loss and subsequently actually receives Insurance Proceeds or other amounts in respect of such Expense or Loss, then such Indemnified Party shall pay to the Indemnifying Party a sum equal to the lesser of (1) the after-tax amount of such Insurance Proceeds or other amounts actually received or (2) the net amount of Indemnity Payments actually received previously, in each case increased by any actual tax benefit derived by the Indemnified Party as a result of such -40- payment (with such tax benefit determined pursuant to Section 12.5(d)). The --------------- Indemnified Party agrees that the Indemnifying Party shall be subrogated to such Indemnified Party under any insurance policy. (b) An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto, or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a "windfall" (i.e., a benefit he or she would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification provisions hereof. (c) If any Indemnified Party realizes a Tax benefit or detriment in one or more Tax periods by reason of having incurred an Expense or a Loss for which such Indemnified Party receives an Indemnity Payment from an Indemnifying Party (or by reason of the receipt of any Indemnity Payment), then such Indemnified Party shall pay to such Indemnifying Party an amount equal to the Tax benefit or such Indemnifying Party shall pay to such Indemnified Party an additional amount equal to the Tax detriment (taking into account, without limitation, any Tax detriment resulting from the receipt of such additional amounts), as the case may be. The amount of any Tax benefit or any Tax detriment for a Tax period realized by an Indemnified Party by reason of having incurred an Expense or a Loss (or by reason of the receipt of any Indemnity Payment) shall be deemed to equal the product obtained by multiplying (i) the amount of any deduction or loss or inclusion in income for such period resulting from such Expense or Loss (or the receipt of any Indemnity Payment or additional amount), as the case may be without regard to whether such deduction or loss or such inclusion in income results in any actual decrease or increase in Tax liability for such period (with the amount of any deduction or loss or inclusion in income determined in accordance with Section 12.5(d) below), by (ii) the highest --------------- applicable marginal Tax rate for such period (provided, however, that the amount -------- ------- of any Tax benefit attributable to an amount that is creditable shall be deemed to equal the amount of such creditable item). Any payment due under this Section ------- 12.5(c) with respect to a Tax benefit or Tax detriment realized by an - ------ an Indemnified Party in a Tax period shall be due and payable within 30 days from the time the return for such Tax period is due, without taking into account any extension of time granted to the Party filing such return. (d) Amounts paid by TSC to or for the benefit of eLoyalty, or by eLoyalty to or for the benefit of TSC, under this Article XII (and under other ----------- specified provisions of this Agreement) shall be treated by the Parties, for all applicable Tax purposes, as adjustments to the amount of Transferred Assets. (e) In the event that an Indemnity Payment shall be denominated in a currency other than United States dollars, the amount of such payment shall be translated into United States dollars using the Foreign Exchange Rate for such currency determined in accordance with the following rules: -41- (i) with respect to an Expense or a Loss arising from payment by a financial institution under a guarantee, comfort letter, letter of credit, foreign exchange contract or similar instrument, the Foreign Exchange Rate for such currency shall be determined as of the date on which such financial institution shall have been reimbursed; (ii) with respect to an Expense or a Loss covered by insurance, the Foreign Exchange Rate for such currency shall be the Foreign Exchange Rate employed by the insurance company providing such insurance in settling such Expense or Loss with the Indemnifying Party; and (iii) with respect to an Expense or a Loss not covered by clause (i) or (ii) above, the Foreign Exchange Rate for such currency shall be determined as of the date that notice of the claim with respect to such Expense or Loss shall be given to the Indemnified Party. 12.6. Procedures for Indemnification of Third Party Claims. (a) If ---------------------------------------------------- any third party shall make any claim or commence any arbitration proceeding or suit (collectively, a "Third Party Claim") against any one or more of the ----------------- Indemnified Parties with respect to which an Indemnified Party intends to make any claim for indemnification against eLoyalty under Section 12.2 or against TSC ------------ under Section 12.3, such Indemnified Party shall promptly give written notice to ------------ the Indemnifying Party describing such Third Party Claim in reasonable detail, and the following provisions shall apply. Notwithstanding the foregoing, the failure of any Indemnified Party to provide notice in accordance with this Section 12.6(a) shall not relieve the related Indemnifying Party of its - --------------- obligations under this Article XII, except to the extent that such Indemnifying ----------- Party is actually prejudiced by such failure to provide notice. (b) The Indemnifying Party shall have 20 business days after receipt of the notice referred to in Section 12.6(a) to notify the Indemnified Party --------------- that it elects to conduct and control the defense of such Third Party Claim. If the Indemnifying Party does not give the foregoing notice, the Indemnified Party shall have the right to defend, contest, settle or compromise such Third Party Claim in the exercise of its exclusive discretion subject to the provisions of Section 12.6(c), and the Indemnifying Party shall, upon request from any of the - --------------- Indemnified Parties, promptly pay to such Indemnified Parties in accordance with the other terms of this Section 12.6(b) the amount of any Expense or Loss --------------- resulting from their liability to the third party claimant. If the Indemnifying Party gives the foregoing notice, the Indemnifying Party shall have the right to undertake, conduct and control, through counsel reasonably acceptable to the Indemnified Party, and at its sole expense, the conduct and settlement of such Third Party Claim, and the Indemnified Party shall cooperate with the Indemnifying Party in connection therewith, provided that (i) the Indemnifying -------- Party shall not thereby permit any lien, encumbrance or other adverse charge to thereafter attach to any asset of any Indemnified Party; (ii) the Indemnifying Party shall not thereby permit any injunction against any Indemnified Party; (iii) the Indemnifying Party shall permit the Indemnified Party and counsel chosen by the Indemnified Party and reasonably acceptable to the Indemnifying Party to monitor such conduct or settlement and shall -42- provide the Indemnified Party and such counsel with such information regarding such Third Party Claim as either of them may reasonably request (which request may be general or specific), but the fees and expenses of such counsel (including allocated costs of in-house counsel and other personnel) shall be borne by the Indemnified Party unless (A) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel or (B) the named parties to any such Third Party Claim include the Indemnified Party and the Indemnifying Party and in the reasonable opinion of counsel to the Indemnified Party representation of both parties by the same counsel would be inappropriate due to actual or likely conflicts of interest between them, in either of which cases the reasonable fees and disbursements of counsel for such Indemnified Party (including allocated costs of in-house counsel and other personnel) shall be reimbursed by the Indemnifying Party to the Indemnified Party; and (iv) the Indemnifying Party shall agree promptly to reimburse to the extent required under this Article XII the Indemnified Party for the full amount ----------- of any Expense or Loss resulting from such Third Party Claim and all related expenses incurred by the Indemnified Party. In no event shall the Indemnifying Party, without the prior written consent of the Indemnified Party, settle or compromise any claim or consent to the entry of any judgment that does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party a release from all liability in respect of such claim. If the Indemnifying Party shall not have undertaken the conduct and control of the defense of any Third Party Claim as provided above, the Indemnifying Party shall nevertheless be entitled through counsel chosen by the Indemnifying Party and reasonably acceptable to the Indemnified Party to monitor the conduct or settlement of such claim by the Indemnified Party, and the Indemnified Party shall provide the Indemnifying Party and such counsel with such information regarding such Third Party Claim as either of them may reasonably request (which request may be general or specific), but all costs and expenses incurred in connection with such monitoring shall be borne by the Indemnifying Party. (c) So long as the Indemnifying Party is contesting any such Third Party Claim in good faith, the Indemnified Party shall not pay or settle any such Third Party Claim. Notwithstanding the foregoing, the Indemnified Party shall have the right to pay or settle any such Third Party Claim, provided that -------- in such event the Indemnified Party shall waive any right to indemnity therefor by the Indemnifying Party, and no amount in respect thereof shall be claimed as an Expense or a Loss under this Article XII. ----------- If the Indemnified Party shall have undertaken the conduct and control of the defense of any Third Party Claim as provided above, the Indemnified Party, on not less than 30 days prior written notice to the Indemnifying Party, may make settlement (including payment in full) of such Third Party Claim, and such settlement shall be binding upon the Parties for the purposes hereof, unless within said 30-day period the Indemnifying Party shall have requested the Indemnified Party to contest such Third Party Claim at the expense of the Indemnifying Party. In such event, the Indemnified Party shall promptly comply with such request and the Indemnifying Party shall have the right to direct the defense of such claim or any litigation based thereon subject to all of the conditions of Section 12.6(b). Notwithstanding anything in this Section 12.6(c) --------------- --------------- to -43- the contrary, if the Indemnified Party, in the belief that a claim may materially and adversely affect it other than as a result of money damages or other money payments, advises the Indemnifying Party that it has determined to settle a claim, the Indemnified Party shall have the right to do so at its own cost and expense, without any requirement to contest such claim at the request of the Indemnifying Party, but without any right under the provisions of this Article XII for indemnification by the Indemnifying Party. - ----------- (d) To the extent that, with respect to any Tax audit or proceeding governed by Article V of the Tax Sharing Agreement, there is any inconsistency --------- between the provisions of such Article V and of this Section 12.6, the --------- ------------ provisions of Article V of the Tax Sharing Agreement shall control with respect --------- to such Tax audit or proceeding. 12.7. Procedures for Indemnification of Direct Claims. Any claim ----------------------------------------------- for indemnification on account of an Expense or a Loss made directly by the Indemnified Party against the Indemnifying Party and that does not result from a Third Party Claim shall be asserted by written notice from the Indemnified Party to the Indemnifying Party specifically claiming indemnification hereunder. Such Indemnifying Party shall have a period of 30 business days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 30 business-day period, such Indemnifying Party shall be deemed to have accepted responsibility to make payment and shall have no further right to contest the validity of such claim. If such Indemnifying Party does respond within such 30 business-day period and rejects such claim in whole or in part, such Indemnified Party shall be free to pursue resolution as provided in Article XIII. - ------------ 12.8. Contribution. If the indemnification provided for in this ------------ Article XII is unavailable to an Indemnified Party in respect of any Expense or - ----------- Loss arising out of or related to information contained in the Registration Statement or the Information Statement, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Expense or Loss in such proportion as is appropriate to reflect the relative fault of the eLoyalty Indemnified Parties, on the one hand, or the TSC Indemnified Parties, on the other hand, in connection with the statements or omissions that resulted in such Expense or Loss. The relative fault of any eLoyalty Indemnified Party, on the one hand, and of any TSC Indemnified Party, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission of a material fact relates to information about or supplied by the eLoyalty Business or an eLoyalty Indemnified Party, on the one hand, or about or by the Retained Business or a TSC Indemnified Party, on the other hand. 12.9. Remedies Cumulative. The remedies provided in this Article ------------------- ------- XII shall be cumulative and, subject to the provisions of Article XIII below, - --- ------------ shall not preclude assertion by an Indemnified Party of any other rights or the seeking of any and all other remedies against any Indemnifying Party. -44- 12.10. Survival. All covenants and agreements of the Parties -------- contained in this Agreement relating to indemnification shall survive the Distribution Date indefinitely, unless a specific survival or other applicable period is expressly set forth herein. ARTICLE XIII DISPUTE RESOLUTION ------------------ 13.1. Agreement to Arbitrate. Except as otherwise specifically ---------------------- provided in any Operating Agreement, the procedures for discussion, negotiation and arbitration set forth in this Article XIII shall apply to all disputes, ------------ controversies or claims (whether sounding in contract, tort or otherwise) that may arise out of or relate to, or arise under or in connection with, this Agreement or any Operating Agreement, or the transactions contemplated hereby or thereby (including all actions taken in furtherance of the transactions contemplated hereby or thereby on or prior to the date hereof), or the commercial or economic relationship of the Parties. Each Party agrees on behalf of itself and its respective Subsidiaries and Affiliates that the procedures set forth in this Article XIII shall be the sole and exclusive remedy in connection ------------ with any dispute, controversy or claim relating to any of the foregoing matters and irrevocably waives any right to commence any Action in or before any Governmental Authority, except as expressly provided in Section 13.7(b) and --------------- except to the extent provided under the Arbitration Act in the case of judicial review of arbitration results or awards. EACH PARTY ON BEHALF OF ITSELF AND ITS RESPECTIVE SUBSIDIARIES AND AFFILIATES IRREVOCABLY WAIVES ANY RIGHT TO ANY TRIAL IN A COURT THAT WOULD OTHERWISE HAVE JURISDICTION OVER ANY CLAIM, CONTROVERSY OR DISPUTE SET FORTH IN THE FIRST SENTENCE OF THIS SECTION 13.1. ------------ 13.2. Escalation and Mediation. (a) The Parties agree to use ------------------------ commercially reasonable efforts to resolve expeditiously any dispute, controversy or claim between them with respect to the matters covered hereby that may arise from time to time on a mutually acceptable negotiated basis. In furtherance of the foregoing, any Party involved in a dispute, controversy or claim may deliver a notice (an "Escalation Notice") demanding an in-person ----------------- meeting involving representatives of the Parties at a senior level of management of the Parties (or if the Parties agree, of the appropriate strategic business unit or division within such entity). A copy of any such Escalation Notice shall be given to the General Counsel, or like officer or official, of each Party involved in the dispute, controversy or claim (which copy shall state that it is an Escalation Notice pursuant to this Agreement). Any agenda, location or procedures for such discussions or negotiations between the Parties may be established by the Parties from time to time; provided, however, that the -------- ------- Parties shall use commercially reasonable efforts to meet within 30 days of the Escalation Notice. -45- (b) The Parties must retain a mediator to aid the Parties in their discussions and negotiations by informally providing advice to the Parties. Any opinion expressed by the mediator shall be strictly advisory and shall not be binding on the Parties, nor shall any opinion expressed by the mediator be admissible in any arbitration proceeding. The mediator shall be selected by the Party that did not deliver the applicable Escalation Notice from the list of individuals set forth on Exhibit H, the names of which individuals were supplied --------- to the Parties by JAMS/Endispute. Costs of the mediation shall be borne equally by the Parties involved in the matter, except that each Party shall be responsible for its own expenses. Mediation is a prerequisite to a demand for arbitration under Section 13.3. ------------ 13.3. Procedures for Arbitration. (a) At any time after the -------------------------- completion of the mediation required by Section 13.2(b) (the "Arbitration Demand --------------- ------------------ Date"), any Party involved in the dispute, controversy or claim (regardless of - ---- whether such Party delivered the Escalation Notice) may, unless the Applicable Deadline (as hereinafter defined) has occurred, make a written demand (the "Arbitration Demand Notice") that the dispute be resolved by binding - -------------------------- arbitration, which Arbitration Demand Notice shall be given to the Parties to the dispute, controversy or claim in the manner set forth in Section 15.9. In ------------ the event that any Party shall deliver an Arbitration Demand Notice to another Party, such other Party may itself deliver an Arbitration Demand Notice to such first Party with respect to any related dispute, controversy or claim with respect to which the Applicable Deadline has not passed without the requirement of delivering an Escalation Notice. No Party may assert that the failure to resolve any matter during any discussions or negotiations, the course of conduct during the discussions or negotiations or the failure to agree on a mutually acceptable time, agenda, location or procedures for the meeting, in each case, as contemplated by Section 13.2, is a prerequisite to a demand for arbitration ------------ under this Section 13.3. In the event that any Party delivers an Arbitration ------------ Demand Notice with respect to any dispute, controversy or claim that is the subject of any then pending arbitration proceeding or of a previously delivered Arbitration Demand Notice, all such disputes, controversies and claims shall be resolved in the arbitration proceeding for which an Arbitration Demand Notice was first delivered unless the arbitrator in his or her sole discretion determines that it is impracticable or otherwise inadvisable to do so. (b) Except as may be expressly provided in any Operating Agreement, any Arbitration Demand Notice may be given until one year and 45 days after the later of (i) the occurrence of the act or event giving rise to the underlying claim or (ii) the date on which such act or event was, or should have been, in the exercise of reasonable due diligence, discovered by the Party asserting the claim (as applicable and as it may in a particular case be specifically extended by the Parties in writing, the "Applicable Deadline"). Any discussions, ------------------- negotiations or mediations between the Parties pursuant to this Agreement or otherwise will not toll the Applicable Deadline unless expressly agreed in writing by the Parties. Each Party agrees on behalf of itself and its respective Subsidiaries and Affiliates that if an Arbitration Demand Notice with respect to a dispute, controversy or claim is not given prior to the expiration of the Applicable Deadline, such dispute, controversy or claim will be barred. Subject to Section 13.7(d), upon delivery of an Arbitration Demand Notice --------------- pursuant to Section 13.3(a) prior to the Applicable Deadline, the --------------- -46- dispute, controversy or claim shall be decided by a sole arbitrator in accordance with the rules set forth in this Article XIII. ------------ 13.4. Selection of Arbitrator. (a) If the amount in dispute is less ----------------------- than $500,000, the mediator selected by the provisions set forth in Section ------- 13.2(b) above shall also serve as the sole arbitrator. If the amount in dispute - ------- equals or exceeds $500,000, the mediator selected by the provisions set forth in Section 13.2(b) above shall select a sole arbitrator from a list provided by - --------------- JAMS/Endispute. After selection of such sole arbitrator, the mediator shall have no further role with respect to the dispute. Any arbitrator selected pursuant to this paragraph (a) shall be disinterested with respect to any of the Parties and the matter and shall be reasonably competent in the applicable subject matter. (b) The sole arbitrator selected pursuant to paragraph (a) above will set a time for the hearing of the matter which will commence no later than 90 days after the date of appointment of the sole arbitrator pursuant to paragraph (a) above, and such hearing will be no longer than 30 days (unless in the judgment of the arbitrator the matter is unusually complex and sophisticated and thereby requires a longer time, in which event such hearing shall be no longer than 90 days). The final decision of such arbitrator will be rendered in writing to the Parties not later than 60 days after the last hearing date, unless otherwise agreed by the Parties in writing. 