UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 0-27975
ELOYALTY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 36-4304577
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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150 FIELD DRIVE , SUITE 250
LAKE FOREST, ILLINOIS 60045
(Address of Registrant's Principal Executive Offices)
Registrant's telephone number, including area code: (847) 582-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO _
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [X]
THE AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF MARCH 15, 2002 (BASED UPON THE CLOSING PRICE PER SHARE OF REGISTRANT'S COMMON STOCK ON MARCH 15, 2002 AS REPORTED BY THE NASDAQ NATIONAL MARKET SYSTEM) WAS APPROXIMATELY $30,086,318.
THE NUMBER OF SHARES OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR VALUE PER
SHARE, OUTSTANDING AS OF MARCH 15, 2002 WAS 6,296,990.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF ELOYALTY'S PROXY STATEMENT FOR ITS 2002 ANNUAL MEETING OF
STOCKHOLDERS, TO BE FILED WITHIN 120 DAYS AFTER THE END OF ELOYALTY'S FISCAL
YEAR, ARE INCORPORATED HEREIN BY REFERENCE INTO PART III WHERE INDICATED.
TABLE OF CONTENTS
PART I
ITEM PAGE
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Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of
Security Holders 5
Item 4A. Executive Officers of the Company 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Qualitative and Quantitative Disclosures about Market Risk 20
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 49
PART III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management 49
Item 13. Certain Relationships and Related Transactions 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 49
Signatures 51
Exhibit Index
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PART I
ITEM 1. BUSINESS.
GENERAL
This Annual Report on Form 10-K (this "Form 10-K") contains forward-looking statements that are based on current management expectations, forecasts and assumptions. These include, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," "plans," "intends," "projects," "future" and similar expressions, references to plans, strategies, objectives and anticipated future performance, and other statements that are not strictly historical in nature. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. Such risks, uncertainties and other factors that might cause such a difference include, without limitation, those noted under Factors That May Affect Future Results or Market Price of Stock included in Item 7, Part II of this Form 10-K. Readers should also carefully review the risk factors described in other documents that eLoyalty Corporation files from time to time with the SEC.
Readers are cautioned not to place undue reliance on forward-looking statements. They reflect opinions, assumptions and estimates only as of the date they are made, and eLoyalty Corporation undertakes no obligation to publicly update or revise any forward-looking statements in this report, whether as a result of new information, future events or circumstances or otherwise.
INTRODUCTION
eLoyalty Corporation (together with its subsidiaries "eLoyalty," "we" or the "Company") was incorporated in Delaware in May 1999 as a wholly-owned subsidiary of Technology Solutions Company ("TSC"). The Company's business was initiated in May 1994 as a call center business unit within TSC. This unit within TSC was subsequently renamed the Enterprise Customer Management ("ECM") business unit, and later the eLoyalty division. Since its inception and under its various names, this business unit has developed management consulting and technology capabilities in an effort to lead the development of, and stay at the forefront of, the customer relationship management or "CRM" market, with the specific focus on incorporating new technologies into CRM solutions.
While the growth of the Company's business primarily was organic during its ownership by TSC, in 1997 TSC acquired and incorporated into its ECM unit The Bentley Group, a business and operations consulting firm, for total consideration of $17.5 million, and Geising International, a German-based business consulting firm, for $1.4 million. Further, in 1996, TSC acquired Aspen Consultancy Ltd., a privately owned consulting firm based in the United Kingdom for $3.4 million. The purpose of each of these acquisitions was to expand the range of the business's competencies in the CRM space in order to more effectively serve its clients' needs.
In May 1999, TSC's ECM business unit was renamed eLoyalty and a new subsidiary by the same name was formed in anticipation of a spin-off of eLoyalty. In February 2000, TSC transferred the businesses of its eLoyalty division to the Company and declared a dividend, payable to the stockholders of record of TSC, based upon a ratio of one share of the Company's common stock, par value of $.01 per share (the "Common Stock"), for every one share of TSC Common Stock held. Effective February 15, 2000, all of the outstanding shares of Common Stock were distributed to TSC's stockholders. eLoyalty became a separate publicly traded company as of the same date.
On December 19, 2001, eLoyalty sold approximately 4.6 million shares of a new class of 7% Series B Convertible Preferred Stock ("Series B stock"), par value $.01 per share, in a private placement to funds managed by Technology Crossover Ventures ("TCV") and Sutter Hill Ventures ("Sutter Hill") and in a concurrent rights offering to eLoyalty stockholders. Immediately prior to the closing of these transactions, (i) eLoyalty amended its certificate of
incorporation to increase the number of its authorized shares of common stock from 100 million to 500 million and its authorized shares of preferred stock from 10 million to 40 million, and (ii) effected a one-for-ten reverse stock split of its outstanding common stock (with a corresponding reduction in its authorized shares of common stock, to 50 million). The private placement, authorized share increase and reverse stock split were approved by eLoyalty's stockholders on December 18, 2001 at a special meeting held for such purpose.
The Series B stock will accrue dividends at a rate of 7% per annum, will be entitled to a preference upon liquidation and will be convertible into shares of common stock on a one for one basis (subject to adjustment in the future to give effect to certain actions) at the option of the holder beginning June 19, 2002. In addition, the Series B stock generally votes with the Company's common stock as a single class (subject to specified matters as to which the Series B stock is entitled to a separate class vote) on the basis of one vote per share (subject to adjustment in the future to give effect to certain actions).
Approximately 1.9 million shares of Series B stock were sold to TCV for gross proceeds of approximately $9.6 million. Approximately 1.3 million shares of Series B stock sold to Sutter Hill for gross proceeds of approximately $6.4 million. Approximately 1.4 million shares of Series B stock were sold in the rights offering to approximately 350 eLoyalty stockholders for gross proceeds of approximately $7.3 million.
TCV and Sutter Hill were eLoyalty stockholders prior to these transactions. In addition, Jay Hoag and Tench Coxe, eLoyalty directors, are (and were prior to these transactions) affiliated with TCV and Sutter Hill, respectively. The terms of the transactions were negotiated between TCV and Sutter Hill, on the one hand, and the members of eLoyalty's board of directors (other than Messrs. Hoag and Coxe) and its representatives, on the other hand. As a result of these transactions, TCV and Sutter Hill own approximately 41% and 28%, respectively, of the outstanding Series B stock and approximately 26% and 14%, respectively, of the aggregate voting power of the Series B stock and common stock.
In connection with the closing of the private placement, eLoyalty, TCV and Sutter Hill entered into an Amended and Restated Investor Rights Agreement. Under that agreement, eLoyalty must use its best efforts to have a Registration Statement on Form S-3 for the shares of common stock issuable upon the conversion of the Series B stock issued in the private placement, plus certain previously owned TCV shares, declared effective within 180 days after closing. eLoyalty will be required to maintain the effectiveness of the Registration Statement until all of the common stock underlying the Series B stock issued in the private placement can be sold in any and all three month periods under Rule 144 under the Securities Act of 1933 (without giving effect to Rule 144(k)). The agreement also provides TCV and Sutter Hill with certain piggyback registration rights.
Our executive offices are located at 150 North Field Drive, Suite 250, Lake Forest, Illinois 60045 (telephone number 847-582-7000).
OVERVIEW
eLoyalty is a global management consulting and systems integration organization focused exclusively on building customer loyalty solutions for our clients. We offer a range of CRM-related services including evaluating and developing business strategy, designing and implementing technical architecture, selecting, implementing and integrating appropriate CRM software applications and providing ongoing support for multi-vendor systems. We refer to the solutions that we provide our clients to enhance their customer relations as "loyalty solutions," in that they are designed to create long-term customer loyalty measured by factors including an increase in repeat sales, reduction of the cost of sales and increase in customer referrals. We help companies identify and measure the impact of improved customer relationships on profitability. Our customized solutions align many isolated customer contact channels, including the Internet, e-mail, call centers, field sales and field service. The solutions we design and implement enable our clients to sustain higher levels of success with their customers.
Our revenues are generated primarily from professional services, which are billed principally on a time and materials basis and, occasionally, on a fixed fee basis. These services generally include the following:
- Evaluating our clients' efficiency and effectiveness in handling customer interactions. We capture and analyze the
performance measures of each customer interaction, including the number of legacy systems used to handle the situation, interaction time, reason for interaction and actions taken to resolve any customer issues.
- Assisting our clients in identifying their most valuable customers through detailed segmentation of their customer base. This allows our clients to target high-value customers to receive special offers or service levels.
- Performing detailed financial analysis to calculate the expected return on investment for the implementation of our various loyalty solutions. This process helps our clients establish goals, alternatives and priorities and assigns client accountability throughout resulting projects.
- Selecting the appropriate loyalty solution for our client. The implementation of our loyalty solutions can lead to significant organizational, structural, operational and staffing changes and we assist our clients in determining the steps they need to take in this regard.
- Implementing the technical aspects of our loyalty solutions, including the integration of a variety of software applications from third-party vendors and our own software.
In addition, we generate revenues from licensing of our proprietary Loyalty Suite(TM) software, which ties together the critical components of the loyalty solution. This software provides sophisticated real-time information regarding a customer's various contacts with the client's organization, allowing the client to handle each customer interaction in a consistent manner throughout the enterprise. Other sources of revenue include maintenance and support of our solutions, the provision of purpose-built hosting solutions and services relating to e-PROFILE(TM) Internet banking products. These licensing and "managed loyalty services" offerings, in the aggregate, accounted for less than 10% of our revenues in each of the last three years. Licensing revenues are expected to decrease going forward based on our decision in 2002 to cease new development of the Loyalty Suite(TM) software.
We operate in two primary business segments: North America (consisting of the US and Canada) and International. In 2001, we globalized and centralized our delivery, business development and infrastructure organizations and processes. Accordingly, there are no material distinctions between the character and nature of the two segments, other than financial results as discussed herein.
For information regarding domestic and foreign revenues, operating income and total assets, see Note Fifteen to the Consolidated Financial Statements of eLoyalty, appearing under Item 8, Part II of this Form 10-K.
INTELLECTUAL PROPERTY RIGHTS
A majority of our clients require that we grant to them some or all proprietary and intellectual property rights with respect to the original work product resulting from our services, including the intellectual property rights to any custom software developed for them. While each grant of proprietary and intellectual property rights limits our ability to reuse work product components with other clients, it is our practice to retain the rights in the underlying core intellectual property on which it is based, including methodologies, workplans and software. We regard these software and methodologies as proprietary and intend to protect our rights, where appropriate, with registered copyrights, patents, and trademarks, applicable trade secret laws and contractual restrictions on disclosure and transferring title. Further, we attempt to obtain from our clients an ownership interest or a license to permit us to market custom software and other original materials to other clients. These arrangements may be nonexclusive or exclusive, and licensors to us may retain the right to sell products and services that compete with those of eLoyalty. In addition, to protect our proprietary information, we rely upon a combination of trade secret and common law, employee nondisclosure policies and third-party confidentiality agreements.
SEASONALITY
The Company typically experiences seasonal revenue and earnings fluctuations globally in the fourth quarter, as the total number of billing days is reduced due to holidays. Additionally, our European operations historically have experienced decreased revenues and earnings in the third quarter because of extended summer vacation periods.
CLIENTS
During fiscal 2001, our five and twenty largest clients accounted for 49% and 82%, respectively, of our revenues. Two clients accounted for more than 10% of our total revenues during the year, with each of Agilent Technologies and UnitedHealth Group contributing 13% of total revenues for 2001. In June 2001, Agilent Technologies notified us of the cancellation of the project on which we and other third parties were engaged. For the fiscal year ended December 29, 2001, 31 clients each accounted for over $1 million of revenues. While our focus, consistent with the focus of our services, is on developing long-term relationships with our clients, the nature of its business is such that its activities with specific clients will fluctuate periodically as individual projects are initiated and progress through their life span. As a result, the percentage of revenue contributed by any particular client can be expected to vary, perhaps significantly, among periods.
COMPETITION
We operate in a highly competitive and rapidly changing market and compete with a variety of organizations that offer services similar to ours. The market includes a variety of participants that compete with us at various levels of our business, including strategic consulting firms, systems integrators, web-consulting firms, online agencies and firms that provide both consulting and systems integration services. In our opinion, few competitors offer the full range of CRM services that we can provide. We believe that our principal competitors are the "Big 5" consultancies: Accenture, Cap Gemini Ernst & Young, Deloitte Consulting, KPMG Consulting and PricewaterhouseCoopers.
Many of our competitors have longer operating histories, more clients, longer relationships with their clients, greater brand or name recognition and significantly greater financial, technical, marketing and public relations resources than we do. As a result, our competitors may be in a better position to respond quickly to new or emerging technologies and changes in client requirements. They may also develop and promote their products and services more effectively than we do. New market entrants also pose a threat to our business. Existing or future competitors may develop or offer solutions that are comparable or superior to ours at a lower price. In addition, several competitors have announced their intention to offer a broader range of services than they currently provide.
RESEARCH AND DEVELOPMENT
The market in which we operate is constantly evolving and we believe that it is necessary to invest in research and development to remain competitive. In 1998, we formally established our Loyalty Lab in Austin, Texas as a center for our research and development group. Its activities include the research and evaluation of emerging technologies, working with technology partners to decrease the time and difficulty of integrating various CRM software products, acting as a center for demonstrating loyalty solutions to our current and prospective clients and training our employees on our solutions.
Our research and development expenditures for the years ended December 29, 2001, December 30, 2000, and December 31, 1999 were approximately $5.1 million, $8.8 million and $5.5 million, respectively.
EMPLOYEES
As of December 29, 2001, we employed 494 persons. Of the 494 employees, 358 were located in North America, with the balance in Europe and Australia. As our business consists primarily of the provision of professional services, it is inherently people intensive. We believe we have a satisfactory relationship with our employees. Our average
annualized voluntary turnover of field employees was 14% in 2001. None of our employees are represented by a union. Most of our Vice Presidents and European employees generally have employment agreements requiring three months' notice of termination by us. In addition, the laws and regulations of the foreign countries in which we operate may increase the cost of terminating employees in those countries. We maintain various programs and strategies to retain and recruit employees.
ITEM 2. PROPERTIES
Our principal physical properties consist of our leased headquarters in Lake Forest, Illinois (north of Chicago), and additional leased office facilities in other locations throughout the United States, including Atlanta, GA; Dallas and Austin, TX; New York, NY; San Francisco, CA; and Washington, D.C.; and in various international locations, including Toronto, (Ontario), Canada; Frankfurt, Germany; Dublin, Ireland; and London, England. Our total leased square footage is 42,000. We believe that our leased facilities are appropriate for our current and anticipated business requirements.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this report, we are not a party to any pending legal proceedings, other than ordinary routine litigation or other legal proceedings incidental to our business, none of which we believe would constitute material legal proceedings for which disclosure is required under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 18, 2001, we held a Special Meeting of Stockholders (the "Special Meeting"). 36,241,116 shares of eLoyalty common stock were represented at the Special Meeting, in person or by proxy. This represented more than a majority of the shares of eLoyalty common stock outstanding on the record date for the Special Meeting and therefore constituted a quorum. Each share present was entitled to one vote.
The following actions were taken at the Special Meeting:
(1) Stockholders approved the sale of shares of eLoyalty's 7% Series B Convertible Preferred Stock (the "Series B stock") in a private placement to affiliates of TCV and Sutter Hill. 32,465,085 shares, or nearly 90% of the shares voted, were voted in favor of the sale, 3,762,785 shares were voted against it and 13,246 shares abstained from voting. In addition, taking into account only the 26,687,672 shares that were represented at the meeting and held by persons not affiliated with the purchasers (such affiliation determined in accordance with the requirements set forth in the Stock Purchase Agreement for the private placement), 22,911,641 shares, or nearly 86%, voted in favor of the sale, 3,762,785 shares voted against and 13,246 shares abstained from voting. As a result, our unaffiliated stockholders approved the Series B stock sale as well.
(2) Stockholders approved an amendment to eLoyalty's Certificate of Incorporation to increase the number of authorized shares of eLoyalty common stock from 100,000,000 shares to 500,000,000 shares and to increase the number of authorized shares of eLoyalty preferred stock from 10,000,000 shares to 40,000,000 shares. 28,438,122 shares, or approximately 55% of the shares outstanding, voted in favor of the amendment, 7,789,788 shares voted against it and 13,206 shares abstained from voting.
(3) Stockholders approved an amendment to eLoyalty's Certificate of Incorporation to effect a one-for-ten stock combination, or reverse stock split, of eLoyalty common stock and a corresponding reduction in the number of authorized shares of eLoyalty common stock. 35,002,954 shares, or nearly 68% of the shares outstanding, voted for the reverse stock split, 1,226,759 shares voted against, and 11,403 shares abstained from voting.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The following table includes the name, age (as of March 15, 2002), current position and term of office of each of our executive officers.
Held
Name Age Current Position Since
Kelly D. Conway* 44 President and Chief Executive Officer 1999
Timothy J. Cunningham 48 Vice President, Chief Financial Officer and 1999
Corporate Secretary
Jackie L. Hilt 45 Vice President, Employee Loyalty 1999
Jay A. Istvan 42 Vice President, Strategy and Marketing 2001
Mark D. Kuchel 47 Vice President, Demand 1999
Steven C. Pollema 42 Vice President, Delivery and Operations 2001
Robert S. Wert 37 Vice President and General Counsel 2001
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* Member of the Board of Directors
Except as required by individual employment agreements between executive officers and the Company, there exists no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was elected. Each executive officer serves until his or her successor is elected and qualified or until his or her earlier removal or resignation.
The principal business experience of the executive officers for at least the last five years is as follows:
Kelly D. Conway has been the President and Chief Executive Officer and a Director of eLoyalty since its incorporation in May 1999. Mr. Conway joined TSC in November 1993 as Senior Vice President, assumed the position of Executive Vice President in July 1995 and became Group President in October 1998. From 1991 until joining TSC, Mr. Conway served as a Partner in the management consulting firm of Spencer, Shenk and Capers. Prior thereto, he held various management positions with Telcom Technologies, a manufacturer of automatic call distribution equipment, including President and Chief Executive Officer from 1989 to 1991, and Vice President of Finance and Marketing from 1984 to 1989.
Timothy J. Cunningham has served as eLoyalty's Vice President, Chief Financial Officer and Corporate Secretary since November 1999. From October 1998 until November 1999, he was the Vice President-Finance and Chief Financial Officer of CTS Corporation, a publicly traded electronics and communications company. Mr. Cunningham was Vice President-Finance of the Moore Document Solutions division of Moore Corporation from July 1996 until September 1998, and Group Controller for the ConAgra Refrigerated Foods group of ConAgra, Inc. from 1995 to 1996.
Jackie L. Hilt has been eLoyalty's Vice President of Employee Loyalty since May 1999, with responsibility for recruiting and human resources functions with a specific focus on employee relationships. Previously, Ms. Hilt had been with TSC for more than ten years, most recently as the Senior Vice President in charge of its international recruiting organization, a role she assumed in 1994. Ms. Hilt currently is on a voluntary leave of absence from eLoyalty.
Jay A. Istvan has been the Vice President, Strategy and Marketing, of eLoyalty since February 2001. Mr. Istvan was affiliated with The Boston Consulting Group, Inc., a global strategic consulting firm, for more than fourteen years
prior to joining eLoyalty. He was a Vice President of Boston Consulting Group from 1993 and was Midwest Regional Leader of its Healthcare practice from 1997 until joining eLoyalty and Regional Leader of its High Technology and Convergence Practice from 1993 to 1997.
Mark D. Kuchel has been a Vice President of eLoyalty since February 2000, was the Area Practice Leader for the Eastern Region of North America from November 2000 to August 2001 and has been Vice President, Demand since that date. Prior to such time, Mr. Kuchel had been a Senior Vice President of TSC since March 1996.
Steven C. Pollema has been Vice President, Delivery and Operations of eLoyalty since August 2001, after joining eLoyalty in June 2001 as Senior Vice President, Operations. Prior to joining eLoyalty, Mr. Pollema had been with MarchFirst, Inc. and its predecessor, Whittman-Hart, Inc., since June 1997, most recently as its President from March 2001 to May 2001. Prior to assuming the office of President, Mr. Pollema was Executive Vice President-Global Operations of MarchFirst from October 2000 through March 2001, Managing Executive -- Chicago Office/Region from October 1998 to October 2000, Solution Director -- Business Development from October 1997 to October 1998 and Partner -- Enterprise Account Manager from July 1997 to October 1997. Prior to MarchFirst/Whittman-Hart, Mr. Pollema was with Andersen Consulting, LLC, most recently as an Associate Partner.
Robert S. Wert has been Vice President and General Counsel of eLoyalty since October 2001. He joined eLoyalty in January 2001 as Vice President and Senior Counsel. Prior to joining the Company, Mr. Wert was Associate General Counsel and Assistant Secretary of Katy Industries, Inc., a publicly-held, diversified holding company since August 1998. From 1989 to 1998, Mr. Wert was with the Chicago law firm of Holleb & Coff, most recently as a Partner in its Business Department from January 1997.
Please note that in February 2002, we ceased using the title Senior Vice President for any of our officers. All persons previously holding that title currently hold the title of Vice President. For simplicity, the current office of each of the executive officers, other than Mr. Conway, is characterized as that of Vice President with respect to his or her current role in the organization. Certain of the executive officers were Senior Vice Presidents at the time they assumed those roles.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our Common Stock is traded on the National Market System under the NASDAQ symbol ELOY. The following table sets forth, for the periods indicated, the quarterly high and low prices of the common stock on the NASDAQ Stock Market.
PRICE RANGE(1): High Low ---------------------------------------------------------------------------------------------------- Fiscal Year 2001 First Quarter $ 120.00 $ 22.50 Second Quarter 45.00 6.00 Third Quarter 10.20 4.00 Fourth Quarter 6.90 4.00 Fiscal Year 2000(2) First Quarter (beginning February 16, 2000) $ 405.00 $ 184.40 Second Quarter 240.00 105.00 Third Quarter 181.30 98.80 Fourth Quarter 128.80 31.90 |
(1) Adjusted as necessary, to give effect to the one-for-ten reverse stock
split effected before the opening of business on December 19, 2001.
(2) We completed our 100% spin-off from TSC and began public trading on
February 16, 2000.
There were approximately 467 owners of record of our Common Stock, par value $0.01 per share, as of March 15, 2002.
On December 19, 2001, we raised an aggregate of $23.3 million of gross cash proceeds in connection with the sale, pursuant to a private placement and related rights offering, of shares of our Series B stock, par value $0.01 per share. See "Introduction" in Item 1 Part I of this 10-K for more information regarding the private placement. Each share of Series B stock is convertible into one share of our common stock, at the option of the holder thereof, beginning June 19, 2002. This conversion ratio is subject to adjustment in the future in the event of certain transactions. The Series B stock will automatically convert into our common stock at any time beginning June 19, 2002 if the last sale price of our common stock is at least five times the original sale price per share of Series B stock ($5.10) for 30 consecutive trading days, subject to certain limitations.
The private placement was made in reliance on the exemption from registration under the Securities Act of 1933, as amended, afforded by Section 4(2) thereof and the rules promulgated under Regulation D thereunder. Prior to the private placement, TCV and Sutter Hill were stockholders in our company and the transaction was negotiated on a private basis between us and TCV and Sutter Hill. In addition, in connection with the private placement, TCV and Sutter Hill made certain representations to us regarding, among other things, their status as "accredited investors" for purposes of the rules under Regulation D.
DIVIDENDS
Historically, we have not paid cash dividends on our common stock, and do not expect to do so in the future. However, a cash dividend of approximately $0.9 million is expected to be paid in July 2002 on the Company's redeemable Series B stock. In addition, two semi-annual dividend payments of approximately $0.8 million each are expected to be paid in 2003 on the Series B stock. The amount of the dividend would be affected by any conversions of the Series B stock into common stock, which is permitted at the option of the holder beginning June 19, 2002.
ITEM 6. SELECTED FINANCIAL DATA.
The following tables summarize our selected financial data. This information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, and the financial statements and notes thereto, which are included elsewhere in this Form 10-K. The statements of operations data for the years ended December 29, 2001, December 30, 2000 and December 31, 1999, for the seven month period ended December 31, 1998 and for each of the years ended May 31, 1998 and 1997, and the balance sheet data as of December 29, 2001, December 30, 2000, December 31, 1999 and 1998, and May 31, 1998 and 1997, below are derived from the audited financial statements. The statements of operations data for the year ended December 31, 1998 and for the seven month period ended December 31, 1997 are derived from the unaudited financial statements. In the opinion of management, the unaudited financial statements referred to above reflect all adjustments, consisting of normal adjustments, necessary for a fair presentation of eLoyalty's results of operations for the year ended December 31, 1998, and for the seven month period ended December 31, 1997.
Certain reclassifications have been made in the statements of operations for the years ended December 30, 2000, December 31, 1999 and 1998, the seven month periods ended December 31, 1998 and 1997, and the fiscal years ended May 31, 1998 and 1997 to conform to the 2001 presentation. In December 2000, we changed our fiscal year from a calendar year to a fiscal year ending on the Saturday closest to the end of December. The fiscal year-end for 2001 was December 29. We had previously changed our fiscal year-end from May 31 to December 31, effective December 31, 1998. For comparative purposes, we have included the statements of operations data for the year ended December 31, 1998, and the seven month period ended December 31, 1997, which have been derived from unaudited financial statements. In the opinion of management, the unaudited financial statements for these periods reflect all adjustments, consisting of normal adjustments, necessary for a fair presentation of eLoyalty's results of operations for the year ended December 31, 1998 and the seven month period ended December 31, 1997.
The financial information for periods prior to February 15, 2000 reflect our results of operations and financial position as we operated within TSC, and the financial information for periods subsequent to February 15, 2000 reflect our results of operations and financial position as we operated as a separate, stand-alone, publicly-traded company. The financial information for periods prior to February 15, 2000 may not necessarily reflect what the financial position and results of operations would have been had we operated as a separate, stand-alone, publicly-traded entity during such periods.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
For the
Seven Month
Period Ended For the
For the Years Ended December December Years Ended May
(In thousands, -------------------------------- ---------- ---------------
except per share data)(1) 2001 2000 1999 1998 1998 1997 1998 1997
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Revenues(2) $146,729 $236,498 $163,180 $117,616 $71,993 $48,806 $94,428 $48,261
Operating expenses:
Costs of services(2) (3) 113,282 150,691 103,306 72,406 44,569 30,922 58,348 26,585
Selling, general and
administrative(3) 58,832 73,411 39,377 33,915 21,342 13,536 25,851 14,612
Severance and
related costs 33,444 -- -- -- -- -- -- --
Research and development 5,091 8,821 5,494 3,770 3,029 1,453 2,461 1,749
Depreciation expense 5,683 2,372 1,502 601 421 128 308 131
Goodwill amortization 4,808 4,972 4,996 3,794 2,450 1,856 3,201 376
---------------------------------------------------------------------------------------------
Total operating expenses 221,140 240,267 154,675 114,486 71,811 47,895 90,169 43,453
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Operating (loss) income (74,411) (3,769) 8,505 3,130 182 911 4,259 4,808
Other income (expense) 1,654 2,921 (408) (391) (327) (14) (24) 15
---------------------------------------------------------------------------------------------
(Loss) income before
income taxes (72,757) (848) 8,097 2,739 (145) 897 4,235 4,823
Income tax
(benefit) provision (9,096) (424) 4,039 1,672 398 562 2,022 1,897
---------------------------------------------------------------------------------------------
Net (loss) income $(63,661) $ (424) $ 4,058 $ 1,067 $ (543) $ 335 $ 2,213 $ 2,926
Dividends and accretion related
to Series B preferred stock (3,576) -- -- -- -- -- -- --
---------------------------------------------------------------------------------------------
Net (loss) income available to
common stockholders $(67,237) $ (424) $ 4,058 $ 1,067 $ (543) $ 335 $ 2,213 $ 2,926
---------------------------------------------------------------------------------------------
Basic net (loss) income
per common share(4) $ (13.42) $ (0.09) $ 0.98 $ 0.26 $ (0.13) $ 0.08 $ 0.53 $ 0.71
Diluted net (loss) income
per common share(4) (5) $ (13.42) $ (0.09) $ 0.92 $ 0.25 $ (0.13) $ 0.07 $ 0.47 $ 0.63
(In millions)
Basic weighted average
shares outstanding(4) 5.01 4.82 4.14 4.14 4.14 4.14 4.14 4.14
Dilutive weighted average
shares outstanding 5.16 5.37 4.42 4.31 NA(6) 4.58 4.68 4.66
|
Noncash compensation included in individual line items above: (7)
For the Years Ended December
2001 2000 1999
-------------------------------------------------------------------
Cost of services $ 841 $ 789 $ 319
Selling, general and
administrative 2,294 1,337 251
Research and
development 54 81 69
---------------------------------------------------------------
Total noncash
compensation $3,189 $2,207 $ 639
-------------------------------------------------------------------
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(1) All share amounts have been adjusted to give effect to the one-for-ten
reverse stock split effected by the Company prior to the opening of
business on December 19, 2001.
(2) All periods presented have been adjusted to reflect adoption of EITF
D-103 requiring billable expenses to be classified as revenue.
(3) All periods presented have been adjusted to reflect the
reclassification of other costs of engageable project personnel from
Selling, General and Administrative to Cost of Services.
(4) In December 1999, eLoyalty issued 4.14 million shares to TSC. For
periods prior to February 15, 2000, basic earnings per share has been
computed based on the 4.14 million shares and diluted earnings per
share has been computed based on the 4.14 million shares plus the
estimated dilutive effect of common stock equivalents using the
"treasury stock" method. For periods subsequent to February 15, 2000,
basic earnings per share has been computed based on actual weighted
shares outstanding and dilutive earnings per share has been computed
based on the actual weighted shares outstanding plus the dilutive
effect of common stock equivalents using the "treasury stock" method.
(5) In periods of a loss, common stock equivalents were not included in
the calculation as they are antidilutive.
(6) Common stock equivalent information was not previously calculated for
this period when eLoyalty was part of TSC as they were antidilutive.
Subsequent to the spin-off eLoyalty does not maintain the information
to calculate common stock equivalents for this period.
(7) Not applicable for previous periods.
BALANCE SHEET DATA
As of
----------------------------------
December 29, December 30, As of December 31, As of May 31,
------------ ------------ ------------------ -------------------
(In thousands) 2001 2000 1999 1998 1998 1997
------------------------------------------------------------------------------------------------------------------
Cash and cash
equivalents $ 42,653 $ 41,138 $ 13,462 $ 4,411 $ 4,726 $ 4,130
Working capital $ 59,795 $ 109,934 $ 54,927 $ 26,231 $ 23,840 $13,506
Total assets $128,014 $ 184,618 $ 96,603 $ 63,904 $ 54,118 $24,188
Long-term obligations $ 3,390 -- -- -- -- --
Redeemable
preferred stock $ 19,499 -- -- -- -- --
Stockholders'
equity $ 77,347 $ 140,856 $ 73,615 $ 47,888 $ 40,893 $ 17,147
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The following Management's Discussion and Analysis and other parts of this Form 10-K contain forward-looking statements that are based on current management expectations, forecasts and assumptions. These include, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," "plans," "intends," "projects," "future" and similar expressions, references to plans, strategies, objectives and anticipated future performance, and other statements that are not strictly historical in nature. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements. Such risks, uncertainties and other associated factors that might cause such a difference include, without limitation, those noted under "Factors That May Affect Future Results or Market Price of Stock" included elsewhere in Item 7.