13.5. Hearings. Within the time period specified in Section -------- ------- 13.4(d), the matter shall be presented to the arbitrator at a hearing by means - ------- of written submissions of memoranda and verified witness statements, filed simultaneously, and responses, if necessary in the judgment of the arbitrator or both of the Parties. If the arbitrator deems it to be essential to a fair resolution of the dispute, live cross-examination or direct examination may be permitted, but is not generally contemplated to be necessary. The arbitrator shall actively manage the arbitration with a view to achieving a just, speedy and cost-effective resolution of the dispute, claim or controversy. The arbitrator may, in his or her sole discretion, set time and other limits on the presentation of each Party's case, its memoranda or other submissions, and refuse to receive any proffered evidence that the arbitrator, in his or her sole discretion, finds to be cumulative, unnecessary, irrelevant or of low probative nature. Except as otherwise set forth herein, any arbitration hereunder will be conducted in accordance with the JAMS/Endispute Streamlined Rules for Commercial, Real Estate and Construction Cases then prevailing. The decision of the arbitrator will be final and binding on the Parties, and judgment thereon may be had and will be enforceable in any court having jurisdiction over the Parties. Arbitration awards will bear interest at an annual rate of the Prime Rate plus 2% per annum. To the extent that the provisions of this Agreement and the prevailing rules of JAMS/Endispute conflict, the provisions of this Agreement shall govern. 13.6. Discovery and Certain Other Matters. (a) Any Party involved ----------------------------------- in the applicable dispute may request limited document production from the other Party of specific and expressly relevant documents, with the reasonable expenses of the producing Party incurred in such production paid by the requesting Party. Any such discovery (which rights to documents shall be substantially less than document discovery rights prevailing under the Federal Rules of Civil Procedure) shall be conducted expeditiously and shall not cause the hearing provided for in -47- Section 13.5 to be adjourned except upon consent of all of the Parties or upon - ------------ an extraordinary showing of cause demonstrating that such adjournment is necessary to permit discovery essential to a Party to the proceeding. Depositions, interrogatories or other forms of discovery (other than the document production set forth above) shall not occur except by consent of all of the Parties. Disputes concerning the scope of document production and enforcement of the document production requests will be determined by written agreement of the Parties or, failing such agreement, will be referred to the arbitrator for resolution. All discovery requests will be subject to the Parties' rights to claim any applicable privilege. The arbitrator will adopt procedures to protect the proprietary rights of the Parties and to maintain the confidential treatment of the arbitration proceedings (except as may be required by law). Subject to the foregoing, the arbitrator shall have the power to issue subpoenas to compel the production of documents relevant to the dispute, controversy or claim. (b) The arbitrator shall have full power and authority to determine issues of arbitrability but shall otherwise be limited to interpreting or construing the applicable provisions of this Agreement or any Operating Agreement, and will have no authority or power to limit, expand, alter, amend, modify, revoke or suspend any condition or provision of this Agreement or any Operating Agreement; it being understood, however, that the arbitrator will have full authority to implement the provisions of this Agreement or any Operating Agreement and to fashion appropriate remedies for breaches of this Agreement (including interim or permanent injunctive relief); provided, however, that the -------- ------- arbitrator shall not have any authority in excess of the authority a court having jurisdiction over the Parties and the controversy or dispute would have absent these arbitration provisions. It is the intention of the Parties that in rendering a decision the arbitrator give effect to the applicable provisions of this Agreement and the Operating Agreements and follow applicable law (it being understood and agreed that this sentence shall not give rise to a right of judicial review of the arbitrator's award). (c) If a Party fails or refuses to appear at and participate in an arbitration hearing after due notice, the arbitrator may hear and determine the controversy upon evidence produced by the appearing Party. (d) Arbitration costs will be borne equally by each Party involved in the matter, except that each Party will be responsible for its own attorney's fees and other costs and expenses, including the costs of witnesses selected by such Party. 13.7. Certain Additional Matters. (a) Any arbitration award shall be -------------------------- a bare award limited to a holding for or against a Party and shall be without findings as to facts, issues or conclusions of law (including with respect to any matters relating to the validity or infringement of patents or patent applications) and shall be without a statement of the reasoning on which the award rests, but must be in adequate form so that a judgment of a court may be entered thereupon. Judgment upon any arbitration award hereunder may be entered in any court having jurisdiction thereof. -48- (b) Prior to the time at which an arbitrator is appointed pursuant to Section 13.4, any Party may seek one or more temporary restraining orders in a - ------------ court of competent jurisdiction if necessary in order to preserve and protect the status quo. Neither the request for, nor the grant or denial of, any such temporary restraining order shall be deemed a waiver of the obligation to arbitrate as set forth herein, and the arbitrator may dissolve, continue or modify any such order. Any such temporary restraining order shall remain in effect until the first to occur of the expiration of the order in accordance with its terms or the dissolution thereof by the arbitrator. (c) Except as required by law, the Parties shall hold, and shall cause their respective officers, directors, employees, agents and other representatives to hold, the existence, content and result of mediation or arbitration in confidence in accordance with the provisions of Article XIV and ----------- except as may be required in order to enforce any award. Each of the Parties shall request that any mediator or arbitrator comply with such confidentiality requirement. (d) In the event that at any time the sole arbitrator shall fail to serve as an arbitrator for any reason, the Parties shall select a new arbitrator who shall be disinterested as to the Parties and the matter in accordance with the procedure set forth herein for the selection of the initial arbitrator. The extent, if any, to which testimony previously given shall be repeated or as to which the replacement arbitrator elects to rely on the stenographic record (if there is one) of such testimony shall be determined by the replacement arbitrator. 13.8. Continuity of Service and Performance. Unless otherwise ------------------------------------- agreed in writing, the Parties will continue to provide service and honor all other commitments under this Agreement and each Operating Agreement during the course of dispute resolution pursuant to the provisions of this Article XIII ------------ with respect to all matters not subject to such dispute, controversy or claim. 13.9. Law Governing Arbitration Procedures. The interpretation of ------------------------------------ the provisions of this Article XIII, only insofar as they relate to the ------------ agreement to arbitrate and any procedures pursuant thereto, shall be governed by the Arbitration Act and other applicable federal law. In all other respects, the interpretation of this Agreement shall be governed as set forth in Section ------- 15.2. - ---- 13.10. Choice of Forum. Any arbitration hereunder shall take place --------------- in Chicago, Illinois, unless otherwise agreed in writing by the Parties. ARTICLE XIV ACCESS TO INFORMATION AND SERVICES ---------------------------------- 14.1. Agreement for Exchange of Information. (a) At all times ------------------------------------- from and after the Distribution Date for a period of ten (10) years, as soon as reasonably practicable after written -49- request: (i) TSC shall afford to eLoyalty, its Subsidiaries and their authorized accountants, counsel and other designated representatives reasonable access during normal business hours to, or, at eLoyalty's expense, provide copies of, all records, books, contracts, instruments, data, documents and other information (collectively, "Information") in the possession or under the control ----------- of TSC immediately following the Distribution Date that relates to eLoyalty, the eLoyalty Business or the eLoyalty Employees; and (ii) eLoyalty shall afford to TSC, its Subsidiaries and their authorized accountants, counsel and other designated representatives reasonable access during normal business hours to, or, at TSC's expense, provide copies of, all Information in the possession or under the control of eLoyalty immediately following the Distribution Date that relates to TSC, the TSC Business or the TSC Employees; provided, however, that -------- ------- in the event Party determines that any such provision of or access to Information could be commercially detrimental, violate any law or agreement or waive any attorney-client privilege, the Parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence. (b) Either Party may request Information under Section 14.1(a) (i) to --------------- comply with reporting, disclosure, filing or other requirements imposed on the requesting party (including under applicable securities or tax laws) by a Governmental Authority having jurisdiction over the requesting party, (ii) for use in any other judicial, regulatory, administrative, tax or other proceeding or in order to satisfy audit, accounting, claims defense, regulatory filings, litigation, tax or other similar requirements, (iii) for use in compensation, benefit or welfare plan administration or other bona fide business purposes or (iv) to comply with its obligations under this Agreement or any Operating Agreement. 14.2. Ownership of Information. Any Information owned by one Party ------------------------ that is provided to a requesting Party pursuant to Section 14.1 shall be deemed ------------ to remain the property of the providing Party. Unless specifically set forth herein, nothing contained in this Agreement shall be construed to grant or confer rights of license or otherwise in any such Information. 14.3. Compensation for Providing Information. The Party requesting -------------------------------------- Information agrees to reimburse the providing Party for the reasonable costs, if any, of creating, gathering and copying such Information, to the extent that such costs are incurred for the benefit of the requesting Party. Except as otherwise specifically provided in this Agreement, such costs shall be computed in accordance with the providing Party's standard methodology and procedures. 14.4. Retention of Records. To facilitate the possible exchange of -------------------- Information pursuant to this Article XIV after the Distribution Date, the ----------- Parties agree to use commercially reasonable efforts to retain all Information in their respective possession or control on the Distribution Date in accordance with the policies and procedures of TSC as in effect on the Distribution Date. No party will destroy, or permit any of its Subsidiaries or Affiliates to destroy, any Information that the other Party may have the right to obtain pursuant to this Agreement prior to the seventh anniversary of the date hereof, and thereafter without first using commercially -50- reasonable efforts to notify the other Party of the proposed destruction and giving the other Party the opportunity to take possession of such Information prior to such destruction; provided, however, that in the case of any -------- ------- Information relating to Taxes, such period shall be extended to one year after the expiration of the applicable statute of limitations (giving effect to any extensions thereof). 14.5. Limitation of Liability. No Party shall have any liability to ----------------------- the other Party (i) if any Information exchanged or provided pursuant to this Agreement that is an estimate or forecast, or that is based on an estimate or forecast, is found to be inaccurate, in the absence of willful misconduct by the Party providing such Information, or (ii) if any Information is destroyed after commercially reasonable efforts to comply with the provisions of Section 14.4. ------------ 14.6. Production of Witnesses. At all times from and after the ----------------------- Distribution Date, each Party shall use commercially reasonable efforts to make available to the other Party (without cost (other than reimbursement of actual out-of-pocket expenses) to, and upon prior written request of, the other Party) its directors, officers, employees and agents as witnesses to the extent that the same may reasonably be required by the other Party in connection with any legal, administrative or other proceeding in which the requesting Party may from time to time be involved with respect to the eLoyalty Business, the Retained Business or any transactions contemplated hereby. 14.7. Confidentiality. (a) From and after the Distribution Date, --------------- each of TSC and eLoyalty shall hold, and shall cause their respective directors, officers, employees, agents, consultants, advisors and other representatives to hold, in strict confidence, with at least the same degree of care that applies to TSC's confidential and proprietary information pursuant to policies in effect as of the Distribution Date, all non-public information concerning or belonging to the other Party or any of its Subsidiaries or Affiliates obtained by it prior to the Distribution Date, accessed by it pursuant to Section 14.1 hereof, or ------------ furnished to it by the other Party or any of its Subsidiaries or Affiliates pursuant to this Agreement or any agreement or document contemplated hereby, including, without limitation, any trade secrets, technology, know-how and other non-public, proprietary intellectual property rights licensed pursuant to the Intellectual Property License Agreements and shall not release or disclose such information to any other Person, except its representatives, who shall be bound by the provisions of this Section 14.7; provided, however, that TSC and eLoyalty ------------ -------- ------- and their respective directors, officers, employees, agents, consultants, advisors and other representatives may disclose such information if, and only to the extent that, (i) a disclosure of such information is compelled by judicial or administrative process or, in the opinion of such Party's counsel, by other requirements of law (in which case the disclosing Party will provide, to the extent practicable under the circumstances, advance written notice to the other Party of its intent to make such disclosure), or (ii) such Party can show that such information (A) is published or is or otherwise becomes available to the general public as part of the public domain without breach of this Agreement; (B) has been furnished or made known to the recipient without any obligation to keep it confidential by a third party under circumstances which are not known to the recipient to involve a breach of the third party's obligations to a Party -51- hereto; (C) was developed independently of information furnished to the recipient under this Agreement; or (D) in the case of information furnished after the Distribution Date, was not known to the recipient at the time of the Distribution but became known to the recipient prior to the time of receipt thereof from the other Party. (b) Each Party acknowledges that the other Party would not have an adequate remedy at law for the breach by the acknowledging Party of any one or more of the covenants contained in this Section 14.7 and agrees that, in the ------------ event of such breach, the other Party may, in addition to the other remedies that may be available to it, apply to a court for an injunction to prevent breaches of this Section 14.7 and to enforce specifically the terms and ------------ provisions of this Section. Notwithstanding any other Section hereof, the provisions of this Section 14.7 shall survive the Distribution Date ------------ indefinitely. 14.8. Privileged Matters. (a) Each of TSC and eLoyalty agrees to ------------------ maintain, preserve and assert all privileges, including, without limitation, privileges arising under or relating to the attorney-client relationship (which shall include without limitation the attorney-client and work product privileges), not heretofore waived, that relate to the eLoyalty Business and the Transferred Assets for any period prior to the Distribution Date ("Privilege" or --------- "Privileges"). Each Party agrees that it shall not waive any Privilege that ---------- could be asserted under applicable law without the prior written consent of the other Party. The rights and obligations created by this Section 14.8 shall ------------ apply to all information relating to the eLoyalty Business as to which, but for the Distribution, either Party would have been entitled to assert or did assert the protection of a Privilege ("Privileged Information"), including without ---------------------- limitation, (i) any and all information generated prior to the Distribution Date but which, after the Distribution, is in the possession of either Party; and (ii) all information generated, received or arising after the Distribution Date that refers to or relates to Privileged Information generated, received or arising prior to the Distribution Date. (b) Upon receipt by either Party of any subpoena, discovery or other request that may call for the production or disclosure of Privileged Information or if either Party obtains knowledge that any current or former employee of TSC or eLoyalty has received any subpoena, discovery or other request that may call for the production or disclosure of Privileged Information, such Party shall notify promptly the other Party of the existence of the request and shall provide the other Party a reasonable opportunity to review the information and to assert any rights it may have under this Section 14.8 or otherwise to prevent ------------ the production or disclosure of Privileged Information. Each Party agrees that it will not produce or disclose any information that may be covered by a Privilege under this Section 14.8 unless (i) the other Party has provided its ------------ written consent to such production or disclosure (which consent shall not be unreasonably withheld), or (ii) a court of competent jurisdiction has entered a final, nonappealable order finding that the information is not entitled to protection under any applicable Privilege. (c) TSC's transfer of books and records and other information to eLoyalty, and TSC's agreement to permit eLoyalty to possess Privileged Information existing or generated prior -52- to the Distribution Date, are made in reliance on eLoyalty's agreement, as set forth in Sections 14.7 and 14.8, to maintain the confidentiality of Privileged ------------- ---- Information and to assert and maintain all applicable Privileges. The access to information being granted pursuant to Section 14.1, the agreement to provide ------------ witnesses and individuals pursuant to Section 14.6 and the transfer of ------------ Privileged Information to eLoyalty pursuant to this Agreement shall not be deemed a waiver of any Privilege that has been or may be asserted under this Section 14.8 or otherwise. Nothing in this Agreement shall operate to reduce, - ------------ minimize or condition the rights granted to TSC in, or the obligations imposed upon eLoyalty by, this Section 14.8. ------------ ARTICLE XV MISCELLANEOUS ------------- 15.1. Entire Agreement. This Agreement and the Operating Agreements ---------------- including the Schedules and Exhibits referred to herein and therein and the documents delivered pursuant hereto and thereto, constitute the entire agreement between the Parties with respect to the subject matter contained herein or therein, and supersede all prior agreements, negotiations, discussions, understandings, writings and commitments between the Parties with respect to such subject matter. 