Readers are cautioned not to place undue reliance on forward-looking statements. They reflect opinions, assumptions and estimations only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements in this Form 10-K, whether as a result of new information, future events or circumstances, or otherwise.
BACKGROUND
We are a global management consulting and systems integration organization focused exclusively on building customer loyalty solutions for our clients. We offer a broad range of customer relationship management ("CRM") related services including business strategy, technical architecture, selecting, implementing and integrating appropriate CRM software applications and providing ongoing support for multi-vendor systems.
We spun off from Technology Solutions Company ("TSC") into a separate, publicly-traded company on February 15, 2000 (the "spin-off"). Accordingly, the statements of operations for periods subsequent to the spin-off reflect our results as a stand-alone company. The statements of operations for periods prior to the spin-off are presented as if eLoyalty operated as a separate entity, and include a cost allocation of certain TSC general corporate expenses that were not directly related to our operations. These costs were allocated proportionately to us based on revenues and headcount.
PERFORMANCE OVERVIEW AND GENERAL OUTLOOK
Our consolidated revenues were $146.7 million in 2001. This represents an approximate 38% decline as compared to 2000. Average revenues per billable day for 2001 were $585,000, down from $938,000 for 2000. The decrease in revenues is primarily due to a general economic slowdown that has contributed to decreased spending on information technology. Beginning with this report, revenue reflects adoption of Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) D-103, requiring billable expenses to be reported as revenue. Prior to the adoption of EITF D-103 billable expenses had been recorded net of recoveries from customers as a component of cost of services. All periods presented have been revised to reflect this change.
We have experienced declines during 2001 in the utilization rate of our engageable field consultants, partially mitigated by our cost reduction activities throughout this year. Utilization is defined as billed time as a percentage of total available time. Average utilization was at 54% in the fourth quarter 2001 versus 63% in the fourth quarter of 2000. Average utilization for the year was 55% in 2001 versus 66% in 2000. We continue to experience pricing pressures that have resulted in a decline of our average hourly billing rate from $234 in the fourth quarter of 2000 to $202 in the fourth quarter of 2001.
We presently expect the current economic slowdown and related uncertain client expenditure commitments and extended decision time frames to persist in 2002. Our revenue is expected to remain fairly constant for the first quarter of 2002 compared to the fourth quarter of 2001. We expect both our North American segment (which has historically accounted for more than 80% of our consolidated revenues) and our International segment to continue to suffer from a difficult business environment.
In response to this economic environment and demand slowdown, we have undertaken a number of cost reduction activities, including headcount reductions and office closures and downsizing. Annual savings resulting from these actions are expected to be about $65 million and will substantially be realized in 2002. These actions were taken in connection with a substantial reorganization of our business and business operating processes. As a result of these activities, we recognized a special pre-tax charge of $33.4 million (approximately $22.7 million after tax) in 2001. As a result of these combined 2001 actions, we reduced our overall headcount by approximately 51%, from 1,018 total employees at the end of fiscal 2000 to approximately 494 employees at December 29, 2001. We expect substantially all severance and related costs to be paid out by the end of 2002 pursuant to agreements entered into with affected employees, and facility costs related to the office closures to be paid pursuant to contractual lease terms through 2007. In addition we expect an estimated $1 million to $2 million pre-tax charge to be taken in the first quarter of 2002, relating primarily to severance benefits associated with reductions in headcount. This additional severance related charge is expected to be substantially paid out by the end of 2002.
During the second quarter of 2001, we established a valuation allowance against the benefit of certain international operating unit tax losses previously recognized, and ceased recognizing the benefit of losses incurred by these operating units. This decision was made following a company-wide review of expected financial results by geography under various alternative scenarios and the related assessments of recoverability of these net deferred tax assets in light of the period over which they arose and the predictability of a near-term return of international operating units to acceptable, continuing levels of profitability. As of December 29, 2001, we had a valuation allowance of $14.1 million relating to these international operating unit tax losses.
Primarily as a result of the above-described business conditions and the responsive cost reduction actions, we experienced a 2001 operating loss of $74.4 million, compared to an operating loss of $3.8 million for fiscal 2000.
During 2001, we entered into a share purchase agreement with affiliates of Technology Crossover Ventures and Sutter Hill Ventures, already stockholders of our Company, under which these investors purchased $16.0 million of a new series of preferred stock, a redeemable 7% Series B Convertible Preferred Stock (the "Series B stock"), in a private placement. See the section titled "Introduction" in Item 1, Part I of this Form 10-K for more information about the private placement. In addition, we closed concurrently on a rights offering pursuant to which our existing common stockholders purchased $7.3 million of the Series B stock. We also effected a one-for-ten reverse split of our common stock shortly before the closing of the private placement and rights offering. The private placement, the reverse stock split and related changes to our capital structure were approved by stockholders in a special meeting of stockholders held December 18, 2001.
During the fourth quarter 2001, we offered our US employees the opportunity to exchange certain of their options to purchase Common Stock for restricted Common Stock on a one for one basis. For non-US employees, we offered the opportunity to exchange certain of their options to purchase Common Stock for the right to receive shares of our Common Stock, on a one for one basis, subject to the terms and conditions of an installment stock award. See Note Thirteen to our consolidated financial statements. Furthermore, in connection with a new compensation program for our Vice Presidents, on February 28, 2002, we issued additional shares of restricted Common Stock to our US Vice Presidents and granted our non-US Vice Presidents the right to receive additional shares of our Common Stock subject to the terms of an installment stock award. See Note Eighteen to our consolidated financial statements.
Our revenues are generated primarily from professional services, which are billed principally on a time and materials basis. We have on occasion, contracted projects on a fixed fee basis. Revenues are recognized for time and material engagements as services are rendered utilizing the percentage-of-completion method.
Other revenue contributors include fees generated from Managed Loyalty Services (including Loyalty Support(TM) services, purpose-built hosted solutions and e-PROFILE(TM)). These revenues comprised 5% and 3% of revenues in 2001 and 2000, respectively. Revenues from sales of our Loyalty Suite(TM) software decreased to 1% from 2% of revenues in 2001 and 2000, respectively, and are expected to decrease further due to our decision in 2002 to cease new development of this software.
Our revenues from international operations primarily represent revenues in Europe and Australia. International operations represented 18% and 12% of revenues for the years ended December 29, 2001 and December 30, 2000, respectively. While certain of our professionals remain in Australia to perform services for an existing client, we have closed our Australia office and do not anticipate near term additional projects in that country.
We typically experience seasonal fluctuations in our revenues and earnings on a global basis in the fourth quarter because of the reduced number of billing days due to holidays. In addition, we have historically experienced decreases in revenues from our European operations in the third quarter because of extended summer vacation periods. Although those decreases in revenues have not been significant in the past, they may increase in the future.
Our most significant operating cost is cost of services associated with projects, which are primarily comprised of labor costs including salaries, fringe benefits and incentive compensation of engageable consultants. Cost of services also includes employee costs for training, travel expenses, laptop computer leases and other expenses of a billable and non-billable nature.
Selling, general and administrative expenses consist primarily of salaries, incentive compensation and employee benefits for business development, marketing, administrative personnel, plus a provision for uncollectible amounts. Selling, general and administrative also includes expenses relating to administrative and technical support services provided by TSC, which continued to be provided after the spin-off in 2000 as part of a shared services agreement. None of these services were provided by TSC in 2001.
Research and development expenses consist primarily of salaries, incentive compensation and employee benefits for dedicated personnel, staff recruiting costs, administrative costs, travel expenses and depreciation expenses. Our Loyalty Lab(TM) is the center for our research and development activities, and we believe it improves the effectiveness of our loyalty solutions, allows us to work closely with emerging technology and serves as a demonstration center for our clients' senior executives.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our management discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to the costs and timing of completion of client projects, collectibility of customer accounts receivable, the timing and amounts of expected payments associated with cost reduction activities, the realizability of net deferred tax assets and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect more significant judgments and estimates used in the preparation of our consolidated financial statements.
We recognize revenue and profit from professional services performed for clients as work progresses using the percentage-of-completion method. Percentage of completion estimates are based on the ratio of actual hours incurred to total estimated hours. We follow this method because we believe that reasonably dependable estimates of the revenue and costs applicable to various stages of a client project can be made. Revisions in profit estimates are recorded in the period in which the facts that give rise to the revision become known. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments and customers indicating their intention to dispute their obligation to pay for contractual services provided by us. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
We have recorded an income tax valuation allowance to reduce our international net deferred tax assets to zero representing the amount that is considered more likely than not to be realized and have ceased recognizing any future
benefits. The decision to establish a valuation allowance was made following an assessment of the recoverability of these net deferred tax assets in light of current estimates of a near-term return of international operating units to acceptable, continuing level of profitability. No valuation allowance has been recorded at December 29, 2001 for US net deferred tax assets of $22.5 million as it is considered more likely than not that these net assets will be realized over the carryforward period. This conclusion was based on forecasts of future financial results which indicate that we will return to profitability in fiscal 2002 and that the net deferred tax asset will be fully realized by 2004. The amount of the US net deferred tax asset that is considered realizable could be reduced in the near term through the recording of valuation allowances if current estimates of the timing and amount of future taxable income during the carryforward period are significantly revised or if we undergo an ownership change for purposes of Section 382 of the Internal Revenue Code. In the event we were to determine that we would be able to more likely than not realize deferred tax assets for which valuation allowances had previously been provided, an adjustment to the deferred tax asset would be required increasing income in the period such determination was made.
We have recorded accruals for severance and related costs associated with the cost reduction efforts undertaken during 2001. A substantial portion of the accruals represents contractual severance for identified employees and is not subject to significant revision. That portion of the accruals relating to office closures and associated contractual lease obligations is based in part on assumptions and estimates of the timing and amount of sublease rentals that are affected by overall economic and local market conditions. To the extent estimates of the success of our sublease efforts change in the future, adjustments increasing or decreasing the related accruals will be recorded.
YEAR ENDED DECEMBER 29, 2001 COMPARED WITH THE YEAR ENDED DECEMBER 30, 2000
REVENUES
Our revenues decreased $89.8 million, or 38%, to $146.7 million in 2001 from $236.5 million in 2000. Revenues from professional fees decreased $84.6 million, or 38%, to $138.6 million in 2001 from $223.2 million in 2000. The decrease in revenues is due to a weak economic environment that led to decreased demand for the CRM services provided by us.
Revenues from Managed Loyalty Services decreased $0.5 million to $7.3 million in 2001 from $7.8 million in 2000. Managed Loyalty Services revenues represented 5% and 3% of total revenues for the years ended December 29, 2001 and December 30, 2000, respectively. Revenues from software decreased $4.7 million to $0.8 million in 2001 from $5.5 million in 2000. Revenues from international operations increased to approximately 18% of total revenues in 2001, compared to 12% in 2000.
COST OF SERVICES
Cost of services decreased $37.4 million, or 25%, to $113.3 million in 2001 from $150.7 million in 2000. This is due to a decrease in the number of our engageable consultants to 387 as of December 29, 2001, for a decrease of 50%, from 768 as of December 30, 2000. Cost of services as a percentage of revenues increased to 77% in 2001 compared to 64% in 2000. This increase was primarily due to lower utilization in 2001 versus 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $14.6 million, or 20%, to $58.8 million in 2001 from $73.4 million in 2000. This decrease is primarily the result of the reduction of headcount and office closures in response to the decline of revenue.
SEVERANCE AND RELATED COSTS
Severance and related costs increased to $33.4 million in 2001 compared to none in 2000. This was the result of workforce reductions and facilities closures in response to a decline in revenue and expected activity. Annual savings resulting from these actions are expected to be $65 million.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased $3.7 million, or 42%, to $5.1 million in 2001 from $8.8 million in 2000. This decrease is primarily due to lower investment in the Loyalty Lab, including headcount reductions.
DEPRECIATION
Depreciation expense increased to $5.7 million for 2001 compared to $2.4 million in 2000. The $3.3 million increase is due to investments in computer hardware and software that were established in North American and International locations. The bulk of this system implementation occurred in 2000 when we built out our own infrastructure as a stand-alone company for US operations, following the February 2000 spin-off from TSC.
GOODWILL AMORTIZATION
Goodwill amortization expense decreased slightly to $4.8 million in 2001 compared to $5.0 million in 2000. Goodwill amortization is primarily attributable to the acquisition of The Bentley Group in 1997. Effective January 2002, we adopted SFAS 142 "Goodwill and Other Intangible Assets" which requires that goodwill no longer be amortized effective January 2002.
OTHER INCOME (EXPENSE)
We recognized non-operating other income of $1.7 million in 2001 compared to $2.9 million in 2000. The $1.2 million decrease in non-operating other income is primarily due to lower average invested cash balances and yields, and increased interest expense on short-term borrowings.
INCOME TAX (BENEFIT) PROVISION
The effective tax rate declined year-over-year due to a $14.1 million valuation allowance established for non-US net deferred tax assets. During the second quarter of 2001, we established a valuation allowance against the benefit of certain international operating unit tax losses previously recognized and ceased recognizing the benefit of losses incurred by these operating units. We continue to record the income tax benefit of US operating losses using applicable statutory rates.
NET (LOSS) INCOME
We reported a net loss of $63.7 million for 2001 as compared with a net loss of $0.4 million in 2000. We reported a net loss of $13.42 per share on a diluted basis in 2001 versus a net loss of $0.09 per share in 2000.
YEAR ENDED DECEMBER 30, 2000 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
REVENUES
Our revenues increased $73.3 million, or 45%, to $236.5 million in 2000 from $163.2 million in 1999. Revenues from professional fees increased $65.0 million, or 41%, to $223.2 million in 2000 from $158.2 million in 1999. The increase in revenues is due to the combined effect of strong demand for our CRM services and higher average billing rates in the period-over-period comparison.
Revenues from Managed Loyalty Services increased $5.9 million to $7.8 million in 2000 from $1.9 million in 1999. Managed Loyalty Services revenues represented 3% and 1% of total revenues for the years ended December 30, 2000 and December 31, 1999, respectively. Revenues from software increased $2.4 million to $5.5 million in 2000 from $3.1 million in 1999. Revenues from international operations decreased to approximately 12% of total revenues in 2000, compared to 17% in 1999.
COST OF SERVICES
Cost of services increased $47.4 million, or 46%, to $150.7 million in 2000 from $103.3 million in 1999. This is due to an increase in the number of our engageable consultants to 768 as of December 30, 2000, representing an increase of 37%, from 561 at December 31, 1999. Cost of services as a percentage of revenues increased to 64% in 2000 compared to 63% in 1999. This was due, in part, to the approximately $5.9 million of incremental cost of services incurred in 2000 as part of the expansion of our Managed Loyalty Services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $34.0 million, or 86%, to $73.4 million in 2000 from $39.4 million in 1999. This increase is the result of our growth and the build-out of our stand-alone infrastructure, including finance, treasury, legal, human resources and technical systems support, while also making payments to TSC for similar services as part of the shared services agreement during the build-out process. The increase is also due to the continued expansion of our business development group, establishment of the eLoyalty brand in the marketplace and increased uncollectible amounts due from clients, including a $2.8 million incremental charge in the fourth quarter of 2000.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased $3.3 million, or 60%, to $8.8 million in 2000 from $5.5 million in 1999. This increase is primarily due to an increased investment in the Loyalty Lab, including the addition of developers.
DEPRECIATION
Depreciation expense was $2.4 million for 2000 and $1.5 million in 1999. The increase was attributable to the implementation of IT infrastructure which occurred in 2000, following the February 2000 spin-off from TSC.
GOODWILL AMORTIZATION
Goodwill amortization expense was $5.0 million for 2000 and 1999. Goodwill amortization is primarily related to the acquisition of The Bentley Group in 1997.
OTHER INCOME (EXPENSE)
We recognized non-operating other income of $2.9 million in 2000 compared to a non-operating other expense of $0.4 million in 1999. The $3.3 million increase in non-operating other income is primarily due to incremental interest income earned as a result of higher average cash and cash equivalent balances in 2000 versus 1999. The increase in the average cash balances was due to the cash generated by financing activities, most of which were completed during the first half of 2000.
INCOME TAX (BENEFIT) PROVISION
Income tax (benefit) provision represents combined federal, state and foreign taxes. Due to a pre-tax loss of $0.8 million in 2000, a $0.4 million tax benefit was recognized compared to $4.0 million tax provision recognized in 1999. The effective tax rate remained flat year-over-year.
NET (LOSS) INCOME
We reported a net loss of $0.4 million, or $0.09 per share on a diluted basis, for 2000 as compared with net income of $4.1 million, or $0.92 per share on a diluted basis, for 1999. The 2000 results are reflective of the $3.8 million operating loss for the year (as compared to operating income of $8.5 million in 1999), offset in substantial part by the non-operating interest income from investment of increased cash balances obtained through financing activities.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are to fund working capital needs, capital expenditures and other investments in support of revenue generation and growth.
At December 29, 2001, we had cash and cash equivalents of $42.7 million representing an increase of approximately $1.5 million in cash and cash equivalents from December 30, 2000. Restricted cash represents cash as security for our line of credit and letters of credit. The increase in our cash and cash equivalents was primarily attributable to the $20.3 million cash generated from financing activities, as described below. Both operating activities and investing activities (in capital expenditures) negatively impacted our available 2001 cash resources, with a combined use of cash resources of approximately $17.2 million.
Operating activities used net cash of approximately $8.7 million during 2001 compared to $22.3 million during 2000. In addition to the negative $63.7 million impact of its net loss in 2001, we also experienced a reduction in accrued compensation due to the $90 million reduction in revenue and the significant reduction in the work force. The reduction in accrued compensation was also attributable to a decline in bonus accruals and the timing of salary payments. Accounts receivable decreased by $47.7 million due to improved invoicing and collection processes and systems. At December 29, 2001, there remained $7.9 million of unpaid severance and related costs.
Cash flows used in investing activities consisted of capital expenditures of $8.5 million during 2001, as compared to capital expenditures of $18.6 million for 2000. The 2001 spending was primarily related to the continuation of investments in computer hardware and software that were completed in the US and established in non-US locations. The bulk of this system implementation occurred in 2000 when we built out our own infrastructure as a stand-alone company for US operations, following the February 2000 spin-off from TSC. We expect that our capital expenditures for 2002 will be between $2 million and $3 million.
We have made an additional commitment to invest up to $14.7 million, through a related entity, in eLoyalty Ventures, L.L.C. ("eLoyalty Ventures"). eLoyalty Ventures is a $30 million venture capital fund formed in 2000 by eLoyalty, together with entities associated with Bain Capital, Sutter Hill Ventures and Technology Crossover Ventures, to focus on investing in early-stage CRM technology companies. We have not been requested to contribute any of our eLoyalty Ventures commitment and so remain subject to capital calls against that commitment on 10 business days' prior written notice. While no formal action has been taken to suspend the fund's activities, we believe none of the members of eLoyalty Ventures would recommend investment activity at this time. We further believe that the fund's management is not actively engaging in evaluation of investment opportunities. Accordingly, we do not expect any expenditures relating to this fund in 2002.
Cash flows provided by financing activities decreased $48.0 million to $20.3 million for 2001 from $68.3 million in 2000. Cash from such activities decreased during 2001 primarily as a result of two financing events in 2000: the issuance of 4.5 million shares of eLoyalty's Common Stock to venture capital investors for aggregate net proceeds of $34.9 million and a $20 million cash contribution from TSC in connection with the spin-off. In 2001, we received $23.3 million ($20.0 million, net) related to the issuance of the Series B stock. Cash dividends of approximately $0.9 million are expected to be paid in July 2002 on the Series B stock. In addition, two semi-annual dividend payments of approximately $0.8 million each are expected to be paid in 2003 on the Series B stock. The amount of the dividend would be affected by any conversions of the Series B stock into common stock. We also received $8.6 million of financing through our credit line and we deposited $9.4 million into a secured bank account as a result of our Loan Agreement as discussed below. Additional cash flows from financing activities were provided by cash proceeds of $1.1 million from the exercise of employee stock options and purchases under our employee stock purchase plan. We have elected to freeze the employee stock purchase plan immediately following the next quarterly purchase at the end of the first quarter 2002.
Our near-term capital resources consist of our current cash balances, together with anticipated future cash flows from operations and availability under an external credit line. Our balance of cash and cash equivalents was $42.7 million as of December 29, 2001.
We entered into a Loan Agreement with LaSalle Bank National Association (the "Bank") effective as of December 17, 2001, providing for a secured revolving line of credit in a maximum principal amount of $15 million through December 28, 2002 (the "Facility"). The Facility requires us to maintain cash and cash equivalents within a secured account at the Bank. The balance in this secured account cannot be less than the total line of credit and letter of credit obligations under the Facility. The Facility replaced our prior revolving credit facility with Bank of America, N.A. At December 29, 2001, our borrowings under the Facility equaled $8.6 million. Available credit under the Facility has been reduced by an additional $0.8 million related to letters of credit issued under the Facility for operational commitments. Loans under the Facility bear interest at the Bank's prime rate or, at our election, an alternate rate of LIBOR (London InterBank Offering Rate) plus 0.75%. Under the Facility, we agreed to pay a commitment fee of $25,000.
At December 29, 2001 we had two customers, Telekom Austria and UnitedHealth Group, which accounted for 20% and 18% respectively of our total net accounts receivable. We have collected substantially all of these amounts. With a higher percentage of our revenues dependent on fewer customers, delayed payments by a few of our larger clients could result in additional borrowing under the Facility. We currently have future minimum rental commitments under non-cancellable operating leases of $16.6 million. These are due in the following periods: $5.9 million in 2002, $9.7 million in 2003-2005, and $1.0 million in 2006-2007. Minimum payments have not been reduced by minimum sublease rentals of $0.4 million, $0.3 million, $0.2 million and $0.2 million due in the future for years 2002, 2003, 2004, and 2005, respectively, under noncancelable subleases. Of the future minimum rental commitments, the Company has accrued as part of the severance and related costs as discussed in Note Three, $2.5 million, $1.3 million, $0.6 million, $0.5 million and $0.6 million for 2002, 2003, 2004, 2005, 2006 and thereafter, respectively. These amounts are net of estimated sublease recoveries.
We anticipate that our current cash resources, together with other expected internal and external sources of liquidity, should be sufficient to satisfy our working capital and capital expenditure needs for the balance of the year. We also anticipate that our cash resources will be sufficient to meet our long-term needs. If, however, our operating activities or net cash needs for the year were to differ materially from current expectations due to uncertainties surrounding the current capital market, credit and general economic conditions, competition, potential for suspension or cancellation of a large project, there could be no assurance that we would have access to additional external capital resources on acceptable terms.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 eliminates the systematic amortization of goodwill and indefinite lived intangible assets and requires them to be tested for impairment at least annually. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. We adopted SFAS No. 141 effective July 1, 2001 and adopted SFAS No. 142 effective January 1, 2002. As total goodwill at December 29, 2001 is $2.1 million, we do not expect that application of the nonamortization and impairment provisions of SFAS No. 142 will have a material impact on results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is required to be adopted for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 will have a material impact on our financial position and or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of" while retaining many of the provisions of that statement. We do not expect the adoption of SFAS No. 144 to have a material impact on our financial position or results of operations.
In November 2001, the Emerging Issues Task Force ("EITF") reached a consensus on "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred." The EITF concluded that reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the income statement. This consensus is to be applied in financial reporting periods beginning after December 15, 2001. We adopted this policy in this Form 10-K and have reclassed prior period amounts in order to make the financial statements comparable. This change in presentation does not affect reported net income or loss.
FACTORS THAT MAY AFFECT FUTURE RESULTS OR MARKET PRICE OF STOCK
Some of the factors that may affect our future results or the market price of our stock and cause or contribute to material differences between actual results and those reflected in forward-looking statements contained in this Form 10-K include the following:
- uncertainties associated with the attraction of new clients,
the continuation of existing and new engagements with existing
clients and the timing of related client commitments, including
potential client delays or deferrals of new engagements or
existing project extensions in light of prevailing general
economic conditions and uncertainties;
- reliance on a relatively small number of customers for a
significant percentage of our revenues, reliance on major
suppliers, including CRM software providers and other alliance
partners, and maintenance of good relations with key business
partners;
- management of the risks associated with increasingly complex
client projects in general as well as new services offerings,
including risks relating to the variability and predictability
of the number, size, scope, cost and duration of, and revenues
from, client engagements, unanticipated cancellations or
deferrals of client projects or follow-on phases of engagements
in process, collection of billed amounts, shifts from time and
materials-based engagements to alternative pricing or
value-based models and variable employee utilization rates,
project personnel costs and project requirements;
- management of growth, expansion into new geographic and market
areas and development and introduction of new services
offerings, including the timely and cost-effective
implementation of enhanced operating, financial and other
infrastructure systems and procedures;
- challenges in attracting, training, motivating and retaining
highly skilled management, strategic, technical, product
development and other professional employees in a competitive
information technology labor market;
- continuing intense competition in the information technology
services industry generally and, in particular, among those
focusing on the provision of CRM services and software,
including firms with both significantly greater financial and
technical resources than eLoyalty and new entrants;
- the rapid pace of technological innovation in the information
technology services industry, including frequent technological
advances and new product introductions and enhancements, and
the ability to create innovative and adaptable solutions that
are consistent with evolving standards and responsive to client
needs, preferences and expectations;
- access in tightened capital and credit markets to sufficient
debt and/or equity capital on acceptable terms to meet our
future operating and financial needs;
- protection of our technology, proprietary information and
other intellectual property rights or challenges to our
intellectual property by third parties;
- future legislative or regulatory actions relating to the
information technology or information technology services
industries including those relating to data privacy;
- maintenance of our reputation and expansion of our name
recognition in the marketplace;
- risks associated with global operations, including those
relating to the economic conditions in each country, potential
currency exchange and credit volatility, compliance with a
variety of foreign laws and regulations and management of a
geographically dispersed organization;
- the overall demand for CRM services and software and
information technology consulting services generally;
- the continued impact of the current economic slowdown, as well
as other future general business, capital market and economic
conditions and volatility; and
- significant revisions to current estimates of the timing and
amount of future taxable income during the carryforward period
may affect the realizability of deferred tax assets.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our international operations create special risks, including those relating to the economic conditions in each country, potential currency exchange and credit volatility, restrictions on the movement of cash and certain technologies across national borders, tax issues resulting from multiple tax laws, compliance with a variety of other foreign national and local laws and regulations, political instability and management of a geographically dispersed organization. Our ability to deploy our resources globally while accommodating a variety of local labor and immigration laws and regulations may become more challenging as we implement our operational reorganization into global delivery groups. If not adequately addressed, these risks may adversely affect our business.
We provide solutions to clients in a number of countries including the United States, Canada, United Kingdom, Germany, France and Australia. For the years ended December 2001 and 2000, 23% and 17%, respectively, of our revenues were denominated in foreign currencies. Historically, we have not experienced material fluctuations in our results of operations due to foreign currency exchange rate changes. As a result of our exposure to foreign currencies, future financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in those foreign markets. We do not currently engage nor is there any plan to engage in hedging foreign currency risk.
We also have interest rate risk with respect to changes in variable rate interest on our revolving line of credit. Interest on the line of credit is based on LIBOR, which varies in accordance with prevailing market conditions. A change in interest rate impacts the interest expense on the line of credit and cash flows, but does not impact the fair value of the debt. A 1% increase in the LIBOR rate would result in additional interest expense of approximately $0.1 million based on current borrowing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF ELOYALTY CORPORATION
Financial Statements:
Page
Report of Independent Accountants 22
Consolidated Balance Sheets - December 29, 2001 and December 30, 2000 23
Consolidated Statements of Operations -- for each of the three years
in the period ended December 29, 2001 24
Consolidated Statements of Cash Flows - for each of the three
years in the period ended December 29, 2001 25
Consolidated Statements of Changes in Stockholders' Equity
(Accumulated Deficit) and Comprehensive Income (Loss) -- for
each of the three years in the period ended December 29, 2001 26
Notes to Consolidated Financial Statements 28
Financial Statement Schedule:
Schedule II-Valuation and Qualifying Accounts - for each of the
three years in the period ended December 29, 2001 48
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of eLoyalty Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows, and of changes in stockholders' equity (accumulated deficit) and comprehensive income (loss) present fairly, in all material respects, the financial position of eLoyalty Corporation and its subsidiaries (the "Company") at December 29, 2001 and December 30, 2000, and the results of their operations and their cash flows for the years ended December 29, 2001, December 30, 2000, and December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. In addition, the accompanying financial statement schedule for the years ended December 29, 2001, December 30, 2000 and December 31, 1999 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 of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 31, 2002, except for Note 18, as to which the date is February 28, 2002
ELOYALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
December 29, December 30,
2001 2000
----------------- ---------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 42,653 $ 41,138
Restricted cash 9,448 --
Marketable securities -- 9,902
Receivables, net 22,934 75,886
Deferred income taxes 2,451 16,301
Prepaid expenses 1,190 2,935
Refundable income taxes 6,597 4,619
Other current assets 2,300 2,915
------------- -------------
Total current assets 87,573 153,696
Equipment and leasehold improvements, net 17,889 18,784
Goodwill, net 2,135 6,990
Deferred income taxes 20,059 2,664
Long-term receivables and other 358 2,484
------------- -------------
Total assets $ 128,014 $ 184,618
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Short-term debt $ 8,600 $ --
Accounts payable 2,154 6,880
Accrued compensation and related costs 8,274 19,964
Deferred compensation -- 9,897
Other current liabilities 8,750 7,021
------------- -------------
Total current liabilities 27,778 43,762
------------- -------------
Long-term liabilities 3,390 --
Commitments and contingencies -- --
Redeemable Series B convertible preferred stock, $0.01 par value;
5,000,000 shares authorized and designated; 4,562,372 shares
issued and outstanding with a liquidation preference of
$23,318 at December 29, 2001 19,499 --
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 35,000,000 and 10,000,000 shares
authorized, respectively; none issued and outstanding -- --
Common stock, $0.01 par value; 50,000,000 and 100,000,000 shares authorized,
respectively; 5,629,218 and 49,925,702 shares
issued and outstanding, respectively 56 499
Additional paid-in capital 150,071 144,860
(Accumulated deficit) retained earnings (61,490) 2,171
Other (11,290) (6,674)
------------- -------------
Total stockholders' equity 77,347 140,856
------------- -------------
Total liabilities and stockholders' equity $ 128,014 $ 184,618
============= =============
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The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information.
ELOYALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the years ended December
----------------------------
2001 2000 1999
---- ---- ----
Revenues $ 146,729 $ 236,498 $ 163,180
Operating Expenses:
Cost of services 113,282 150,691 103,306
Selling, general and administrative 58,832 73,411 39,377
Severance and related costs 33,444 -- --
Research and development 5,091 8,821 5,494
Depreciation expense 5,683 2,372 1,502
Goodwill amortization 4,808 4,972 4,996
--------- --------- ---------
Total operating expenses 221,140 240,267 154,675
--------- --------- ---------
Operating (loss) income (74,411) (3,769) 8,505
Other income (expense) 1,654 2,921 (408)
--------- --------- ---------
(Loss) income before income taxes (72,757) (848) 8,097
Income tax (benefit) provision (9,096) (424) 4,039
--------- --------- ---------
Net (loss) income $ (63,661) $ (424) $ 4,058
Dividends and accretion related to Series B preferred
Stock (3,576) -- --
--------- --------- ---------
Net (loss) income available to common stockholders $ (67,237) $ (424) $ 4,058
========= ========= =========
Basic net (loss) income per common share $ (13.42) $ (0.09) $ 0.98
========= ========= =========
Diluted net (loss) income per common share $ (13.42) $ (0.09) $ 0.92
========= ========= =========
Shares used to calculate basic net (loss) income per
share 5,011 4,823 4,140
========= ========= =========
Shares used to calculate diluted net (loss) income per
share 5,011 4,823 4,420
========= ========= =========
Noncash compensation included in individual line items above:
Cost of services $ 841 $ 789 $ 319
Selling, general and administrative 2,294 1,337 251
Research and development 54 81 69
--------- --------- ---------
Total noncash compensation $ 3,189 $ 2,207 $ 639
========= ========= =========
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The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information.
ELOYALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years ended December
----------------------------
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(63,661) $ (424) $ 4,058
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation, goodwill amortization and noncash compensation 13,680 9,551 7,137
Provision for uncollectible amounts 4,512 4,064 2,059
Severance and related costs, net of cash 14,436 -- --
Deferred income taxes (3,545) (7,950) (5,763)
Other -- -- 463
Changes in assets and liabilities:
Receivables 47,672 (36,932) (21,496)
Sales (purchases) of trading securities related to
deferred compensation program 9,902 (2,727) (2,689)
Other current assets (4,273) (8,407) (1,820)
Accounts payable (4,688) 6,281 (313)
Accrued compensation and related costs (13,318) 8,565 4,517
Deferred compensation (9,897) 2,722 2,689
Other current liabilities (1,621) 3,521 653
Other assets 2,125 (613) (536)
-------- -------- --------
Net cash used in operating activities (8,676) (22,349) (11,041)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,542) (18,633) (2,175)
-------- -------- --------
Net cash used in investing activities (8,542) (18,633) (2,175)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable Series B
convertible preferred stock, net 19,988 -- --
Proceeds from revolving credit agreement 17,600 -- --
Repayments on revolving credit agreement (9,000) -- --
Required deposit on revolving credit agreement (9,448) -- --
Proceeds from stock compensation plans 1,130 8,552 --
Proceeds from issuance of common stock -- 34,914 --
Capital contribution from Technology Solutions Company -- 20,000 --
Net advances from Technology Solutions Company -- 4,802 21,929
-------- -------- --------
Net cash provided by financing activities 20,270 68,268 21,929
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (1,537) 390 338
-------- -------- --------
Increase in cash and cash equivalents 1,515 27,676 9,051
Cash and cash equivalents, beginning of period 41,138 13,462 4,411
-------- -------- --------
Cash and cash equivalents, end of period $ 42,653 $ 41,138 $ 13,462
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 293 $ -- $ --
Cash (refunded) paid for income taxes $ (2,054) $ 9,865 $ --
|
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information.
ELOYALTY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(ACCUMULATED DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share data)
Accumulated
Advances Other
From Retained Comprehen-
Common Stock Additional Technology Earnings sive Total
----------------- Paid-in Solutions (Accumulated Income Unearned Stockholders'
Shares Amount Capital Company Deficit) (Loss) Compensation Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31,1998 -- $ -- $ -- $48,475 $ -- $ (587) $ -- $ 47,888
-----------------------------------------------------------------------------------------------------------------------------------
Net income 4,058 4,058
Foreign currency translation (260) (260)
-----
Comprehensive income 3,798
Net transfers from TSC 21,929 21,929
Issuance of
common stock 41,400,000 414 (414) --
Issuance of compensatory
stock options 963 (963) --
-----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1999 41,400,000 414 963 74,048 -- (847) (963) 73,615
-----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income (2,595) 2,171 (424)
Foreign currency translation (1,123) (1,123)
------
Comprehensive loss (1,547)
Net transfers and capital
contribution from TSC 24,802 24,802
Spin-off from Technology
Solutions Company 2,529,029 25 96,230 (96,255) --
Issuance of common stock
for stock option awards
and Employee Stock
Purchase Plan (ESPP) 1,163,568 12 8,540 8,552
Issuance of common stock
to venture capital firms 4,539,980 45 34,869 34,914
Issuance of compensatory
stock options 524 (524) --
Issuance of restricted common
stock pursuant to cancellation
of certain stock options 293,125 3 3,734 (3,737) --
Amortization of unearned
compensation 520 520
-----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 30, 2000 49,925,702 $499 $144,860 $ -- $2,171 $(1,970) $(4,704) $140,856
-----------------------------------------------------------------------------------------------------------------------------------
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ELOYALTY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY (ACCUMULATED DEFICIT) AND COMPREHENSIVE INCOME (LOSS) (CONTINUED)
(In thousands, except share data)
Accumulated
Advances Other
From Retained Comprehen-
Common Stock Additional Technology Earnings sive Total
----------------- Paid-in Solutions (Accumulated Income Unearned Stockholders'
Shares Amount Capital Company Deficit) (Loss) Compensation Equity
------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 30, 2000 49,925,702 $499 $144,860 $ -- $ 2,171 $(1,970) $(4,704) $140,856
-----------------------------------------------------------------------------------------------------------------------------------
Net loss (63,661) (63,661)
Foreign currency translation (2,571) (2,571)
------
Comprehensive loss (66,232)
Issuance of common stock
for stock option awards
and ESPP 638,785 6 1,124 1,130
Issuance of restricted and
installment common stock
pursuant to cancellation
of certain stock options
through an exchange 4,831,656 48 2,932 (2,980) --
Issuance of restricted
common stock 1,315,000 13 2,257 (2,270) --
Amortization/forfeitures of
unearned compensation (414,829) (4) (2,047) 3,205 1,154
Accretion of preferred
stock issuance costs (3,281) (3,281)
Preferred stock beneficial
conversion feature 4,015 4,015
Accretion of beneficial
conversion feature (245) (245)
Preferred stock dividend (50) (50)
Reverse 1:10 stock split (50,667,096) (506) 506 --
-----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 29, 2001 5,629,218 $56 $150,071 $ -- $(61,490) $(4,541) $(6,749) $ 77,347
-----------------------------------------------------------------------------------------------------------------------------------
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The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information.
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE ONE--DESCRIPTION OF BUSINESS
eLoyalty is a global management consulting and systems integration organization focused exclusively on building customer loyalty solutions for our clients. eLoyalty offers a broad range of Customer Relationship Management ("CRM") related services including business strategy, technical architecture, selecting, implementing and integrating appropriate CRM software applications and providing ongoing support for multi-vendor systems.
eLoyalty was spun off from Technology Solutions Company ("TSC") into a separate, publicly traded company on February 15, 2000 (the "spin-off"). The spin-off, which was approved by the TSC Board of Directors on February 9, 2000, was accomplished by distributing to TSC stockholders, as a dividend, all of the outstanding common stock of eLoyalty owned by TSC. In the spin-off, TSC stockholders received one share of eLoyalty common stock, par value $0.01 per share, for every one share of TSC common stock they owned of record as of February 9, 2000.
NOTE TWO--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The financial statements for periods subsequent to the spin-off reflect eLoyalty's results of operations and financial position as it operates as a separate, publicly traded company. The consolidated financial statements for periods prior to the spin-off reflect eLoyalty's results of operations and financial position as it operated within TSC, and have been prepared using the historical basis in the assets, liabilities and results of operations.
The consolidated statements of operations for the periods prior to February 15, 2000 reflect all of the related costs of doing business including an allocation of certain general corporate expenses of TSC not directly related to eLoyalty's operations, including legal, information systems, finance, insurance, human resources, benefits administration, stockholders' services and corporate management services. These costs were allocated to eLoyalty primarily on a proportional cost allocation method based on revenues and headcount. Management believes these allocations were made on a reasonable basis.
The financial information for periods prior to February 15, 2000 may not necessarily reflect what the financial position and results of operations of eLoyalty would have been had eLoyalty operated as a separate, stand-alone publicly traded entity during such periods.
Change in Fiscal Year-End--In connection with implementing new business systems and processes in December 2000, eLoyalty changed from a calendar year-end to a fiscal year ending with the Saturday closest to the end of December. The fiscal year-end for 2001 is December 29 while the fiscal year-end for 2000 is December 30 . Also, on November 22, 1998, TSC's Board of Directors voted to change the fiscal year of TSC from a fiscal year ending on May 31 to a calendar year ending on December 31 in each year.
Consolidation--The consolidated financial statements include the accounts of eLoyalty and all of its subsidiaries. All significant intercompany transactions have been eliminated.
Revenue Recognition--eLoyalty derives substantially all of its revenues from professional services. eLoyalty provides professional services primarily on a time and materials basis. Although eLoyalty occasionally performs projects on a fixed fee basis, the total portion of revenues derived from fixed fee engagements is not significant. eLoyalty recognizes revenues on the percentage of completion method as services are performed, based on hourly billing rates. Percentage of completion estimates are based on the ratio of actual hours incurred to total estimated hours. From time to time, eLoyalty uses subcontractors to supplement its resources in client engagements. Revenues generated through subcontractors are recognized as the service is performed, and the related subcontractor costs are included in cost of services as incurred. Revenue reflects adoption of Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) D-103 requiring billable expenses to be reported as revenue. All periods presented have been revised to
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
reflect this change. Losses on engagements, if any, are recognized when determined. eLoyalty also derives revenues from in-house developed software and in certain circumstances resale of third party software. Software license fee revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the license fee is fixed and determinable and the collection of the fee is probable. Fees from licenses sold together with consulting services are recognized upon delivery, provided that the above criteria have been met and payment of the license fees is not dependent upon the performance of the consulting services. In those instances when it is determined that the payment of the license fee is dependent upon the performance of consulting services, both the license and consulting fees are recognized under the percentage of completion method of contract accounting. Revenues from post-contract Loyalty Support(TM) are recognized ratably over the term of the maintenance contract on a straight-line basis. Revenues from purpose-built hosted solutions and e-PROFILE(TM) are recognized ratably over the contract term.
Reclassifications--The accompanying consolidated financial statements reflect reclassifications of billable expenses as part of FASB Emerging Issues Task Force (EITF) D-103 requiring billable expenses to be reported as revenue. It also reflects the reclassification of certain other costs of engageable project personnel from Selling, General and Administrative to Cost of Services. All periods presented have been revised to reflect these changes. These reclassifications had no impact on net income (loss) or shareholders' equity.
Cost of Services--Cost of Services consist primarily of salaries, incentive compensation, billable and non-billable expenses, employee benefits for eLoyalty personnel available for client assignments, and fees paid to subcontractors for work performed on client projects.
Cash and Cash Equivalents--eLoyalty considers all highly liquid investments readily convertible into known amounts of 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.
Restricted Cash--Restricted cash principally represents cash as security for eLoyalty's line of credit and letters of credit.
Marketable Securities--eLoyalty's marketable securities consist of investments related to eLoyalty's executive deferred compensation plan (see Note Ten) and are classified as trading securities, with unrealized gains and losses included in eLoyalty's statements of operations. Realized gains or losses are determined based on the specific identification method. eLoyalty recognized a net loss of $5 and $89 for the year ended December 29, 2001 and December 30, 2000, respectively, and a net gain of $730, for the year ended December 31, 1999. Since trading securities relate to eLoyalty's executive deferred compensation plan, a corresponding adjustment is included in the statements of operations to recognize eLoyalty's increased/decreased liability for the deferred compensation plan. The executive deferred compensation plan was terminated effective July 15, 2001 (see Note Ten).
Equipment and Leasehold Improvements--Computers, software, furniture and equipment are carried at cost and depreciated on a straight-line basis over their estimated useful lives. Leasehold improvements are amortized over the lesser of the useful life or the lease term. Useful lives generally are five years or less. Maintenance and repair costs are expensed as incurred. The cost and related accumulated depreciation of assets sold or disposed of are eliminated from the respective accounts and resulting gain or loss is included in the statements of operations. The carrying value of equipment and leasehold improvements is periodically reviewed to assess recoverability based on future undiscounted cash flows. An impairment loss, if any, would be measured as the excess of the carrying value over the fair value.
eLoyalty accounts for software developed for internal use in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." As such, costs incurred that relate to the planning and post-implementation phases of development are expensed. Costs incurred to develop internal use software are capitalized and amortized over the asset's estimated useful life, generally three to five years.
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
Goodwill--Goodwill is amortized on a straight-line basis, generally over a five-year period. Accumulated amortization of goodwill as of December 29, 2001 and December 30, 2000 was $20,043 and $16,477, respectively. The carrying value of goodwill is periodically reviewed to assess recoverability based on future undiscounted cash flows. An impairment loss, if any, would be measured as the excess of the carrying value over the fair value. In June 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets" which requires that goodwill no longer be amortized effective January 2002. In association with this, the net book value of this asset will be periodically reviewed to assess recoverability based on future discounted cash flows. At December 29, 2001, unamortized goodwill aggregated $2.1 million.
Research and Development Costs--Research and development costs are expensed as incurred. Research and development expenses relate primarily to the dedicated research and development facility maintained by eLoyalty, and consist primarily of salaries, incentive compensation and employee benefits costs for dedicated personnel, occupancy costs, staff recruiting costs, administrative costs, travel expenses and depreciation.
Software Development Costs--eLoyalty capitalizes software development costs for software to be sold to third parties once technological feasibility is established and prior to general release. Amortization is computed as the greater of the amount computed using the (a) ratio of current revenues to the total current and anticipated future revenues or (b) the straight-line method over the estimated economic life of the product. There are no capitalized software development costs included on eLoyalty's balance sheets as of December 29, 2001 or December 30, 2000.
Stockholders' Equity--Stockholders' equity includes common stock issued, additional paid-in capital, retained earnings (deficit), accumulated other comprehensive income (loss) related to foreign currency translation and unearned compensation related to stock-based compensation. Net transfers from TSC represent transfers to eLoyalty primarily for operations and working capital requirements, offset by cash collected by TSC for the periods prior to the spin-off. In connection with the spin-off, net transfers from TSC were recorded as common stock and additional paid-in capital (see Note Four). Following the spin-off, eLoyalty no longer received operational funding from TSC and no longer participated in the TSC cash management program. The 4.6 million shares issued of redeemable 7% Series B Convertible Preferred Stock is not classified as permanent equity in the accompanying balance sheets as the preferred stockholders' have the ability to trigger a redemption that is considered outside eLoyalty's control.
Earnings (Loss) Per Common Share--eLoyalty calculates earnings (loss) per share in accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share have been computed by dividing the net earnings for each period presented by the weighted average shares outstanding. Diluted earnings per share have been computed by dividing the net earnings by the weighted average shares outstanding plus the dilutive effect of common stock equivalents using the "treasury stock" method. In periods in which there was a loss, the dilutive effect of common stock equivalents was not included in the dilutive earnings per share calculation as they were antidilutive.
Foreign Currency Translation--The functional currencies for eLoyalty's foreign subsidiaries are their local currencies. All assets and liabilities of foreign subsidiaries are translated to US dollars at end of period exchange rates. The resulting translation adjustments are recorded as a component of stockholders' equity and comprehensive income. 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 and liabilities approximated their fair values as of December 29, 2001 and December 30, 2000.
Concentration of Credit Risk--Financial instruments that potentially subject eLoyalty to a concentration of credit risk consists of cash and cash equivalents, restricted cash and accounts receivable. Cash and cash equivalents and restricted cash are deposited with high credit quality financial institutions. The Company's accounts receivable are derived from revenue earned from customers located primarily in the US and are denominated in US dollars. For the year
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
ended December 29, 2001, eLoyalty had two clients, each accounting for 13% of eLoyalty's total revenue: Agilent Technologies and UnitedHealth Group. In June 2001, Agilent Technologies notified eLoyalty of the cancellation of the project on which eLoyalty and other third parties were engaged. Agilent Technologies also accounted for 15% of revenues for the year ended December 30, 2000. No client accounted for 10% or more of revenues during the year ended December 31, 1999. At December 29, 2001, we had two customers, Telekom Austria and UnitedHealth Group, which accounted for 20% and 18% respectively of our total net accounts receivable. We have collected substantially all of these amounts.
Stock-Based Compensation--eLoyalty accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Compensation costs for employee stock options are measured as the excess, if any, of the fair value of common stock at the date of grant over the amount an employee must pay to acquire the stock, providing that all other requirements for fixed plan accounting are satisfied. In the event stock options are granted at a price lower than the fair value on the date of grant, the difference is recorded as unearned compensation. Cancelled and reissued stock options are accounted for under variable plan accounting with the related unearned compensation subject to adjustment in future periods based on the fluctuations of the fair value of the common stock. Unearned compensation is amortized over the vesting period of the related stock option or right. The unearned compensation recorded at December 29, 2001, December 30, 2000 and December 31, 1999 relates solely to eLoyalty stock-based awards.
Income Taxes--eLoyalty uses an asset and liability approach, as required under SFAS No. 109, to financial accounting and reporting for income taxes. Deferred income taxes are provided when tax laws and financial accounting standards differ with respect to the amount of income for a year and the basis of assets and liabilities and for tax loss carryforwards. eLoyalty does not provide US deferred income taxes on earnings of foreign subsidiaries which are expected to be indefinitely reinvested. Prior to the spin-off, eLoyalty's results have been included in TSC's consolidated federal and state income tax returns. The income tax provision for such periods is calculated, and deferred tax assets and liabilities are recorded, as if eLoyalty had operated as an independent entity.
Use of Estimates--The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those amounts.
New Accounting Standards--In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 eliminates the systematic amortization of goodwill and indefinite lived intangible assets and requires them to be tested for impairment at least annually. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. eLoyalty adopted SFAS No. 141 effective July 1, 2001 and adopted SFAS No. 142 effective January 1, 2002. As total goodwill at December 29, 2001 is $2.1 million, we do not expect that application of the nonamortization and impairment provisions of SFAS No. 142 will have a material impact on results of operations, cash flows or financial position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is required to be adopted for fiscal years beginning after June 15, 2002. eLoyalty does not expect the adoption of SFAS No. 143 will have a material impact on eLoyalty's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" which is effective for fiscal years beginning after December 15, 2001. SFAS No. 144 addresses financial
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of" while retaining many of the provisions of that statement. eLoyalty does not expect the adoption of SFAS No. 144 to have a material impact on eLoyalty's financial position or results of operations.
In November 2001, the Emerging Issues Task Force ("EITF") reached a consensus on "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred." The EITF concluded that reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the income statement. This consensus is to be applied in financial reporting periods beginning after December 15, 2001. We adopted this policy in this Form 10-K and have reclassed prior period amounts in order to make the financial statements comparable. This change in presentation does not affect reported net income or loss.
NOTE THREE--SEVERANCE AND RELATED COSTS
During 2001, eLoyalty recognized pre-tax charges of $11.4 million, $10.7 million, $7.1 million, and $4.2 million in first quarter, second quarter, third quarter, and fourth quarter, respectively. This aggregate $33.4 million charge for 2001 was the result of cost reduction actions taken throughout the year. These charges relate to employee severance payments and related costs for the elimination of approximately 475 positions, in both the North American and International segment, and related office closures. Severance costs include contractual salary and related fringe benefits over the severance payment period, forgiveness of employee loans and outplacement costs. Facility costs primarily include expected losses on contractual lease commitments, net of estimated sublease recoveries, and write down of leasehold improvements. Other costs include laptop and other computer lease termination costs, legal expenses and the write down of deposits related to outside services, which have been terminated.
During the twelve months ended December 29, 2001, eLoyalty made cash payments of $19.0 million. Annual savings resulting from these actions are expected to be about $65 million and will substantially be realized in 2002. A portion of these savings were recognized in 2001. eLoyalty expects substantially all severance and related costs to be paid out by the end of 2002 pursuant to agreements entered into with affected employees, facility costs related to the office closures to be paid pursuant to contractual lease terms through 2007 and other costs to be paid pursuant to contractual commitments through 2003.
The severance and related costs and their utilization as of and for the year ended December 29, 2001 are as follows:
Reserve
Utilized Balance
2001 through December 29,
Charges 12/29/01 2001
--------------------------------------------------------------------------------------------------------------
Employee severance $ 20,218 $ 18,617 $ 1,601
Facilities 8,076 3,935 4,141
Other 5,150 2,976 2,174
--------------------------------------------------------------------------------------------------------------
Total $ 33,444 $ 25,528 $ 7,916
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Of the $7,916 that remains reserved as of December 29, 2001, $3,390 related to future lease payments net of estimated sublease recoveries is reflected in Long Term Liabilities, $1,601 related to severance payments is reflected in Accrued Compensation and the balance of $2,925 is reflected in Other Current Liabilities.
In addition eLoyalty expects an estimated $1 million to $2 million pre-tax charge to be taken in the first quarter of 2002, relating primarily to severance benefits associated with further anticipated reductions in headcount. These additional severance benefits are expected to be substantially paid out by the end of 2002.
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE FOUR--ELOYALTY SPIN-OFF FROM TECHNOLOGY SOLUTIONS COMPANY
eLoyalty was spun off from TSC into a separate, publicly traded company on February 15, 2000. In connection with the spin-off, TSC's net advances to eLoyalty were recorded as common stock and additional paid-in capital. The net assets distributed to eLoyalty were as follows:
February 15, 2000
-------------------------------------------------------------------------------
Cash $ 30,794
Receivables, net 50,056
Other current assets 23,603
Goodwill 11,342
Other long-term assets 7,379
Accounts payable 1,238
Other current liabilities 26,784
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NOTE FIVE--RELATED PARTY TRANSACTIONS
Pursuant to the spin-off, on February 15, 2000, eLoyalty entered into contractual arrangements with TSC whereby TSC provided eLoyalty with certain administrative support through 2000. The total charges from TSC for the years ended December 30, 2000 and December 31, 1999 were $5,036, and $14,173, respectively.
eLoyalty periodically provides employee loans as part of employment agreements. These loans have interest rates ranging from 2.5% to 6.6%. The loans are generally forgiven over one to three years at various rates, depending on the value of the loan and the terms of the employment agreement, based on continued employment with eLoyalty. The unforgiven loan balances and related accrued interest are due and payable in full if an employee terminates employment before the end of the loan term. The total value of outstanding employee loans, including certain loans to officers, was $1.1 million and $3.4 million, respectively, as of December 29, 2001 and December 30, 2000.
NOTE SIX--RECEIVABLES, NET
Receivables consist of the following:
As of December
2001 2000
-----------------------------------------------------------------------------------------
Amounts billed to clients $ 25,210 $ 62,501
Unbilled revenues 124 14,990
----------------------------------------------------------------------------------------
25,334 77,491
Reserve for uncollectible amounts (2,400) (1,605)
----------------------------------------------------------------------------------------
Receivables, net $22,934 $75,886
----------------------------------------------------------------------------------------
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Amounts billed to clients represent professional fees and reimbursable project-related expenses. Unbilled revenues represent professional fees, project-related expenses, materials and subcontractor costs performed in advance of billings in accordance with contract terms. A substantial portion of unbilled revenues at the end of any period are billed in the following period. Unbilled revenues at December 29, 2001 and December 30, 2000 consist of amounts due from customers to be collected within one year of the balance sheet date.
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE SEVEN--EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
As of December
----------------------
2001 2000
----------------------------------------------------------------------------------------
Computers and software $21,195 $15,840
Furniture and equipment 4,117 4,750
Leasehold improvements 1,486 3,338
----------------------------------------------------------------------------------------
26,798 23,928
Accumulated depreciation and amortization (8,909) (5,144)
----------------------------------------------------------------------------------------
Equipment and leasehold improvements, net $17,889 $18,784
----------------------------------------------------------------------------------------
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Depreciation expense was $5,683, $2,372, and $1,502 for the years ended December 29, 2001, December 30, 2000 and December 31, 1999, respectively.
NOTE EIGHT--INCOME TAXES
The income tax (benefit) provision consists of the following:
For the Years Ended
------------------------------------------------
December 29, December 30, December 31,
2001 2000 1999
--------------------------------------------------------------------------------------------------------------
Current:
Federal $ (5,465) $ 6,950 $ 4,546
State (208) 859 1,059
Foreign 122 (712) 1,876
--------------------------------------------------------------------------------------------------------------
Total current (5,551) 7,097 7,481
--------------------------------------------------------------------------------------------------------------
Deferred:
Federal (12,709) (1,923) (2,008)
State (1,633) 204 (478)
Foreign 10,797 (5,802) (956)
--------------------------------------------------------------------------------------------------------------
Total deferred (3,545) (7,521) (3,442)
--------------------------------------------------------------------------------------------------------------
Income tax (benefit) provision $ (9,096) $ (424) $ 4,039
--------------------------------------------------------------------------------------------------------------
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ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
Total income tax (benefit) provision differed from the amount computed by applying the federal statutory income tax rate due to the following:
For the Years Ended
-----------------------------------------------
December 29, December 30, December 31,
2001 2000 1999
---------------------------------------------------------------------------------------------------------------
Federal tax provision
(benefit), at statutory rate $(25,465) $(297) $2,834
State tax provision (benefit),
net of federal benefit (2,510) 539 405
Effect of foreign tax rate
differences 96 (1,205) 406
Nondeductible expenses 202 208 134
Nondeductible goodwill 263 235 279
Other 1,527 96 (19)
Non US rate changes 1,290 -- --
Non US NOL Adjustments 1,421 -- --
Non US deferred valuation allowance 14,080 -- --
--------------------------------------------------------------------------------------------------------------
Income tax (benefit) provision $ (9,096) $(424) $4,039
--------------------------------------------------------------------------------------------------------------
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Deferred tax assets and liabilities were comprised of the following:
As of December
-------------------
2001 2000
--------------------------------------------------------------------------------------
Deferred tax assets:
Deferred compensation and bonuses $ -- $ 3,753
Equity losses of unconsolidated investee 400 341
Receivable allowances 672 448
Other accruals 1,460 2,061
Net operating loss carryforwards 29,787 10,798
Depreciation and amortization 1,364 2,680
Non-deductible reserves 2,468 --
Tax credit carry forwards 520 --
Non US deferred valuation allowance (14,080) --
--------------------------------------------------------------------------------------
Total deferred tax assets 22,591 20,081
--------------------------------------------------------------------------------------
Deferred tax liabilities:
Prepaid expenses (81) (1,116)
--------------------------------------------------------------------------------------
Total deferred tax liabilities (81) (1,116)
--------------------------------------------------------------------------------------
Net deferred tax asset $ 22,510 $18,965
--------------------------------------------------------------------------------------
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We have recorded a deferred tax asset of $22,510 reflecting primarily the benefit of US loss carryforwards, which expire in periods through 2021. Realization is dependent on generating sufficient taxable income in the US prior to expiration of these loss carryforwards. Although realization is not assured, we believe that it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if current estimates of the timing and amount of future taxable income during the carryforward period are significantly revised.
During the second quarter of 2001, we established a valuation allowance against the benefit of certain international operating unit tax losses previously recognized and ceased recognizing the benefit of losses incurred by these operating
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
units. This decision was made following a company-wide review of expected financial results by geography under various alternative scenarios and the related assessments of recoverability of these net deferred tax assets in light of the period over which they arose and the predictability of a near-term return of international operating units to acceptable, continuing levels of profitability. As of December 29, 2001, we had a valuation allowance of $14,080 relating to these international operating unit tax losses.
Pursuant to the Tax Sharing and Disaffiliation Agreement between TSC and eLoyalty, TSC will generally be liable to eLoyalty for any income tax benefits realized by TSC related to the exercise of eLoyalty stock options by TSC employees (see Note Thirteen). With respect to the realizability of these tax benefits, if any, eLoyalty is dependent on TSC's ability to realize the benefits, and accordingly, eLoyalty does not recognize these benefits until realized by TSC.
Income (loss) before income taxes consisted of the following:
For the Years Ended
-----------------------------------------------------
December 29, December 30, December 31,
2001 2000 1999
-------------------------------------------------------------------------------------------------------------------
United States $(50,203) $18,602 $7,447
Foreign (22,554) (19,450) 650
-------------------------------------------------------------------------------------------------------------------
Total $(72,757) $ (848) $8,097
-------------------------------------------------------------------------------------------------------------------
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eLoyalty's ability to utilize its net operating loss (NOL) carryforwards could become subject to significant limitations under Section 382 of the Internal Revenue Code if eLoyalty were to undergo an ownership change. An ownership change would occur if the stockholders who own or have owned, directly or indirectly, 5% or more of eLoyalty's common stock or are otherwise treated as 5% stockholders under Section 382 and the regulations promulgated thereunder increase their aggregate percentage ownership of eLoyalty's stock by more than 50 percentage points over the lowest percentage of the stock owned by these stockholders at any time during the testing period, which is generally the three-year period preceding the potential ownership change. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carryforwards. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL carryforwards.
NOTE NINE--LINE OF CREDIT
eLoyalty entered into a Loan Agreement with LaSalle Bank National Association (the "Bank") effective as of December 17, 2001, providing for a secured revolving line of credit in a maximum principal amount of $15 million through December 28, 2002 (the "Facility"). The Facility requires eLoyalty to maintain a minimum cash and cash equivalent balance within a secured account at the Bank. The balance in the secured account cannot be less than the outstanding balance drawn on the line of credit and all outstanding letter of credit obligations under the Facility. The Facility replaced eLoyalty's prior revolving credit facility with the Bank of America, N.A. eLoyalty's borrowings under the Facility aggregated $8,600 at December 29, 2001. Available credit under the Facility has been reduced by an additional $848 related to letters of credit issued under the Facility for operational commitments. Loans under the Facility bear interest at the Bank's prime rate or, at eLoyalty's election, an alternate rate of LIBOR (London InterBank Offering Rate) plus 0.75%. The effective annual interest rate at December 29, 2001 was 2.67% under the Facility.
NOTE TEN--EXECUTIVE DEFERRED COMPENSATION PLAN
We terminated our Executive Deferred Compensation Plan effective July 15, 2001, and provided for all participant account balances to be distributed in a lump sum following the termination effective date. We also terminated an associated Executive Benefit Trust, effective on completion of distributions from the plan. This nonqualified deferred
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
compensation plan allowed eligible participants (employees at or above the level of Vice President) to defer receipt of a portion of their cash compensation. All distributions from this plan were completed before September 29, 2001. Investments purchased by eLoyalty with the deferred compensation funds and the corresponding obligations to participants, including investment earnings thereon, are reflected as assets and liabilities, respectively, on our balance sheet as of December 30, 2000 under the captions "Marketable Securities" and "Deferred Compensation". Prior to the spin-off from TSC, eLoyalty executives participated in the TSC non-qualified executive deferred compensation plan.