15.2. Choice of Law and Forum. This Agreement shall be governed by ----------------------- and construed and enforced in accordance with the substantive laws (except for any otherwise applicable conflicts of law provisions) of the State of Illinois and the federal laws of the United States of America applicable therein, as though all acts and omissions related hereto occurred in Illinois. Any lawsuit arising from or related to this Agreement or any of the Operating Agreements shall be brought only in the United States District Court for the Northern District of Illinois or the Circuit Court of Cook County, Illinois. To the extent permissible by law, the Parties hereby consent to the jurisdiction and venue of such courts. Each Party hereby waives, releases and agrees not to assert, and agrees to cause its Affiliates to waive, release and not to assert, any rights such Party or its Affiliates may have under any foreign law or regulation that would be inconsistent with the terms of this Agreement as governed by Illinois law. 15.3. Amendment. This Agreement shall not be amended, modified or --------- supplemented except by a written instrument signed by an authorized representative of each of the Parties. 15.4. Waiver. Any term or provision of this Agreement may be waived, ------ or the time for its performance may be extended, by the Party or Parties entitled to the benefit thereof. Any such waiver shall be validly and sufficiently given for the purposes of this Agreement if, as to any Party, it is in writing signed by an authorized representative of such Party. The failure of any Party to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, or in any way to affect the validity of this Agreement or any part hereof or the -53- right of any Party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. 15.5. Partial Invalidity. Wherever possible, each provision hereof ------------------ shall be interpreted in such a manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision or provisions shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such provision or provisions or any other provisions hereof, unless such a construction would be unreasonable. 15.6. Execution in Counterparts. This Agreement may be executed in ------------------------- one or more counterparts, each of which shall be deemed an original instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have been signed by and delivered to each of the Parties. 15.7. Successors and Assigns. (a) This Agreement and each ---------------------- Operating Agreement shall be binding upon and inure to the benefit of the Parties hereto and thereto, respectively, and their successors and permitted assigns; provided, however, that the rights of either Party under this Agreement -------- ------- and each Operating Agreement shall not be assignable by such Party without the prior written consent of the other Party. The successors and permitted assigns hereunder shall include, without limitation, any permitted assignee as well as the successors in interest to such permitted assignee (whether by merger, liquidation (including successive mergers or liquidations) or otherwise). 15.8. Third Party Beneficiaries. Except to the extent otherwise ------------------------- provided in Section 10.5 or Article XII hereof or in any Operating Agreement, ------------ ----------- the provisions of this Agreement and each Operating Agreement are solely for the benefit of the Parties and their respective Affiliates, successors and permitted assigns and shall not confer upon any third Person any remedy, claim, liability, reimbursement or other right in excess of those existing without reference to this Agreement or any Operating Agreement. Nothing in this Agreement or any Operating Agreement shall obligate TSC or eLoyalty to assist any eLoyalty Employee to enforce any rights such employee may have with respect to any of the employee benefits described in this Agreement. 15.9. Notices. All notices, requests, claims, demands and other ------- communications required or permitted hereunder shall be in writing and shall be deemed given or delivered (i) when delivered personally, (ii) if transmitted by facsimile when confirmation of transmission is received, (iii) if sent by registered or certified mail, postage prepaid, return receipt requested, on the third business day after mailing or (iv) if sent by private courier when received; and shall be addressed as follows: If to TSC, to: -54- Technology Solutions Company 205 North Michigan Avenue Suite 1500 Chicago, Illinois 60601 Attention: General Counsel Telephone: (312) 228-4500 Facsimile: (312) 228-4501 If to eLoyalty, to: eLoyalty Corporation 205 North Michigan Avenue Suite 1500 Chicago, Illinois 60601 Attention: Chief Financial Officer Telephone: (312) 228-4500 Facsimile: (312) 228-4501 or to such other address as such Party may indicate by a notice delivered to the other Party. 15.10. Performance. Each Party shall cause to be performed, and ----------- hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary or Affiliate of such Party. 15.11. Force Majeure. No Party shall be deemed in fault of this ------------- Agreement or any Operating Agreement to the extent that any delay or failure in the performance of its obligations under this Agreement or any Operating Agreement results from any cause beyond its reasonable control and without its fault or negligence, including, without limitation, acts of God, acts of civil or military authority, embargoes, epidemics, war, riots, insurrections, fires, explosions, earthquakes, floods, unusually severe weather conditions, labor problems or unavailability of parts, or, in the case of computer systems, any failure in electrical or air conditioning equipment. In the event of any such excused delay, the time for performance shall be extended for a period equal to the time lost by reason of the delay. 15.12. No Public Announcement. Neither TSC nor eLoyalty shall, ---------------------- without the approval of the other, make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that any such Party shall be so obligated by law or the rules of any stock exchange or quotation system, in which case the other Party shall be advised and the Parties shall use commercially reasonable efforts to cause a mutually agreeable release or announcement to be issued; provided, -------- however, that the foregoing shall not preclude communications or disclosures - ------- necessary to implement the provisions of this -55- Agreement or to comply with the accounting and SEC disclosure obligations or the rules of any stock exchange. 15.13. Termination. Notwithstanding any provisions hereof, this ----------- Agreement may be terminated and the Distribution abandoned at any time prior to the Distribution Date by and in the sole discretion of the Board of Directors of TSC without the prior written approval of any Person. In the event of such termination, this Agreement shall forthwith become void and no Party shall have any liability to any Person by reason of this Agreement, except that TSC shall be liable for any costs and expenses, including attorneys' fees, incurred by eLoyalty or its Subsidiaries prior to or arising out of such termination. -56- IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their authorized representatives as of the date first above written. TECHNOLOGY SOLUTIONS COMPANY By: /s/ WILLIAM H. WALTRIP ------------------------------------------- William H. Waltrip Chairman of the Board eLOYALTY CORPORATION By: /s/ TIMOTHY J. CUNNINGHAM ------------------------------------------- Timothy J. Cunningham Chief Financial Officer, Secretary and Treasurer Signature Page to the Reorganization Agreement EX-4.1 3 CERTIFICATE OF DESIGNATION EXHIBIT 4.1 CERTIFICATE OF DESIGNATION OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK OF TECHNOLOGY SOLUTIONS COMPANY ________________________________________________________________________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware ________________________________________________________________________________ The undersigned do hereby certify that the following resolution was duly adopted by the Board of Directors of Technology Solutions Company, a Delaware corporation (the "Corporation"), on October 29, 1998: RESOLVED, that pursuant to the authority vested in the board of directors of the Corporation by the Certificate of Incorporation, as amended (the "Charter"), the Board of Directors does hereby create, authorize and provide for the issue of a series of Preferred Stock, par value $.01 per share, of the Corporation, to be designated "Series A Junior Participating Preferred Stock" (hereinafter referred to as the "Series A Preferred Stock"), initially consisting of 1,000,000 shares, and to the extent that the designations, powers, preferences and relative and other special rights and the qualifications, limitations or restrictions of the Series A Preferred Stock are not stated and expressed in the Charter, does hereby fix and herein state and express such designations, powers, preferences and relative and other special rights and the qualifications, limitations and restrictions thereof, as follows (all terms used herein which are defined in the Charter shall be deemed to have the meanings provided therein): Section 1. Designation and Amount. The shares of such series shall ---------------------- be designated as "Series A Junior Participating Preferred Stock" and the number of shares constituting such series shall be 1,000,000. Section 2. Dividends and Distributions. --------------------------- (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Preferred Stock with -1- respect to dividends, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first business day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $.01 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, par value $.01 per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time after October 29, 1998 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided, however, that, in the event no -------- ------- dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior to and superior to the shares of Series A Preferred Stock with respect to dividends, a dividend of $.01 per share on the Series A Preferred Stock shall nevertheless by payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the -2- Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. ------------- The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote collectively as one class on all matters submitted to a vote of stockholders of the Corporation. (C) (i) If at any time dividends on any Series A Preferred Stock shall be in arrears in an amount equal to -3- six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) Directors. (ii) During any default period, such voting right of the holders of Series A Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that such voting right shall not be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting rights. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) Directors or, if such right is exercised at an annual meeting, to elect two (2) Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A ---- ----- Preferred Stock. (iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of special -4- meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the Chairman of the Board, the President, a Vice President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this paragraph (C)(iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him or her at his or her last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 10 days and not later than 50 days after such order or request, or in default of the calling of such meeting within 50 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this paragraph (C)(iii), no such special meeting shall be called during the period within 50 days immediately preceding the date fixed for the next annual meeting of the stockholders. (iv) In any default period, the holders of Common Stock, and, if applicable, other classes of capital stock of the Corporation, shall continue to be entitled to elect the whole number of Directors until the holders of Preferred Stock shall have exercised their right to elect two (2) Directors voting as a class, after the exercise of which right (x) the Directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of capital stock which elected the Director whose office shall have become vacant. References in this paragraph (C) to Directors elected by the holders of a particular class of stock shall include Directors appointed by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in -5- the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. (D) Except as set forth herein, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. -------------------- (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of capital stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any capital stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any capital stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of capital stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as -6- determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. ----------------- Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. -------------------------------------- (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of capital stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Preferred Stock and Common Stock, respectively, and the payment of liquidation preferences of all other shares of capital stock -7- which rank prior to or on a parity with Series A Preferred Stock, holders of Series A Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. -------------------------- In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of capital stock, securities, cash and/or any other property (payable in kind), as the case may be, for which or into which each share of Common Stock is exchanged or changed. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is -8- the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. ------------- The shares of Series A Preferred Stock shall not be redeemable. Section 9. Ranking. ------- The Series A Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, whether or not upon the dissolution, liquidation or winding up of the Corporation, unless the terms of any such series shall provide otherwise. Section 10. Amendment. --------- The Charter shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority of the outstanding shares of Series A Preferred Stock, voting separately as a class. Section 11. Fractional Shares. ----------------- Series A Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. -9- IN WITNESS WHEREOF, Technology Solutions Company has caused its corporate seal to be hereunto affixed and this certificate to be signed by John T. Kohler, its President and Chief Executive Officer, and the same to be attested to by Paul R. Peterson, its Secretary and General Counsel, this 29th day of October, 1998. TECHNOLOGY SOLUTIONS COMPANY By: /s/ JOHN T. KOHLER ------------------------------------ Name: John T. Kohler Title: President and Chief Executive Officer (Corporate Seal) Attest: /s/ PAUL R. PETERSON - --------------------------------- Paul R. Peterson Secretary and General Counsel -10- EX-4.3 4 FIRST AMENDMENT TO RIGHTS AGREEMENT EXHIBIT 4.3 First Amendment to Rights Agreement First Amendment, dated as of February 9, 2000 (this "Amendment"), to Rights Agreement, dated as of October 29, 1998 (the "Rights Agreement"), between Technology Solutions Company, a Delaware corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C., a New Jersey limited liability company (the "Rights Agent"). W I T N E S S E T H : Whereas, the Board of Directors of the Company, at a meeting held on January 26, 2000 and based in part on the recommendation of the Company's legal advisors, has determined that it is advisable and in the best interest of the Company to amend the Rights Agreement as set forth below; Whereas, at the date of this Amendment, the Distribution Date has not occurred and there is no Acquiring Person; and Whereas, in compliance with Section 27 of the Rights Agreement, the Company and the Rights Agent are willing to amend the Rights Agreement as hereinafter set forth and the Company and the Rights Agent have each executed and delivered this Amendment. Now, therefore, in consideration of the Rights Agreement and the premises and mutual agreements herein set forth, the parties hereby agree as follows: 1. The second sentence of Section 1(a) of the Rights Agreement is hereby amended and restated to read as follows: Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of shares of Common Stock by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the shares of Common Stock then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional shares of Common Stock (other than pursuant to a dividend or distribution paid or made by the Company on the outstanding Common Stock or pursuant to a split or subdivision of the outstanding Common Stock), then such Person shall be deemed to be an "Acquiring Person". 2. The last paragraph of Section 1 of the Rights Agreement is hereby amended by moving the word "and" appearing immediately before clause (xxii) to immediately before clause (xxi) and deleting clause (xxii) in its entirety. 3. Section 2 of the Rights Agreement is hereby amended by adding the following sentence at the end thereof: The Rights Agent shall have no duty to supervise, and in no event shall be liable for, the acts or omissions of any such co-Rights Agent. 4. The first sentence of Section 3(a) of the Rights Agreement is hereby amended and restated to read as follows: Until the earlier of (i) the Close of Business on the tenth day after the Stock Acquisition Date (or, if the tenth day after the Stock Acquisition Date occurs before the Record Date, the Close of Business on the Record Date) or (ii) the Close of Business on the tenth Business Day (or such later date as may be determined by action of the Board of Directors of the Company prior to such time as any Person becomes an Acquiring Person) after the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person organized, appointed or established by the Company for or pursuant to the terms of any such plan) is first published or sent or given within the meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act, if upon consummation thereof, such Person would be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding (the earlier of (i) and (ii) being herein referred to as the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of paragraph (b) of this Section 3) by the certificates for the Common Stock registered in the names of the holders of the Common Stock (which certificates for Common Stock shall be deemed also to be 2 certificates for Rights) and not by separate certificates and (y) the Rights will be transferable only in connection with the transfer of the underlying shares of Common Stock (including a transfer to the Company). 5. Section 6(a) of the Rights Agreement is hereby amended by adding the following sentence at the end thereof: The Rights Agent shall have no duty or obligation to take any action under any Section of this Agreement which requires the payment by a Rights holder of applicable taxes and governmental charges unless and until the Rights Agent is satisfied that all such taxes and/or charges have been paid. 6. Section 11(o) of the Rights Agreement is hereby amended by inserting the phrase", Section 24" immediately after the phrase "Section 23". 7. Section 13(a) of the Rights Agreement is hereby amended by deleting each occurrence of the phrase "or during the pendency of a 180 Day Period". 8. Section 13(d) of the Rights Agreement is hereby deleted and Section 13(e) of the Rights Agreement is hereby redesignated as Section 13(d). 9. Section 14 of the Rights Agreement is hereby amended by adding Section 14(e), which shall read as follows: (e) The Rights Agent shall have no duty or obligation with respect to this Section 14 and Section 24(e) unless and until it has received specific instructions (and sufficient cash, if required) from the Company with respect to its duties and obligations under such Sections. 