NOTE ELEVEN--EMPLOYEE BENEFIT PLANS
eLoyalty Corporation 401(k) Plan--eLoyalty employees are eligible to
participate in the eLoyalty Corporation 401(k) Plan (the "401(k) Plan") on the
first day of the month coinciding with or following their date of hire. The
401(k) Plan allows employees to contribute up to 15% of their annual
compensation, subject to Internal Revenue Service statutory limits. Company
contributions are made annually to the 401(k) Plan at the discretion of the
Board of Directors. Company contributions were made annually for 2001 and prior
years. Effective in 2002, the matching contribution will no longer be
discretionary. Instead, the Board of Directors approved a non-discretionary
matching contribution at the rate of 50% of the first 6% of eligible
compensation contributed to the 401(k) Plan with a maximum match of 3% of
eligible earnings. Prior to the spin-off from TSC, eLoyalty employees
participated in the TSC 401(k) Plan. eLoyalty recognized expenses related to
these 401(k) plans of $540, $1,697 and $1,131 for the years ended December 29,
2001, December 30, 2000 and December 31, 1999, respectively.
eLoyalty Employee Stock Purchase Plan--eLoyalty employees are eligible to participate in the eLoyalty employee stock purchase plan (the "Stock Purchase Plan") after meeting certain minimum eligibility service requirements. The Stock Purchase Plan qualifies under section 423 of the Internal Revenue Code ("IRC") and is administered by the Compensation Committee of the Board of Directors. The Stock Purchase Plan permits eligible employees to purchase an aggregate of 125,000 shares of eLoyalty's common stock. Shares are purchased by the plan for the benefit of the participants at the end of each three-month purchase period. The Stock Purchase Plan purchased 55,800 shares of eLoyalty common stock for the year ended December 29, 2001. The Company has elected to freeze the Stock Purchase Plan immediately following the next quarterly purchase at the end of the first quarter 2002, previously due to low employee participation. eLoyalty retains the ability to reactivate this plan in the future.
NOTE TWELVE--REDEEMABLE CONVERTIBLE PREFERRED STOCK AND CAPITAL STOCK
On December 18, 2001, eLoyalty's stockholders approved, at a special meeting (i) the issuance and sale of shares of redeemable 7% Series B Convertible Preferred Stock (the "Series B stock") in a private placement financing; (ii) an increase in the number of authorized shares of eLoyalty's Common Stock and preferred stock in connection with the private placement and rights offering described below; and (iii) a one-for-ten reverse split of eLoyalty's outstanding Common Stock and a corresponding reduction in the number of authorized shares of common stock described below.
The private placement involved the sale of approximately 3.2 million shares of Series B stock to various funds managed by Technology Crossover Ventures ("TCV") and Sutter Hill Ventures ("Sutter Hill"), for gross proceeds of approximately $16,000. The purchase price per share of Series B stock was $5.10 (after giving effect to the one-for-ten reverse stock split, which was effected immediately prior to the closing of the transaction). The private placement was completed on December 19, 2001, concurrently with the rights offering described below.
In connection with the private placement, eLoyalty conducted a rights offering in which existing common stockholders on the record date for the rights offering, October 8, 2001, were offered the right to purchase Series B stock at the same price as the investors in the private placement. Pursuant to the rights offering, on December 19, 2001, eLoyalty sold approximately 1.4 million shares of Series B stock for gross proceeds of approximately $7,300.
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
At the time of issuance of the Series B stock, a beneficial conversion adjustment was calculated (since the fair market value of a share of common stock at the time exceeded the purchase price of a share of Series B stock) aggregating $4.0 million. The Series B stock was recorded at the date of issuance net of issuance costs and the beneficial conversion adjustment. The discount attributable to the issuance costs was fully accreted on the date of issuance by charging additional paid-in capital and increasing the recorded amount of Series B stock. The Series B stock will be accreted to its full redemption value of $23,300 on a straight line basis from the date of issuance to June 19, 2002 by charging additional paid-in capital of $669 per month and increasing the recorded amount of Series B stock by a like amount.
The Series B stock accrues dividends at a rate of 7% per annum, is entitled to a preference upon liquidation and is convertible on a one for one basis into shares of our common stock beginning on June 19, 2002, subject to adjustment for stock splits, stock dividends and similar actions. The Series B stock generally votes on a one for one basis with the common stockholders, subject to adjustment for certain actions and specified matters as to which the Series B stock is entitled to a separate class vote.
On December 19, 2001, prior to the closing of the private placement and rights offering, eLoyalty amended its Certificate of Incorporation to increase the authorized number of shares of its common stock from 100 million shares to 500 million shares (which was subsequently reduced to 50 million shares in connection with the reverse stock split) and in the authorized number of shares of its preferred stock from 10 million shares to 40 million shares. In connection with this, eLoyalty increased the number of authorized shares of Series A junior participating preferred stock designated in connection with its Rights Plan (described below) from 1 million to 5 million shares, which are included in the 40 million shares of preferred stock described above.
Also on December 19, 2001, immediately prior to the closing of the private placement and rights offering but after the increase in authorized share capital described above, eLoyalty effected a one-for-ten reverse split of its issued and outstanding common stock, with a corresponding reduction in the number of authorized shares of common stock. eLoyalty effected the reverse stock split (1) to reduce the number of its shares outstanding after the private placement and the rights offering to allow it to rationalize its resulting equity capital structure, (2) to enhance the acceptability and marketability of its common stock to the financial community and the investing public, and (3) to attempt to increase the per share market price of its common stock above Nasdaq's $1.00 minimum bid requirement.
eLoyalty was spun off from TSC into a separate, publicly traded company on February 15, 2000. In connection with establishing eLoyalty as a separate entity, 100 million shares (pre-split) of common stock, $0.01 par value, were authorized, of which 43,929,029 common stock shares (pre-split) were issued.
Pursuant to the spin-off, eLoyalty received $8,400 from the sale of 2.5 million shares (pre-split) of common stock to TCV and Sutter Hill. On May 26, 2000, eLoyalty also closed its common stock purchase agreement with TCV entities and issued 2 million shares (pre-split) of common stock at $13.50 per share, the closing market price on April 18, 2000, the signing date of the initial letter of intent, for proceeds of $26,500, net of issuance costs.
On March 17, 2000, the Board of Directors adopted a Stockholder Rights Plan (the "Rights Plan"). The Rights Plan is intended to assure fair and equal treatment for all of eLoyalty's stockholders in the event of a hostile takeover attempt.
Under the terms of the Rights Plan, after giving effect to the reverse stock split described above, each share of eLoyalty's common stock has associated with it ten rights ("Rights"). Each Right entitles the registered holder to purchase from eLoyalty one one-hundredth of a share of Series A junior participating preferred stock, without par value, at an exercise price of $160 (subject to adjustment). The Rights become exercisable under certain circumstances: 10 days after the first public announcement that any person (an "acquiring person") has acquired 15% or more of eLoyalty's common stock or the announcement that any person has commenced a tender offer for 15% or more of eLoyalty's common stock. On September 24, 2001, eLoyalty amended the Rights Plan in connection with the private placement
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
described above. The amendment provides, among other things, that (i) TCV and certain related parties shall not become an "acquiring person" for purposes of the Rights Plan so long as they do not own more than 35% of eLoyalty's outstanding common stock (determined after giving effect to the conversion of the new Series B stock), and (ii) Sutter Hill and certain related parties shall not become an "acquiring person" for purposes of the Rights Plan so long as they do not own more than 20% of eLoyalty's outstanding common stock (determined after giving effect to the conversion of the new Series B preferred stock).
In general, eLoyalty may redeem the Rights in whole, but not in part, at a price of $0.01 per Right at any time until 10 days after any person has acquired 15% or more of eLoyalty's common stock. The Rights will expire on March 17, 2010, unless earlier redeemed by eLoyalty or exchanged for other shares of eLoyalty's common stock.
Under specified conditions, each Right will entitle the holder to purchase eLoyalty's common stock (or if eLoyalty is acquired in a merger or other business combination, common stock of the acquiror) at the exercise price having a current market value of two times the exercise price. The terms of the Rights may be amended by eLoyalty's Board of Directors.
NOTE THIRTEEN--STOCK INCENTIVE PLANS
eLoyalty maintains two stock incentive plans: the eLoyalty Corporation 1999 Stock Incentive Plan (the "1999 Plan") and the eLoyalty Corporation 2000 Stock Incentive Plan (the "2000 Plan"). All share amounts in this Note Thirteen are presented after giving effect to the one-for-ten reverse stock split described in Note Twelve, unless indicated otherwise.
Under the 1999 Plan, awards of stock options, stock appreciation rights, bonus and restricted stock and performance shares may be granted to directors, officers, employees, consultants, independent contractors and agents of eLoyalty and its subsidiaries. Stock option awards may be in the form of incentive or non-statutory options, provided that incentive stock options may only be granted to officers and employees of eLoyalty. All awards made under the 1999 Plan to date have been in the form of non-statutory stock options, restricted stock or bonus (installment) stock. An aggregate of 534,000 shares of eLoyalty common stock was initially reserved for issuance under the 1999 Plan for all awards other than those issued in connection with the spin-off as discussed below. On the first day of each fiscal year, beginning in 2000, the aggregate number of shares available for issuance under the 1999 Plan is automatically increased by an amount equal to 5% of the total number of shares of common stock that are outstanding as of the time of the increase. In addition, 738,756 shares were reserved for issuance under the 1999 Plan in connection with the spin-off in substitution of previously granted options to purchase shares of TSC common stock. These substitute options are not subject to the limit on shares reserved set forth above.
On May 12, 2000, the Board of Directors approved the eLoyalty Corporation 2000 Stock Incentive Plan. Under the original terms of the 2000 Plan, non-statutory stock option awards may be granted to officers, employees and certain consultants and independent contractors of eLoyalty and its subsidiaries. The 2000 Plan was amended in September 2001 to expand the form of awards permitted under the plan to include installment and restricted stock. Awards of non-statutory stock options, restricted stock and installment stock (in the form of installment stock grants) have been made under the 2000 Plan. An aggregate of 280,000 shares of eLoyalty common stock has been reserved for issuance under the 2000 Plan.
If options or shares awarded under the 1999 Plan and the 2000 Plan are not issued due to cancellation then those options or shares will again become available for issuance under the plans. As of December 29, 2001, there were a total of 589,466 shares available for future grants under the 1999 and 2000 Plans.
Stock options granted under the 1999 Plan and 2000 Plan are made at the discretion of the Compensation Committee of eLoyalty's Board of Directors or another duly constituted committee of the Board to the extent authorized
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
by such plans and the Board (the "Compensation Committee"). Most employees are eligible to receive a grant of non-statutory stock options periodically with the number of shares generally determined by the employee's position grade, performance level and the size of the award pool as determined by the Compensation Committee. In addition, full-time employees normally receive a grant of non-statutory stock options upon hire. Stock options are generally granted with an exercise price per share equal to the fair market value of a share of eLoyalty common stock on the date of grant and a maximum term of 10 years. Although the Compensation Committee has the authority to set other terms, the options generally become exercisable over a period of four years. The initial vesting may occur after a one or two-year period, with the balance of the shares vesting in equal monthly installments over the remainder of the four-year period, or the entire award may vest in equal monthly increments over the four-year period.
The 1999 Plan was amended in December 2000 to increase the number of option shares automatically awarded to non-employee directors. The 1999 Plan, as amended, provides that each non-employee director will receive a non-statutory stock option to purchase 5,000 shares of eLoyalty common stock when he or she commences service as a director. In addition, on the day following the date of each annual shareholders' meeting, each non-employee director will receive a non-statutory stock option to purchase 1,200 shares of eLoyalty common stock. Stock options granted to non-employee directors have an exercise price per share equal to the fair market value of a share of eLoyalty common stock on the grant date and a maximum term of 10 years. Stock options granted to non-employee directors upon commencement of services vest ratably over a period of 48 months. Stock options granted to non-employee directors following an annual shareholders' meeting vest ratably over a period of 12 months.
At the time of the spin-off, each outstanding option to purchase TSC common stock held by a person who was an employee or director of eLoyalty immediately after the spin-off (and who was not also a director of TSC) was converted into a substitute option to purchase eLoyalty common stock. Furthermore, each outstanding TSC option granted before June 22, 1999 to a person who was an employee or director of TSC after the spin-off, or who was neither an employee or director of eLoyalty or TSC after the spin-off, was converted into both an adjusted TSC option and a substitute eLoyalty option. The conversion of the options was done in a manner such that (1) the aggregate intrinsic value of the options immediately before and after the exchange were the same, (2) the ratio of the exercise price per option to the market value per option was not reduced, and (3) the vesting provisions and option period of the replacement options are the same as the original vesting terms and option period. Each substitute option takes into account all employment with both TSC and eLoyalty for purposes of determining when the option becomes exercisable and when it terminates. All other terms of the substitute option are the same as the terms of the TSC option to which it relates. Of the 738,756 shares subject to replacement options issued in connection with the spin-off, 355,782 shares were subject to replacement options issued to persons who were employees or directors of eLoyalty immediately after the spin-off.
Under the 1999 Plan, eLoyalty granted 119,500, net of cancellations (and excluding shares issued in exchange for stock options as discussed below), and 29,312 shares of restricted common stock to certain executives during the year ending December 29, 2001 and December 30, 2000, respectively. During the restricted period, the holders of such shares have the same rights as common stockholders of eLoyalty, except that the shares may not be sold, assigned, pledged or otherwise encumbered. Restrictions on shares granted in the second quarter of 2001 lapse in equal monthly installments over a period of 48 months beginning on (i) May 1, 2001 with respect to 83,500 shares, and (ii) May 1, 2003 with respect to 31,000 shares. Restrictions on 5,000 shares granted in 2001 and 22,901 shares, net of cancellations, granted in 2000 lapse ratably over a period of 60 months beginning July 1, 2001 and August 1, 2000, respectively. As of December 29, 2001, a total of 120,663 restricted common stock shares (excluding shares issued in exchange for stock options) continued to be subject to restrictions.
On November 9, 2001, eLoyalty authorized the exchange of certain outstanding non-statutory stock options issued under the 1999 Plan and 2000 Plan, having an exercise price above $30 per share on a post-split basis and an original term of no more than ten years, for awards of restricted and installment common stock. Restricted Stock awards are shares of eLoyalty common stock granted to an individual. During the restriction period, the holder of the restricted stock receives all of the benefits of ownership (right to dividends, voting rights, etc.), other than the right to sell or
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
otherwise transfer any interest in the stock. Installment Stock awards are grants to an individual of a contractual right to receive future grants of eLoyalty common stock in specified amounts on specified dates, subject to the individual remaining an eLoyalty employee on the date of the subject grant. With respect to the installment stock awards made in connection with the exchange offer, the grant dates are contemporaneous with the vesting dates for the restricted stock granted in the exchange offer. In the exchange offer, eligible US employees received one share of restricted stock for each share underlying options tendered, with restrictions lapsing on such restricted shares in 20 equal quarterly installments beginning on February 28, 2002. Eligible non-US employees received an installment stock award that provides for the issuance of one share of common stock for each share underlying options tendered with the issuance of such shares being made in 20 equal quarterly installments beginning February 28, 2002. As a result of the exchange, which was voluntary, eLoyalty accepted the tender of options to purchase approximately 573,097 shares of its common stock, issued approximately 483,165 shares of restricted common stock to its eligible US employees, and reserved for issuance to eligible non-US employees approximately 89,932 shares of its common stock. Upon the exchange, the aggregate fair value of the restricted stock issued and installment stock to be issued, $2,980, was recorded as unearned compensation and will be amortized to expense over the 20 quarter vesting or installment period.
Option activity was as follows for the years ending December 31, 1999, December 30, 2000 and December 29, 2001: (All share and exercise prices have been adjusted to reflect the one-for-ten reverse stock split.)
Option Weighted-Average Options
Shares Exercise Price Exercisable
------------------------------------------------------------------------------------------------------------
Outstanding as of December 31, 1998 -- $ -- --
------------------------------------------------------------------------------------------------------------
Granted 544,725 $ 38.80
Exercised -- $ --
Forfeited (10,725) $ 35.00
------------------------------------------------------------------------------------------------------------
Outstanding as of December 31, 1999 534,000 $ 38.90 --
------------------------------------------------------------------------------------------------------------
Granted 506,691 $ 209.10
Granted in connection
with the spin-off(1) 738,756 $ 68.50
Exercised (91,329) $ 62.40
Forfeited (190,838) $ 186.50
------------------------------------------------------------------------------------------------------------
Outstanding as of December 30, 2000 1,497,280 $ 90.90 594,143
------------------------------------------------------------------------------------------------------------
Granted 259,883 $ 27.59
Exercised (8,059) $ 57.17
Forfeited(2) (1,091,364) $ 96.49
------------------------------------------------------------------------------------------------------------
Outstanding as of December 29, 2001 657,740 $ 56.81 467,855
------------------------------------------------------------------------------------------------------------
|
(1) Includes options issued in connection with the spin-off in
substitution of previously granted TSC options.
(2) Includes options tendered in exchange for restricted stock and
installment stock awards.
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
The following table summarizes the status of stock options outstanding and exercisable as of December 29, 2001 by range of exercise price: (All share and exercise prices have been adjusted to reflect the one-for-ten reverse stock split.)
Options Outstanding Options Exercisable
----------------------------------------------------------------------------------- --------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Number Remaining Contractual Exercise Price Number Exercise Price
Exercise Prices Outstanding Life (in Years) Per Share Exercisable Per Share
---------------------------------------------------------------------------------------------------------------------
$ 2.73--$ 19.99 223,062 8.3 $ 17.08 112,755 $ 17.45
$ 20.00--$ 39.99 188,987 9.0 $ 25.10 140,991 $ 23.98
$ 40.00--$ 79.99 110,154 7.9 $ 70.07 99,585 $ 70.93
$ 80.00--$139.99 78,801 6.8 $ 114.85 71,868 $ 114.82
$140.00--$366.25 56,736 8.1 $ 212.32 42,656 $ 203.33
---------------------------------------------------------------------------------------------------------------------
Total 657,740 8.2 $ 56.81 467,855 $ 62.71
---------------------------------------------------------------------------------------------------------------------
|
eLoyalty has elected to disclose the pro forma effects of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and, as permitted under SFAS 123, applies Accounting Principles Board Opinion No. 25 ("APB 25") and related interpretations in accounting for its plans.
Under APB 25, compensation costs for employee stock options are measured as the excess, if any, of the fair value of eLoyalty common stock at the date of grant over the option exercise price, providing all other requirements for fixed plan accounting are satisfied. Some option shares with exercise prices below fair value were issued by eLoyalty in 1999 and 2000, thus resulting in eLoyalty recording related compensation expense. During 2000, eLoyalty cancelled and reissued options for 11,200 shares at a lower exercise price. The cancellation and reissuance of these options was necessary to meet commitments made to newly hired employees. These replacement options are accounted for under variable plan accounting and the related compensation will be subject to adjustment in the future periods based on the fluctuation of the fair value of a share of eLoyalty's common stock. No compensation expense was recognized for these reissued options during 2001 based on the fair value of eLoyalty's common stock during 2001. Under APB No. 25, the fair value of restricted shares at the date of grant is amortized to expense ratably over the vesting period. eLoyalty recorded compensation expense related to awards of restricted stock and installment stock awards, including awards issued in exchange for stock options tendered, of approximately $1,161 for the year ended December 29, 2001 and $520 for the year ended December 30, 2000.
eLoyalty is required under SFAS 123 to disclose pro forma information regarding option grants made to its directors, officers and employees based on specified valuation techniques that produce estimated compensation charges. The fair value of eLoyalty options, including substitute options issued in connection with the spin-off, were estimated at grant date using the Black-Scholes option pricing model.
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
The weighted average grant date fair value and the assumptions used in the Black-Scholes model to calculate such fair values are shown below:
For the Year Ended For the Year Ended For the Year Ended
December 29, December 30, December 31,
Options 2001 2000 1999
---------------------------------------------------------------------------------------------------------------
Substitute TSC Options (1)
Expected volatility -- -- 49.7%--54.2%
Risk-free interest rates -- -- 4.6%--6.3%
Expected lives -- -- 4.5 years
Dividends -- -- --
Weighted average grant date fair value -- -- $ 50.80
--------------------------------------------------------------------------------------------------------------
eLoyalty Options
Expected volatility 50% 50% 50%
Risk-free interest rates 3.6%-5.0% 5.6%--6.8% 5.7%--6.3%
Expected lives 4.5 years 4.5 years 4.5 years
Dividends -- -- --
Weighted average grant date fair value
Issued above market prices $ -- $126.20 --
Issued at market prices $ 12.92 $ 53.10 $ 17.90
Issued below market prices $ -- $ 85.40 $ 86.20
---------------------------------------------------------------------------------------------------------------
|
(1) eLoyalty stock options issued in connection with the spin-off in substitution of previously granted TSC options.
Had compensation costs for eLoyalty's stock option plans been determined using the fair value method under SFAS 123, eLoyalty's net (loss) income available to common stockholders and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
For the Year Ended For the Year Ended For the Year Ended
December 29, December 30, December 31,
2001 2000 1999
---------------------------------------------------------------------------------------------------------------------------
Net (loss) income available to common stockholders:
As reported $ (67,237) $ (424) $ 4,058
Pro forma $ (73,628) $ (12,381) $ 1,219
Basic net (loss) income per share:
As reported $ (13.42) $ (0.09) $ 0.98
Pro forma $ (14.69) $ (2.57) $ 0.29
Diluted net (loss) income per share:
As reported $ (13.42) $ (0.09) $ 0.92
Pro forma $ (14.69) $ (2.57) $ 0.28
-------------------------------------------------------------------------------------------------------------------
|
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE FOURTEEN--EARNINGS PER SHARE
The following table sets forth the computation of the income (loss) and shares used in the calculation of basic and diluted earnings per share:
For the Years Ended December(1) (2)
--------------------------------------------------
December 29, December 30, December 31,
2001 2000 1999
------------------------------------------------------------------------------------------------------------
Net (loss) income $(63,661) $(424) $4,058
Series B preferred stock dividends and accretion (3,576) -- --
------------------------------------------------------------------------------------------------------------
Net (loss) income available to common stockholders $(67,237) $(424) $4,058
------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (in thousands) 5,011 4,823 4,140
Common stock equivalents (in thousands) 146 549 280
------------------------------------------------------------------------------------------------------------
Total weighted average shares and
common stock equivalents 5,157 5,372 4,420
------------------------------------------------------------------------------------------------------------
|
(1) In December 2001, eLoyalty effected a one-for-ten reverse stock split.
Share amounts presented for all prior periods reflect the effect of the
reverse split.
(2) In December 1999, eLoyalty issued approximately 4.1 million shares
(post-split) to TSC. For periods prior to February 15, 2000 the
weighted average shares outstanding is based on these 4.1 million
shares.
NOTE FIFTEEN--SEGMENT INFORMATION
We operate in one business segment focused exclusively on providing customer relationship management ("CRM") related consulting services. Beginning in 2001, as a result of organizational changes, we have two reportable geographic segments. Those segments are: North America and International. Our North American business includes our United States and Canadian operations. Our International business includes operations in Europe and Australia. The following table reflects revenues, operating results, and total assets by reportable segment for the years ended December 2001, 2000 and 1999.
North
America International Total
----------------------------------------------------------------------------------------------------------------
Revenues
2001 $ 120,429 $ 26,300 $ 146,729
2000 $ 208,222 $ 28,276 $ 236,498
1999 $ 136,241 $ 26,939 $ 163,180
Operating income (loss)
2001 $ (64,658) $ (9,753) $ (74,411)
2000 $ 4,545 $ (8,314) $ (3,769)
1999 $ 14,902 $ (6,397) $ 8,505
Total assets
2001 $ 110,780 $ 17,234 $ 128,014
2000 $ 153,835 $ 30,783 $ 184,618
1999 $ 67,644 $ 28,959 $ 96,603
|
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
Other Total
United North North United Other Total
States America America Germany Kingdom International International Total
-------------------------------------------------------------------------------------------------------------------------------
Revenues
2001 $113,208 $7,221 $120,429 $12,844 $10,686 $2,770 $26,300 $146,729
2000 $198,478 $9,744 $208,222 $10,339 $10,703 $7,234 $28,276 $236,498
1999 $127,715 $8,526 $136,241 $ 9,474 $11,934 $5,531 $26,939 $163,180
|
Total long-lived assets for our US operations are $19,055, $25,555, and $13,223 for the years ended December 29, 2001, December 30, 2000 and December 31, 1999, respectively. At December 29, 2001, 99% of our revenues related to services.
NOTE SIXTEEN--LEASES
eLoyalty leases various office facilities under operating leases expiring at various dates through September 30, 2007. Additionally, eLoyalty leases various property and office equipment under operating leases expiring at various dates. Rental expense for all operating leases approximated $8,111, $6,659, and $1,436 for the years ended December 29, 2001, December 30, 2000 and December 31, 1999, respectively.
Future minimum rental commitments under noncancelable operating leases with terms in excess of one year are as follows:
Year Amount
-----------------------------------------------
2002 $ 5,920
2003 4,560
2004 3,204
2005 1,910
2006 530
Thereafter 475
-----------------------------------------------
$ 16,599
-----------------------------------------------
|
Minimum payments have not been reduced by minimum sublease rentals of $0.4 million, $0.3 million, $0.2 million and $0.2 million due in the future for years 2002, 2003, 2004, and 2005, respectively, under noncancelable subleases. Of the future minimum rental commitments, the Company has accrued as part of the severance and related costs as discussed in Note Three, $2.5 million, $1.3 million, $0.6 million, $0.5 million and $0.6 million for 2002, 2003, 2004, 2005, 2006 and thereafter, respectively.
NOTE SEVENTEEN--COMMITMENTS AND CONTINGENCIES
eLoyalty has made a commitment to invest up to $14,700, through a related entity, in eLoyalty Ventures, L.L.C. ("eLoyalty Ventures"). eLoyalty Ventures is a $30,000 venture capital fund formed in 2000 by eLoyalty, together with entities associated with Bain Capital, Sutter Hill and TCV, to focus on investing in early-stage CRM technology companies. eLoyalty has not been requested to contribute any of its eLoyalty Ventures commitment and so remains subject to capital calls against that commitment on 10 business days' prior written notice. While no formal action has been taken to suspend the fund's activities, eLoyalty believes none of the members of eLoyalty Ventures would recommend investment activity at this time. eLoyalty further believes that the fund's management is not actively
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
engaging in evaluation of investment opportunities. Accordingly, eLoyalty does not expect any expenditures relating to this fund in 2002.
eLoyalty, from time to time, has been subject to legal claims arising in connection with its business. While the results of these claims cannot be predicted with certainty, at December 29, 2001 there were no asserted claims against eLoyalty that, in the opinion of management, if adversely decided, would have a material effect on eLoyalty's financial position, results of operations, and cash flows.
NOTE EIGHTEEN--SUBSEQUENT EVENTS
In early 2002, management presented the Board of Directors with a proposed compensation program (the "Program") for eLoyalty's Vice Presidents, including those who previously held the title of Senior Vice President. As part of the Program, each Vice President was assigned to one of five tiers and total target cash compensation (base salary and target bonus) for all Vice Presidents within each tier was made uniform. Among the goals of the Program was to more closely align the interests of these senior level employees with those of the Company's stockholders. To this end, under the Program, a target equity ownership level in eLoyalty was set for each tier. The Program was approved by the Compensation Committee of the Board of Directors on February 25, 2002 and was ratified by the entire Board of Directors thereafter.
On February 28, 2002, each US Vice President received a grant of restricted eLoyalty Common Stock in an amount such that, when combined with previous equity grants to such Vice President, the aggregate equity granted to such Vice President approximately equaled the target equity ownership level for the tier to which such Vice President was assigned. The restrictions will lapse on such stock in 20 equal quarterly installments, beginning on May 31, 2002. Non-US Vice Presidents received an installment stock award that provides for the issuance, in the aggregate, of the same number of shares of eLoyalty Common Stock as would have been issued to them as restricted stock, had they been US employees, in 20 equal quarterly installments, beginning on May 31, 2002. Approximately 890,000 shares of eLoyalty Common Stock, in the aggregate, either were granted as restricted stock or reserved for issuance under installment stock grants in connection with the Program. Substantially all of this stock came from the 1999 Plan and such stock constituted substantially all of the stock then available for issuance under the 1999 Plan. This issuance will result in an aggregate of $5,800 in non-cash compensation charges over the five year restriction lapsing and installment grant period.
At eLoyalty's 2002 Annual Meeting of Stockholders, to be held on May 16, 2002, the stockholders will be asked to approve a 500,000 share increase in the number of shares available for issuance under the 1999 Plan. This increase will permit equity grants to be made to eLoyalty's President and Chief Executive Officer, the size and form of which grant has not yet been determined, and members of its Board of Directors, currently anticipated to be in the form of options to purchase 50,000 shares of Common Stock per director, with a reserve for grants to any additional directors added to the Board.
eLoyalty also has elected to freeze its Employee Stock Purchase Plan immediately following the next quarterly purchase at the end of the first quarter 2002. See also Note Eleven.
ELOYALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
NOTE NINETEEN--QUARTERLY DATA (UNAUDITED)
1st 2nd 3rd 4th Year
-----------------------------------------------------------------------------------------------------------------
For the Year Ended December 2001
Revenues $ 53,687 $ 38,267 $ 29,129 $ 25,646 $146,729
Operating loss $(27,116)(1) $(22,097)(2) $(15,617)(3) $ (9,581)(4) $(74,411)
Net loss available
to common stockholders $(16,477) $(29,913) $ (9,983) $(10,864)(5) $(67,237)
Basic net loss per share $ (3.30) $ (5.98) $ (1.99) $ (2.16) $ (13.42)
Diluted net loss per share(6) $ (3.30) $ (5.98) $ (1.99) $ (2.16) $ (13.42)
Shares used to calculate basic net
loss per share (in millions) (7) 5.00 5.00 5.01 5.04 5.01
Shares used to calculate diluted net
loss per share (in millions) (6)(7) 5.00 5.00 5.01 5.04 5.01
1st 2nd 3rd 4th Year
-------------------------------------------------------------------------------------------------------------------
For the Year Ended December 2000
Revenues $ 51,347 $ 56,964 $ 63,627 $ 64,560 $236,498
Operating loss $ (133) $ (2) $ (383) $ (3,251)(8) $ (3,769)
Net income (loss) available
to common stockholders $ 156 $ 406 $ 348 $ (1,334) $ (424)
Basic net income (loss) per share $ 0.04 $ 0.08 $ 0.07 $ (0.27) $ (0.09)
Diluted net income (loss) per share(6) $ 0.03 $ 0.08 $ 0.06 $ (0.27) $ (0.09)
Shares used to calculate basic net
(loss) income per share (in millions)(7) 4.43 4.79 4.97 4.98 4.82
Shares used to calculate diluted net
(loss) income per share (in millions)(6)(7) 4.99 5.31 5.44 4.98 4.82
|
(1) Includes $11,475 costs relating to severance and related costs associated with cost reduction plans.
(2) Includes $10,719 costs relating to severance and related costs associated with cost reduction plans.
(3) Includes $7,100 costs relating to severance and related costs associated with cost reduction plans.
(4) Includes $4,150 costs relating to severance and related costs associated with cost reduction plans.
(5) The fourth quarter of 2001 includes a $3,576 charge for Series B preferred stock dividends and accretion.
(6) In periods of a loss, common stock equivalents were not included in the calculation as they are antidilutive.
(7) All share amounts presented give effect to the one-for-ten reverse stock split effected in December 2001.
(8) The fourth quarter of 2000 includes a $2,800 incremental charge for uncollectable amounts due from clients.
ELOYALTY CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Balance
Description of Beginning at End of
Allowance and Reserves of Period Additions Deductions Period
------------------------------------------ ---------- ---------- ---------- ------
Valuation allowances for uncollectible amounts:
Year ended December 29, 2001 $1,605 4,512 (3,717) $2,400
Year ended December 30, 2000 $2,084 4,064 (4,543) $1,605
Year ended December 31, 1999 $2,638 2,059 (2,613) $2,084
Valuation allowances for deferred tax assets:
Year ended December 29, 2001 $ -- 14,080 -- $14,080
Year ended December 30, 2000 $ -- -- -- $ --
Year ended December 31, 1999 $ -- -- -- $ --
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
For information about our executive officers, see "Executive Officers of the Company" included as Item 4A of Part I of this report. The information contained under the captions "Director Election - General" and "Security Ownership of Certain Beneficial Owners and Management --- Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement to be filed by eLoyalty for its 2002 Annual Meeting of Stockholders is incorporated herein by reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION.
The information under "Director Election - Compensation of Directors" and "Executive Compensation - Summary Compensation Table", "--- Compensation Committee Interlocks and Insider Participation", "--- Option Grants in Fiscal 2001", "--- Option Exercises in Fiscal 2001 and Option Values at December 29, 2001", "--- Option Repricings", "--- Employment Contracts and Employment Termination and Change in Control Arrangements" in the Proxy Statement to be filed by eLoyalty for its 2002 Annual Meeting of Stockholders is incorporated herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Security Ownership of Certain Beneficial Owners and Management --- Beneficial Ownership Information" in the Proxy Statement to be filed by eLoyalty for its 2002 Annual Meeting of Stockholders is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Certain Relationships and Related Transactions" in the Proxy Statement to be filed by eLoyalty for its 2002 Annual Meeting of Stockholders is incorporated herein by reference in response to this item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
(1) Financial Statements. The consolidated financial statements filed as part of this report are listed and indexed under Item 8 of this Form 10-K, and such list is incorporated herein by reference.
(2) Financial Statement Schedule.
The financial statement schedule filed as part of this report is listed and indexed under Item 8 of this Form 10-K, and is incorporated herein by reference. We have omitted financial statement schedules other than that listed under Item 8 because such schedules are not required or applicable.
(3) Exhibits. The list of exhibits filed with or incorporated by reference into this report is contained in the Exhibit Index to this report on Page I-1, which is incorporated herein by reference.
(b) Reports on Form 8-K:
eLoyalty filed the following Current Reports on Form 8-K during the fourth quarter of 2001:
(1) On December 14, 2001, eLoyalty filed a Form 8-K reporting under Item 5 thereof the purchase price for sales of its 7% Series B Convertible Preferred Stock in its previously announced private placement and rights offering.
(2) On December 18, 2001, eLoyalty filed a Form 8-K reporting under Item 5 thereof its new $15 million revolving credit facility with LaSalle Bank National Association.
(3) On December 19, 2001, eLoyalty filed a Form 8-K reporting under Item 5 thereof the voting results from its December 18, 2001 Special Meeting of Stockholders.
(4) On December 21, 2001, eLoyalty filed a Form 8-K reporting under Item 5 thereof the completion of its previously announced private placement and rights offering.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on March 28, 2002.
eLOYALTY CORPORATION
By /s/ KELLY D. CONWAY
----------------------
Kelly D. Conway
President and Chief
Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant in the capacities indicated on this 28th day of March 2002.
Name Capacity
---- --------
/s/ KELLY D. CONWAY Director, President and Chief
--------------------------------- Executive Officer (Principal
Kelly D. Conway Executive Officer)
*
--------------------------------- Chairman of the Board and Director
Tench Coxe
*
--------------------------------- Director
Jay C. Hoag
*
--------------------------------- Director
John T. Kohler
*
--------------------------------- Director
Michael J. Murray
/s/ TIMOTHY J. CUNNINGHAM Vice President, Chief Financial
--------------------------------- Officer and Corporate Secretary
Timothy J. Cunningham (Principal Financial and
Accounting Officer)
*By: /s/ TIMOTHY J. CUNNINGHAM
--------------------------------------
Timothy J. Cunningham, Attorney-in-Fact
|
EXHIBIT INDEX
We are including as exhibits to this Annual Report on Form 10-K certain documents that we have previously filed with the Securities and Exchange Commission (" SEC") as exhibits, and we are incorporating such documents as exhibits herein by reference from the respective filings identified in parentheses below. The management contracts and compensatory plans or arrangements required to be filed as exhibits to this Annual Report on Form 10-K pursuant to Item 14(c) are those listed below as Exhibits 10.11 through 10.26, inclusive, and Exhibits 10.32 through 10.38, inclusive.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
3.1 Certificate of Incorporation of eLoyalty, as amended (filed
as Exhibit 3.1 to eLoyalty's Registration Statement on Form
S-1 (Registration No. 333-94293) (the "S-1")).
3.2 Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company (included as Exhibit 4.2 to
Amendment No.1 to eLoyalty's Registration Statement on Form
8-A (File No. 0-27975) filed with the SEC on March 24, 2000
(the "8-A Amendment")).
3.3+ Certificate of Amendment to eLoyalty's Certificate of
Incorporation, effective 7:59a.m., eastern time, December
19, 2001.
3.4+ Certificate of Amendment to eLoyalty's Certificate of
Incorporation, effective 7:58a.m., eastern time, December
19, 2001.
3.5+ Certificate of Increase of Series A Junior Participating
Preferred Stock of eLoyalty, filed December 19, 2001.
3.6+ Certificate of Designation of 7% Series B Convertible
Preferred Stock of eLoyalty, filed December 19, 2001.
3.7 By-Laws of eLoyalty (filed as Exhibit 3.2 to the S-1).
4.1 Rights Agreement, dated as of March 17, 2000, between
eLoyalty and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent (filed as Exhibit 4.1 to the 8-A Amendment).
4.2 Amendment, dated as of September 24, 2001, to the Rights
Agreement between eLoyalty and Mellon Investor Services LLC
(filed as Exhibit 4.2 to eLoyalty's Current Report on Form
8-K dated September 24, 2001, File No. 0-27975).
4.3+ Certificate of Adjustment dated January 10, 2002.
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10.1 Form of Reorganization Agreement between Technology
Solutions Company ("TSC") and eLoyalty Corporation
("eLoyalty") (included as Exhibit 2.1 to the S-1).
10.2 Common Stock Purchase Agreement, dated as of May 26, 2000,
among eLoyalty Corporation and TCV IV, L.P., TCV IV
Strategic Partners, L.P., TCV III (GP), TCV III (Q), L.P.
and TCV III Strategic Partners, L.P. (filed as Exhibit 10.1
to eLoyalty's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 (File No. 0-27975)).
10.3 Amended and Restated Business Loan Agreement, dated as of
December 30, 2000, between eLoyalty Corporation and Bank of
America, N.A. (filed as Exhibit 10.5 to eLoyalty's Annual
Report on Form 10-K for the year ended December 30, 2000).
10.4 Form of Tax Sharing and Disaffiliation Agreement between
TSC and eLoyalty (filed as Exhibit 10.6 to the S-1).
10.5 Form of TSC (Licensor) Intellectual Property License
Agreement (filed as Exhibit 10.7 to the S-1).
10.6 Form of eLoyalty (Licensor) Intellectual Property License
Agreement (filed as Exhibit 10.8 to the S-1).
10.7 Office Lease -- Two Conway Park made as of December 6, 1999
by and between Riggs & Company, a division of Riggs Bank,
N.A., as Landlord, and eLoyalty Corporation, as Tenant
(filed as Exhibit 10.13 to the S-1).
10.8 River Place Point II Lease Agreement, dated March 17, 2000,
by and between Investors Life Insurance Company of North
America, as Landlord, and eLoyalty Corporation, as Tenant
(filed as Exhibit 10.15 to eLoyalty's Annual Report on Form
10-K for the year ended December 31, 1999 (File No.
0-27975)).
10.9 eLoyalty Ventures, L.L.C. Operating Agreement, dated as of
July 21, 2000, by and among Brookside Capital Partners Fund
LP, Sutter Hill Ventures L.P., TCV IV, L.P. and TCV
Strategic Partners IV, L.P. and eLoyalty Employee
Investors, L.L.C. (filed as Exhibit 10.2 to eLoyalty's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 0-27975)).
10.10 eLoyalty Employee Investors, L.L.C. Operating Agreement,
entered into in July 2000, among eLoyalty Employee
Investors, L.L.C., eLoyalty Corporation as the initial
member and Sarah Faux as the manager (filed as Exhibit
10.13 to eLoyalty's Annual Report on Form 10-K for the year
ended December 30, 2000 (File No. 0-27975)).
10.11 eLoyalty Corporation 1999 Stock Incentive Plan (as Amended
and Restated as of February 28, 2001) (filed as Exhibit
10.14 to eLoyalty's Annual Report on Form 10-K for the year
ended December 30, 2000 (File No. 0-27975)).
10.12 eLoyalty Corporation 2000 Stock Incentive Plan (as Amended
and Restated as of September 24, 2001) (filed as Exhibit
(d)(2) to eLoyalty's Tender Offer Statement on Schedule TO
filed October 15, 2001).
10.13+ 1999 Employee Stock Purchase Plan (as Amended and Restated
as of November 6, 2001).
|
10.14 eLoyalty Corporation Executive Deferred Compensation Plan
dated January 1, 2000 (filed as Exhibit 10.14 to the S-1).
10.15 Summary of Discretionary Cash Bonus Program for Executive
Officers (filed as Exhibit 10.18 to eLoyalty's Annual
Report on Form 10-K for the year ended December 30, 2000
(File No. 0-27975)).
10.16 Employment Agreement, dated as of January 19, 1996, between
Kelly D. Conway and TSC (to which eLoyalty has succeeded)
(filed as Exhibit 10.9 to the S-1).
10.17 Promissory Note, dated November 12, 1998, by Kelly D.
Conway in favor of TSC (filed as Exhibit 10.12 to the S-1).
10.18 Promissory Note, dated December 15, 1999, by Kelly D.
Conway in favor of TSC (filed as Exhibit 10.21 to
eLoyalty's Annual Report on Form 10-K for the year ended
December 30, 2000 (File No. 0-27975)).
10.19 Employment Agreement, dated as of October 20, 1998, between
Craig Lashmet and TSC (to which eLoyalty has succeeded)
(filed as Exhibit 10.11 to the S-1).
10.20 Employment Agreement, dated as of November 15, 1999,
between Timothy J. Cunningham and TSC (to which eLoyalty
has succeeded) (filed as Exhibit 10.10 to the S-1).
10.21 Promissory Note, dated November 19, 1999, of Timothy J.
Cunningham in favor of TSC (to which eLoyalty has
succeeded) (filed as Exhibit 10.24 to eLoyalty's Annual
Report on Form 10-K for the year ended December 30, 2000
(File No. 0-27975)).
10.22 Contract of Employment, entered into May 12, 2000, between
eLoyalty (UK) Limited and Vaughan Thomas (filed as Exhibit
10.1 to eLoyalty's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 (File No. 0-27975)).
10.23 Form of Loan Note, dated July 1, 2000, of Vaughan Thomas in
favor of eLoyalty (UK) Ltd. (filed as Exhibit 10.3 to
eLoyalty's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000 (File No. 0-27975)).
10.24 Form of Indemnification Agreement entered into between
eLoyalty Corporation and each of Tench Coxe and Jay C. Hoag
(filed as Exhibit 10.15 to the S-1).
10.25+ Promissory Note, dated December 28, 2001, of Kelly D.
Conway in favor of eLoyalty Corporation.
10.26+ Compromise Agreement, dated as of December 18, 2001,
between eLoyalty (UK) Limited and Vaughan Thomas.
10.27+ Loan Agreement, dated as of December 17, 2001, between
eLoyalty Corporation and LaSalle Bank National Association,
together with Amendment No. 1 to Loan Agreement, dated as
of February 27, 2002.
|
10.28 Share Purchase Agreement, dated as of September 24, 2001,
by and among eLoyalty and the Investors named therein
(filed as Exhibit 10.1 to eLoyalty's Current Report on Form
8-K dated September 24, 2001, File No. 0-27975).
10.29+ Amendment No. 1 to Share Purchase Agreement, dated as of
December 19, 2001, by and among eLoyalty and the investors
named therein.
10.30+ Amended and Restated Investor Rights Agreement, dated as of
December 19, 2001, by and among eLoyalty and the
stockholders named therein.
10.31 Amendment No. 1 to the Amended and Restated Business Loan
Agreement, dated as of September 28, 2001, between Bank of
America, N.A. and eLoyalty (filed as Exhibit 10.1 to
eLoyalty's Quarterly Report on Form 10-Q for the quarter
ended September 29, 2001, File No. 0-27975).
10.32 Employment Agreement, dated January 2 and 8, 2001, and
effective January 29, 2001, between Jay A. Istvan and
eLoyalty (filed as Exhibit 10.1 to eLoyalty's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001,
File No. 0-27975).
10.33 Promissory Note dated February 20, 2001, of Jay A. Istvan
in favor of eLoyalty (filed as Exhibit 10.2 to eLoyalty's
Quarterly Report on Form 10-Q for the quarter ended March
31, 2001, File No. 0-27975).
10.34 Letter agreement, dated January 2, 2001, between Jay A.
Istvan and eLoyalty (filed as Exhibit 10.3 to eLoyalty's
Quarterly Report on Form 10-Q for the quarter ended March
31, 2001, File No. 0-27975).
10.35 Indemnification Agreement, effective as of January 29,
2001, between Jay A. Istvan and eLoyalty (filed as Exhibit
10.4 to eLoyalty's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001, File No. 0-27975).
10.36 Employment Agreement, effective June 1, 2001, between
Steven C. Pollema and eLoyalty (filed as Exhibit 10.1 to
eLoyalty's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001, File No. 0-27975).
10.37 Promissory Note, dated June 1, 2001, of Steven C. Pollema
in favor of eLoyalty (filed as Exhibit 10.2 to eLoyalty's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2001, File No. 0-27975).
10.38 Indemnification Agreement, dated June 11, 2001, between
Steven C. Pollema and eLoyalty (filed as Exhibit 10.3 to
eLoyalty's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001, File No. 0-27975).
21.1+ Subsidiaries of eLoyalty Corporation
23.1+ Consent of PricewaterhouseCoopers LLP.
24.1+ Power of Attorney from Tench Coxe, Director
24.2+ Power of Attorney from Jay C. Hoag, Director
24.3+ Power of Attorney from John T. Kohler, Director
24.4+ Power of Attorney from Michael J. Murray, Director
----------------
|
+ Filed herewith
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ELOYALTY CORPORATION
Adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware
The undersigned, being the President and Chief Executive Officer of eLoyalty Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "GCL"), does hereby certify:
1. That Article IV, paragraph A of the Certificate of Incorporation of the Corporation is hereby amended to read in its entirety as follows:
"(A) Authorized Capital Stock. The total number of shares of capital stock which the Corporation shall have authority to issue is 540,000,000, consisting of 500,000,000 shares of common stock, with a par value of $.01 per share ("Common Stock"), and 40,000,000 shares of preferred stock, with a par value of $.01 per share ("Preferred Stock")."
2. That the foregoing amendment of the Certificate of Incorporation of the Corporation has been duly adopted in accordance with Section 242 of the GCL.
3. This Certificate of Amendment, and the amendment effected hereby, shall become effective at 7:58 a.m., Eastern Standard Time, on December 19, 2001.
IN WITNESS WHEREOF, the undersigned has caused this Certificate to be signed this 18th day of December, 2001.
eLOYALTY CORPORATION
By: /s/ Kelly D. Conway ----------------------------------------- Name: Kelly D. Conway Title: President and Chief Executive Officer |
EXHIBIT 3.4
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
OF ELOYALTY CORPORATION
Adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware
The undersigned, being the President and Chief Executive Officer of eLoyalty Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "GCL"), does hereby certify:
1. That Article IV, paragraph (A) of the Certificate of Incorporation of the Corporation, as amended, is hereby amended to read in its entirety as follows:
"(A) Authorized Capital Stock. The total number of shares of capital stock which the Corporation shall have authority to issue is 90,000,000, consisting of 50,000,000 shares of common stock, with a par value of $.01 per share ("Common Stock"), and 40,000,000 shares of preferred stock, with a par value of $.01 per share ("Preferred Stock")."
2. That Article IV of the Certificate of Incorporation of the Corporation, as amended, is hereby amended to add the following text as paragraph (F) of Article IV:
"(F) Upon the Certificate of Amendment to the Certificate of Incorporation of the Corporation which adds this paragraph (F) becoming effective in accordance with the General Corporation Law of the State of Delaware (the "Effective Time"), each ten (10) shares of common stock, par value $.01 per share, of the Corporation issued immediately prior to the Effective Time (the "Old Common Stock") shall be automatically reclassified as and converted into one (1) share of Common Stock (the "Reverse Stock Split"). Notwithstanding the immediately preceding sentence, no fractional shares of Common Stock shall be issued in connection with the Reverse Stock Split. In lieu thereof, upon surrender after the Effective Time to the Corporation of a certificate formerly representing shares of Old Common Stock, the Corporation shall pay to the holder of the certificate an amount in cash (without interest) equal to the product obtained by multiplying (a) the fraction of a share of Common Stock to which such
holder (after taking into account all shares of Old Common Stock held immediately prior to the Effective Time by such holder) would otherwise be entitled to, by (b) the average of the closing sale prices of Old Common Stock (as adjusted to reflect the Reverse Stock Split) for the 20 trading days ending on the date which is the day before the date on which the Effective Time occurs, as officially reported by the Nasdaq National Market. If such price or prices are not available, the fractional shares payment will be based on the average of the last bid and asked prices for the Old Common Stock (as adjusted to reflect the Reverse Stock Split) for such days, in each case as officially reported by the Nasdaq National Market, or other such process as determined by the Board of Directors. The ownership of a fractional interest will not give the holder thereof any voting, dividend, or other rights except to receive payment therefor as described herein. Each stock certificate that, immediately prior to the Effective Time, represented shares of Old Common Stock shall, from and after the Effective Time, automatically and without the necessity of presenting the same for exchange, represent that number of shares of Common Stock into which the shares of Old Common Stock represented by such certificate shall have been reclassified (as well as the right to receive cash in lieu of fractional shares of Common Stock as provided herein), provided, however, that each person of record holding a certificate that represented shares of Old Common Stock shall receive, upon surrender of such certificate to the Corporation, a new certificate evidencing and representing the number of shares of Common Stock into which the shares of Old Common Stock represented by such certificate shall have been reclassified pursuant hereto."
3. That the foregoing amendments of the Certificate of Incorporation of the Corporation have been duly adopted in accordance with Section 242 of the GCL.
4. This Certificate of Amendment, and the amendments effected hereby, shall become effective at 7:59 a.m., Eastern Standard Time, on December 19, 2001. IN WITNESS WHEREOF, the undersigned has caused this Certificate to be signed this 18th day of December, 2001.
eLOYALTY CORPORATION
By: /s/ Kelly D. Conway ----------------------------------------- Name: Kelly D. Conway Title: President and Chief Executive Officer |
EXHIBIT 3.5
CERTIFICATE OF INCREASE
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
ELOYALTY CORPORATION
(Pursuant to Section 151 of the General Corporation Law of the State of Delaware)
eLoyalty Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, in accordance with provisions of Section 151(g) thereof, DOES HEREBY CERTIFY:
That pursuant to the authority set forth in the Certificate of Incorporation of the Corporation, as amended, the Board of Directors of the Corporation has adopted the following resolution increasing the number of authorized shares of Series A Junior Participating Preferred Stock, par value $.01 per share, of the Corporation:
RESOLVED: That the number of shares of the series of Preferred Stock of the Corporation designated as Series A Junior Participating Preferred Stock, par value $.01 per share, be, and hereby is, increased from 1,000,000 shares to 5,000,000 shares, and that the appropriate officers of the Corporation be and hereby are authorized and directed in the name and on behalf of the Corporation to execute and file a Certificate of Increase with the Secretary of State of the State of Delaware increasing the number of shares constituting the Series A Junior Participating Preferred Stock, par value $.01 per share, from 1,000,000 to 5,000,000 and to take any and all other actions deemed necessary or appropriate to effectuate this resolution.
This Certificate of Increase, and the increase effected hereby, shall become effective upon filing.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Kelly D. Conway, its President and Chief Executive Officer, this 19th day of December, 2001.
eLOYALTY CORPORATION
By: /s/ Kelly D. Conway ----------------------------------------- Name: Kelly D. Conway Title: President and Chief Executive Officer |
EXHIBIT 3.6
CERTIFICATE OF DESIGNATIONS
OF
7% SERIES B CONVERTIBLE PREFERRED STOCK
OF ELOYALTY CORPORATION
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
The undersigned do hereby certify that the following resolution was duly adopted by the Board of Directors of eLoyalty Corporation, a Delaware corporation, on December 19th, 2001:
WHEREAS, the Certificate of Incorporation of eLoyalty Corporation, a Delaware corporation (the "Corporation"), authorizes the Corporation to issue a total of 40,000,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"), which may be divided into one or more series as the Board of Directors may determine;
WHEREAS, the Certificate of Incorporation of the Corporation expressly vests in the Board of Directors the authority to fix and determine the designations, powers, preferences and rights, and the qualifications, limitations and restrictions, of the Preferred Stock;
WHEREAS, the Board of Directors deems it advisable to designate a series of the Preferred Stock consisting of 5,000,000 shares designated as 7% Series B Convertible Preferred Stock; and
WHEREAS, immediately prior to the filing of this Certificate of Designation with the Secretary of State of the State of Delaware, the Corporation filed an amendment to its Certificate of Incorporation which, among other things, gave effect to a one-for-ten reverse stock split of the Corporation's common stock, $.01 par value per share.
NOW, THEREFORE, IT IS HEREBY RESOLVED, that pursuant to Article IV of the Certificate of Incorporation of the Corporation, there be and hereby is authorized and created a series of Preferred Stock hereby designated as 7% Series B Convertible Preferred Stock, to consist of 5,000,000 shares, having a par value of $.01 per share, which series shall have the voting rights, designations, powers, preferences, relative and other special rights, and the qualifications, limitations and restrictions set forth below:
Series B Convertible Preferred Stock. 5,000,000 of the authorized shares of Preferred Stock are hereby designated "7% Series B Convertible Preferred Stock" (the "Series B Preferred Stock"). The rights, preferences, privileges, restrictions and other matters relating to the Series B Preferred Stock are as follows:
(a) Dividend Rights.
(i) Subject to the right of any other series of Preferred Stock that may from time to time come into existence and which is expressly senior to the rights of the Series B Preferred Stock, the holders of Series B Preferred Stock, in preference to the holders of common stock, par value $.01 per share, of the Corporation (the "Common Stock"), the Series A Junior Participating Preferred Stock, par value $.01 per share, of the Corporation and any other stock of the Corporation hereafter created which shall be junior to the Series B Preferred Stock (together, "Series B Junior Stock"), shall be entitled to receive dividends, when, as and if declared by the Board of Directors, but only out of funds that are legally available therefor, at the rate of 7% of the Series B Original Issue Price (as defined below) per annum (the "Series B Dividend Rate") on each outstanding share of Series B Preferred Stock (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares). For any share of Series B Preferred Stock, such dividends shall begin to accrue commencing upon the first date such share is issued and becomes outstanding and shall be payable semi-annually in cash on January 1 and July 1 of each year, beginning on July 1, 2002 (each, a "Dividend Payment Date"), provided, that, (i) if any such Dividend Payment Date is not a Business Day, then any such dividend shall be payable on the next Business Day, and (ii) any such dividend shall be payable only as the Board of Directors may from time to time determine, and only when, as and if declared by the Board of Directors. Subject to the foregoing, any such dividend shall be paid to the holders of record at the close of business on the date specified by the Board of Directors at the time such dividend is declared, provided, however, that such date may not be more than 60 days nor less than 10 days prior to the applicable dividend payment date. Such dividends shall accrue day by day and shall be cumulative, whether or not declared by the Board of Directors and whether or not there shall be funds legally available for the payment of dividends. The original issue price of the Series B Preferred Stock shall be $5.10 (the "Series B Original Issue Price"). Dividends payable for any period shorter or longer than a semi-annual dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. Dividends in arrears may be declared by the Board of Directors and paid on any date fixed by the Board of Directors, without reference to any regular Dividend Payment Date. Any dividend paid upon the Series B Preferred Stock at a time when any accrued dividends for any prior periods are delinquent shall be expressly declared as a dividend in whole or partial payment of the accrued dividend for the earliest period or periods for which dividends are then delinquent, and shall be so designated to each holder to whom payment is made thereof. The term "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in the City of Chicago, Illinois are authorized or required by law to be closed.
(ii) So long as any shares of Series B Preferred Stock shall be outstanding, without the prior written consent of the holders of a majority of the then issued and outstanding shares of Series B Preferred Stock, no dividend (other than a Common Stock dividend paid pro rata to the Corporation's stockholders), whether in cash, securities or other property, shall be paid or declared, nor shall any other distribution (other than a Common
Stock dividend paid pro rata to the Corporation's stockholders) be made, on any Series B Junior Stock, nor shall any shares of any Series B Junior Stock of the Corporation be purchased, redeemed or otherwise acquired for value by the Corporation or any of its subsidiaries (except (A) for acquisitions of Common Stock by the Corporation or its subsidiaries pursuant to stock-based compensation arrangements or agreements that permit the Corporation to repurchase such shares upon termination of services to the Corporation or its subsidiaries for a price not greater than the cost thereof to the applicable service provider, (B) for acquisitions by the Corporation or its subsidiaries in whole or partial satisfaction of the exercise price or applicable tax withholding requirements in respect of any option, restricted stock or similar award made pursuant to any compensation or benefit plan, agreement or arrangement maintained or assumed by the Corporation or its subsidiaries and (C) by conversion into or exchange for Series B Junior Stock or any security convertible into or exchangeable for Series B Junior Stock) until all dividends (set forth in Section (a)(i) above) then accrued on the Series B Preferred Stock shall have been paid or declared and set apart. In the event that the Corporation shall declare a dividend or distribution payable in securities of the Corporation or of other persons (other than a dividend paid solely in shares of Common Stock), evidences of indebtedness issued by the Corporation or other persons, or options or rights to purchase any such securities or evidences of indebtedness or other assets (including cash) to the holders of the Common Stock, then the holders of the Series B Preferred Stock shall be entitled to a proportionate share of any such dividend or distribution as though the holders of the Series B Preferred Stock were the holders of the number of shares of Common Stock into which their respective shares of Series B Preferred Stock are convertible as of the record date fixed for the determination of the holders of the Common Stock entitled to receive such dividend or distribution (calculated as if the Series B Preferred Stock were convertible upon the Series B Original Issue Date and without consideration of the restriction on conversion contained in Section (d)(i) hereof).
(b) Voting Rights.
(i) General Rights. Except as otherwise provided herein or as required by
law, the Series B Preferred Stock shall be voted equally with the shares of the
Common Stock of the Corporation and not as a separate class, at any annual or
special meeting of stockholders of the Corporation, upon the following basis:
each holder of shares of Series B Preferred Stock shall be entitled to such
number of votes as shall be equal to the whole number of shares of Common Stock
into which such holder's aggregate number of shares of Series B Preferred Stock
are convertible pursuant to Section (d) hereof immediately after the close of
business on the record date fixed for such meeting or the effective date of such
written consent (calculated as if the Series B Preferred Stock were convertible
upon the Series B Original Issue Date and without consideration of the
restriction on conversion contained in Section (d)(i) hereof).
(ii) Separate Vote of Series B Preferred Stock. In addition to any other vote or consent required herein or by law, the vote of the holders of at least a majority of the
outstanding Series B Preferred Stock shall be necessary for effecting or validating the following actions:
(A) any action that authorizes, creates or results in the issuance of any class or series of stock or any other securities convertible into or exercisable for equity securities of the Corporation having rights, preferences or privileges senior to or on a parity with the Series B Preferred Stock;
(B) any increase or decrease in the authorized number of shares of Series B Preferred Stock; or
(C) any amendment, waiver, alteration or repeal of any provisions of the Certificate of Incorporation (including without limitation by merger, consolidation or otherwise) or Bylaws of the Corporation in a way that, directly or indirectly, adversely affects the rights, preferences or privileges of the Series B Preferred Stock.
(iii) Special Voting Rights. During the period beginning on the Series B Original Issue Date (as defined below), and ending on the date which is six months after the Series B Original Issue Date, the Corporation shall not consummate any Sale Transaction to which it is a party unless such Sale Transaction has been approved by the affirmative vote of the holders of at least 85% of the Series B Preferred Stock present in person or by proxy and entitled to vote at a stockholder meeting called for the purpose of approving such Sale Transaction.
(c) Liquidation Rights.
(i) Upon any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any Series B Junior Stock, subject to the rights of any series of Preferred Stock that may from time to time come into existence and which is expressly senior to the rights of the Series B Preferred Stock, the holders of Series B Preferred Stock shall be entitled to be paid in cash out of the assets of the Corporation an amount per share of Series B Preferred Stock equal to 100% of the Series B Original Issue Price (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares), plus an amount equal to accrued but unpaid dividends (the "Liquidation Preference"), for each share of Series B Preferred Stock held by each such holder. If, upon any such liquidation, dissolution, or winding up, the assets of the Corporation shall be insufficient to make payment in full of the Liquidation Preference to all holders of Series B Preferred Stock, then such assets shall be distributed among the holders of Series B Preferred Stock at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled. After the payment of the foregoing full Liquidation Preference of the Series B Preferred Stock and any other distribution that may be required with respect to any series of Preferred Stock that may from time to time come into existence, the assets of the Corporation legally available for distribution, if any, shall be distributed ratably to the
holders of the Series B Junior Stock and the Series B Preferred Stock, on
an as converted basis; provided, however, that if, in connection with a
Sale Transaction (as defined below), the holders of a share of the Common
Stock (before giving effect to the payment of the Liquidation Preference
but after giving effect to the payment of the liquidation preference of
any other class of Preferred Stock and assuming conversion in full of the
outstanding shares of Series B Preferred Stock into Common Stock) would
receive consideration with a value of at least four times the Series B
Original Issue Price (as adjusted for stock splits, stock dividends,
combinations, recapitalizations and the like), then in lieu of the
Liquidation Preference plus participation with the Series B Junior Stock
provided for above, the holders of the Series B Preferred Stock shall
receive the amount that they would be entitled to receive if all shares of
Series B Preferred Stock were converted to Common Stock immediately prior
to the Sale Transaction. The Corporation shall not enter into any Sale
Transaction that does not provide for the treatment of the holders of
Series B Preferred Stock in a manner consistent (assuming in the case of a
merger or consolidation that the assets of the Corporation legally
available for distribution equals the aggregate consideration to be
received by the Corporation's stockholders in such merger or
consolidation) with the provisions of this Section (c). In the event the
requirements of the immediately preceding sentence are not complied with
in connection with a Sale Transaction, the Corporation shall forthwith
either (A) cause the closing of such Sale Transaction to be postponed
until such time as such requirements have been complied with or (B) cancel
such Sale Transaction, in which event the rights, preferences and
privileges of the holders of the Series B Preferred Stock shall revert to
and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in Section
(c)(iv) hereof. Upon receipt by any holder of the full amount of the
distributions to such holder as contemplated by this Section (c)(i) in
respect of any share of Series B Preferred Stock, such share of Series B
Preferred Stock shall be deemed to be retired and shall no longer be
outstanding.