10. Section 18(a) of the Rights Agreement is hereby amended (i) by adding the phrase "(each as finally determined by a court of competent jurisdiction)" immediately after the word "misconduct" and (ii) by adding the word "punitive," immediately after the word "indirect,". 11. Section 20(c) of the Rights Agreement is hereby amended by adding the phrase "(each as finally determined by a court of competent jurisdiction)" immediately after the word "misconduct". 3 12. Section 23(c) of the Rights Agreement is hereby deleted. 13. The third occurrence of the word "such" appearing in Section 27 of the Rights Agreement and the last sentence of Section 27 of the Rights Agreement are hereby deleted. 14. The first sentence of the first paragraph appearing on page B-2 of the form of Rights Certificate attached as Exhibit B to the Rights Agreement is hereby amended by inserting the phrase", as the same may be amended from time to time" immediately after the first occurrence of the phrase "October 29, 1998". 15. The third full paragraph appearing on page B-3 of the form of Rights Certificate attached as Exhibit B to the Rights Agreement is hereby amended by deleting the sentence "Under certain circumstances set forth in the Rights Agreement, the Rights may not be redeemed for a period of one hundred eighty days (180)." 16. The last sentence of the first paragraph of the Summary of Rights to Purchase Preferred Stock attached as Exhibit C to the Rights Agreement is hereby amended and restated to read as follows: The description and terms of the Rights are set forth in a Rights Agreement, dated as of October 29, 1998 as amended by the First Amendment dated as of February 9, 2000 thereto (collectively, the "Rights Agreement"), between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. 17. The second paragraph of the Summary of Rights to Purchase Preferred Stock attached as Exhibit C to the Rights Agreement is hereby amended and restated to read as follows: Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate Rights certificates will be distributed. The Rights will separate from the Common Stock and the Distribution Date will occur upon the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock (the "Stock Acquisition Date") or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group becomes an 4 Acquiring Person) following the commencement of a tender offer or exchange offer which, if consummated, would result in a person or group beneficially owning 15% or more of the outstanding shares of Common Stock. 18. The ninth paragraph of the Summary of Rights to Purchase Preferred Stock attached as Exhibit C to the Rights Agreement is amended by deleting the phrase "or during the pendency of a 180 day period". 19. The last sentence of the thirteenth paragraph of the Summary of Rights to Purchase Preferred Stock attached as Exhibit C to the Rights Agreement is hereby deleted. 20. The last sentence of the fifteenth paragraph of the Summary of Rights to Purchase Preferred Stock attached as Exhibit C to the Rights Agreement is hereby deleted. 21. This Amendment shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed with in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. 22. This Amendment may be executed in two or more counterparts, each of which shall for all purposes be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 23. Any capitalized term used herein without definition shall have the meaning specified in the Rights Agreement. 24. Except as otherwise expressly set forth herein, this Amendment shall not by implication or otherwise alter, modify, amend or in any other manner affect any of the terms, conditions, obligations, covenants or agreements contained in the Rights Agreement, all of which are hereby ratified and confirmed in all respects and shall continue in full force and effect. 5 In Witness Whereof, the parties hereto have caused this Amendment to be duly executed and attested, all as of the day and year first above written. Attest: Technology Solutions Company By: /s/ PAUL R. PETERSON ____ By: /s/ TIMOTHY P. DIMOND __ Name: Paul R. Peterson Name: Timothy P. Dimond Title: Secretary and General Counsel Title: Senior Vice President and Chief Financial Officer Attest: ChaseMellon Shareholder Services, L.L.C. By: /s/ LEE TINTO ___________ By: /s/ LYNORE LECONCHE ____ Name: Lee Tinto Name: Lynore LeConche_____ Title: Vice President Title:_Vice President _______ 6 EX-10.12 5 JOHN T. KOHLER SEPARATION AGREEMENT EXHIBIT 10.12 SEPARATION AGREEMENT AND LIMITED MUTUAL RELEASE FROM EMPLOYMENT AGREEMENT This Separation Agreement and Limited Mutual Release from Employment Agreement (the "Separation Agreement") is entered into this ___ day of November, 1999 by and between Technology Solutions Company, a Delaware corporation with its principal place of business at 205 North Michigan Avenue, Suite 1500, Chicago, Illinois 60601 ("TSC") and John T. Kohler, an individual who resides in Chicago, Illinois ("Employee"). Collectively, TSC and Employee are referred to herein as the "Parties." WHEREAS, TSC and Employee previously entered into an Employment Agreement (the "Employment Agreement") dated as of January 19, 1996 pursuant to which Employee has since been employed by TSC as President and Chief Executive Officer; WHEREAS, Employee has also served as a member of the TSC Board of Directors since June 1994; WHEREAS, TSC is in the process of undergoing a series of transactions that are anticipated to result in its eLoyalty division becoming an independent, publicly-traded corporation that is subject to the reporting requirements under the Securities Exchange Act of 1934, as amended, and known as eLoyalty Corporation ("eLoyalty") through a distribution of eLoyalty shares to shareholders of TSC (the "Spin-off"); WHEREAS, Employee has served as a member of the eLoyalty Board of Directors since May 1999; WHEREAS, on the day prior to the Spin-off, Employee's Employment Agreement shall terminate as provided herein; WHEREAS, on the effective date of the Spin-off Employee shall resign as a director of TSC, as provided herein; WHEREAS, in lieu of any payment or other obligations that may be triggered by termination of the Employment Agreement, the Parties agree that TSC will make payments and other commitments to Employee as provided below; WHEREAS, the Parties desire to set forth their agreement in this Separation Agreement and to detail those respective obligations of the Parties from which each will be released and those respective obligations of the Parties that will survive the termination of the Employment Agreement. NOW THEREFORE, in consideration of the mutual premises and obligations contained herein, and notwithstanding anything contained in the Employment Agreement to the contrary, the Parties hereby agree as follows: 1. Termination of Employment Agreement. Effective at the close of ------------------------------------ business on the day before TSC distributes its shares of eLoyalty to the shareholders of TSC, Employee shall resign as President and Chief Executive Officer of TSC and Employee's Employment Agreement shall terminate. 2. Lump Sum Payment of Salary. In lieu of the on-going Current Salary --------------------------- payments to Employee as provided in Section 3(a) of the Employment Agreement, upon termination of the Employment Agreement TSC shall make a one-time, lump sum payment to Employee in the amount of $1,100,000 (less required withholding), such amount equal to two times Employee's current salary of $550,000 per year. 3. Lump Sum Payment of Bonus. In lieu of the on-going Average Bonus -------------------------- payments to Employee as provided in Section 3(a) of the Employment Agreement, upon termination of the Employment Agreement TSC shall make a one-time, lump sum payment to Employee in the amount of $647,000 (the "Bonus Payment"). If Employee so elects for the period commencing January 1, 2000, a portion of the Bonus Payment as elected will be contributed to Employee's deferred compensation account under the TSC Executive Deferred Compensation Plan, and the balance will be paid in cash to Employee (subject to required withholding). 4. Continuation of Health Benefits. TSC shall continue Employee's health -------------------------------- insurance benefits until the end of the two year period following the termination of the Employment Agreement or until Employee is re-employed, whichever comes first. 5. Resignation from TSC Board of Directors. Effective upon termination of ---------------------------------------- the Employment Agreement, Employee shall resign from the TSC Board of Directors. 6. Service as eLoyalty Director. Employee will continue to serve as a ----------------------------- director of eLoyalty. As a director of eLoyalty, Employee shall be entitled to receive the normal compensation given to eLoyalty directors. Employee agrees, however, that he shall not be entitled to receive any eLoyalty stock options as a director of eLoyalty until Employee would otherwise have received 125,000 eLoyalty options, at which time Employee shall be entitled to participate in the stock option program provided to eLoyalty directors at that time. 7. Forfeit of Previously Granted eLoyalty Options. Employee hereby agrees ----------------------------------------------- to forfeit 75,000 unvested options to acquire shares of stock of eLoyalty. 8. Treatment of Other TSC and eLoyalty Stock Options. As a director of -------------------------------------------------- eLoyalty, all stock options in both TSC and eLoyalty held by Employee pursuant to Stock Option Agreements shall continue to vest in accordance with the vesting schedules provided in the Stock Option Agreements for so long as Employee continues to serve as a director of eLoyalty; and further, the provisions in any of the Stock Option Agreements that require Employee to exercise vested options within 90 days of termination of employment with TSC shall not be triggered until the effective date of Employee's termination as a director of eLoyalty. 9. Treatment of Employee Deferred Compensation Account. TSC agrees that ---------------------------------------------------- the Compensation Committee of its Board of Directors will adopt a resolution that will provide that for purposes of the TSC Executive Deferred Compensation Plan, Employee's service as a director of eLoyalty shall be treated as service as an Eligible Employee as defined in the Plan. 10. Continuation of Voice Mail; Use of TSC Assets. TSC agrees that ---------------------------------------------- Employee will be entitled to continue use of voice mail for so long as Employee remains a director of eLoyalty. TSC further agrees that following termination of the Employment Agreement, Employee shall be entitled to retain possession and use of the TSC computers and equipment previously provided to Employee during his employment with TSC as set forth in Schedule A hereto for so long as Employee remains a director of eLoyalty. 11. Release of TSC by Employee. Except as specifically provided in this --------------------------- Separation Agreement, upon termination of the Employment Agreement TSC shall be released from all of its obligations under the Employment Agreement, including without limitation the obligations to continue paying Employee's base salary or from making any Current Salary payments or Average Bonus payments (as such terms are defined in Section 3(a) of the Employment Agreement). 12. Release of Employee by TSC. Upon termination of the Employment --------------------------- Agreement, Employee shall be released from his obligations to perform the duties of President and Chief Executive Officer of TSC. 13. Survival of Certain Terms. The following provisions of the Employment -------------------------- Agreement shall survive termination: Section 8 (Noncompetition and Nondisclosure), Section 9 (Remedies), Section 10 (Intellectual Property), Section 12 (Assignment), Section 13 (Notices), Section 14 (Entire Agreement), Section 15 (Applicable Law), Section 16 (Mediation of Disputes), Section 17 (Binding Arbitration), and Section 18 (Severability). 14. Notices. All notices shall be in writing. Notices intended for TSC -------- shall be sent by registered or certified mail addressed to it at 205 North Michigan Avenue, 15th Floor, Chicago, Illinois 60601 or its current principal office, and notices intended for Employee shall be either delivered personally to him or sent by registered or certified mail addressed to his last known address. 15. Entire Agreement. This Separation Agreement constitutes the entire ----------------- agreement between TSC and Employee with respect to the subject matter hereof. Neither Employee nor TSC may modify this Separation Agreement by oral agreements, promises or representations. The Parties may modify this Separation Agreement only by a written instrument signed by the Parties. 16. Applicable Law. This Separation Agreement shall be governed by and --------------- construed in accordance with the laws of the State of Illinois. 17. Severability. Whenever possible, each provision of this Separation ------------- Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Separation Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Separation Agreement. 18. Dispute Resolution. Any dispute between the Parties arising from or ------------------- in connection with this Separation Agreement shall be resolved using the procedure set forth in Sections 16 and 17 of the Employment Agreement. IN WITNESS WHEREOF, the Parties have executed this Separation Agreement and Limited Mutual Release from Employment Agreement as of the date first set forth above. TECHNOLOGY SOLUTIONS COMPANY EMPLOYEE By:_/s/ WILLIAM H. WATRIP /s/ JOHN T. KOHLER William H. Waltrip John T. Kohler Chairman of the Board of Directors Date:________________________________ Date:________________________ By:_/s/ JOHN R. PURCELL____ John R. Purcell Chairman of the Compensation Committee EX-10.13 6 LETTER AGREEMENT WITH JACK N. HAYDEN EXHIBIT 10.13 February 26, 1999 Mr. Jack N. Hayden 2608 Ocean Boulevard Corona Del Mar, California 92625 Dear Jack: We are pleased that you have decided not to terminate your employment with TSC and to resume your full-time employment effective April 1, 1999, pursuant to the terms set forth below. Your employment with TSC will continue to be governed by the letter of understanding of August 5, 1998, until April 1, 1999. On that date you will resume full-time employment pursuant to the terms of your January 19, 1996 employment agreement, subject to the following amendments: (a) your new position, which reports directly to me, shall be Group President; and, (b) your new base salary shall be $480 thousand per annum. In consideration for your agreement to resume full-time employment in your new role, TSC agrees to pay you a bonus of $460 thousand which shall not be grossed up for taxes. Additionally, TSC agrees to guarantee you a bonus for calendar year 1999 of at least $200 thousand. While the options you were previously granted shall remain in full force pursuant to the terms thereof, TSC agrees to grant you 150 thousand new options, subject to the approval of the Compensation Committee of the Board, pursuant to the company's current option agreement for existing employees. I am very enthused about your decision to resume full-time employment with the company in your new role. If you are in agreement with the terms of this letter and the accompanying agreement please execute them both and fax them to me at 312 228-4556. Following the execution of the faxes it is our intention to exchange hard copies for signature. Very truly yours, Concurrence /s/ JOHN T. KOHLER /s/ JACK N. HAYDEN John T. Kohler Jack N. Hayden President and Chief Executive Officer EX-10.14 7 JACK N. HAYDEN EMPLOYMENT AGREEMENT AMENDMENTS EXHIBIT 10.14 EMPLOYMENT AGREEMENT AMENDMENT Technology Solutions Company ("TSC") and Jack N. Hayden ("Employee") enter into this amendment to his Employment Agreement as of October 1, 1999. WHEREAS, on January 19, 1996 Employee entered into an employment agreement covering his position of Executive Vice President ("Employment Agreement"). WHEREAS, by agreement dated February 26, 1999 Employee's position was changed to Group President. WHEREAS, the Employment Agreement contains a termination provision which entitles Employee to receive his salary, a bonus equal to the average annual bonus earned during the two years immediately preceding the termination for each of the two years, and health insurance benefits for a two year period or until Employee is re-employed, whichever comes first, if Employee is terminated by TSC other than for Serious Misconduct. Employee and TSC now agree to amend the termination provision of his Employment Agreement, Section 3. Termination, paragraph (a) by inserting the following sentence at the end of paragraph (a): "Notwithstanding anything to the contrary in any of Employee's stock option agreements, Employee's unvested shares at option shall vest automatically when terminated if he is terminated by TSC other than for Serious Misconduct." Technology Solutions Company Jack N. Hayden By: /s/ JOHN T. KOHLER /s/ JACK N. HAYDEN --------------------- --------------------- Position: CEO Date: 10/5/99 --------------- --------------- Date: 10/4/99 ------------------ EX-10.15 8 PAUL R. PETERSON EMPLOYMENT AGREEMENT AMENDMENTS EXHIBIT 10.15 EMPLOYMENT AGREEMENT AMENDMENT Technology Solutions Company ("TSC") and Paul R. Peterson ("Employee") enter into this amendment to his Employment Agreement as of October 1, 1999. WHEREAS, on November 22, 1994 Employee entered into an employment agreement covering his position of General Counsel and Secretary ("Employment Agreement"). WHEREAS, the Employment Agreement contains a Change in Control provision which entitles Employee to receive his salary, bonus, and health insurance benefits for a one year period if following a Change in Control his title, position, duties, or salary is diminished and Employee resigns within 90 days after the diminishment becomes effective; or, if Employee is ordered to relocate permanently to any location outside the Chicago metropolitan area and employee declines and is terminated. Employee and TSC now agree to amend the Change in Control provision of his Employment Agreement (paragraph two of Section 3.) by inserting the following sentence after the first sentence in paragraph two: "Notwithstanding anything to the contrary in any of Employee's stock option agreements, Employee's unvested shares at option shall vest automatically upon a Change in Control." Technology Solutions Company Paul R. Peterson By: /s/ JOHN T. KOHLER /s/ PAUL R. PETERSON ------------------- Position: CEO ------ EX-10.16 9 TIMOTHY P. DIMOND EMPLOYMENT AGREEMENT EXHIBIT 10.16 EMPLOYMENT AGREEMENT Technology Solutions Company, doing business as TSC, and Timothy P. Dimond ("Employee") enter into this Employment Agreement ("Agreement") as of April 28, 1999. In consideration of the agreements and covenants contained in this Agreement, TSC and Employee agree as follows: 1. Employment Duties: TSC shall employ Employee as Senior Vice President and Chief Financial Officer. Employee shall have such responsibilities, duties and authority as the Chief Executive Officer may reasonably designate. The Chief Executive Officer may from time to time expand or contract such duties and responsibility and may enhance but not diminish Employee's title or position. Employee shall perform faithfully the duties assigned to him to the best of his ability and shall devote his full and undivided business time and attention to the transaction of TSC's business. 2. Term of Employment: The term of employment covered by this Agreement shall commence as of the effective date of this Agreement and continue until terminated pursuant to Section 3 below. 