(ii) The following events (each a "Sale Transaction") shall be considered a liquidation under this Section:
(A) any consolidation or merger of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Corporation immediately prior to such consolidation, merger or reorganization, own less than 50% of the Corporation's voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions to which the Corporation is a direct contracting party in which in excess of 50% of the Corporation's voting power is transferred, excluding any consolidation or merger effected exclusively to change the domicile of the Corporation (an "Acquisition"); or
(B) a sale, lease or other disposition of all or substantially all of the assets of the Corporation (an "Asset Transfer").
(iii) In any of the events set forth in subparagraph (ii), if the consideration received by the Corporation or its stockholders is other than cash, its value will be deemed its fair market value as determined in good faith by the Board of Directors. Any securities shall be valued as follows:
(A) Securities not subject to restrictions on free marketability covered by subparagraph (B) below:
(1) If traded on a securities exchange or through the Nasdaq National Market (or a similar national quotation system), the value shall be deemed to be the average of the closing prices of the securities on such quotation system over the 30 day period ending three days prior to the closing;
(2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the 30 day period ending three days prior to the closing; and
(3) If there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors.
(B) The method of valuation of securities subject to restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in subparagraphs (iii)(A)(1), (2) or (3) to reflect the approximate fair market value thereof, as determined in good faith by the Board of Directors.
(iv) Written notice of any such liquidation, dissolution or winding up (or deemed liquidation, dissolution or winding up) of the Corporation within the meaning of this Section, which states the payment date, the place where said payments shall be made and the date on which conversion rights as set forth herein terminate as to such shares (which shall be not less than 10 days after the date of such notice), shall be given by first class mail, postage prepaid, or by telecopy or facsimile, not less than 20 days prior to the payment date stated therein, to the then holders of record of Series B Preferred Stock, such notice to be addressed to each such holder at its address as shown on the records of the Corporation.
(d) Conversion Rights. The holders of the Series B Preferred Stock shall have the following rights with respect to the conversion of the Series B Preferred Stock into shares of Common Stock:
(i) Optional Conversion. Subject to and in compliance with the provisions of this Section (d), any shares of Series B Preferred Stock may, at the option of the holder, be converted at any time on and after the date which is six months after the Series B Original
Issue Date into fully-paid and nonassessable shares of Common Stock. The number of shares of Common Stock to which a holder of Series B Preferred Stock shall be entitled upon conversion shall be the product obtained by multiplying the "Series B Preferred Conversion Rate" then in effect (determined as provided in subsection (ii)) by the number of shares of Series B Preferred Stock being converted.
(ii) Series B Preferred Conversion Rate. The conversion rate in effect at any time for conversion of the Series B Preferred Stock (the "Series B Preferred Conversion Rate") shall be the quotient obtained by dividing the Series B Original Issue Price by the "Series B Preferred Conversion Price," calculated as provided in subsection (iii) below.
(iii) Series B Preferred Conversion Price. The conversion price for the Series B Preferred Stock shall initially be the Series B Original Issue Price (the "Series B Preferred Conversion Price"). Such initial Series B Preferred Conversion Price shall be adjusted from time to time in accordance with this Section (d). All references to the Series B Preferred Conversion Price herein shall mean the Series B Preferred Conversion Price as so adjusted.
(iv) Mechanics of Conversion. Each holder of Series B Preferred Stock who desires to convert the same into shares of Common Stock pursuant to this Section (d) shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or any transfer agent for the Series B Preferred Stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same. Such notice shall state the number of shares of Series B Preferred Stock being converted. Thereupon, the Corporation shall promptly issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled and shall promptly pay in cash (at the Common Stock's fair market value determined by the Board of Directors as of the date of conversion) the value of any fractional share of Common Stock otherwise issuable to any holder of Series B Preferred Stock. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of Series B Preferred Stock to be converted, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date.
(v) Adjustment Upon Common Stock Event. Upon the happening of a Common Stock Event (as hereinafter defined) at any time or from time to time after the date that the first share of Series B Preferred Stock is issued (the "Series B Original Issue Date"), the Series B Preferred Conversion Price shall, simultaneously with the happening of such Common Stock Event, be adjusted by multiplying the Series B Preferred Conversion Price in effect immediately prior to such Common Stock Event by a fraction, (i) the numerator of which shall be the number of shares of Common Stock issued and outstanding immediately prior to such Common Stock Event, and (ii) the denominator of which shall be the number of shares of Common Stock issued and outstanding immediately after such Common Stock Event, and the product so obtained shall thereafter be the Series B Preferred Conversion
Price. The Series B Preferred Conversion Price shall be readjusted in the same manner upon the happening of each subsequent Common Stock Event. As used in this Section (d), the term "Common Stock Event" shall mean (i) the issue by the Corporation of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise), or (iii) a combination or consolidation, by reclassification or otherwise, of the outstanding shares of Common Stock into a smaller number of shares of Common Stock (unless the Series B Preferred Stock is combined, consolidated or reclassified on an equal basis).
(vi) Adjustment for Other Dividends and Distributions. If at any time or from time to time after the Series B Original Issue Date the Corporation pays a dividend or makes another distribution to the holders of the Common Stock (or fixes a record date for the determination of holders of Common Stock entitled to receive such dividend or other distribution) payable in securities of the Corporation or any of its subsidiaries other than shares of Common Stock, then in each such event provision shall be made so that the holders of Series B Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable upon conversion thereof, the amount of securities of the Corporation or such subsidiary which they would have received had their Series B Preferred Stock been converted into Common Stock (determined as if the Series B Preferred Stock were convertible upon the Series B Original Issue Date and without consideration of the restriction on conversion contained in Section (d)(i) hereof) on the date of such event (or such record date, as applicable) and had they thereafter, during the period from the date of such event (or such record date, as applicable) to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section (d) with respect to the rights of the holders of the Series B Preferred Stock or with respect to such other securities by their terms. Notwithstanding the foregoing, the adjustment provided by this Section (d)(vi) shall not be made if the holders of the Series B Preferred Stock shall have received a proportionate dividend as provided in Section (a)(ii).
(vii) Adjustment for Reclassification, Exchange and Substitution. If
at any time or from time to time after the Series B Original Issue Date,
the Common Stock issuable upon the conversion of the Series B Preferred
Stock is changed into the same or a different number of shares of any
class or classes of stock, whether by recapitalization, reclassification
or otherwise (other than an Acquisition or Asset Transfer as defined in
Section (c) or a subdivision or combination of shares or stock dividend or
a reorganization, merger, consolidation or sale of assets provided for
elsewhere in this Section (d)), in any such event each holder of Series B
Preferred Stock shall have the right thereafter (to the extent such Series
B Preferred Stock is convertible as otherwise provided herein) to convert
such Series B Preferred Stock into the kind and amount of stock and other
securities and property receivable upon such recapitalization,
reclassification or other change by holders of the maximum number of
shares of Common Stock into which such shares of Series B Preferred Stock
could have been converted immediately prior to such recapitalization,
reclassification or change (determined as if the Series B Preferred Stock
were convertible upon the Series B Original Issue Date and without
consideration of the restriction on conversion contained in Section (d)(i)
hereof), all subject to further adjustment as provided herein or with
respect to such other securities or property by the terms thereof. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Section (d) with respect to the rights of the holders
of Series B Preferred Stock after such recapitalization, reclassification
or other change (including adjustment of the Series B Preferred Conversion
Price then in effect and the number of shares issuable upon conversion of
the Series B Preferred Stock), to the end that the provisions of this
Section (d) shall be applicable after that event and be as nearly
equivalent as practicable.
(viii) Adjustment for Reorganizations, Mergers or Consolidations. If at any time or from time to time after the Series B Original Issue Date, there is a capital reorganization of the Common Stock or the merger or consolidation of the Corporation with or into another corporation or another entity or person (other than an Acquisition or Asset Transfer as defined in Section (c) or a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for elsewhere in this Section (d)), as a part of such capital reorganization, merger or consolidation, provision shall be made so that the holders of the Series B Preferred Stock, if any shares thereof remaining outstanding thereafter, shall thereafter be entitled to receive upon conversion of the Series B Preferred Stock the number of shares of stock or other securities or property which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger or consolidation, subject to adjustment in respect of such stock or securities by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section (d) with respect to the rights of the holders of Series B Preferred Stock after the capital reorganization, merger or consolidation (including adjustment of the Series B Preferred Conversion Price then in effect and the number of shares issuable upon conversion of the Series B Preferred Stock), to the end that the provisions of this Section (d) shall be applicable after that event and be as nearly equivalent as practicable.
(ix) Notices of Record Date. Upon (i) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (ii) any Acquisition (as defined in Section (c)) or other capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation with or into any other entity, or any Asset Transfer (as defined in Section (c)), or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series B Preferred Stock at least 10 days prior to the record date specified therein (or such shorter period approved by a majority of the outstanding Series B Preferred Stock) a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or
winding up is expected to become effective, and (C) the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or winding up.
(x) Automatic Conversion.
(A) Each share of Series B Preferred Stock shall automatically be converted into shares of Common Stock, based on the then-effective Series B Preferred Conversion Price, (i) with respect to holders of the Series B Preferred Stock other than the Investors (as defined below), if at any time after six months from the Series B Original Issue Date the Common Stock has a Closing Price (as defined below) of at least five times the Series B Original Issue Price (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) for thirty consecutive trading days, and (ii) with respect to the Investors, if at any time after six months from the Series B Original Issue Date (y) the Common Stock has a Closing Price (as defined below) of at least five times the Series B Original Issue Price (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) for thirty consecutive trading days, and (z) the Shelf Registration as defined in and provided for in the Amended and Restated Investor Rights Agreement, dated as of December 19, 2001 (as the same may be amended from time to time, the "Investor Agreement"), between the Corporation and the investors named on Exhibit A thereto (collectively with the Holders, as such term is defined in the Investor Agreement, the "Investors") has become effective under the Securities Act of 1933, as amended, and is available for sales of Common Stock by the Investors thereunder (to the extent the requirement to maintain such Shelf Registration effective has not at such time lapsed pursuant to Section 5 of such Investor Agreement). For purposes of this Section (d)(x), the term "Closing Price" shall mean (1) if the Common Stock is traded on a securities exchange or through the Nasdaq National Market (or a similar national quotation system), the closing price of the Common Stock on such exchange or the last sale price of the Common Stock on such quotation system, and (2) if clause (1) is inapplicable, the closing bid or sale price (whichever is applicable) in the over-the-counter market.
(B) Upon the occurrence of any of the events specified in subparagraph (A), the applicable outstanding shares of Series B Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless the certificates evidencing such shares of Series B Preferred Stock are either delivered to the Corporation or its transfer agent as provided below, or the
holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Upon the occurrence of such automatic conversion of any of the Series B Preferred Stock, (y) the Corporation shall notify (the "Automatic Conversion Notice") each holder of such Series B Preferred Stock who is shown to be such a holder on the books of the Corporation as of the time immediately prior to such conversion, and (z) the holders of such Series B Preferred Stock shall surrender the certificates representing such shares at the office of the Corporation or any transfer agent for the Series B Preferred Stock, which shall be designated in the Automatic Conversion Notice. Thereupon, there shall be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of Series B Preferred Stock surrendered were convertible on the date on which such automatic conversion occurred. Until such time as a holder of shares of Series B Preferred Stock shall surrender his or its certificates therefor as provided above, such certificates shall be deemed to represent the shares of Common Stock to which such holder shall be entitled pursuant to the terms hereof.
(xi) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of Series B Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series B Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the Corporation shall, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the Common Stock's fair market value (as determined by the Board of Directors) on the date of conversion.
(xii) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series B Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series B Preferred Stock. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Preferred Stock, the Corporation will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.
(xiii) Notices. Any notice required by the provisions of this
Section (d) shall be in writing and shall be deemed effectively given: (i)
upon personal delivery to the party to be notified, (ii) when sent by
confirmed electronic mail or facsimile if sent during normal business
hours of the recipient; if not, then on the next business day, (iii) five
days after
having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Corporation.
(xiv) Payment of Taxes. The Corporation will pay all taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of Series B Preferred Stock, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Series B Preferred Stock so converted were registered.
(xv) No Impairment. The Corporation shall not avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but shall at all times in good faith assist in carrying out all such actions as may be reasonably necessary or appropriate in order to protect the conversion rights of the holders of the Series B Preferred Stock against impairment.
(xvi) Satisfaction of Accrued Dividends. Except as otherwise expressly provided, upon the conversion of any shares of Series B Preferred Stock into Common Stock as provided herein, the Corporation shall pay holders thereof all accrued but unpaid dividends out of funds legally available therefor.
(e) Waiver. Any rights of the holders of Series B Preferred Stock set forth herein, other than the voting rights set forth in Section (b)(iii), may be waived by the affirmative vote or consent of the holders of a majority of the shares of Series B Preferred Stock then outstanding.
(f) Limitation on Reissuance of Shares. No share of shares of Series B Preferred Stock acquired by the Corporation by reason of purchase, conversion or otherwise shall be reissued, and all such shares shall be cancelled, retired and eliminated from the shares of Series B Preferred Stock that the Corporation is authorized to issue.
(g) Limitation on Transfer. The Series B Preferred Stock shall not be eligible to be transferred on the books of the Corporation prior to the one year anniversary of the Series B Original Issue Date except for transfers: (i) in connection with a Sale Transaction, (ii) in any transaction in which a holder that is a partnership or limited liability company distributes Series B Preferred Stock solely to its affiliates (including affiliated fund partnerships), current or former partners or members thereof, or (ii) by will or by the laws of intestate succession. Certificates issued in respect of the Series B Preferred Stock within one year after the Series B Original Issue Date shall bear a legend referencing the restrictions set forth in this Section (g).
This Certificate of Designations, and the designations effected hereby, shall become effective upon filing.
IN WITNESS WHEREOF, eLoyalty Corporation has caused this certificate to be signed by Kelly D. Conway, its President and Chief Executive Officer, and the same to be attested to by Timothy J. Cunningham, its Senior Vice President and Chief Financial Officer, this 19th day of December, 2001.
eLOYALTY CORPORATION
By: /s/ Kelly D. Conway
-----------------------------------------
Name: Kelly D. Conway
Title: President and Chief Executive Officer
Attest:
By: /s/ Timothy J. Cunningham
--------------------------------
Name: Timothy J. Cunningham
Title: Senior Vice President and Chief Financial Officer
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Exhibit 4.3
CERTIFICATE OF ADJUSTMENT
OF
eLOYALTY CORPORATION
To: Mellon Investor Services LLC, as Rights Agent
Each Transfer Agent for the Common Stock and Preferred Stock of
eLoyalty Corporation
eLOYALTY CORPORATION, a corporation organized and existing under the
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laws of the State of Delaware (the "Company"), does hereby certify as follows:
1. The Company is a party to the Rights Agreement, dated as of March 17, 2000, as amended (the "Agreement"), between the Company and Mellon Investor Services LLC (formerly known as ChaseMellon Shareholder Services, L.L.C.), as Rights Agent (the "Rights Agent").
2. Effective as of 7:59 a.m., eastern standard time, on December 19, 2001 (the "Effective Time"), the Company effected a 1-for-10 reverse stock split, whereby each ten shares of the common stock, par value $0.01 per share, of the Company (the "Common Stock") issued as of immediately prior to the Effective Time were reclassified into one share of new Common Stock, par value $0.01 per share, of the Company, with fractional shares settled in cash (the "Reclassification").
3. Section 11 of the Agreement provides that in the event of any combination of shares of Common Stock into a smaller number of shares, then, in such case, the number of Rights (as defined in the Agreement) associated with each share of Common Stock then outstanding, or issued or delivered thereafter (but prior to the Distribution Date, as defined in the Agreement), shall be proportionately adjusted so that the number of Rights thereafter associated with each share of Common Stock following any such event shall equal the result obtained by multiplying the number of Rights associated with each share of Common Stock immediately prior to such event by a fraction the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to the occurrence of the event and the denominator of which shall be the total number of shares of Common Stock outstanding immediately following the occurrence of such event.
4. Whenever an adjustment is made as provided in Section 11 of the Agreement, the Company must, pursuant to Section 12 of the Agreement, among other things, (a) prepare a certificate setting forth the adjustment and a brief statement of the facts and computations accounting therefor and (b) file a copy of such certificate with the Rights Agent and each transfer agent for the Common Stock and the Company's Preferred Stock (as defined in the Agreement).
5. Pursuant to Section 12 of the Agreement, notification is hereby given that the number of Rights associated with each share of Common Stock has been adjusted from one (1) Right to ten (10) Rights.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of Adjustment as of this 10th day of January, 2002.
eLOYALTY CORPORATION
By: /s/ Timothy J. Cunningham
-----------------------------
Name: Timothy J. Cunningham
Title: Senior Vice President and
Chief Financial Officer
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EXHIBIT 10.13
ELOYALTY CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED AND RESTATED AS OF NOVEMBER 6, 2001)
1. Purpose. The purpose of the eLoyalty Corporation 1999 Employee Stock Purchase Plan (the "Plan") is to provide employees of eLoyalty Corporation, a Delaware corporation (the "Company"), and its Subsidiary Companies (as defined in Section 15) added incentive to remain employed by such companies and to encourage increased efforts to promote the best interests of such companies by permitting eligible employees to purchase shares of the common stock, par value $.01, of the Company ("Common Stock") at below-market prices. The Plan is intended to qualify as an "employee stock purchase plan" under section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The Company and its Subsidiary Companies are sometimes hereinafter called individually a "Participating Company" or collectively the "Participating Companies."
2. Eligibility. Participation in the Plan shall be open to each employee of the Participating Companies (a) who has been continuously employed by the Participating Companies for at least three months, (b) whose customary employment by the Participating Companies is greater than 20 hours per week; and (c) whose customary employment by the Participating Companies is more than five months in any calendar year (each an "Eligible Employee") or any of its subsidiaries. No right to purchase Common Stock hereunder shall accrue under the Plan in favor of any person who is not an Eligible Employee as of the first day of a Purchase Period (as defined in Section 4). Notwithstanding anything contained in the Plan to the contrary, no Eligible Employee shall acquire a right to purchase Common Stock hereunder (i) if, immediately after receiving such right, such employee would own 5% or more of the total combined voting power or value of all classes of stock of the Company or any Subsidiary Company (including any stock attributable to such employee under section 424(d) of the Code), or (ii) if for a given calendar year such right would permit such employee's aggregate rights to purchase stock under all employee stock purchase plans of the Company and its Subsidiary Companies or
Parent Corporation (which aggregate rights are exercisable during such calendar year) to accrue at a rate which exceeds $25,000 of fair market value of such stock for such calendar year, all determined in the manner provided by section 423(b)(8) of the Code and the rules and regulations thereunder. In addition, the number of shares of Common Stock which may be purchased by any Eligible Employee during any Purchase Period shall not exceed 1,500, subject to adjustment pursuant to Section 14. Notwithstanding the foregoing, effective upon the implementation of the one-for-ten reverse stock split (which reverse stock split is expected to be submitted to the stockholders for their approval at the Special Meeting of stockholders anticipated to be held on December 18, 2001 (the "Special Meeting")) the number of shares of Common Stock that may be purchased by any Eligible Employee during any Purchase Period shall not exceed 200, subject to further adjustment pursuant to Section 14.
3. Effective Date of Plan. The Plan was adopted by the Board of Directors (the "Board") on October 21, 1999, and thereafter approved by the stockholders of eLoyalty. The Plan became effective on February 16, 2000 (the "Effective Date"), one day after the record date of the pro rata distribution by Technology Solutions Company ("TSC") to its stockholders of all of the shares of Common Stock then owned by TSC.
4. Purchase Periods. The first "Purchase Period" shall be the period beginning on the Effective Date and ending on the last business day of the calendar quarter in which the Effective Date occurs (or the last business day of the first calendar quarter beginning after the Effective Date, if so determined by the Committee prior to the Effective Date in its sole discretion), and shall be followed thereafter by successive three-month Purchase Periods, each of which shall begin on the first business day of the following calendar quarter and end on the last business day of such calendar quarter.
5. Basis of Participation.
(a) Each Eligible Employee shall be entitled to enroll in the Plan as of the first day of any Purchase Period which begins on or after such employee becomes an Eligible Employee and shall be considered a Participant in the Plan thereafter (a "Participant").
(i) To enroll in the Plan, an Eligible Employee shall execute and deliver a payroll deduction authorization (the "Authorization") to the Participating Company which is the Eligible Employee's employer, or its designated agent, in the time and manner specified by the Committee. The Authorization shall become effective on the first day of the Purchase Period commencing after the execution and delivery of such Authorization. Each Authorization shall direct that payroll deductions be made by the Participating Company which is the Eligible Employee's employer for each payroll period during which the Eligible Employee is a Participant in the Plan. The amount of each payroll deduction specified in an Authorization for each such payroll period shall be a whole percentage amount or a whole dollar amount, as determined by the Committee, in either case not to exceed 15%, or such lesser percentage as may be determined by the Committee, of the Participant's current regular wage, salary or earned commissions (before withholding or other deductions) paid to him or her by any of the Participating Companies.
(ii) Payroll deductions (and any other amount paid under the Plan) shall be made for each Participant in accordance with his or her or her Authorization until his or her participation in the Plan terminates or the Plan terminates, all as hereinafter provided.
(iii) A Participant may change the amount of his or her payroll deduction by filing a new Authorization with the Company or its designated agent, which shall become effective on the first day of the Purchase Period commencing after the execution and delivery of such Authorization. No other changes shall be permitted, except that a Participant may elect to terminate his or her participation in the Plan as provided in Section 8.
(iv) Payroll deductions shall be credited to a purchase
account established on the books of the Company on behalf of each
Participant (a "Purchase Account"). At the end of each Purchase Period,
the amount in each Participant's Purchase Account will be applied to
the purchase from the Company of the number of shares of Common Stock
determined by dividing such amount by the Purchase Price (as defined in
Section 6) for such Purchase Period.
(b) The Committee may, in its discretion, establish additional procedures whereby Eligible Employees may participate in the Plan by means other than payroll deduction, including, but not limited to, delivery of funds by Participants in a lump sum or automatic charges to Participants' bank accounts. Such other methods of participating shall be subject to such rules and conditions as the Committee may establish. The Committee may at any time amend, suspend or terminate any participation procedures established pursuant to this paragraph (b) without prior notice to any Participant or Eligible Employee.
6. Purchase Price. The purchase price (the "Purchase Price") per share of Common Stock hereunder for any Purchase Period shall be 85% of the lesser of (i) the fair market value of a share of Common Stock on the first day of such Purchase Period and (ii) the fair market value of a share of Common Stock on the last day of such Purchase Period, unless, prior to the beginning of such Purchase Period, the Committee shall determine otherwise (subject to the limitations contained in clause (iii) of Section 9(c)). If such determination results in a fraction of one cent, the Purchase Price shall be increased to the next higher full cent. The fair market value of a share of Common Stock on a given day shall be the average of the high and low transaction prices of a share of Common Stock as reported on The Nasdaq Stock Market(SM) on the date as of which such value is being determined or, if there shall be no reported transactions on such date, on the next preceding date for which transactions were reported. In no event, however, shall the Purchase Price be less than the par value of the Common Stock.
Notwithstanding the foregoing, effective upon implementation of the one-for-ten reverse stock split (which reverse stock split is expected to be submitted to the stockholders for their approval at the Special Meeting) and the effectiveness of such reverse stock split, the fair market value of a share of Common Stock on the first day of the Purchase Period beginning October 1, 2001 shall be adjusted to reflect the one-for-ten reverse stock split by multiplying the fair market value of a share of Common Stock on such date by ten.
7. Issuance of Shares.
(a) The Common Stock purchased by each Participant shall be considered to be issued and outstanding to his or her credit as of the close of business on the last day of each Purchase Period. The
total number of shares of Common Stock purchased by all Participants during each Purchase Period shall be issued, as of the last day in such Purchase Period, to a nominee or agent for the benefit of the Participants. A Participant will be issued a certificate for his or her shares upon the request of the Participant in accordance with procedures, including the payment of any applicable fees by the Participant, established by the Company.
(b) No interest shall accrue at any time for any amount credited to a Purchase Account of a Participant. After the close of each Purchase Period, a report will be sent to each Participant stating the entries made to his or her Purchase Account, the number of shares of Common Stock purchased and the applicable Purchase Price.
8. Termination of Participation.
(a) A Participant may elect at any time to terminate his or her participation in the Plan, provided such termination is received by the Company in writing prior to the last business day of the Purchase Period for which such termination is to be effective. Upon any such termination, the Company shall promptly deliver to such Participant cash in an amount equal to the balance to his or her credit in his or her Purchase Account on the date of such termination. At any time after such termination, the Participant may request the delivery to such Participant of one or more certificates for the number of whole shares of Common Stock held for his or her benefit, and the cash equivalent for any fractional share so held. Such cash equivalent shall be determined by multiplying the fractional share by the fair market value of a share of Common Stock on the last day of the Purchase Period immediately preceding such termination, determined as provided in Section 6.
(b) If the Participant dies, terminates his or her employment with the Participating Companies for any reason, or otherwise ceases to be an Eligible Employee (including, without limitation, as a result of a Participating Company ceasing to be a Subsidiary Company), his or her participation in the Plan shall immediately terminate. Upon such terminating event, the Company shall promptly deliver to such Participant or his or her legal representative, as the case may be, cash in an amount equal to the balance to his or her credit in his or her Purchase Account on the date of such termination.
9. Termination or Amendment of the Plan.
(a) The Company, by action of the Board or the Committee, may terminate the Plan at any time. Notice of termination shall be given to all Participants, but any failure to give such notice shall not impair the effectiveness of the termination.
(b) Without any action being required, the Plan will terminate in any event when the maximum number of shares of Common Stock to be sold under the Plan (as provided in Section 13) has been purchased. Such termination shall not impair any rights under the Plan that shall have vested on or prior to the date of such termination. If at any time the number of shares remaining available for purchase under the Plan are not sufficient to satisfy all then-outstanding purchase rights, the Board may determine an equitable basis of apportioning available shares among all Participants consistent with Section 423 of the Code.
(c) The Board or the Committee may amend the Plan from time to time in any respect for any reason; provided, however, no such amendment shall (i) materially adversely affect any purchase rights outstanding under the Plan during the Purchase Period in which such amendment is to be effected, (ii) unless approved by the stockholders of the Company, increase the maximum number of shares of Common Stock which may be purchased under the Plan, (iii) decrease the Purchase Price of the shares of Common Stock for any Purchase Period below the lesser of 85% of the fair market value thereof on the first day of such Purchase Period and 85% of the fair market value thereof on the last day of such Purchase Period, (iv) unless approved by the stockholders of the Company, change the class of employees eligible to participate in the Plan or (v) adversely affect the qualification of the Plan under section 423 of the Code.
(d) Upon termination of the Plan, the respective cash balance, if any, to the credit of each Participant in his or her Purchase Account, one or more certificates for the number of whole shares of Common Stock held for his or her benefit, and the cash equivalent of any fractional share so held, determined as provided in Section 8(a), shall be promptly distributed to such Participant.
10. Non-Transferability. Rights acquired under the Plan are not transferable and may be exercised only by a Participant.
11. Stockholder's Rights. No Eligible Employee or Participant shall by reason of the Plan have any rights of a stockholder of the Company until and to the extent he or she shall acquire shares of Common Stock as herein provided.
12. Administration of the Plan.
(a) The Plan shall be administered by: (i) the Compensation Committee of the Board or (ii) any one or more other committees consisting of two or more members of the Board, which in any case have been designated by the Board to administer the Plan (the "Committee"). Notwithstanding the foregoing, in the absence of any such delegation to the Compensation or other committee, references herein to the Committee will refer to the Board. In addition to the power to amend or terminate the Plan pursuant to Section 9, the Committee shall have full power and authority to: (A) interpret and administer the Plan and any instrument or agreement entered into under the Plan; (B) establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (C) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Decisions of the Committee shall be final, conclusive and binding upon all persons, including the Company, any Participant and any other employee of the Company. A majority of the members of the Committee may determine its actions and fix the time and place of its meetings.
(b) The Plan shall be administered so as to ensure all Participants have the same rights and privileges as required by section 423(b)(5) of the Code.
13. Maximum Number of Shares. Subject to the following
sentence, the maximum number of shares of Common Stock that may be purchased
under the Plan is 1,250,000, subject, however, to adjustment pursuant to Section
14. Effective upon the implementation of the one-for-ten reverse stock split
(which reverse stock split is expected to be submitted to the stockholders for
their approval at the Special Meeting), the maximum number of shares of Common
Stock that may be purchased under the
Plan is 125,000, subject to adjustment pursuant to Section 14. Shares of Common Stock sold hereunder may be treasury shares, authorized and unissued shares, or a combination thereof.
14. Adjustment. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a regular cash dividend, the maximum number and class of securities which may purchased under this Plan, the maximum number and class of securities that may be purchased by any Eligible Employee during any Purchase Period, and the purchase price per security shall be appropriately adjusted by the Committee. The decision of the Committee regarding any such adjustment shall be final, binding and conclusive. If any such adjustment would result in a fractional security being available under this Plan, such fractional security shall be disregarded.
15. Miscellaneous.
(a) Except as otherwise expressly provided herein, any Authorization, election, notice or document under the Plan from an Eligible Employee or Participant shall be delivered to the Company, the Participating Company that is the employer of such Eligible Employee, or their designated agents and, subject to any limitations specified in the Plan, shall be effective when so delivered.
(b) The term "business day" shall mean any day other than Saturday, Sunday or a legal holiday recognized by the Participating Company by which the Participant is employed.
(c) The term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
(d) The term "Parent Corporation" shall mean any corporation which is, or becomes, after the Effective Date, a parent corporation of the Company (within the meaning of Section 424(e) of the Code).
(e) The term "Subsidiary Companies" shall mean all corporations which are, or become, after the Effective Date, subsidiary corporations (within the meaning of Section 424(f) of the Code) and of which the Company is the common parent.
(f) The Plan, and the Company's obligation to sell and deliver Common Stock hereunder, shall be subject to all applicable federal, state and foreign laws, rules and regulations, and to such approval by any regulatory or governmental agency as may, in the opinion of counsel for the Company, be required.
16. Change in Control.
(a) In the event of any Change in Control of the Company, as hereinafter defined, the Purchase Period then in progress will terminate immediately prior to the consummation of the Change in Control, all Participants' Purchase Accounts shall be applied to purchase shares of Common Stock pursuant to Section 6, and the Plan shall terminate immediately thereafter.
(b) "Change in Control" for the purposes hereof means the occurrence of any of the following events after the Effective Date:
(i) the acquisition by any individual, entity or group (a
"Person"), including any "person" within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act, of beneficial ownership
within the meaning of Rule 13d-3 promulgated under the Exchange Act, of
25% or more of either (A) the then outstanding shares of common stock
of the Company (the "Outstanding Common Stock") or (B) the combined
voting power of the then outstanding securities of the Company entitled
to vote generally in the election of directors (the "Outstanding Voting
Securities"); excluding, however, the following: (1) any acquisition
directly from the Company (excluding any acquisition resulting from the
exercise of an exercise, conversion or exchange privilege, unless the
security being so exercised, converted or exchanged was acquired
directly from the Company); (2) any acquisition by the Company; (3) any
acquisition by an employee benefit plan (or related trust) sponsored or
maintained by the Company or any Subsidiary Corporation; or (4) any
acquisition by any corporation pursuant to a transaction which complies
with clauses (A), (B) and (C) of subsection (iii) of this Section
16(b); provided further, that for purposes of clause (2) above, if any
Person (other than the Company or any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation
controlled by the Company) shall become the beneficial owner of 25% or
more of the Outstanding Common Stock or 25% or more
of the Outstanding Voting Securities by reason of an acquisition by the Company, and such Person, after such acquisition by the Company, becomes the beneficial owner of any additional shares of the Outstanding Common Stock or any additional Outstanding Voting Securities and such beneficial ownership is publicly announced, such additional beneficial ownership will constitute a Change in Control;
(ii) individuals who, as of the Effective Date, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided that any individual who becomes a director of the Company subsequent to the Effective Date whose election, or nomination for election by the Company's stockholders, was approved by the vote of at least a majority of the directors then comprising the Incumbent Board, will be deemed a member of the Incumbent Board; and provided further, that any individual who was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board, will not be deemed a member of the Incumbent Board;
(iii) the consummation of a reorganization, merger or consolidation of the Company or sale or other disposition of all or substantially all of the assets of the Company (a "Corporate Transaction"); excluding, however, a Corporate Transaction pursuant to which (A) all or substantially all of the individuals or entities who are the beneficial owners, respectively, of the Outstanding Common Stock and the Outstanding Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the outstanding securities of such corporation entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation which, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or indirectly) in substantially the same
proportions relative to each other as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Common Stock and the Outstanding Voting Securities, as the case may be, (B) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or a Subsidiary Corporation, the corporation resulting from such Corporate Transaction, and any Person who beneficially owned, immediately prior to such Corporate Transaction, directly or indirectly, 25% or more of the Outstanding Common Stock or the Outstanding Voting Securities, as the case may be) will beneficially own, directly or indirectly, 25% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding securities of such corporation entitled to vote generally in the election of directors and (C) individuals who were members of the Incumbent Board will constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction; or
(iv) the consummation of a plan of complete liquidation or dissolution of the Company. Notwithstanding the foregoing, in no event will the transactions contemplated by the Share Purchase Agreement dated September 24, 2001 between the Company and affiliates of Technology Crossover Ventures and Sutter Hill Ventures (the "Private Placement"), the distribution to the holders of record of the Company's common stock on October 8, 2001 of non-transferable rights to purchase shares of the Company's 7% Series B convertible preferred stock (the "Rights Offering") or the distribution of any securities of the Company in connection therewith (whether through the purchase of such preferred stock or the conversion thereof into common stock) be deemed to constitute a "Change in Control" for purposes of the Plan.
EXHIBIT 10.25
PROMISSORY NOTE
U.S. $85,000.00 December 28, 2001
FOR VALUE RECEIVD, the undersigned, KELLY D. CONWAY, of 950 Woodbine Place, Lake Forest, Illinois 60045 ("Borrower"), hereby unconditionally promises to pay to the order of eLoyalty Corporation, a Delaware corporation ("Lender"), having its principal office at 150 Field Drive, Suite 250, Lake Forest, Illinois 60045, in lawful money of the United States of America and in immediately available funds, the principal sum of EIGHTY FIVE THOUSAND AND NO/100 DOLLARS ($85,000.00), together with interest on the principal and accrued interest balance from time to time outstanding at the rate of TWO AND FORTY-EIGHT HUNDREDTHS percent (2.48%) per annum from the date hereof until payment in full on November 12, 2003 (the "Payment Date") in accordance with this Promissory Note; provided, however, that if Borrower has been employed by Lender, or any parent or subsidiary company of Lender, from the date hereof through and including the Payment Date, then the entire outstanding principal indebtedness hereunder, plus interest accrued on such amount, shall be discharged and forgiven by Lender and shall no longer be due and, accordingly, Borrower shall have no further obligation to Lender hereunder.
Borrower, however, shall be responsible for income tax on the principal plus interest, if and when they are recognized as income, which shall be withheld by Lender from any amounts owed by Lender to Borrower, including payroll.
Borrower, reserves the right to prepay this Note, in whole or in part, at any time without penalty. In the event of such prepayment, the amount so prepaid will be applied to principal due and interest will be adjusted accordingly.
All payments of principal and interest under this Note shall be made by Borrower to Lender, at Lender's principal place of business as set forth above, or at such other place as Lender may from time to time designate in writing.
The occurrence or existence of one or more of the following events
shall constitute an event of default ("Default") under this Note: (i) the
failure of Borrower to pay when due any principal or interest due hereunder; or
(ii) (a) Borrower shall become generally unable to pay his debts as they become
due, or (b) Borrower shall make an assignment for the benefit of creditors, or
(c) Borrower shall call a meeting of creditors for the composition of debts, or
(d) a proceeding under any bankruptcy, reorganization, arrangement of debt,
insolvency, readjustment of debt or receivership law or statute is filed by or
against Borrower, or a custodian, receiver or agent is appointed or authorized
to take charge of any of Borrower's properties, or Borrower takes any action to
authorize any of the foregoing; or (iii) Borrower shall no longer remain, for
any reason, an employee of Lender, or a parent or subsidiary company of Lender,
or (v) there shall be entered against Borrower any judgment or judgments in an
aggregate amount in excess of
$100,000, unless the amounts of such judgment or judgments are covered by insurance and liability under such insurance has been admitted by the issuer thereof.
In an event of Default, Lender may, by notice to Borrower, declare all the indebtedness evidenced by this Note to be, and thereupon such indebtedness shall become, immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Borrower; provided, however, that if the Default specified in clause (ii) (d) in the paragraph two paragraphs above occurs, the indebtedness evidenced by this Note shall automatically become due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by Borrower.
If payment hereunder becomes due and payable on a day which is not a "Business Day" (as defined below), the due date thereof shall be extended to the next succeeding Business Day, and interest shall be payable thereon during such extension at the rate specified above. "Business Day" shall mean a day on which banks in Chicago, Illinois are open for the transaction of banking business. In no case or event whatsoever shall interest charged hereunder, however such interest may be characterized or computed, exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that Lender has received interest hereunder in excess of the highest rate applicable hereto, Lender shall (i) apply such excess to any unpaid principal balance due and payable by Borrower hereunder to Lender; and (ii) if the amount of such excess exceeds the unpaid principal and other liabilities due and payable by Borrower hereunder, Lender shall remit such excess to Borrower.
Any notice hereunder shall be sufficiently given if in writing and delivered in person or mailed by first class mail addressed as follows:
IF TO BORROWER:
Kelly D. Conway
950 Woodbine Place
Lake Forest, Illinois 60045
IF TO LENDER:
eLoyalty Corporation
150 Field Drive, Suite 250
Lake Forest, IL 60045
Attention: Chief Financial Officer
Borrower and Lender may each designate additional or different addresses by notice to the other party as provided herein.
Lender shall be under no obligation to marshal any assets in favor of Borrower in payment of any or all of Borrower's liabilities hereunder. To the extent that Borrower makes a payment or payments to Lender, and such payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, provincial, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part hereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.
Any dispute between Lender and Borrower arising out of, connected with, related to, or incidental to the relationship established between them in connection with this Note, and whether arising in contract, tort, equity, or otherwise, shall be resolved in accordance with the internal laws and not the conflicts of law provisions of the State of Illinois.
Except as provided in the immediately succeeding paragraph, Lender and Borrower, each agree that all disputes between them arising out of, connected with, related to, or incidental to the relationship established between them in connection with this Note and whether arising in contract, tort, equity, or otherwise, shall be resolved only by state or federal courts located in Cook County, Illinois, but Lender and Borrower acknowledge that any appeals from those courts may have to be heard by a court located outside of Cook County, Illinois. Borrower waives any and all objections that he may have to the location of the court considering the dispute.
Borrower agrees that Lender shall have the right to proceed against Borrower or his property in a court in any location to enable Lender to enforce a judgment or other court order entered in favor of Lender. Borrower agrees that he will not assert any permissive counterclaims in proceeding brought by Lender to enforce a judgment or other court order in favor of Lender. Borrower waives any objection that he may have to the location of the court in which Lender has commenced a proceeding described in this paragraph.
Borrower waives personal service of any process upon him and consents that all such service of process be made by registered mail directed to Borrower at the address stated herein.
Borrower waives the posting of any bond otherwise required of Lender to enforce any judgment or other court order entered in favor of Lender, or to enforce this note by specific performance, temporary restraining order, preliminary or permanent injunction.
Whenever possible, each provision of this Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such Provision or the remaining provisions of this Note. Whenever in this Note reference is made to Lender or Borrower, such reference shall be deemed to include, as applicable, a reference to their respective successors and assigns, and the provisions of this Note shall be binding upon and shall inure to the benefit of said successors and assigns. Borrower's successors and assigns shall include, without limitation, a receiver, receiver and manager, trustee or debtor-in-possession of or for Borrower.
By: /s/ Kelly D. Conway
--------------------
Kelly D. Conway
Borrower
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EXHIBIT 10.26
WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
Dated December 18, 2001
ELOYALTY (UK) LIMITED
and
VAUGHAN THOMAS
COMPROMISE AGREEMENT
WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
THIS AGREEMENT is made Dec. 18, 2001
BETWEEN:
(1) "The Company" ELOYALTY (UK) LIMITED, whose registered office is at
Regina House, 5 Queen Street, London E4N 1SP; and
(2) "The Executive" VAUGHAN THOMAS of Westwind, Fitzroy Park, London N6
6HT.
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BACKGROUND
A. The Executive was employed by the Company as Senior Vice President from 1 July 2000 under the terms and conditions set out in a Contract of Employment between the Executive and the Company dated 12 May 2000 (the "Contract of Employment"), a complete copy of which is attached to this Agreement at Appendix A.
B. The Executive's employment with the Company terminated on 7th December 2001 ("the Termination Date") by reason of redundancy.
C. The Executive has sought advice from the Independent Adviser about his ability to commence proceedings against the Company regarding his employment or the termination of it in relation to unfair dismissal (including constructive, unfair dismissal), wrongful dismissal, unpaid wages, unpaid holiday pay, redundancy pay (including statutory redundancy pay), race discrimination, bonus and commission payments, stock options, restricted stock grants, damages for breach of contract (the "Claims") and any other statutory or contractual claims which he has or may have against the Company or any Group Company, or its or their agents.
D. This Agreement records the terms and conditions upon which the Company and the Executive have agreed to settle all outstanding claims that the Executive may have against the Company and/or any Group Company and/or any of its or their agents (including directors and officers), arising out of his employment and/or its termination, and it is the complete agreement between the parties regarding this matter.
E. The Company is entering into this Agreement for itself and as agent for any Group Company and is duly authorised in that respect. Any Group Company may enforce any of the terms of this Agreement in its own right. The Contracts (Rights of Third Parties) Act 1999 shall apply to this Agreement.
WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
IT IS AGREED AS FOLLOWS:-
1.1 In this Agreement the following words and expressions shall have the following meanings:-
INTERPRETATION
EXPRESSION MEANING
---------- -------
Group Company any of (i) the Company and (ii) any
Holding Company of the Company
(including but not limited to
eLoyalty Corporation) and (iii) any
Subsidiary of any such Holding
Company and (iv) any Subsidiary,
parent, shareholder, employee,
agent, officer or director of the
Company or of any Holding Company.
Independent Adviser Michael Thomas of
RadcliffesLeBrasseur, 5 Great
College Street, Westminster, London
SW1P 3SJ.
Subsidiary and Holding Company have the respective meanings given
to them by Section 736 of the
Companies Act 1985 and any reference
to the subsidiary or subsidiaries or
holding company is (unless
inconsistent with the context)
intended to be a reference to the
Subsidiary or Subsidiaries or
Holding Company respectively of the
Company in question at the relevant
time.
US Business Day Any day of any week which is not
either a Saturday, Sunday or a
public holiday in the United States
of America.
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WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
S203 ERA Section 203(3) of the Employment
Rights Act 1996.
|
1.2 References to "clauses" are references to clauses in this Agreement unless specifically stated otherwise.
2. AGREEMENTS BY THE COMPANY
Unless and until the Executive breaches any of his agreements contained in clause 3 of this Agreement, the Company agrees that:
2.1 the Executive's employment with the Company terminated with effect from 7th December 2001 (the "Termination Date"). The Company will pay the Executive his final accrued salary, and all accrued and unused reasonably documented holiday pay (7.5 days), earned up to and including the Termination Date through the payroll in the normal manner;
2.2 subject to clause 2.3 below, it will pay to the Executive a severance payment which includes a payment in lieu of the Executive's notice entitlement and is taxable in full. The severance payment made by the Company will be the sum of (pound)363,025 less basic rate Income Tax and Employee National Insurance Contributions ("the Severance Payment"). The Company will account to the Inland Revenue for the deductions of Income Tax and Employee National Insurance Contributions made. Any additional Income Tax and/or Employee National Insurance Contributions for which the Executive may be liable will be payable by the Executive to the Inland Revenue as part of the settlement of his tax affairs for the tax year 2001/2002;
2.3 the Severance Payment will be paid as follows:
2.3.1 the first (pound)150,000 (`the First Lump Sum Payment') will
be paid into an escrow account opened in the joint names of
Eversheds Solicitors and Radcliffes Solicitors for the benefit
of the Executive ("the Escrow Account") within 7 US Business
Days of receipt of this Agreement signed by the Executive and
the Independent Adviser by Caroline Garden of Eversheds, 115
Colmore Row, Birmingham B3 3AL ("Eversheds"). In the event
that the Company receives confirmation from the Inland Revenue
that the Loan Forgiveness referred to at clause 2.7 below is
not subject to Income Tax and/or Employee National Insurance
Contributions the First Lump Sum Payment will be paid to the
Executive, together with any interest
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WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
earned thereon, within 7 US Business Days of receipt of such
confirmation from the Inland Revenue. In the event that the
Inland Revenue deems the Loan Forgiveness to be subject to
Income Tax and/or Employee National Insurance Contributions,
the Company will pay any such sums demanded to the Inland
Revenue from the Escrow Account and pay to the Executive any
balance remaining in the Escrow Account together with interest
earned thereon, within 7 US Business Days of the Company's
receipt of the demand from the Inland Revenue, subject to the
Executive first being given 7 US Business Days from the
Company's receipt of such demand from the Inland Revenue to
appeal against such demand and obtain a decision from the
Inland Revenue;
2.3.2 the sum of (pound)131,000 will be paid by the Company, after
receipt by Eversheds of this Agreement signed by the Executive
and the Independent Adviser, in 12 equal monthly instalments
(`the Instalment Payments') commencing on 7th January 2002 and
continuing until 7th December 2002;
2.3.3 the balance of the Severance Payment remaining after the
deduction of the First Lump Sum Payment and the Instalment
Payments ("the Second Lump Sum Payment") will be paid after
the issue of the Executive's P45 and within 7 US business days
of receipt by Eversheds of this Agreement signed by the
Executive and the Independent Adviser;
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2.4 payment by the Company of the Instalment Payments referred to in clause 2.3.2 above will be secured by a Letter of Credit with LaSalle Bank N.A ("the Letter of Credit");
2.5 it will pay to the Executive an ex gratia payment of (pound)30,000 ("the Ex Gratia Payment"). The parties acknowledge that the Ex Gratia Payment is a non-contractual payment for loss of employment and that section 148 of the Income and Corporation Taxes Act 1988 applies. The Ex Gratia Payment will be paid without deduction for Income Tax and Employee National Insurance Contributions and will be paid after the issue of the Executive's P45 and within 7 US business days of receipt by Eversheds of this Agreement signed by the Executive and the Independent Adviser;
2.6 for the period of 1 year from the Termination Date or until the date on which the Executive finds alternative employment, whichever is the earlier, the Company will:-
WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
2.6.1 continue to pay the Executive's health benefits; and
2.6.2 continue to make pension plan contributions on the Executive's
behalf (collectively "the Benefits")
on the same terms as the Executive enjoyed during his employment with
the Company;
2.7 it will forgive one hundred percent (100%) of the outstanding
indebtedness as of the Termination Date owed by the Executive to the
Company pursuant to the Loan Note between the Company and the Executive
dated July 1, 2000 ("the Loan Forgiveness"), a copy of which is
included within Appendix A, provided that the Executive will be solely
responsible for any taxes or Employee National Insurance Contributions
required to be paid to the Inland Revenue or any other governmental
entity as a result of the Loan Forgiveness;
2.8 it will use reasonable endeavours to ensure that its directors and
executive officers do not disparage the Executive in any manner likely
to be harmful to him, provided that the Company's executive officers
will respond accurately and fully to any question, enquiry or request
for information when required by law;
2.9 it will provide upon request from any prospective employer of the
Executive a reference in the terms attached to this Agreement at
Appendix B. The Company agrees not to derogate from the terms of that
reference to the detriment of the Executive;
2.10 it will refund to the Executive in accordance with the terms of the
Company's Employee Share Purchase Plan the balance of the Executive's
contributions paid by the Executive into that Plan;
2.11 it will pay a contribution towards the legal costs incurred by the
Executive in obtaining advice from the Independent Adviser in respect
of the termination of his employment and this Agreement of
(pound)24,675 inclusive of VAT within 14 days of receipt of an invoice
from the Independent Adviser's firm addressed to the Executive and
marked as payable by the Company; and
2.12 it will accept compliance by the Executive of the agreements on his
part contained in clause 3 in full and final settlement of any claims
it has or may have against the Executive, save that this will not
preclude the operation of Section 310 of the
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WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
Companies Act 1985 and save in respect of the Company's right to enforce the terms of this Agreement.
3. AGREEMENTS BY THE EMPLOYEE
In consideration of the agreements on the part of the Company contained in clause 2, the Executive agrees as follows:
3.1 that he will accept compliance by the Company of the agreements on its part contained in clause 2 in full and final settlement of the Claims and all claims which he has or may have against the Company, any Group Company, or its or their agents, whether statutory or contractual including any claims arising out of or in any way connected with the Contract of Employment and the termination thereof save in respect of accrued pension rights and the right to enforce the terms of this Agreement;
3.2 that on the advice of the Independent Adviser he is not aware of any claims that he has or may have other than those Claims referred to in this Agreement;
3.3 that with effect from the Termination Date, the Executive ceased to be an employee of the Company and has no authority to himself hold out as having any continuing connection with the Company or any Group Company;
3.4 that he will immediately notify the Company in writing as soon as he commences alternative employment;
3.5 that he will continue to comply with the post-termination restrictions set out at Section 12.1 of the Contract of Employment ("the Restrictive Covenants"), amended only to the extent that the definition of 'client' at clause 12.1.(a) of the Contract of Employment be limited to those companies set out at Appendix C of this Agreement. The Executive acknowledges that the Restrictive Covenants are enforceable and remain binding upon him for the period and extent contemplated by Clause 12.1 of the Contract of Employment. The Executive further acknowledges that in the one year period preceding the Termination Date, he has not dealt with in the course of his employment or participated in the submission of a proposal in relation to any companies not listed at Appendix C;
3.6 that he will promptly deliver up to Liz Archbold at the Company's London office at its request and in any event within 3 working days of this Agreement, any and all
WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
property belonging to the Company or any Group Company which is in the
Executive's possession, custody or control, including but not limited
to computer hardware and software, keycards, cell phones and pagers,
which must be returned in good working condition. Such property also
includes credit and phone cards (which must be cut in half),
information and records, all correspondence and all other documents,
papers, customer lists, customer contacts, customer sales proposals,
sales contacts, customer sales proposals, sales contracts, Company
plans, Company internal and external business correspondence, including
those which may have been prepared by the Executive in the course of
his employment which are in his possession, custody or control, and the
Executive acknowledges that he has not made or retained copies of or
extracts from documents or any notes of or information in relation to
the business of the Company or any Group Company. The Executive further
acknowledges that he has not deleted any files from his computer and
that all files on his computer are the property of the Company and must
not be copied, altered or deleted;
3.7 that any services being billed to the Company on behalf of the
Executive have been terminated by the Executive;
3.8 that he will not demand any payment under the Letter of Credit referred
to at clause 2.4 if he has breached any of the terms of this Agreement
and if he does so, he will indemnify the Company in full in respect of
the same;
3.9 that he will honour his obligations under Section 10.3(b) of the
Contract of Employment to keep secret and not use for any purposes,
reveal, disclose or publish to any person any Confidential Information
(as defined in the Contract of Employment) or any other information
concerning the business or affairs of the Company;
3.10 that he will honour his obligations under Section 2.9 of the Contract
of Employment to not make any public statements in relation to the
Company or any Group Company at any time and that he will not (a)
represent that he is employed by or connected with the Company, or (b)
use the style of "eLoyalty" or any name including the words "eLoyalty
Corporation" or any name which is similar or likely to be confused
therewith;
3.11 that he will keep the terms of this Agreement and the reason for the
termination of his employment stated herein confidential and will not
disclose the same to any
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WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
person other than his professional advisers, the Inland Revenue, his
immediate family or as may be required by law;
3.12 that, save for any tax and National Insurance Contributions deducted by
the Company, the Executive will indemnify and keep indemnified the
Company and any Group Company against all and any liability to Income
Tax and Employee National Insurance Contributions (including penalties
and interest thereon) arising out of the Severance Payment, the Ex
Gratia Payment and the Loan Forgiveness made by the Company pursuant to
clauses 2.2, 2.3, 2.5 and 2.7, provided that the Executive is given
notice by the Company of any assessment for Income Tax and National
Insurance Contributions and is given 7 US Business Days from the
Company's receipt of such assessment from the Inland Revenue to appeal
against that assessment and obtain a decision from the Inland Revenue;
3.13 that notwithstanding the terms of the eLoyalty Corporation 1999 Stock
Incentive Plan all outstanding stock options lapsed and ceased to be
exercisable at the Termination Date;
3.14 that notwithstanding the terms of the eLoyalty Corporation 1999 Stock
Incentive Plan as amended and restated on 28 February 2001, the
restricted stock under that Plan ceased vesting as of the Termination
Date. The Executive's right to any remaining unvested restricted stock
will be cancelled with effect from the Termination Date and the
Executive agrees that he will undertake any action required by the
Company to ensure that he ceases to have any interest in that
restricted stock;
3.15 that in respect of any Company or Group Company shares owned
(beneficially or otherwise) by the Executive or any Company or Group
Company shares which the Executive has the right to vote in relation to
as of the record date of 22nd October 2001 or any other record date
established for such voting (including but not limited to the
Executive's 131,250 shares of Restricted Stock and the Executive's
shares held in the eLoyalty Corporation Employee Stock Purchase Plan),
the Executive will vote in favour of the 3 proposals as recommended by
the eLoyalty Corporation Board of Directors which are described in the
eLoyalty Corporation Proxy Statement dated 14th November 2001 and which
are scheduled for consideration at the eLoyalty Corporation Special
Meeting of Stockholders to be held on 18th December 2001 (or at any
adjourned or postponed meeting thereof) and any subsequent meeting of
shareholders called for the purpose of voting on such proposals. The
Executive further agrees that he will not amend, modify or revoke such
vote.
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WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
3.16 that he will agree to any reasonable request by the Company to make
himself available and assist the Company with any litigation that
arises in respect of the period of the Executive's employment with the
Company. The Company will pay the Executive at the rate of (pound)100
per hour for such assistance, together with reasonable documented
expenses incurred;
3.17 that he will not disparage the Company or any Group Company, or its or
their officers, directors, employees, shareholders and agents, in any
manner likely to be harmful to them or their business, business
reputation or personal reputation; and
3.18 that if he engages in any of the activities prohibited pursuant to
Section 12.1 of the Contract of Employment or otherwise breaches any of
the terms set out in this clause 3 of this Agreement, the Company's
obligation to provide the Severance Payment, the Loan Forgiveness, the
Ex Gratia Payment and the Benefits hereunder will immediately cease and
the Company shall be entitled to seek recovery of damages from the
Executive associated with or caused by Executive's breach.
4. WAIVER OF RIGHT TO COMMENCE TRIBUNAL PROCEEDINGS
4.1 The parties hereto believe the following statements to be true:
4.1.1 the Executive has received advice from the Independent Adviser
as to the terms and effect of this Agreement and in particular
its effect on his ability to pursue his rights before an
Employment Tribunal; and
4.1.2 that at the time when the Independent Adviser gave the advice
referred to in clause 4.1.1 the risk of all or any claims by
the Executive in respect of loss arising in consequence of the
advice was covered by a contract of insurance or an indemnity
provided for members of a profession or professional body;
4.2 the Independent Adviser by signing this Agreement warrants that:
4.2.1 he is a qualified lawyer; and
4.2.2 the statements set out in clauses 4.1.1 and 4.1.2 are correct.
|
WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
5. PROCEEDINGS
5.1 The Executive hereby warrants that, as at the date of this Agreement, he has not commenced proceedings against the Company or any Group Company in respect of the Claims or any other proceedings in either a Court or Employment Tribunal.
5.2 In the event that the Executive commences proceedings in respect of the Claims then the Executive will repay to the Company the Severance Payment and the Ex Gratia Payment and the Executive will have no entitlement to the Loan Forgiveness (which will become immediately due and payable together with interest at the rate specified in the Loan Note referred to at clause 2.7 above);
6. This Agreement satisfies the conditions for regulating Compromise Agreements under S203 ERA and Section 72 (4) (A) of the Race Relations Act 1976.
7. The parties acknowledge and agree that the various provisions and sub-provisions of this Agreement are severable and that if any provision or sub-provision or identifiable part is held to be invalid or unenforceable by any court of competent jurisdiction then such invalidity or unenforceability shall not affect the validity or enforceability of the agreement's remaining provisions, sub-provisions, or parts of the Agreement.
Signed for and on
behalf of the Company /s/ Timothy J. Cunningham Signed by the Executive /s/ Vaughan Thomas |
Signed by the
Independent Advisor /s/ Mike Thomas |
WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
APPENDIX A
CONTRACT OF EMPLOYMENT
WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
APPENDIX B
AGREED REFERENCE
TO BE TYPED ON ELOYALTY (UK) LIMITED NOTEPAPER
[Date]
Dear
VAUGHAN THOMAS
We confirm that Vaughan Thomas was employed as a Senior Vice President of the Company between 1 July 2000 and 7 December 2001. His responsibilities as a member of the executive included full operational management of the international business operations. This included profit & loss responsibility for Australia, Germany, France and the United Kingdom.
Mr Thomas left the Company's employment by mutual agreement following a strategic realignment of the Company's business on a global basis.
In accordance with the Company's usual practice, this reference is given without liability on the part of the Company or the writer.
Yours
Chief Executive
WITHOUT PREJUDICE
AND SUBJECT TO CONTRACT
APPENDIX C
LIST OF CLIENTS
ASV
Abbott Labs
Axel Springer
BBC
BSkyB
Deutsche Telekom
Eircell
Eli Lily
Geneva Technology
News Limited
Teleperformance
Westpac Banking
EXHIBIT 10.27
LOAN AGREEMENT
This LOAN AGREEMENT dated as of December __, 2001 (the "Agreement"), is executed by and between eLOYALTY CORPORATION, a Delaware corporation (the "Borrower"), whose address is 150 Field Drive, Suite 250, Lake Forest, Illinois 60045, and LASALLE BANK NATIONAL ASSOCIATION, a national banking association (the "Bank"), whose address is 135 South LaSalle Street, Chicago, Illinois 60603.
In consideration of the mutual agreements hereinafter set forth, the Borrower and the Bank hereby agree as follows:
1. DEFINITIONS.
1.1. Defined Terms. For the purposes of this Agreement, the following capitalized words and phrases shall have the meanings set forth below.
"Applicable Margin (Regular)" shall mean three-quarters of one percent (0.75%).
"Bankruptcy Code" shall mean the United States Bankruptcy Code, as now existing or hereafter amended.
"Borrowing Base Amount" shall mean one hundred percent (100%) of the amount of Cash Collateral.
"Business Day" shall mean any day other than a Saturday, Sunday or a legal holiday on which banks are authorized or required to be closed for the conduct of commercial banking business in Chicago, Illinois.
"Capital Lease" shall mean, as to any Person, a lease of any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, by such Person as lessee that is, or should be, in accordance with Financial Accounting Standards Board Statement No. 13, as amended from time to time, or, if such Statement is not then in effect, such statement of GAAP as may be applicable, recorded as a "capital lease" on the balance sheet of the Borrower prepared in accordance with GAAP.
"Cash Collateral" shall mean the cash collateral pledged to the Bank pursuant to the Cash Collateral Pledge Agreement.
"Cash Collateral Pledge Agreement" shall mean the Cash Collateral Pledge Agreement of even date herewith between the Borrower and the Bank.
"Collateral" shall mean the Cash Collateral and any existing or hereafter arising or acquired property of Borrower in which a Lien is granted to the Bank to secure the Obligations.
"Contingent Liability" and "Contingent Liabilities" shall
mean, respectively, each obligation and liability of the Borrower and all such
obligations and liabilities of the Borrower incurred pursuant to any agreement,
undertaking or arrangement by which the Borrower: (a) guarantees, endorses or
otherwise becomes or is contingently liable upon (by direct or indirect
agreement, contingent or otherwise, to provide funds for payment, to supply
funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor
against loss) the indebtedness, dividend, obligation or other liability of any
other Person in any manner (other than by endorsement of instruments in the
course of collection), including without limitation, any indebtedness, dividend
or other obligation which may be issued or incurred at some future time; (b)
guarantees the payment of dividends or other distributions upon the shares or
ownership interest of any other Person; (c) undertakes or agrees (whether
contingently or otherwise): (i) to purchase, repurchase, or otherwise acquire
any indebtedness, obligation or liability of any other Person or any or any
property or assets constituting security therefor, (ii) to advance or provide
funds for the payment or discharge of any indebtedness, obligation or liability
of any other Person (whether in the form of loans, advances, stock purchases,
capital contributions or otherwise), or to maintain solvency, assets, level of
income, working capital or other financial condition of any other Person, or
(iii) to make payment to any other Person other than for value received; (d)
agrees to lease property or to purchase securities, property or services from
such other Person with the purpose or intent of assuring the owner of such
indebtedness or obligation of the ability of such other Person to make payment
of the indebtedness or obligation; (e) to induce the issuance of, or in
connection with the issuance of, any letter of credit for the benefit of such
other Person; or (f) undertakes or agrees otherwise to assure a creditor against
loss. The amount of any Contingent Liability shall (subject to any limitation
set forth herein) be deemed to be the outstanding principal amount (or maximum
permitted principal amount, if larger) of the indebtedness, obligation or other
liability guaranteed or supported thereby.
"Default Rate" shall mean a per annum rate of interest equal to the Prime Rate plus two percent (2%) per annum.
"Employee Plan" includes any pension, stock bonus, employee stock ownership plan, retirement, disability, medical, dental or other health plan, life insurance or other death benefit plan, profit sharing, deferred compensation, stock option, bonus or other incentive plan, vacation benefit plan, severance plan or other employee benefit plan or arrangement, including, without limitation, those pension, profit-sharing and retirement plans of the Borrower described from time to time in the financial statements of the Borrower and any pension plan, welfare plan, Defined Benefit Pension Plans (as defined in ERISA) or any multi-employer plan, maintained or administered by the Borrower or to which the Borrower is a party or may have any liability or by which the Borrower is bound.