3. Termination: TSC may terminate Employee's employment and this Agreement for any reason upon giving Employee 90 days notice of termination. TSC may make the termination effective at any time within the 90 day notice period. TSC must, however, continue Employee's normal salary, bonus, and health insurance benefits for a period of one year following the effective date of the termination unless Employee is terminated for Serious Misconduct. TSC may terminate Employee's employment and this Agreement immediately without notice and with no salary and benefit continuation if Employee engages in "Serious Misconduct". "Serious Misconduct" means embezzlement or misappropriation of corporate funds, other acts of dishonesty, significant activities materially harmful to TSC's reputation, willful refusal to perform or substantial disregard of Employee's assigned duties (including, but not limited to, refusal to travel or work the requested hours), or any significant violation of any statutory or common law duty of loyalty to TSC. If following a Change in Control (which is defined as (i) the acquisition by any individual, entity or group, of beneficial ownership (within the meaning of Rule 13 d-3 promulgated under the Securities Exchange Act of 1934) of 40% or more of the outstanding shares of the common stock of TSC; (ii) the approval of the stockholders of TSC of a merger, where immediately after the merger, persons who were the holders of a majority of TSC's outstanding common stock immediately prior to the merger fail to own at least a majority of the outstanding common stock of the surviving entity in substantially the same proportions as their holdings of TSC common stock immediately prior to the merger; (iii) the sale of substantially all the assets of TSC other than to a corporation in which more that 60% of the outstanding shares are beneficially owned by the individuals and entities who are the beneficial owners of the Company stock prior to the acquisition, or (iv) the naming of a new CEO), Employee's title, position, duties, or salary is diminished and Employee resigns within 90 days after the diminishment becomes effective, or if Employee is ordered to relocate permanently to any location outside of the Chicago metropolitan area and employee declines and is terminated, Employee shall be entitled to Employee's normal salary, bonus, and health insurance benefits for a one-year period following his resignation or termination. Notwithstanding anything to the contrary in any of Employee's stock option agreements, Employee's unvested TSC shares at option shall vest automatically upon a Change in Control. If Employee dies or becomes permanently disabled and unable to continue to work at TSC, TSC must continue Employee's normal salary, bonus, and health insurance benefits for a period of one year following the date of his death or his permanent disability. Employee may terminate employment upon giving TSC 90 day notice. Upon receiving notice, TSC may waive its rights under this paragraph and make Employee's resignation effective immediately or anytime before the 90 day notice period ends. 4. Salary: As compensation for his services, TSC shall pay Employee a base salary in the amount listed in Exhibit A to this Agreement. Employee's base salary shall be subject to annual review and may, at the discretion of TSC's management, be increased from that listed in Exhibit A according to Employee's responsibilities, capabilities and performance during the preceding year. 5. Bonuses: TSC may elect to pay Employee annual bonuses. Payment of such bonuses, if any, shall be at the sole discretion of TSC. 6. Employee Benefits: During the employment period, Employee shall be entitled to participate in such employee benefit plans, including group pension, life and health insurance and other medical benefits, and shall receive all other fringe benefits, as TSC may make available to its Vice Presidents. 7. Business Expenses: TSC shall reimburse Employee for all reasonable and necessary business expenses incurred by Employee in performing his duties. Employee shall provide TSC with supporting documentation sufficient to satisfy reporting requirements of the Internal Revenue Service and TSC. TSC's determination as to reasonableness and necessary shall be final. 2 8. Noncompetition and Nondisclosure: Employee acknowledges that the successful development and marketing of TSC's professional services and products require substantial time and expense. Such efforts generate for TSC valuable and proprietary information ("confidential information") which gives TSC a business advantage over others who do not have such information. Confidential information of TSC and its clients and prospects includes, but is not limited to, the following: business strategies and plans; proposals; deliverables; prospects and customer lists; recruiting prospects and employee lists, methodologies; training materials; and computer software. Employee acknowledges that during the course of his employment, he will obtain knowledge of such confidential information. Accordingly, Employee agrees to undertake the following obligations which he acknowledges to be reasonably designed to protect TSC's legitimate business interests without unnecessarily or unreasonably restricting Employee's post-employment opportunities: (a) Upon termination of employment for any reason, Employee shall return all TSC property, including but not limited to computer programs, files, notes, records, charts, or other documents or things containing in whole or in part any of TSC's confidential information; (b) During the course of his employment and subsequent to termination, Employee agrees to treat all such information as confidential and to take all necessary precautions against disclosure of such information to third parties during and after Employee's employment with TSC. Employee shall refrain from using or disclosing to any person, without the prior written approval of TSC's Chief Executive Officer any confidential information unless at that time the information has become generally and lawfully known to TSC's competitors; (c) Without limiting the obligations of paragraph 8(b), Employee shall not, for a period of one year following his termination for any reason, for himself or as an agent, partner or employee of any person, firm or corporation, engage in the practice of consulting or related services for any client of TSC for whom Employee performed services, or prospective TSC client to whom Employee submitted, or assisted in the submission of a proposal during the two year period preceding his termination; (d) During a one year period immediately following Employee's termination for any reason, Employee shall not induce or assist in the inducement of any TSC employee away from TSC's employ or from the faithful discharge of such employee's contractual and fiduciary obligations to serve TSC's interests with undivided loyalty; (e) For one year following his termination for any reason, Employee shall keep TSC currently advised in writing of the name and address of each business organization for which he acts as agent, partner, representative or employee. 9. Remedies: Employee recognizes and agrees that a breach of any or all of the provisions of paragraph 8 will constitute immediate and irreparable harm to TSC's business advantage, including but not limited to TSC's valuable business relations, for 3 which damages cannot be readily calculated and for which damages are an inadequate remedy. Accordingly, Employee acknowledges that TSC shall therefore be entitled to an order enjoining any further breaches by the Employee. Employee agrees to reimburse TSC for all costs and expenses, including reasonable attorneys' fees, incurred by TSC in connection with the enforcement of its rights under any provision of this Agreement. 10. Intellectual Property: During the employment period, Employee shall disclose to TSC all ideas, inventions and business plans which he develops during the course of his employment with TSC which relate directly or indirectly to TSC's business, including but not limited to any computer programs, processes, products or procedures which may, upon application, be protected by patent or copyright. Employee agrees that any such ideas, inventions or business plans shall be the property of TSC and that Employee shall at TSC's request and cost, provide TSC with such assurances as is necessary to secure a patent or copyright. 11. Assignment: Employee acknowledges that the services to be rendered pursuant to this Agreement are unique and personal. Accordingly, Employee may not assign any of his rights or delegate any of his duties or obligations under this Agreement. TSC may assign its rights, duties or obligations under this Agreement to a purchaser or transferee of all, or substantially all, of the assets of TSC. 12. Notices: All notices shall be in writing, except for notice of termination which may be oral if confirmed in writing within 14 days. Notices intended for TSC shall be sent by registered or certified mail addressed to it at 205 North Michigan Avenue, 15th Floor, Chicago, Illinois 60601 or its current principal office, and notices intended for Employee shall be either delivered personally to his or sent by registered or certified mail addressed to his last known address. 13. Entire Agreement: This Agreement constitutes the entire agreement between TSC and Employee. Neither Employee nor TSC may modify this Agreement by oral agreements, promises or representations. The parties may modify this Agreement only by a written instrument signed by the parties. 14. Applicable Law: This Agreement shall be governed by and construed in accordance with the laws of the State of Illinois. 15. Mediation of Disputes: Neither party shall initiate arbitration or other legal proceedings (except for any claim in equity under Sections 8(b), 8(c), or 8(d) of this Agreement), against the other party, or, in the case of TSC, any of its directors, officers, employees, agents, or representatives, relating in any way to this Agreement, to Employee's employment with TSC, the termination of his employment or any or all other claims that one party might have against the other party until 30 days after the party against whom the claim[s] is made ("respondent") receives written notice from the claiming party of the specific nature of any purported claim and the amount of any purported damages. Employee and TSC further agree that if respondent submits the claiming party's claim to the Center for Public Resources, 680 Fifth Avenue, New York, 4 New York 10019, for nonbinding mediation prior to the expiration of such 30 day period, the claiming party may not institute arbitration or other legal proceedings against respondent until the earlier of a) the completion of nonbinding mediation efforts, or b) 90 days after the date on which the respondent received written notice of the claimant's claim. 16. Binding Arbitration: Employee and TSC agree that all claims or disputes relating to his employment with TSC or the termination of such employment, and any and all other claims that Employee might have against TSC, any TSC director, officer, employee, agent, or representative, and any and all claims or disputes that TSC might have against Employee (except for any claim in equity under Sections 8(b), 8(c), or 8(d) of this Agreement) shall be resolved under the Expedited Commercial Rules of the American Arbitration Association. If either party pursues a claim and such claim results in an Arbitrator's decision, both parties agree to accept such decision as final and binding. 17. Severability: Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 18. Employee acknowledges that he has read, understood and accepts the provisions of this Agreement. Technology Solutions Company Timothy P. Dimond By: /s/ JOHN T. KOHLER /s/ TIMOTHY P. DIMOND ------------------------------- Position:_________________________ Position: Senior Vice President and Chief Financial Officer Date:____________________________ Date: 4/28/99 ------- 5 EXHIBIT A --------- EMPLOYEE: Timothy P. Dimond POSITION: Senior Vice President and Chief Financial Officer BASE SALARY: $240,000 EFFECTIVE DATE: April 28, 1999 /s/ TIMOTHY P. DIMOND Timothy P. Dimond 4/28/99 -------- Date /s/ JOHN T. KOHLER ---------------------------- Technology Solutions Company _____________________________ Date 6 EX-10.17 10 TIMOTHY DIMOND EMPLOYMENT AGREEMENT AMENDMENT EXHIBIT 10.17 EMPLOYMENT AGREEMENT AMENDMENT Technology Solutions Company ("TSC") and Timothy P. Dimond ("Employee") enter into this amendment to his Employment Agreement as of October 1, 1999. WHEREAS, on April 28, 1999 in conjunction with Employee's promotion to Chief Financial Officer TSC and Employee entered into an employment agreement consistent with his new position ("Employment Agreement"). WHEREAS, the Employment Agreement contains a Change in Control provision which entitles Employee to receive his salary, bonus, and health insurance benefits for a one year period if following a Change in Control his title, position, duties, or salary is diminished and Employee resigns within 90 days after the diminishment becomes effective; or, if Employee is ordered to relocate permanently to any location outside the Chicago metropolitan area and employee declines and is terminated. Employee and TSC now agree to amend the Change in Control provision of his Employment Agreement (paragraph two of Section 3.) by inserting the following sentence after the first sentence in paragraph two: "Notwithstanding anything to the contrary in any of Employee's stock option agreements, Employee's unvested shares at option shall vest automatically upon a Change in Control." Technology Solutions Company Timothy P. Dimond By: /s/ JOHN T. KOHLER /s/ TIMOTHY P. DIMOND ------------------------ Position: CEO ------------------ EX-10.18 11 ELOYALTY SHARED SERVICES AGREEMENT EXHIBIT 10.18 ------------- SHARED SERVICES AGREEMENT by and between TECHNOLOGY SOLUTIONS COMPANY and eLOYALTY CORPORATION Dated as of February 15, 2000 TABLE OF CONTENTS -----------------
Page ---- SECTION 1. Definitions; Rules of Construction.............................. 1 1.1 Definitions..................................................... 1 1.2 Other Terms..................................................... 3 1.3 Rules of Construction........................................... 3 SECTION 2. Term............................................................ 4 SECTION 3. Performance of Services by TSC.................................. 4 3.1 General......................................................... 5 3.2 Standard of Care................................................ 5 3.3 Service Modifications........................................... 5 3.4 Compliance with Law............................................. 6 3.5 Audit........................................................... 6 SECTION 4. Provision of eLoyalty Information............................... 7 SECTION 5. Fees............................................................ 7 5.1 General......................................................... 7 5.2 Sales Taxes..................................................... 7 5.3 License Fees.................................................... 7 5.4 Cap on Fees..................................................... 7 SECTION 6. Invoicing and Payment........................................... 7 SECTION 7. Independence.................................................... 8 SECTION 8. Nonexclusivity.................................................. 8 SECTION 9. Confidentiality................................................. 8 9.1 TSC Information................................................. 8 9.2 eLoyalty Information............................................ 9 9.3 Security........................................................ 9 9.4 General......................................................... 9 SECTION 10. Termination..................................................... 10 10.1 Grounds for Termination......................................... 10 10.2 Procedures on Termination....................................... 10 10.3 Termination Costs............................................... 10 SECTION 11. Limitation of Liability and Remedy.............................. 10 11.1 Damages......................................................... 10 11.2 eLoyalty's Exclusive Remedies................................... 11 11.3 TSC's Exclusive Remedies........................................ 11 11.4 Affiliates...................................................... 12
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Page ---- SECTION 12. Force Majeure................................................... 12 SECTION 13. Assignment...................................................... 12 13.1 Assignment with Consent......................................... 12 13.2 Assignment in Event of Acquisition.............................. 12 SECTION 14. Indemnification and Insurance................................... 12 14.1 TSC's Obligation................................................ 12 14.2 eLoyalty's Obligation........................................... 13 14.3 Third-Party Claims.............................................. 13 14.4 Insurance....................................................... 15 SECTION 15. Disputes........................................................ 15 15.1 Agreement to Arbitrate.......................................... 15 15.2 Escalation and Mediation........................................ 15 15.3 Procedures for Arbitration...................................... 16 15.4 Arbitrator...................................................... 16 15.5 Hearings........................................................ 17 15.6 Discovery and Certain Other Matters............................. 17 15.7 Certain Additional Matters...................................... 18 15.8 Law Governing Arbitration Procedures............................ 19 15.9 Choice of Forum................................................. 19 SECTION 16. Miscellaneous Provisions........................................ 19 16.1 Notices......................................................... 19 16.2 Entire Agreement................................................ 20 16.3 Choice of Law................................................... 20 16.4 Amendment; Waiver............................................... 20 16.5 Severability.................................................... 20 16.6 Relationship of the Parties..................................... 20 16.7 Survival........................................................ 20 16.8 Counterparts.................................................... 20 16.9 Records Retention............................................... 21 16.10 Beneficiaries................................................... 21
-ii- SHARED SERVICES AGREEMENT This Agreement is made as of February 15, 2000 (the "Effective Date") -------------- by Technology Solutions Company, a Delaware corporation ("TSC"), and eLoyalty --- Corporation, a Delaware corporation ("eLoyalty"). -------- RECITALS TSC is planning to spin-off certain businesses by transferring those businesses to eLoyalty (or its subsidiaries) and distributing all of the stock of eLoyalty to the stockholders of TSC as a dividend. As a result of the distribution of that dividend, TSC and eLoyalty, and their respective subsidiaries, will be separate and independent corporations. As a consequence of the foregoing contemplated actions, eLoyalty will acquire business operations that have traditionally been supported by administrative functions that will remain with TSC after the spin-off. TSC and eLoyalty agree that it is advisable for eLoyalty to continue to receive administrative services from TSC. AGREEMENT In consideration of the mutual undertakings contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, TSC and eLoyalty agree as follows: SECTION 1. Definitions; Rules of Construction. ---------------------------------- 1.1 Definitions. As used in this Agreement (including the Schedules ----------- hereto): (i) "Action" shall mean any action, claim, suit, arbitration, ------ inquiry, subpoena, discovery request, proceeding or investigation by or before any court or grand jury, any governmental or other regulatory or administrative entity, agency or commission or any arbitration tribunal. (ii) "Affiliate" shall mean any Person controlling, controlled by, or --------- under direct or indirect common control with a Party. For the purpose of this definition, the term "control" means the power to direct the management of an ------- entity, directly or indirectly, whether solely through the ownership of voting securities (as in the case of a subsidiary), by contract, or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. ----------- ---------- eLoyalty and TSC shall not be deemed to be Affiliates of each other. (iii) "Agreement" means this Shared Services Agreement dated as of --------- February 15, 2000 including all Schedules attached hereto. (iv) "Arbitration Act" shall mean the United States Arbitration Act, --------------- 9 U.S.C. (S)(S) 1-14, as the same may be amended from time to time. (v) "Change in Control" shall mean (i) the acquisition by any ----------------- individual, entity or group, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of 40% or more of the outstanding shares of the common stock of either party; (ii) the approval of the stockholders of either party of a merger, where immediately after the merger, persons who were the holders of a majority of that party's outstanding common stock immediately prior to the merger fail to own at least a majority of the outstanding common stock of the surviving entity in substantially the same proportions as their holdings of that party's common stock immediately prior to the merger; or (iii) the sale of all or substantially all the assets of a party other than to a corporation more than 60% of the outstanding shares of which are beneficially owned by the individuals and entities who were the beneficial owners of the party's stock prior to the asset sale. (vi) "Cost" whether used alone or as part of another defined term ---- shall mean cost as determined by TSC in a manner substantially the same as the manner in which TSC determined such cost in the one-year period ending December 31, 1999. Cost shall not include any Costs associated with William H. Waltrip, Jack Hayden or John T. Kohler, including Costs associated with their direct support personnel. (vii) "Exchange Act" shall mean the Securities Exchange Act of 1934, ------------ as amended. (viii) "Fully Burdened Cost" shall mean all direct Costs allocable to ------------------- the provision of any Service without regard to whether the Service is provided to eLoyalty or to TSC. As regards any individual employee, "Fully Burdened Cost" shall include all direct Costs relating to that individual (including their salary and accruals for incentive compensation, vacation, holiday, insurance (medical, dental, vision, life, legal, short term and long term disability, employee assistance program), workers compensation and 401 k match and FUI, SUI, OASDI, and Medicare) and any stay bonus or Severance Pay paid. (ix) "Governmental Authority" shall mean any foreign, federal, ---------------------- state, local or other government, statutory or administrative authority, regulatory body or commission or any court, tribunal or judicial or arbitral body. (x) "Notice" shall mean notice given in accordance with Section 16.1. ------ ------------ (xi) "Party" shall mean either TSC or eLoyalty. ----- (xii) "Person" shall mean an individual, corporation, partnership, ------ limited liability company, unincorporated syndicate, unincorporated organization, trust, trustee, executor, administrator or other legal representative, governmental authority or agency, or any group of Persons acting in concert. (xiii) "SEC" shall mean the Securities and Exchange Commission. --- -2- (xiv) "Service" shall mean each service generally described in ------- Schedule 2, performed in substantially the same manner and containing the same - ---------- elements as when such Service was provided to TSC or Affiliates of TSC prior to the Effective Date, except as otherwise permitted under Section 3. --------- (xv) "Term" shall mean the period of time provided in Section 2, ---- --------- including any and all extensions thereof. (xvi) "Transfer" shall mean any assignment, transfer, sale or other -------- disposition to a Person that is not an Affiliate of the Transferor, including any Transfer by way of merger or consolidation or otherwise by operation of law. 1.2 Other Terms. Terms defined in other Sections of this Agreement will ----------- have the meanings therein provided. 1.3 Rules of Construction. --------------------- (a) In this Agreement, unless a clear contrary intention appears: (i) the singular number includes the plural number and vice versa; (ii) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this Agreement; (iii) reference to any gender includes the other gender; (iv) reference to any Section or Schedule means such Section of this Agreement or such Schedule to this Agreement, as the case may be, and references in any Section or definition to any clause means such clause of such Section or definition; (v) "herein", "hereunder", "hereof", "hereto," and words of ------ --------- ------ ------ similar import shall be deemed references to this Agreement as a whole and not to any particular Section or other provision hereof or thereof; (vi) "including" (and with correlative meaning "include") --------- ------- means including without limiting the generality of any description preceding such term; (vii) relative to the determination of any period of time, "from" means "from and including", "to" means "to but excluding" and ---- -- "through" means "through and including"; ------- (viii) reference to any law (including statutes and ordinances) means such law as amended, modified, codified or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder; -3- (ix) accounting terms used herein shall have the meanings historically attributed to them by TSC and its subsidiaries based upon TSC's internal financial policies and procedures in effect prior to the spin-off described in the recitals above; (x) in the event of any conflict between the provisions of the body of this Agreement and the Schedules hereto, the provisions of the body of this Agreement shall control; and (xi) the headings contained in this Agreement have been inserted for convenience of reference only, and are not to be used in construing this Agreement. (b) This Agreement was drafted and negotiated by the Parties with the benefit of legal representation, and any rule of construction or interpretation otherwise requiring this Agreement to be construed or interpreted against either Party shall not apply to any construction or interpretation hereof. SECTION 2. Term. ---- (a) General. The initial Term of this Agreement shall begin on the ------- Effective Date and, except as otherwise provided in this Agreement, end at the end of the day on June 30, 2000. The Term may be extended for successive additional periods, subject to the Parties agreeing upon the terms and conditions of such an extension. Any such agreement to extend the term of this Agreement must be entered into at least 90 days in advance of the date on which this Agreement would otherwise naturally terminate. Each Party may in its absolute discretion determine whether or not the terms of any such proposed extension are acceptable and may refuse to agree to any such extension for any reason whatsoever. Notwithstanding the above, eLoyalty shall have access to TSC's systems, reports, databases and other records, which access shall not be unreasonably requested by eLoyalty or denied by TSC, for 45 days after the date of the termination of this Agreement. Such access shall be provided in order to allow eLoyalty to complete its financial accounting and otherwise maintain its records for the period when this Agreement shall have been in force. (b) Extension Period Information Systems Services. eLoyalty may, for --------------------------------------------- the period from July 1, 2000 up to December 31, 2000 (the "Extension Period"), ---------------- choose to receive the Extension Period Information Systems Services described in Schedule 2 (V) (iii), (iv), and (vii) so long as TSC is notified in writing by April 30, 2000 of eLoyalty's decision to extend. If eLoyalty chooses to terminate the extension services prior to December 31, 2000 it must provide 30 days prior written notice of its decision to terminate. During the Extension Period, unless otherwise agreed to by both parties, TSC will have no obligation to provide any services other than those identified in Schedule 2 (V) (iii), (iv), and (vii). TSC's provision of the Extension Period Information Systems Services will be governed by the terms of this Agreement. SECTION 3. Performance of Services by TSC. ------------------------------ -4- 3.1 General. From time to time, beginning on the Effective Date, TSC ------- will, subject to Section 3.2(c) and Section 5.3, provide Services to eLoyalty -------------- ----------- (and to those Persons who were, as of the Effective Date, eLoyalty Affiliates) on an "as needed" basis (as determined by eLoyalty or its covered Affiliates). Services may be provided by TSC itself or TSC may outsource the provision of the Services. 3.2 Standard of Care. ---------------- (a) TSC will use (and will cause its Affiliates to use) commercially reasonable efforts in the performance of its obligations hereunder and will do so with the same degree of care, skill and prudence customarily exercised when engaged in similar activities for itself and its Affiliates. TSC will have no liability with respect to the provision of services to eLoyalty hereunder in the absence of gross negligence or willful misconduct. To the extent that any error or omission in any Service is not caused by failure of eLoyalty or its Affiliates to conform to eLoyalty's obligations under Section 4 or is not --------- otherwise excused under Section 12 and correction thereof by reperformance or ---------- otherwise is practical, TSC will make such correction. (b) TSC makes no representations or warranties whatsoever, either express or implied, to eLoyalty or any other Person that the Services provided hereunder are or will be adequate and sufficient (as to quantity, quality or type) to meet the needs (including any specifically identified needs) or any objectives of eLoyalty or any such Person with respect to the conduct of the business of eLoyalty or such Person. (c) The proportionate share of each Service to which eLoyalty will be entitled will be approximately equal to the proportionate share of that Service that was, prior to the Effective Date, devoted to the businesses that TSC is planning to spin-off to eLoyalty. To the extent that TSC's capacity to perform a Service is diminished, be it by system failure, departure of personnel or any other factor outside of the control of TSC, the Services to which eLoyalty will be entitled will be decreased proportionately. (d) In performing its responsibilities hereunder, TSC will accord eLoyalty and its Affiliates the same priority under comparable circumstances as it provides itself and its Affiliates. Without limiting the generality of the foregoing, in the provision of Services under comparable circumstances TSC and its Affiliates will not discriminate against eLoyalty or any of its Affiliates solely because eLoyalty or one of its Affiliates is the recipient of such Services. (e) TSC will use all reasonable efforts to provide Services at the same levels of quality and efficiency as they have been provided to TSC and its affiliates prior to the Effective Date. TSC shall give due consideration to any suggestion by eLoyalty to improve performance but shall have no obligation to accept or implement any such suggestion that it shall not, in its sole discretion, deem advisable and in the best interests of TSC. 3.3 Service Modifications. --------------------- (a) TSC may reasonably supplement, modify, substitute or otherwise alter a Service from time to time in a manner consistent with supplements, modifications, substitutions -5- or alterations made with respect to similar services provided or otherwise made available by TSC to itself or its Affiliates; provided that no change which, in the good faith judgment of TSC, adversely affects the quality or availability of a Service or increases eLoyalty's cost of using the Service (including any product thereof) in any material respect, shall be made without the consent of eLoyalty. TSC will give eLoyalty not less than 90 days Notice, prior to the implementation of any change in a Service that, in the good faith judgment of TSC, may adversely affect the quality or availability of a Service or increase the cost of using the Service in any material respect. (b) Without limiting the generality of the provisions of the preceding subsection (a), TSC will not make any changes in any Service which would require eLoyalty to modify any bridge or other interface between eLoyalty facilities and the point at which data is transmitted to such facilities, except when the costs of such modification is less than $10,000, unless eLoyalty consents thereto. Conversely, TSC will not be obligated to make any change in a Service because of changes eLoyalty makes in its facilities. 3.4 Compliance with Law. ------------------- In performing Services, TSC will comply in all material respects with all laws, rules and regulations that apply to the performance of the Services. 3.5 Audit. ----- (a) Each of TSC and eLoyalty may audit the other with respect to (i) the performance of Services to ensure that adequate internal and administrative controls and procedures are being employed, (ii) any Cost used to determine any amounts payable hereunder, and (iii) any other matters reasonably required to verify compliance with the terms of this Agreement. The Party requesting the audit may use independent auditors, who may participate fully in such audit. (b) In the event that an audit is proposed with respect to information which the Party to be audited wishes not to disclose to the other Party ("Restricted Information"), then on the written demand of the Party to be ---------------------- audited the individuals conducting the audit with respect to Restricted Information will be limited to the independent auditors of the Party requesting the audit. In such event, the Party to be audited shall pay the costs of the independent auditors conducting such audit, but only with respect to that portion of the audit relating to Restricted Information. Such independent auditors shall enter into an agreement with the Parties hereto, on terms that are agreeable to both Parties hereto, under which such independent auditors shall agree to maintain the confidentiality of the information obtained during the course of such audit. Such agreement shall establish what information such auditors will be permitted to disclose to report the results of any audit of Restricted Information to the Party requesting the audit. (c) Any such audit shall be conducted during regular business hours, in a manner that does not interfere unreasonably with the operations of the Party being audited. Such audits shall be conducted not more than once in any calendar quarter. Subject to the foregoing limitations, any such audit shall be conducted when requested by Notice given not less than 30 days prior to the commencement of the audit. -6- SECTION 4. Provision of eLoyalty Information. --------------------------------- To enable TSC to provide the Services, eLoyalty will provide information, furnish access to data and take such other action as is reasonably requested by TSC. SECTION 5. Fees. ---- 5.1 General. The aggregate Fully Burdened Costs for the Services set forth ------- in Schedule 2 will be allocated on a Service-by-Service basis as between the ---------- Parties according to the procedures set forth in Schedule 3. ---------- 5.2 Sales Taxes. eLoyalty shall pay, or reimburse TSC for, the gross ----------- amount of any present or future sales, use, excise, occupation, privilege, value-added, gross-receipts or other similar tax (excluding any tax on net income, corporate franchise tax or fee or any similar tax or fee) applicable to the fee, sale or furnishing of any Service or to its use by eLoyalty. 5.3 License Fees. If TSC is required to obtain a consent or license to ------------ permit it to use any intellectual property for the provision of Services to eLoyalty, TSC will, together with eLoyalty, use reasonable efforts to obtain such consent or license. eLoyalty shall be solely responsible for any consent or license fees required to be paid. TSC will have no obligation to provide Services requiring the use of such intellectual property if the consent or license is required and eLoyalty is not able, for any reason, to obtain the necessary consent or license. 5.4 Cap on Fees. Notwithstanding any other provision of this Agreement, ----------- fees charged to eLoyalty under this Agreement shall not exceed 60% of the aggregate Fully Burdened Cost of all of the Services. Any license or consent fees payable pursuant to Section 5.3 and any fees charged for the provision of ----------- the Extension Period Information Systems Services shall not be subject to this Section 5.4. - ----------- SECTION 6. Invoicing and Payment. --------------------- TSC will each month submit to eLoyalty for payment a statement of amounts due under this Agreement. The statement will specify the charge for each of the Services provided during the relevant month. Each statement will specify the nature of the Services provided and will contain or be followed by such other supporting detail as eLoyalty may from time to time reasonably request. eLoyalty will pay or cause its Affiliates receiving the Services to pay all amounts due pursuant to this Agreement within 30 days after the date received of each such statement hereunder. If any amounts due hereunder have not been received by the due date, such overdue amounts shall bear interest from the due date at the rate of 1% per month, or portion thereof, until received. Either Party shall have the right to withhold any disputed amounts due hereunder if such Party in good faith disputes the amount claimed by the other Party to be due hereunder and such Party notifies the other Party of such dispute within 30 days after the date of the statement -7- containing the disputed amount. The foregoing right to withhold payment of disputed amounts shall be limited to amounts disputed in good faith, and interest will accrue and be payable on the net amount determined to be payable. Neither payments made by eLoyalty nor the acceptance of payments by TSC in the amount or less than the amount shown on TSC's statements shall be construed as an acceptance or agreement with the amount so stated or the amount received, respectively. Except as otherwise provided, either eLoyalty or TSC may recover from the other the amount of any overpayment or underpayment. Without limiting the generality of the foregoing, TSC may supplement any statement it renders for less than the full amount to which it is entitled hereunder; provided that such supplement is made within a reasonable time after the statement being supplemented. In addition to any other rights available to it at law or in equity, upon ten days Notice to eLoyalty, TSC may suspend the provision of any Services for which an undisputed statement for provision of Services hereunder from TSC has not been satisfied within 20 days of its due date until such statement has been satisfied. SECTION 7. Independence. ------------ All employees and representatives of TSC providing Services to eLoyalty will be deemed for purposes of all compensation and employee benefits to be employees or representatives of TSC (or its subcontractors) and not employees or representatives of eLoyalty. In performing such services, such employees and representatives will be under the direction, control and supervision of TSC (or its subcontractors) (and not of eLoyalty) and TSC (or its subcontractors) will have the sole right to exercise all authority with respect to the employment (including termination of employment), assignment and compensation of such employees and representatives. SECTION 8. Nonexclusivity. -------------- Nothing in this Agreement shall prevent TSC from providing any Service to any other Person. Nothing in this Agreement shall prevent eLoyalty from obtaining all or any part of the Services from its own employees and facilities or from providers other than TSC. SECTION 9. Confidentiality. --------------- 9.1 TSC Information. eLoyalty agrees to hold, and to use reasonable --------------- efforts to cause its employees and representatives to hold, in confidence in a manner consistent with eLoyalty's treatment of its own confidential information, all information concerning TSC reasonably understood to be confidential (i) contained in any of the Schedules to this Agreement or otherwise received by eLoyalty from TSC after the Effective Date relating to the determination of the fees and charges payable hereunder, (ii) obtained from TSC by the use of any access to TSC data afforded by any connection between eLoyalty's systems and TSC's systems maintained in connection with the provision of Services hereunder, (iii) obtained from TSC in the course of an audit pursuant to Section 3.5 or ----------- (iv) furnished to or obtained by eLoyalty after the Effective Date in the course of its receipt of Services hereunder. Except as may -8- otherwise be provided in another agreement between the Parties, eLoyalty shall not use such information for any purpose other than as contemplated under this Agreement or verifying compliance with this Agreement, without TSC's prior written consent. 9.2 eLoyalty Information. TSC agrees to hold, and to use its reasonable -------------------- efforts to cause its employees and representatives to hold, in confidence in a manner consistent with TSC's treatment of its own confidential information all information reasonably understood to be confidential concerning eLoyalty, furnished to or obtained by TSC after the Effective Date in connection with this Agreement. Except as may otherwise be provided in another agreement between the Parties, TSC shall not use such information for any purpose other than as contemplated under this Agreement or verifying compliance with this Agreement, without eLoyalty's prior written consent. 9.3 Security. Each Party shall be responsible for preventing unauthorized -------- remote access by such Party's own agents and employees to data transferred or otherwise made available to the other Party under this Agreement. 9.4 General. The obligations of confidentiality and non-disclosure imposed ------- under this Section 9 shall not apply to data and information that the recipient --------- can demonstrate: (i) is published or is or otherwise becomes available to the general public as part of the public domain without breach of this Agreement; (ii) has been furnished or made known to the recipient without any obligation to keep it confidential by a third party under circumstances which are not known to the recipient to involve a breach of the third party's obligations to a Party hereto; (iii) was developed independently of information furnished to the recipient under this Agreement; or (iv) was known to the recipient at the time of receipt thereof from the other Party, is not otherwise subject to (a) the confidentiality restrictions contained in the Reorganization Agreement dated as of February 15, 2000 between eLoyalty and TSC or (b) any other obligation to keep it confidential and was not obtained from a third party under circumstances which were known to the recipient to involve a breach of the third party's obligations to a Party hereto. Each Party (the "first party") acknowledges that the other Party would not ----------- have an adequate remedy at law for the breach by the first party of any one or more of the covenants contained in this Section 9 and agrees that, in the event --------- of such breach, the other Party may, in addition to the other remedies which may be available to it, apply to a court for an injunction to prevent breaches of this Section 9 and to enforce specifically the terms and provisions of this --------- Section. The provisions of this Section 9 shall not preclude disclosures required by --------- law; provided, however, that each Party will use reasonable efforts to notify -------- ------- the other, prior to making any such -9- disclosure, and permit the other to take such steps as it deems appropriate, including obtaining a protective order, consistent with applicable law, to minimize any loss of confidentiality. SECTION 10. Termination. ----------- 10.1 Grounds for Termination. Each Party shall have the right to ----------------------- terminate this Agreement effective upon delivery of Notice to the other Party if the other Party: (a) makes an assignment for the benefit of creditors, or becomes bankrupt or insolvent, or is petitioned into bankruptcy, or takes advantage of any state, federal or foreign bankruptcy or insolvency act, or if a receiver or receiver/manager is appointed for all or any substantial part of its property and business and such receiver or receiver/manager remains undischarged for a period of 30 days, (b) has its corporate existence terminated by voluntary or involuntary dissolution,(c) materially defaults in the performance of any of its covenants or obligations contained in this Agreement and such default is not remedied to the nondefaulting Party's reasonable satisfaction within 30 days after Notice to the defaulting Party of such default, or if such default is not capable of rectification within 30 days, if the defaulting Party has not promptly commenced to rectify the default within such 30 day period and is not proceeding diligently to rectify the default, (d) effects a Transfer of its rights and obligations under this Agreement pursuant to Section 13.2, or (e) ------------ undergoes a Change in Control. Except as provided above, neither this Agreement nor any of the Services may be terminated prior to June 30, 2000, except with the mutual agreement of the Parties. 10.2 Procedures on Termination. On any termination of this Agreement, TSC ------------------------- will cooperate with eLoyalty as reasonably necessary to avoid disruption of the ordinary course of eLoyalty's business, and such termination shall not affect TSC's rights to payment for Services provided. Except as otherwise required pursuant to Section 16.9 each Party shall ------------ destroy or return to the other Party all records made or obtained in the course of performance hereunder containing information regarding the other Party or its customers that is protected from disclosure under Section 9. In the event that --------- any Party shall elect to destroy any records as permitted above, such Party shall provide the other Party with written confirmation of any such destruction. 10.3 Termination Costs. If eLoyalty elects to terminate any Service ----------------- pursuant to Section 10.1 and such termination results in TSC's becoming liable ------------ for termination charges imposed by a Person that is not an Affiliate of TSC, eLoyalty will reimburse TSC therefor. If the amount of any such charges is subject to negotiation between TSC and such Person, TSC will allow eLoyalty to participate therein and will not agree to the amount thereof without eLoyalty's consent, which will not be unreasonably withheld. Any amounts payable under this Section 10.3 shall be in addition to, and separate from, any amounts payable - ------------ under Sections 5.5-5.7. ---------------- SECTION 11. Limitation of Liability and Remedy. ---------------------------------- 11.1 Damages. In no event, whether based on contract, indemnity, warranty, ------- tort (including willful and wanton misconduct or negligence), strict liability or otherwise, shall either Party or any of its directors, officers, employees or agents, be liable for any lost profits or any -10- special, exemplary, punitive, incidental, indirect or consequential damages. The foregoing limitation and disclaimer shall apply irrespective of whether the possibility of such lost profits or any special, exemplary, punitive, incidental, indirect or consequential damages had been disclosed in advance or could have reasonably been foreseen. The amounts due from one Party to the other based upon the Parties' respective obligations to indemnify each other pursuant to this Agreement shall not be deemed to be damages that would be excluded by this paragraph. The limitations and disclaimers of obligations and liabilities contained in this Section 11 are intended to apply to the fullest extent permitted by law; ---------- provided that such limitations and disclaimers shall not limit amounts payable - -------- with respect to any express indemnity provided for in this Agreement. 11.2 eLoyalty's Exclusive Remedies. eLoyalty's exclusive remedies against ----------------------------- TSC for any breach of, or other act or omission arising out of or relating to, this Agreement shall be: (i) the right to receive refunds of the amount of any payment in excess of amounts owed under this Agreement; (ii) the right to require reperformance of any Service to the extent required pursuant to Section 3.2; ----------- (iii) the right to indemnification as provided in Section 14; ---------- (iv) the right to injunction, specific performance or other equitable non-monetary relief when available under applicable law; (v) the right to terminate this Agreement for material breach as set forth in Section 10; and ---------- (vi) the right to actual damages, any such damages to be limited to the amount of fees paid. 11.3 TSC's Exclusive Remedies. TSC's exclusive remedies against eLoyalty ------------------------ for any breach of, or other act or omission arising out of or relating to, this Agreement shall be: (i) the right to receive payment for Services and any other amounts due under this Agreement; (ii) the right to suspend performance as provided in Section 6; --------- (iii) the right to indemnification as provided in Section 14; ---------- (iv) the right to injunction, specific performance or other equitable non-monetary relief when available under applicable law; and (v) the right to terminate this Agreement for material breach as set forth in Section 10. ---------- -11- 11.4 Affiliates. The provisions of Sections 11.1 - 11.3 apply to a ---------- -------------------- Party's Affiliates providing any part of any Service or performing any other function hereunder or receiving any part of any Service hereunder. SECTION 12. Force Majeure. ------------- The obligations of either Party to perform under this Agreement shall be excused during each period of delay caused by matters (not including lack of funds or other financial causes) such as strikes, supplier delays, shortages of raw materials, government orders or acts of God, which are reasonably beyond the control of the Party obligated to perform; provided that nothing contained in -------- this Agreement shall affect either Party's ability or discretion with respect to any strike or other employee dispute or disturbance and all such strikes, disputes or disturbances shall be deemed to be beyond the control of such Party. A condition of force majeure shall be deemed to continue only so long as the affected Party shall be taking all reasonable actions necessary to overcome such condition. In the event that either Party hereto shall be affected by a condition of force majeure, such Party shall give the other Party prompt Notice thereof, which Notice shall contain the affected Party's estimate of the duration of such condition and a description of the steps being taken or proposed to be taken to overcome such condition of force majeure. Any delay occasioned by any such cause shall not constitute a default under this Agreement, and the obligations of the Parties shall be suspended during the period of delay so occasioned. During any period of force majeure, the Party that is not directly affected by such condition of force majeure shall be entitled to take any reasonable action necessary to mitigate the effects of such condition of force majeure. SECTION 13. Assignment. ---------- 13.1 Assignment with Consent. This Agreement shall be binding upon and ----------------------- inure to the benefit of the Parties hereto and their respective successors and permitted assigns, provided, however, that, except as provided below, neither -------- ------- Party may Transfer its interest in the Agreement, including Transfers by operation of law such as by way of merger or consolidation, without the prior written consent of the other Party, which consent may not be unreasonably withheld. 13.2 Assignment in Event of Acquisition. Notwithstanding the foregoing ---------------------------------- provisions of this Section 13, either Party may Transfer its rights and ---------- obligations under this Agreement to any corporation or other entity that shall acquire all or substantially all of such Party's business and assets and assume in writing all of such Party's obligations hereunder and deliver a signed copy of such assumption instrument to the other Party; and, upon the other Party's receipt of such assumption instrument, the assigning Party shall be fully released and discharged from its obligations under this Agreement. In the event of such a Transfer, the Non-Affected Party shall have the right to terminate this Agreement as provided in Section 10. ---------- SECTION 14. Indemnification and Insurance. ----------------------------- 14.1 TSC's Obligation. TSC agrees to indemnify and hold eLoyalty and ---------------- the eLoyalty Indemnified Parties (as hereinafter defined) harmless from and against, and in respect of, any and all damages, claims, losses, demands, suits, fines, penalties and liabilities asserted -12- against or incurred, and all expenses (including all reasonable fees and expenses of counsel, travel costs and other out-of-pocket costs) incurred in connection with pending or threatened litigation or other proceedings ("Expenses") which arise out of or relate to any claim, action or proceeding -------- asserted by a third party to the extent exclusively and solely arising out of any matter or thing constituting a breach by TSC hereunder or any gross negligence or willful misconduct by TSC (or its employees or agents) in its performance of this Agreement. The eLoyalty Indemnified Parties shall mean and include: (x) eLoyalty's Affiliates; and (y) the respective directors, officers, agents and employees of eLoyalty and its Affiliates. Expenses shall be reimbursed or advanced when and as incurred promptly upon submission by eLoyalty or any eLoyalty Indemnified Party of statements to TSC. 14.2 eLoyalty's Obligation. eLoyalty agrees to indemnify and hold TSC and --------------------- the TSC Indemnified Parties (as hereinafter defined) harmless from and against, and in respect of, any and all Expenses which arise out of or relate to any claim, action or proceeding asserted by a third party to the extent exclusively and solely arising out of any matter or thing constituting a breach by eLoyalty hereunder or any gross negligence or willful misconduct by eLoyalty (or its employees or agents) in its performance of this Agreement. The TSC Indemnified Parties shall mean and include: (x) TSC's Affiliates; and (y) the respective directors, officers, agents and employees of TSC and its Affiliates. Expenses shall be reimbursed or advanced when and as incurred promptly upon submission by TSC or any TSC Indemnified Party of statements to eLoyalty. 14.3 Third-Party Claims. If any third party shall make any claim or ------------------ commence any arbitration proceeding or suit against any one or more of the TSC Indemnified Parties or the eLoyalty Indemnified Parties (hereafter "Indemnified ----------- Persons") with respect to which an Indemnified Person intends to make any claim - ------- for indemnification against TSC under Section 14.1 or against eLoyalty under ------------ Section 14.2 (as the case may be, the "Indemnifying Party"), such Indemnified - ------- ------------------ Persons shall promptly give written notice to the Indemnifying Party of such third party claim, arbitration proceeding or suit and the following provisions shall apply. (a) Control of Proceedings. 1. In the event that some portion of the claim, arbitration proceeding or suit brought against the Indemnified Person is for matters for which the Indemnified Person will not seek indemnification from the Indemnifying Party, the Parties shall negotiate in good faith as to which party shall have control over the proceedings. 2. In all other instances, the Indemnifying Party shall have 20 business days after receipt of the notice referred to above in this Section 14.3 ------------ to notify the Indemnified Party that it elects to conduct and control the defense of such claim, proceeding or suit. If the Indemnifying Party does not give the foregoing notice, the Indemnified Party shall have the right to defend, contest, settle or compromise such claim, proceeding or suit in the exercise of its exclusive discretion subject to the provisions of Section 14.3(b), and the --------------- Indemnifying Party shall, upon request from any of the Indemnified Persons, promptly pay to such Indemnified Persons in accordance with the other terms of this Section 14 the amount of any third party claim resulting from their ---------- liability to the third party claimant and all related Expense. -13- 3. If the Indemnifying Party gives the foregoing notice, the Indemnifying Party shall have the right to undertake, conduct and control, through counsel reasonably acceptable to the Indemnified Party, and at its sole expense, the conduct and settlement of such claim, proceeding or suit, and the Indemnified Party shall cooperate with the Indemnifying Party in connection therewith, provided that (i) the Indemnifying Party shall not thereby permit any -------- lien, encumbrance or other adverse charge to thereafter attach to any asset of any Indemnified Person; (ii) the Indemnifying Party shall not thereby permit any injunction against any Indemnified Person; (iii) the Indemnifying Party shall permit the Indemnified Person and counsel chosen by the Indemnified Person and reasonably acceptable to the Indemnifying Party to monitor such conduct or settlement and shall provide the Indemnified Person and such counsel with such information regarding such claim, proceeding or suit as either of them may reasonably request (which request may be general or specific), but the fees and expenses of such counsel shall be borne by the Indemnified Person unless (1) the Indemnifying Party and the Indemnified Person shall have mutually agreed to the retention of such counsel or (2) the named parties to any such claim, proceeding or suit include the Indemnified Person and the Indemnifying Party and in the reasonable opinion of counsel to the Indemnified Person representation of both parties by the same counsel would be inappropriate due to actual or likely conflicts of interest between them, in either of which cases the reasonable fees and disbursements of counsel for such Indemnified Person shall be reimbursed by the Indemnifying Party to the Indemnified Person; and (iv) the Indemnifying Party shall agree promptly to reimburse to the extent required under this Section 14 the Indemnified Person for the full amount of any third party claim - ---------- resulting from such claim, proceeding or suit and all related Expense incurred by the Indemnified Person. 4. In no event shall the Indemnifying Party without the prior written consent of the Indemnified Person, settle or comprise any claim or consent to the entry of any judgment that does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Person a release from all liability in respect of such claim. 5. If the Indemnifying Party shall not have undertaken the conduct and control of the defense of any claim, suit or proceeding as provided above, the Indemnifying Party shall nevertheless be entitled through counsel chosen by the Indemnifying Party and reasonably acceptable to the Indemnified Person to monitor the conduct or settlement of such claim by the Indemnified Person, and the Indemnified Person shall provide the Indemnifying Party and such counsel with such information regarding such action or suit as either of them may reasonably request (which request may be general or specific), but all costs and expenses incurred in connection with such monitoring shall be borne by the Indemnifying Party. (b) Settlement of Third-Party Claims By the Indemnified Person. So ---------------------------------------------------------- long as the Indemnifying Party is contesting any such claim, proceeding or suit in good faith, the Indemnified Person shall not pay or settle any such claim, proceeding or suit. Notwithstanding the foregoing, the Indemnified Person shall have the right to pay or settle any such claim, proceeding or suit, provided -------- that in such event the Indemnified Person shall waive any right to indemnity therefor by the Indemnifying Party, and no amount in respect thereof shall be claimed as Loss or Expense under this Section 14. ---------- If the Indemnifying Party shall not have undertaken the conduct and control of the defense of any claim, proceeding or suit as provided above, the Indemnified Person, on not less -14- than 30 days' prior written Notice to the Indemnifying Party, may make settlement (including payment in full) of such claim and such settlement shall be binding upon the Parties hereto for the purposes hereof, unless within said 30-day period the Indemnifying Party shall have requested the Indemnified Person to contest such claim at the expense of the Indemnifying Party. In such event, the Indemnified Person shall promptly comply with such request and the Indemnifying Party shall have the right to direct the defense of such claim or any litigation based thereon subject to all of the conditions of this Section ------- 14. Anything in this Section 14 to the contrary notwithstanding, if the - -- ---------- Indemnified Person advises the Indemnifying Party that it has determined to make settlement of a claim, the Indemnified Person shall have the right to do so at its own cost and expense, without any requirement to contest such claim at the request of the Indemnifying Party, but without any right under the provisions of this Section 14 for indemnification by the Indemnifying Party. ---------- 14.4 Insurance. Each Party is responsible for carrying any insurance --------- desired by it in its sole discretion, including comprehensive general liability insurance, insurance to cover its facilities, products liability insurance and business interruption insurance. The indemnification provided for in Sections -------- 14.1 and 14.2 shall not apply to the extent the Indemnified Party is compensated - ---- ---- by any insurance. SECTION 15. Disputes. -------- 15.1 Agreement to Arbitrate. The procedures for discussion, negotiation ---------------------- and arbitration set forth in this Section 15 shall apply to all disputes, ---------- controversies or claims (whether sounding in contract, tort or otherwise) that may arise out of or relate to, or arise under or in connection with, this Agreement. Each Party agrees on behalf of itself and its respective Affiliates that the procedures set forth in this Section 15 shall be the sole and exclusive ---------- remedy in connection with any dispute, controversy or claim relating to any of the foregoing matters and irrevocably waives any right to commence any Action in or before any Governmental Authority, except as expressly provided in Section ------- 15.7(b) and except to the extent provided under the Arbitration Act in the case - ------- of judicial review of arbitration results or awards. Each Party on behalf of itself and its respective Affiliates irrevocably waives any right to any trial by jury with respect to any claim, controversy or dispute set forth in the first sentence of this Section 15.1. ------------ 15.2 Escalation and Mediation. ------------------------ (a) Each Party agrees to use its respective reasonable efforts to resolve expeditiously any dispute, controversy or claim between them with respect to the matters covered hereby that may arise from time to time on a mutually acceptable negotiated basis. In furtherance of the foregoing, any Party involved in a dispute, controversy or claim may deliver a notice (an "Escalation ---------- Notice") demanding an in-person meeting involving representatives of the Parties - ------ at a senior level of management of the Parties (or if the Parties agree, of the appropriate strategic business unit or division within such entity). A copy of any such Escalation Notice shall be given to the General Counsel, or like officer or official, of each Party involved in the dispute, controversy or claim (which copy shall state that it is an Escalation Notice pursuant to this Agreement). Any agenda, location or procedures for such discussions or negotiations between the Parties may be established by the Parties from time to time; provided, however, that the Parties shall use their reasonable efforts to -------- ------- meet within 10 days of the Escalation Notice. -15- (b) In the event that a dispute, controversy or claim is not resolved pursuant to subsection (a) of Section 15.2, the Parties agree to submit the ------------ matter to mediation. The mediator shall be selected by the Party that did not deliver the applicable Escalation Notice from the list of individuals set forth on Exhibit A, the names of which individuals were supplied to the Parties by --------- JAMS/Endispute. Any opinion expressed by the mediator shall be strictly advisory and shall not be binding on the Parties, nor shall any opinion expressed by the mediator be admissible in any arbitration proceeding. Costs of the mediation shall be borne equally by the Parties involved in the matter, except that each Party shall be responsible for its own expenses. Mediation is a prerequisite to a demand for arbitration under Section 15.3. ------------ 15.3 Procedures for Arbitration. -------------------------- (a) If the dispute, controversy, or claim is not resolved through mediation required by Section 15.2(b), any Party involved in the dispute, --------------- controversy or claim (regardless of whether such Party delivered the Escalation Notice) may, unless the Applicable Deadline (as hereinafter defined) has occurred, make a written demand (the "Arbitration Demand Notice") that the ------------------------- dispute be resolved by binding arbitration, which Arbitration Demand Notice shall be given to the Parties to the dispute, controversy or claim in the manner set forth in Section 16.1. In the event that any Party shall deliver an ------------ Arbitration Demand Notice to another Party, such other Party may itself deliver an Arbitration Demand Notice to such first Party with respect to any related dispute, controversy or claim with respect to which the Applicable Deadline has not passed without having to satisfy the Section 15.2 requirements. No Party may ------------ assert that the failure to resolve any matter during any discussions or negotiations, the course of conduct during the discussions or negotiations or the failure to agree on a mutually acceptable time, agenda, location or procedures for the meeting, in each case, as contemplated by Section 15.2, is a ------------ prerequisite to a demand for arbitration under this Section 15.3. In the event ------------ that any Party delivers an Arbitration Demand Notice with respect to any dispute, controversy or claim that is the subject of any then pending arbitration proceeding or of a previously delivered Arbitration Demand Notice, all such disputes, controversies and claims shall be resolved in the arbitration proceeding for which an Arbitration Demand Notice was first delivered unless the arbitrator in his or her sole discretion determines that it is impracticable or otherwise inadvisable to do so. (b) Any Arbitration Demand Notice may be given until one year and 45 days after the later of (i) the occurrence of the act or event giving rise to the underlying claim or (ii) the date on which such act or event was, or should have been, in the exercise of reasonable due diligence, discovered by the Party asserting the claim (as applicable and as it may in a particular case be specifically extended by the Parties in writing, the "Applicable Deadline"). Any ------------------- discussions, negotiations or mediations between the Parties pursuant to this Agreement or otherwise will not toll the Applicable Deadline unless expressly agreed in writing by the Parties. Each Party agrees on behalf of itself and its respective Affiliates that if an Arbitration Demand Notice with respect to a dispute, controversy or claim is not given prior to the expiration of the Applicable Deadline, such dispute, controversy or claim will be barred. Subject to Section 15.7(d), upon delivery of an Arbitration Demand Notice pursuant to --------------- Section 15.3(a) prior to the Applicable Deadline, the dispute, controversy or - --------------- claim shall be decided by a sole arbitrator in accordance with the rules set forth in this Section 15. ---------- 15.4 Arbitrator. ---------- -16- (a) If the amount in dispute is less than $500,000, the mediator selected by the provisions set forth in Section 15.2(b) above shall also serve --------------- as the sole arbitrator. If the amount in dispute equals or exceeds $500,000, the mediator selected by the provisions set forth in Section 15.2(b) above shall --------------- select a sole arbitrator from a list provided by JAMS/Endispute. After selection of such sole arbitrator, the mediator shall have no further role with respect to the dispute. Any arbitrator selected pursuant to this paragraph (a) shall be disinterested with respect to any of the Parties and the matter and shall be reasonably competent in the applicable subject matter. (b) The sole arbitrator selected pursuant to paragraph (a) above will set a time for the hearing of the matter which will commence no later than 90 days after the date of the appointment of the sole arbitrator pursuant to paragraph (a) above, and such hearing will be no longer than 30 days (unless in the judgment of the sole arbitrator the matter is unusually complex and sophisticated and thereby requires a longer time, in which event such hearing shall be no longer than 90 days). The final decision of such arbitrator will be rendered in writing to the Parties not later than 60 days after the last hearing date, unless otherwise agreed by the Parties in writing. 15.5 Hearings. Within the time period specified in Section 15.4(b), the -------- --------------- matter shall be presented to the arbitrator at a hearing by means of written submissions of memoranda and verified witness statements, filed simultaneously, and responses, if necessary in the judgment of the arbitrator or both of the Parties. If the arbitrator deems it to be essential to a fair resolution of the dispute, live cross-examination or direct examination may be permitted, but is not generally contemplated to be necessary. The arbitrator shall actively manage the arbitration with a view to achieving a just, speedy and cost- effective resolution of the dispute, claim or controversy. The arbitrator may, in his or her sole discretion, set time and other limits on the presentation of each Party's case, its memoranda or other submissions, and refuse to receive any proffered evidence that the arbitrator, in his or her sole discretion, finds to be cumulative, unnecessary, irrelevant or of low probative nature. Except as otherwise set forth herein, any arbitration hereunder will be conducted in accordance with the JAMS/Endispute Streamlined Rules for Commercial, Real Estate and Construction Cases then prevailing. The decision of the arbitrator will be final and binding on the Parties, and judgment thereon may be had and will be enforceable in any court having jurisdiction over the Parties. Arbitration awards will bear interest at an annual rate of the Prime Rate plus 2% per annum. To the extent that the provisions of this Agreement and the prevailing rules of JAMS/Endispute conflict, the provisions of this Agreement shall govern. 15.6 Discovery and Certain Other Matters. ----------------------------------- (a) Any Party involved in the applicable dispute may request limited document production from the other Party of specific and expressly relevant documents, with the reasonable expenses of the producing Party incurred in such production paid by the requesting Party. Any such discovery (which rights to documents shall be substantially less than document discovery rights prevailing under the Federal Rules of Civil Procedure) shall be conducted expeditiously and shall not cause the hearing provided for in Section 15.5 to be adjourned except ------------ upon consent of all of the Parties or upon an extraordinary showing of cause demonstrating that such adjournment is necessary to permit discovery essential to a Party to the proceeding. Depositions, interrogatories or other forms of discovery (other than the document production set -17- forth above) shall not occur except by consent of all of the Parties. Disputes concerning the scope of document production and enforcement of the document production requests will be determined by written agreement of the Parties or, failing such agreement, will be referred to the arbitrator for resolution. All discovery requests will be subject to the Parties' rights to claim any applicable privilege. The arbitrator will adopt procedures to protect the proprietary rights of the Parties and to maintain the confidential treatment of the arbitration proceedings (except as may be required by law). Subject to the foregoing, the arbitrator shall have the power to issue subpoenas to compel the production of documents relevant to the dispute, controversy or claim. (b) The arbitrator shall have full power and authority to determine issues of arbitrability but shall otherwise be limited to interpreting or construing the applicable provisions of this Agreement, and will have no authority or power to limit, expand, alter, amend, modify, revoke or suspend any condition or provision of this Agreement; it being understood, however, that the arbitrator will have full authority to implement the provisions of this Agreement and to fashion appropriate remedies for breaches of this Agreement; provided, however, that the arbitrator shall not have (i) any authority in - -------- ------- excess of the authority a court having jurisdiction over the Parties and the controversy or dispute would have absent these arbitration provisions,(ii) any right or power to award punitive or multiplicative damages or (iii) any power to impose remedies other than those set forth in Section 11.2 and 11.3. It is the ------------ ---- intention of the Parties that in rendering a decision the arbitrator give effect to the applicable provisions of this Agreement and follow applicable law (it being understood and agreed that this sentence shall not give rise to a right of judicial review of the arbitrator's award). (c) If a Party fails or refuses to appear at and participate in an arbitration hearing after due notice, the arbitrator may hear and determine the controversy upon evidence produced by the appearing Party. (d) Arbitration costs will be borne equally by each Party involved in the matter, except that each Party will be responsible for its own attorney's fees and other costs and expenses, including the costs of witnesses selected by such Party. 15.7 Certain Additional Matters. -------------------------- (a) Any arbitration award shall be a bare award limited to a holding for or against a Party and shall be without findings as to facts, issues or conclusions of law (including with respect to any matters relating to the validity or infringement of patents or patent applications) and shall be without a statement of the reasoning on which the award rests, but must be in adequate form so that a judgment of a court may be entered thereupon. Judgment upon any arbitration award hereunder may be entered in any court having jurisdiction thereof. (b) Prior to the commencement of an arbitration hearing pursuant to Section 15.5, any Party may seek one or more temporary restraining orders in a - ------------ court of competent jurisdiction if necessary in order to preserve and protect the status quo. Neither the request for, nor the grant or denial of, any such temporary restraining order shall be deemed a waiver of the obligation to arbitrate as set forth herein, and the arbitrator may dissolve, continue or modify any such order. Any such temporary restraining order shall remain in effect until the first to occur of -18- the expiration of the order in accordance with its terms or the dissolution thereof by the arbitrator. (c) Except as required by law, the Parties shall hold, and shall cause their respective officers, directors, employees, agents and other representatives to hold, the existence, content and result of mediation or arbitration in confidence in accordance with the provisions of Section 9 of this --------- Agreement and except as may be required in order to enforce any award. Each of the Parties shall request that any mediator or arbitrator comply with such confidentiality requirement. (d) In the event that at any time the sole arbitrator shall fail to served as an arbitrator for any reason, the Parties shall select a new arbitrator who shall be disinterested as to the Parties and the matter in accordance with the procedure set forth herein for the selection of the initial arbitrator. The extent, if any, to which testimony previously given shall be repeated or as to which the replacement arbitrator elects to rely on the stenographic record (if there is one) of such testimony shall be determined by the replacement arbitrator. 15.8 Law Governing Arbitration Procedures. The interpretation of the ------------------------------------ provisions of this Article 15, only insofar as they relate to the agreement to ---------- arbitrate and any procedures pursuant thereto, shall be governed by the Arbitration Act and other applicable federal law. In all other respects, the interpretation of this Agreement shall be governed as set forth in Section 16.3. ------------ 15.9 Choice of Forum. Any arbitration hereunder shall take place in --------------- Chicago, Illinois, unless otherwise agreed in writing by the Parties. SECTION 16. Miscellaneous Provisions. ------------------------ 16.1 Notices. All notices, requests, claims, demands and other ------- communications required or permitted hereunder shall be in writing and shall be deemed given or delivered (i) when delivered personally, (ii) if transmitted by facsimile when confirmation of transmission is received, (iii) if sent by registered or certified mail, postage prepaid, return receipt requested, on the third business day after mailing or (iv) if sent by private courier when received; and shall be addressed as follows: If to TSC, to: Technology Solutions Company 205 North Michigan Avenue Suite 1500 Chicago, Illinois 60601 Attention: General Counsel Telephone: (312) 228-4500 Facsimile: (312) 228-4501 If to eLoyalty, to: -19- eLoyalty Corporation 205 North Michigan Avenue Suite 1500 Chicago, Illinois 60601 Attention: Chief Financial Officer Telephone: (312) 228-4500 Facsimile: (312) 228-4501 or to such other address as such Party may indicate by a notice delivered to the other Party. 16.2 Entire Agreement. This Agreement is the entire agreement between the ---------------- Parties hereto with respect to the subject matter hereof, there being no prior written or oral promises or representations not incorporated herein. 16.3 Choice of Law. This Agreement shall be governed by and construed and ------------- enforced in accordance with the laws of the State of Illinois and the federal laws of the United States of America applicable therein, as though all acts and omissions related hereto occurred in Illinois. Any lawsuit arising from or related to this Agreement shall only be brought in the United States District Court for the Northern District of Illinois or the Circuit Court of Cook County, Illinois. To the extent permissible by law, the Parties hereby consent to the jurisdiction and venue of such courts. Each Party hereby waives, releases and agrees not to assert, and agrees to cause its Affiliates to waive, release and not assert, any rights such Party or its Affiliates may have under any foreign law or regulation that would be inconsistent with the terms of this Agreement as governed by Illinois law. 16.4 Amendment; Waiver. No amendment or modification of the terms of this ----------------- Agreement shall be binding on either Party unless reduced to writing and signed by an authorized representative of the Party to be bound. The waiver by either Party of any particular default by the other Party shall not affect or impair the rights of the Party so waiving with respect to any subsequent default of the same or a different kind; nor shall any delay or omission by either Party to exercise any right arising from any default by the other affect or impair any rights which the nondefaulting Party may have with respect to the same or any future default. 16.5 Severability. Any provision of this Agreement which is prohibited or ------------ unenforceable in any jurisdiction shall be ineffective in such jurisdiction to the extent of such prohibition or unenforceability without affecting, impairing or invalidating the remaining provisions or the enforceability of this Agreement. 16.6 Relationship of the Parties. By virtue of this Agreement, neither --------------------------- Party constitutes the other as its agent, partner, joint venturer, or legal representative and neither Party has express or implied authority to bind the other in any manner whatsoever. 16.7 Survival. The rights and obligations of the Parties under Sections -------- -------- 3.5, 6, 9, 11, 14, 15 and 16.9, shall survive any termination of this Agreement. - --- - - -- -- -- ---- 16.8 Counterparts. For convenience of the Parties hereto, this Agreement ------------ may be executed in one or more counterparts, each of which shall be deemed an original for all purposes. -20- 16.9 Records Retention. Each Party will retain all information obtained or ----------------- created in the course of performance hereunder for five years from the Effective Date. 16.10 Beneficiaries. Except for the provisions of Section 14 hereof, which ------------- ---------- are also for the benefit of the other Persons indemnified, this Agreement is solely for the benefit of the Parties hereto and their respective Affiliates, successors and permitted assigns and shall not confer upon any other Person any remedy, claim, liability, reimbursement or other right in excess of those existing without reference to this Agreement. -21- IN WITNESS WHEREOF, the Parties have caused this Agreement to be signed by their authorized representatives as of the Effective Date. TECHNOLOGY SOLUTIONS COMPANY By: /s/ WILLIAM H. WALTRIP William H. Waltrip Chairman of the Board of Directors eLOYALTY CORPORATION By: /s/ TIMOTHY J. CUNNINGHAM Timothy J. Cunningham Chief Financial Officer, Secretary and Treasurer Signature Page to the Shared Services Agreement EXHIBIT A LIST OF MEDIATORS ----------------- 1. Hon. Michael B. Getty (Ret.) 2. Hon. Mel R. Jiganti (Ret.) 3. William F. Hartgering EX-21 12 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 Technology Solutions Company Subsidiaries of the Company The following are all the subsidiaries of the Registrant and are included in its audited consolidated financial statements filed with its Annual Report on Form 10-K for the year ended December 31, 1999. Place of Subsidiary (Year Organized or Acquired) Incorporation ----------------------------------------------------------- --------------- Technology Solutions Company de Mexico S.A. de C.V. (1995) Mexico TSC Europe (U.K.) Ltd (1999) England TSC South America, Inc. (1996) Delaware TSC Colombia, Inc. (1996) Delaware TSC Latin America, Inc. (1996) Delaware TSC Colombia S.A. (1996) Colombia Goalsetters, Inc. (1996) Delaware OrTech Solutions Company (1996) Delaware TSC Asia, Inc. (1997) Delaware Technology Solutions Company Brasil LTDA (1997) Brazil HRM Resources, Inc. (1997) New York TSC Europe (France) SARL (1999) France Go Source, Inc. (1997) Delaware Technology Solutions Company (TSC) Pte. Ltd. Singapore EX-23 13 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-63057), (No. 333-31387), (No. 33-63612), (No. 33-83434), (No. 33-83436) and (No. 33-98068) and the Prospectus constituting part of the Registration Statement on Form S-3 (No. 333-33671) of Technology Solutions Company of our report dated February 15, 2000 appearing in the Technology Solutions Company Report on Form 10-K for the year ended December 31, 1999. /s/ PricewaterhouseCoopers LLP March 23, 2000 Chicago, Illinois EX-27 14 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 81,002 17,826 27,751 3,715 0 137,497 17,943 13,827 223,309 49,698 0 0 0 434 173,177 223,309 0 156,320 0 173,167 (3,705) 3,850 139 (17,131) (5,553) (11,578) (1,656) 0 0 (13,234) (0.31) (0.31)
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