"Environmental Laws" shall mean all federal, state, district, local and foreign laws, rules, regulations, ordinances, and consent decrees relating to health, safety, hazardous
substances, pollution and environmental matters, as now or at any time hereafter in effect, applicable to the Borrower's business or facilities owned or operated by the Borrower, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contamination, chemicals, or hazardous, toxic or dangerous substances, materials or wastes in the environment (including, without limitation, ambient air, surface water, land surface or subsurface strata) or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.
"Event of Default" shall mean any of the events or conditions set forth in Section 11 hereof.
"GAAP" shall mean generally accepted accounting principles, using the accrual basis of accounting and consistently applied with prior periods, provided, however, that GAAP with respect to any interim financial statements or reports shall be deemed subject to fiscal year-end adjustments and footnotes made in accordance with GAAP.
"Hazardous Materials" shall mean any hazardous, toxic or dangerous substance, materials and wastes, including, without limitation, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials or wastes that are or become regulated under any Environmental Law (including without limitation, any that are or become classified as hazardous or toxic under any Environmental Law).
"Indebtedness" shall mean at any time (a) all Liabilities of
the Borrower, (b) all Capital Lease obligations of the Borrower, (c) all other
debt, secured or unsecured, created, issued, incurred or assumed by the Borrower
for money borrowed or for the deferred purchase price of any fixed or capital
asset, (d) indebtedness secured by any Lien existing on property owned by the
Borrower whether or not the Indebtedness secured thereby has been assumed, and
(e) all Contingent Liabilities of the Borrower whether or not reflected on its
balance sheet.
"Indemnified Party" and "Indemnified Parties" shall mean, respectively, each of the Bank and any parent corporations, affiliated corporations or subsidiaries of the Bank, and each of their respective officers, directors, employees, attorneys and agents, and all of such parties and entities.
"Interest Period" shall mean, with regard to any LIBOR Loan, successive one, two, three or six month periods as selected from time to time by the Borrower by notice given to the Bank not less than three (3) Business Days prior to the first day of each
respective Interest Period; provided, however, that: (i) each such Interest Period occurring after the initial Interest Period of any LIBOR Loan shall commence on the day on which the preceding Interest Period for such LIBOR Loan expires, (ii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, however, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, then the last day of such Interest Period shall occur on the immediately preceding Business Day, (iii) whenever the first day of any Interest Period occurs on a day of a month for which there is no numerically corresponding day in the calendar month in which such Interest Period terminates, such Interest Period shall end on the last Business Day of such calendar month, and (iv) the final Interest Period must be such that its expiration occurs on or before the Maturity Date.
"Interest Rate Agreements" shall mean any interest rate protection agreement, interest rate swap or other interest rate hedge arrangement (other than any interest rate cap or other similar agreement or arrangement pursuant to which the Borrower has no credit exposure to the Bank) to or under which the Borrower or any Subsidiary of the Borrower is a party or beneficiary.
"Letter of Credit" and "Letters of Credit" shall mean, respectively, a standby letter of credit and all such standby letters of credit issued by the Bank, in its sole discretion, upon the execution and delivery by the Borrower and the acceptance by the Bank of a Master Letter of Credit Agreement and an application for Letter of Credit, as set forth in Section 2.5 of this Agreement.
"Letter of Credit Obligations" shall mean, at any time, an
amount equal to the aggregate of the original face amounts of all Letters of
Credit minus the sum of (i) the amount of any reductions in the original face
amount of any Letter of Credit which did not result from a draw thereunder, (ii)
the amount of any payments made by the Bank with respect to any draws made under
a Letter of Credit for which the Borrower has reimbursed the Bank, (iii) the
amount of any payments made by the Bank with respect to any draws made under a
Letter of Credit which have been converted to a Revolving Loan as set forth in
Section 2.5, and (iv) the portion of any issued but expired Letter of Credit
which has not been drawn by the beneficiary thereunder. For purposes of
determining the outstanding Letter of Credit Obligations at any time, the Bank's
acceptance of a draft drawn on the Bank pursuant to a Letter of Credit shall
constitute a draw on the applicable Letter of Credit at the time of such
acceptance.
"Liabilities" shall mean at all times all liabilities of the Borrower that would be shown as such on a balance sheet of the Borrower prepared in accordance with GAAP.
"LIBOR Loan" or "LIBOR Loans" shall mean that portion, and collectively those portions, of the aggregate outstanding principal balance of the Revolving Loans that will bear interest with reference to the LIBOR Rate.
"LIBOR Rate" shall mean a rate of interest equal to the per annum rate of interest at which United States dollar deposits in an amount comparable to the amount of the relevant LIBOR Loan and for a period equal to the relevant Interest Period are offered generally to the Bank (rounded upward if necessary, to the nearest 1/16 of 1.00%) in the London Interbank Eurodollar market at 11:00 a.m. (London time) two (2) Business Days prior to the commencement of each Interest Period less the maximum reserve percentages for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency liabilities, or as LIBOR is otherwise determined by the Bank in its sole and absolute discretion, such rate to remain fixed for such Interest Period. The Bank's determination of LIBOR shall be conclusive, absent manifest error.
"Lien" shall mean any mortgage, pledge, hypothecation, judgment lien or similar legal process, title retention lien, or other lien or security interest, including, without limitation, the interest of a vendor under any conditional sale or other title retention agreement and the interest of a lessor under a lease of any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, by such Person as lessee that is, or should be, a Capital Lease on the balance sheet of the Borrower prepared in accordance with GAAP.
"Loans" shall mean, collectively, all Revolving Loans (whether Prime Loans or LIBOR Loans) made by the Bank to the Borrower and all Letter of Credit Obligations, under and pursuant to this Agreement.
"Loan Documents" shall have the meaning set forth in
Section 3.1.
"Maturity Date" shall mean the first anniversary of the date the Bank notifies the Borrower that the Loan Agreement has become effective pursuant to the Effective Date Letter which anniversary shall be on or before December 31, 2002.
"Maximum Letter of Credit Obligation" shall mean Three Million and No/100 Dollars ($3,000,000.00).
"Note" shall mean the Revolving Note.
"Obligations" shall mean the Loans, all interest accrued thereon, any fees due the Bank hereunder, any expenses incurred by the Bank hereunder and any and all other liabilities and obligations of the Borrower (and of any partnership in which the Borrower is or may be a partner) to the Bank, howsoever created, arising or evidenced, and howsoever owned, held or acquired, whether now or hereafter existing, whether now due or to become due, direct or indirect, absolute or contingent, and whether several, joint or joint and several, including, but not limited to, any Interest Rate Agreements.
"Obligor" shall mean the Borrower, any guarantor, accommodation endorser, third party pledgor, or any other party liable with respect to the Obligations.
"Person" shall mean any individual, partnership, limited liability company, corporation, trust, joint venture, joint stock company, association, unincorporated organization, government or agency or political subdivision thereof, or other entity.
"Prime Loan" or "Prime Loans" shall mean that portion, and collectively, those portions of the aggregate outstanding principal balance of the Revolving Loans that will bear interest with reference to the Prime Rate.
"Prime Rate" shall mean the floating per annum rate of interest which at any time, and from time to time, shall be most recently announced by the Bank as its Prime Rate, which is not intended to be the Bank's lowest or most favorable rate of interest at any one time. The effective date of any change in the Prime Rate shall for purposes hereof be the date the Prime Rate is changed by the Bank. The Bank shall not be obligated to give notice of any change in the Prime Rate.
"Regulatory Change" shall mean the introduction of, or any change in any applicable law, treaty, rule, regulation or guideline or in the interpretation or administration thereof by any governmental authority or any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank or its lending office.
"Revolving Loan" and "Revolving Loans" shall mean,
respectively, each direct advance and the aggregate of all such direct advances,
from time to time in the form of either Prime Loans and/or LIBOR Loans, made by
the Bank to the Borrower under and pursuant to this Agreement, as set forth in
Section 2.1 of this Agreement.
"Revolving Loan Availability" shall mean at any time, the lesser of (a) the Revolving Loan Commitment less the Letter of Credit Obligations, or (b) the Borrowing Base Amount less the Letter of Credit Obligations.
"Revolving Loan Commitment" shall mean Fifteen Million and No/100 Dollars ($15,000,000.00).
"Revolving Note" shall have the meanings set forth in Section 4.1 hereof.
"Subsidiary" and "Subsidiaries" shall mean, respectively, each and all such corporations, partnerships, limited partnerships, limited liability companies, limited liability partnerships or other entities of which or in which the Borrower owns directly or indirectly fifty percent (50%) or more of (i) the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such entity if a corporation, (ii) the management authority and capital interest or profits interest of such entity, if a partnership, limited partnership, limited liability company, limited liability partnership, joint venture or similar entity, or (iii) the beneficial interest of such entity, if a trust, association or other unincorporated organization.
"UCC" shall mean the Uniform Commercial Code in effect in Illinois from time to time.
1.2. Accounting Terms. Any accounting terms used in this Agreement which are not specifically defined herein shall have the meanings customarily given them in accordance with GAAP. Calculations and determinations of financial and accounting terms used and not otherwise specifically defined hereunder and the preparation of financial statements to be furnished to the Bank pursuant hereto shall be made and prepared, both as to classification of items and as to amount, in accordance with GAAP as used in the preparation of the financial statements of the Borrower on the date of this Agreement. If any changes in accounting principles or practices from those used in the preparation of the financial statements are hereafter occasioned by the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or any successor thereto or agencies with similar functions), which results in a material change in the method of accounting in the financial statements required to be furnished to the Bank hereunder or in the calculation of financial covenants, standards or terms contained in this Agreement, the parties hereto agree to enter into good faith negotiations to amend such provisions so as equitably to reflect such changes to the end that the criteria for evaluating the financial condition and performance of the Borrower will be the same after such changes as they were before such changes; and if the parties fail to agree on the amendment of such provisions, the Borrower will furnish financial statements in accordance with such changes but shall provide calculations for all financial covenants, perform all financial covenants and otherwise observe all financial standards and terms in accordance with applicable accounting principles and practices in effect immediately prior to such changes. Calculations with respect to financial covenants required to be stated in accordance with applicable accounting principles and practices in effect immediately prior to such changes shall be reviewed and certified by the Borrower's accountants.
1.3. Other Terms Defined in UCC. All other capitalized words and phrases used herein and not otherwise specifically defined shall have the respective meanings assigned to such terms in the UCC, as amended from time to time, to the extent the same are used or defined therein.
1.4. Other Definitional Provisions; Construction. Whenever the context so requires, the neuter gender includes the masculine and feminine, the single number includes the plural, and vice versa, and in particular the word "Borrower" shall be so construed. The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and references to Article, Section, Subsection, Annex, Schedule, Exhibit and like references are references to this Agreement unless otherwise specified. An Event of Default shall "continue" or be "continuing" until such Event of Default has been waived in accordance with Section 13.3 hereof. References in this Agreement to any party shall include such party's successors and permitted assigns. References to any "Section" shall be a reference to such Section of this Agreement unless otherwise stated. To the extent any of the provisions of the other Loan Documents are inconsistent with the terms of this Loan Agreement, the provisions of this Loan Agreement shall govern.
2. COMMITMENT OF THE BANK.
2.1. Revolving Loans.
(a) Revolving Loan Commitment. Subject to the terms and conditions of this Agreement and the other Loan Documents, and in reliance upon the representations and warranties of the Borrower set forth herein and in the other Loan Documents, the Bank agrees to make such Revolving Loans at such times as the Borrower may from time to time request until, but not including, the Maturity Date, and in such amounts as the Borrower may from time to time request, provided, however, that the aggregate principal balance of all Revolving Loans outstanding at any time shall not exceed the Revolving Loan Availability. Revolving Loans made by the Bank may be repaid and, subject to the terms and conditions hereof, borrowed again up to, but not including the Maturity Date unless the Revolving Loans are otherwise terminated or extended as provided in this Agreement. The Revolving Loans shall be used by the Borrower for working capital purposes.
(b) Revolving Loan Interest and Payments. Except as otherwise provided in this Section 2.1(b), (i) the principal amount of the Prime Loans outstanding from time to time shall bear interest at the Prime Rate, and (ii) the principal amount of the LIBOR Loans outstanding from time to time shall bear interest at the LIBOR Rate plus the Applicable Margin (Regular). Accrued and unpaid interest on the unpaid principal balance of all Revolving Loans outstanding from time to time which are Prime Loans, shall be due and payable monthly, in arrears, commencing on January 1, 2002 and continuing on the first day of each calendar month thereafter, and on the Maturity Date. Accrued and unpaid interest on the unpaid principal balance of all Revolving Loans outstanding from time to time which are LIBOR Loans shall be payable on the last Business Day of each Interest Period (provided, however, that for Interest Periods of six months, accrued interest shall also be paid on the date which is three months from the first day of such Interest Period), commencing on the first such date to occur after the date hereof, on the date of any principal repayment of a LIBOR Loan and on the Maturity Date. During the continuance of an Event of Default, the Revolving Loans shall bear interest payable on demand at the Default Rate.
(c) Revolving Loan Principal Repayments.
(i) Mandatory Principal Prepayments. All Revolving
Loans hereunder shall be repaid by the Borrower on the
Maturity Date, unless payable sooner pursuant to the
provisions of this Agreement. In the event the aggregate
outstanding principal balance of all Revolving Loans hereunder
exceeds the Revolving Loan Availability, the Borrower shall,
without notice or demand of any kind, immediately make such
repayments of the Revolving Loans or take such other actions
as shall be necessary to eliminate such excess. Also, if the
Borrower chooses not to convert any Revolving Loan which is a
LIBOR Loan to a Prime Loan as provided in Section 2.3(b) and
Section 2.3(c), then such Revolving Loan shall be immediately
due and payable on the last
Business Day of the then existing Interest Period or on such earlier date as required by law, all without further demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower.
(ii) Optional Prepayments. The Borrower may from time to time prepay the Revolving Loans which are Prime Loans, in whole or in part, without any prepayment penalty whatsoever, subject to the following conditions: (i) each partial prepayment shall be in an amount equal to Ten Thousand and No/100 Dollars ($10,000.00) or a higher integral multiple of Five Thousand and No/100 Dollars ($5,000.00); and (ii) any prepayment of the entire principal balance of the Prime Loans shall include accrued interest on such Prime Loans to the date of such prepayment and payment in full of all other Obligations (other than the LIBOR Loans), then due and payable.
2.2. Intentionally Omitted.
2.3. Additional LIBOR Loan Provisions.
(a) LIBOR Loan Prepayments. Notwithstanding anything to the contrary contained herein, the principal balance of any LIBOR Loan may not be prepaid in whole or in part at any time. If, for any reason, a LIBOR Loan is paid prior to the last Business Day of any Interest Period, the Borrower agrees to indemnify the Bank against any loss (including any loss on redeployment of the funds repaid), cost or expense incurred by the Bank as a result of such prepayment.
(b) LIBOR Unavailability. If the Bank determines in good faith (which determination shall be conclusive, absent manifest error) prior to the commencement of any Interest Period that (i) United States dollar deposits of sufficient amount and maturity for funding any LIBOR Loan are not available to the Bank in the London Interbank Eurodollar market in the ordinary course of business, or (ii) by reason of circumstances affecting the London Interbank Eurodollar market, adequate and fair means do not exist for ascertaining the rate of interest to be applicable to the relevant LIBOR Loan, the Bank shall promptly notify the Borrower thereof and, so long as the foregoing conditions continue, Revolving Loans may not be advanced as a LIBOR Loan thereafter. In addition, at the Borrower's option, each existing LIBOR Loan shall be immediately (i) converted to a Prime Loan on the last Business Day of the then existing Interest Period, or (ii) due and payable on the last Business Day of the then existing Interest Period, without further demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower.
(c) Regulatory Change. In addition, if, after the date hereof, a Regulatory Change shall, in the reasonable determination of the Bank, make it unlawful for the Bank to make or maintain the LIBOR Loans, then the Bank shall promptly notify the Borrower and Revolving Loans may not be advanced as a LIBOR Loan thereafter. In addition, at the Borrower's option, each existing LIBOR Loan shall be immediately (i) converted to a Prime Loan on the last Business Day of the then existing Interest
Period or on such earlier date as required by law, or (ii) due and payable on the last Business Day of the then existing Interest Period or on such earlier date as required by law, all without further demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower.
(d) LIBOR Loan Indemnity. If any Regulatory Change (whether or not having the force of law) shall (a) impose, modify or deem applicable any assessment, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of or loans by, or any other acquisition of funds or disbursements by, the Bank; (b) subject the Bank or any LIBOR Loan to any tax, duty, charge, stamp tax or fee or change the basis of taxation of payments to the Bank of principal or interest due from the Borrower to the Bank hereunder (other than a change in the taxation of the overall net income of the Bank); or (c) impose on the Bank any other condition regarding such LIBOR Loan or the Bank's funding thereof, and the Bank shall determine (which determination shall be conclusive, absent manifest error) that the result of the foregoing is to increase the cost to the Bank of making or maintaining such LIBOR Loan or to reduce the amount of principal or interest received by the Bank hereunder, then the Borrower shall pay to the Bank, on demand, such additional amounts as the Bank shall, from time to time, determine are sufficient to compensate and indemnify the Bank for such increased cost or reduced amount.
2.4. Interest and Fee Computation; Collection of Funds. All interest on LIBOR Loans shall be calculated on the basis of a year consisting of three hundred sixty (360) days and shall be paid for the actual number of days elapsed and all interest on Prime Loans and fees shall be calculated on the basis of a year consisting of 365 days and shall be paid for the actual number of days elapsed. Principal payments submitted in funds not immediately available shall continue to bear interest until collected. If any payment to be made by the Borrower hereunder or under the Note shall become due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing any interest in respect of such payment.
2.5. Letters of Credit. Subject to the terms and conditions of this Agreement and upon the execution by the Borrower and the Bank of a Master Letter of Credit Agreement and, the upon the execution and delivery by the Borrower, and the acceptance by the Bank of an application for letter of credit, the Bank agrees to issue for the account of the Borrower such Letters of Credit in the standard form of the Bank and otherwise in form and substance acceptable to the Bank, from time to time during the term of this Agreement, provided that (i) the Letter of Credit Obligations may not at any time exceed the Maximum Letter of Credit Obligation, (ii) the Letter of Credit Obligations may not at any time exceed the Borrowing Base Amount less the aggregate outstanding principal amount of the Revolving Loans, and (iii) no Letter of Credit shall have an expiration date later than the Maturity Date. The amount of any payments made by the Bank with respect to draws made by a beneficiary under a Letter of Credit for which the Borrower has failed to reimburse the Bank upon the earlier of (i) the Bank's demand for repayment, or (ii) five (5) days from the date of such payment to such beneficiary by the Bank, shall be deemed to have been converted to a Revolving Loan as of the date such payment was made by the Bank to such beneficiary.
Upon the occurrence of an Event of a Default and at the option of the Bank, all Letter of Credit Obligations shall be converted to Prime Loans, all without demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower. The Borrower and the Bank acknowledge that letter of credit no. 5536057 in the face amount of 131,000 sterling pounds issued by the Bank to Mr. Vaughan Thomas of Westwind constitutes a Letter of Credit subject to the terms hereof.
3. CONDITIONS OF BORROWING.
Notwithstanding any other provision of this Agreement, the Bank shall not be required to disburse or make all or any portion of the Loans (including without limitation issue any Letter of Credit) if any of the following conditions shall have occurred.
3.1. Loan Documents. The Borrower shall have failed to execute and deliver to the Bank any of the following Loan Documents (collectively, the "Loan Documents"), all of which must be satisfactory to the Bank and the Bank's counsel in form, substance and execution:
(a) Loan Agreement. Two copies of this Agreement duly executed by the Borrower.
(b) Revolving Note. A Revolving Note duly executed by the Borrower.
(c) Master Letter of Credit Agreement. Two copies of the Master Letter of Credit Agreement duly executed by the Borrower and the Bank.
(d) Cash Collateral Pledge Agreement. Two copies of the Cash Collateral Pledge Agreement duly executed by the Borrower and the Bank.
(e) Cash Management Documents. Two copies of the documents requested by the Bank to establish bank accounts and cash management with the Bank duly executed by the Borrower and the Bank.
(f) Additional Documents. Such other certificates, financial statements, schedules, charter documents, resolutions, opinions of counsel, notes, agreements, assignments and other documents which are provided for hereunder or which the Bank shall from time to time require, including without limitation the documents listed on Schedule 3.1.
3.2. Event of Default. Any Event of Default, or any event which, with notice or lapse of time, or both would constitute an Event of Default, shall have occurred and be continuing.
3.3. Material Adverse Changes. A material adverse change in the financial condition, business assets or affairs of the Borrower shall have occurred, as reasonably determined by the Bank.
3.4. Litigation. Any litigation or governmental proceeding shall have been instituted against the Borrower or any of its officers or shareholders which in the discretion of the Bank, reasonably exercised, materially adversely affects the financial condition, business issues, or continued operation of the Borrower.
3.5. Representations and Warranties. Any representation or warranty of the Borrower contained herein or in any Loan Document shall be untrue or incorrect in any material respect as of the date of any Loan as though made on such date, except to the extent such representation or warranty expressly relates to an earlier date.
3.6. Commitment Fee. The Borrower agrees to pay to the Bank a commitment fee in the amount of Twenty-Five Thousand and No/100 Dollars ($25,000.00) payable on the date hereof.
4. NOTES EVIDENCING LOANS.
4.1. Revolving Note. The Revolving Loans and the Letter of Credit Obligations shall be evidenced by a single Revolving Note (together with any and all renewal, extension, modification or replacement notes executed by the Borrower and delivered to the Bank and given in substitution therefor, the "Revolving Note") in the form of Exhibit "A" attached hereto, duly executed by the Borrower and payable to the order of the Bank. At the time of the initial disbursement of a Revolving Loan and at each time an additional Revolving Loan shall be requested hereunder or a repayment made in whole or in part thereon, an appropriate notation thereof shall be made on the books and records of the Bank. All amounts recorded shall be, absent demonstrable error, conclusive and binding evidence of (i) the principal amount of the Revolving Loans advanced hereunder and the amount of all Letter of Credit Obligations, (ii) any unpaid interest owing on the Revolving Loans, and (iii) all amounts repaid on the Revolving Loans or the Letter of Credit Obligations. The failure to record any such amount or any error in recording such amounts shall not, however, limit or otherwise affect the obligations of the Borrower under the Revolving Note to repay the principal amount of the Revolving Loans, together with all interest accruing thereon.
5. MANNER OF BORROWING.
Each Loan shall be made available to the Borrower upon its request, from any Person whose authority to so act has not been revoked by the Borrower in writing previously received by the Bank. Each Revolving Loan may be advanced either as a Prime Loan or a LIBOR Loan, as requested by the Borrower, provided, however, that at any time, the Borrower may identify no more than five (5) Revolving Loans which may be LIBOR Loans and no LIBOR Loans may be requested by the Borrower if an Event of Default exists. A request for a Prime Loan must be received by no later than 11:00 a.m. Chicago, Illinois time, on the day it is to be funded. A request for a LIBOR Loan must be (i) received by no later than 11:00 a.m. Chicago, Illinois time, three (3) days before the day it is to be funded, and (ii) in an amount equal to One Million and No/100 Dollars ($1,000,000.00) or a higher integral multiple of One Hundred Thousand and No/100 Dollars ($100,000.00). If for any reason the Borrower shall fail to select timely an Interest Period for an existing LIBOR Loan,
then such LIBOR Loan shall be immediately converted to a Prime Loan on the last Business Day of the then existing Interest Period, all without demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower. The proceeds of each Prime Loan or LIBOR Loan shall be made available at the office of the Bank by credit to the account of the Borrower or by other means requested by the Borrower and acceptable to the Bank.
Each Letter of Credit shall be issued by the Bank upon the execution of
the Bank's standard Master Letter of Credit Agreement by the Borrower and the
Bank, and the execution and delivery by the Borrower and the acceptance by the
Bank of the Bank's standard application for Letter of Credit and the payment by
the Borrower of the Bank's customary fees charged in connection therewith. In
addition to all other applicable fees, charges and/or interest payable by the
Borrower pursuant to the Master Letter of Credit Agreement or otherwise payable
in accordance with the Bank's standard letter of credit fee schedule, all
Letters of Credit issued under and pursuant to this Agreement shall bear an
annual fee equal to three-quarters of one percent (0.75%) of the face amount of
such Letter of Credit, payable by the Borrower on or before the issuance of such
Letter of Credit by the Bank and annually thereafter on the same date unless and
until (i) such Letter of Credit has expired or has been returned to the Bank, or
(ii) the Bank has paid the beneficiary thereunder the full face amount of such
Letter of Credit.
The Bank is authorized to rely on any written, verbal, electronic, telephonic or telecopy loan requests which the Bank believes in its reasonable good faith judgment to emanate from a properly authorized representative of the Borrower, whether or not that is in fact the case. The Borrower does hereby irrevocably confirm, ratify and approve all such advances by the Bank and does hereby indemnify the Bank against losses and expenses (including court costs, attorneys' and paralegals' fees) and shall hold the Bank harmless with respect thereto.
6. REDUCTION OF CASH COLLATERAL REQUIREMENT.
Pursuant to a commitment letter dated November 14, 2001 (the "COMMITMENT LETTER") between the Bank and the Borrower, the Bank agreed to reduce the Cash Collateral required to secure the Obligations on the terms and conditions set forth in the Commitment Letter. The Borrower determined that it did not want to include such terms and conditions in this Agreement; however, the Borrower has requested that the Bank consider adding such terms and conditions after the Bank's receipt of the Borrower's financial statements for the period ending June 30, 2002. Although the Bank no longer has any commitment to add such terms and conditions, the Bank agrees to negotiate in good faith with the Borrower to add such terms and conditions at such time.
7. REPRESENTATIONS AND WARRANTIES.
To induce the Bank to make the Loans, the Borrower makes the following representations and warranties to the Bank, each of which shall be true and correct as of the date of the execution and delivery of this Agreement, and which shall survive the execution and delivery of this Agreement:
7.1. Borrower Organization and Name. The Borrower is a corporation duly organized, existing and in good standing under the laws of the State of Delaware, with full and adequate corporate power to carry on and conduct its business as presently conducted. The Borrower's state issued organizational identification number is 3041162. The Borrower is duly licensed or qualified in all foreign jurisdictions wherein the nature of its activities require such qualification or licensing, except for jurisdictions where the failure to obtain such qualification or licensing could not reasonably be expected to have a material adverse effect on the financial condition, business, assets or affairs of the Borrower. The exact legal name of the Borrower is as set forth in the first paragraph of this Agreement, and the Borrower currently does not conduct, nor has it during the last five (5) years conducted, business under any other name or trade name, except as disclosed on Schedule 7.1.
7.2. Authorization; Validity. The Borrower has full right, power and authority to enter into this Agreement, to make the borrowings and execute and deliver the Loan Documents as provided herein and to perform all of its duties and obligations under this Agreement and the Loan Documents. The execution and delivery of this Agreement and the Loan Documents will not, nor will the observance or performance of any of the matters and things herein or therein set forth, violate or contravene any provision of law or of the certificate of incorporation or bylaws of the Borrower. All necessary and appropriate corporate action has been taken on the part of the Borrower to authorize the execution and delivery of this Agreement and the Loan Documents. This Agreement and the Loan Documents are valid and binding agreements and contracts of the Borrower in accordance with their respective terms.
7.3. Compliance With Laws. The nature and transaction of the Borrower's business and operations and the use of its properties and assets, including, but not limited to, the Collateral or any real estate owned or occupied by the Borrower, do not and during the term of the Loans shall not, violate or conflict with any applicable law, statute, ordinance, rule, regulation or order of any kind or nature, including, without limitation, the provisions of the Fair Labor Standards Act or any zoning, land use, building, noise abatement, occupational health and safety or other laws, any building permit or any condition, grant, easement, covenant, condition or restriction, whether recorded or not.
7.4. Environmental Laws and Hazardous Substances. The Borrower represents, warrants and agrees with the Bank that (i) the Borrower has not generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off any of the premises of the Borrower (whether or not owned by it) in any manner which at any time materially violates any Environmental Law or any license, permit, certificate, approval or similar authorization thereunder, (ii) the operations of the Borrower comply in all material respects with all Environmental Laws and all licenses, permits certificates, approvals and similar authorizations thereunder, (iii) there has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other Person, nor is any pending or, to the best of the Borrower's knowledge, threatened, and the Borrower shall immediately notify the Bank upon becoming aware of any such investigation, proceeding, complaint, order, directive, claim, citation or notice, and shall take prompt and appropriate actions to respond thereto, with
respect to any non-compliance with, or violation of, the requirements of any Environmental Law by the Borrower or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Material or any other environmental, health or safety matter, by the Borrower which affects its business, operations or assets or any properties at which the Borrower has transported, stored or disposed of any Hazardous Materials, (iv) the Borrower has no material liability, contingent or otherwise, in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Material; and (v) without limiting the generality of the foregoing, the Borrower shall, following determination by the Bank that there is material non-compliance, or any condition which requires any action by or on behalf of the Borrower in order to avoid any material non-compliance, with any Environmental Law, at the Borrower's sole expense, cause an independent environmental engineer acceptable to the Bank to conduct such tests of the relevant site as are appropriate, and prepare and deliver a report setting forth the result of such tests, a proposed plan for remediation and an estimate of the costs thereof.
7.5. Absence of Breach. The execution, delivery and performance of this
Agreement, the Loan Documents and any other documents or instruments to be
executed and delivered by the Borrower in connection with the Loans shall not:
(i) violate any provisions of law or any applicable regulation, order, writ,
injunction or decree of any court or governmental authority, or (ii) conflict
with, be inconsistent with, or result in any breach or default of any of the
terms, covenants, conditions, or provisions of any indenture, mortgage, deed of
trust, instrument, document, agreement or contract of any kind to which the
Borrower is a party or by which the Borrower or any of its property or assets
may be bound, which breach or default could reasonably be expected to have a
material adverse effect on the financial condition, business, assets or affairs
of the Borrower.
7.6. Collateral Representations. The Borrower is the sole owner of the Collateral, free from any Lien of any kind, other than the Lien of the Bank and the Liens permitted under Section 8.2.
7.7. Financial Statements. All financial statements submitted to the Bank have been prepared in accordance with GAAP on a basis, except as otherwise noted therein, consistent with the previous fiscal year and truly and accurately reflect the financial condition of the Borrower and the results of the operations for the Borrower as of such date and for the periods indicated. Since the date of the most recent financial statement submitted by the Borrower to the Bank, there has been no material adverse change in the financial condition or in the assets or liabilities of the Borrower.
7.8. Litigation and Taxes. There is no litigation, demand, charge, claim, petition or governmental investigation or proceeding pending, or to the best knowledge of the Borrower, threatened, against the Borrower, which, if adversely determined, would result in any material adverse change in the financial condition or properties, business or operations of the Borrower. The Borrower has duly filed all applicable income or other tax returns and has
paid all income or other taxes when due. There is no controversy or objection pending, or to the best knowledge of the Borrower, threatened in respect of any tax returns of the Borrower.
7.9. Event of Default. No Event of Default has occurred and is continuing, and no event has occurred and is continuing which, with the lapse of time, the giving of notice, or both, would constitute such an Event of Default under this Agreement or any of the Loan Documents and the Borrower is not in default (without regard to grace or cure periods) under any contract or agreement to which it is a party, the effect of which default shall materially adversely affect the performance by the Borrower of its obligations pursuant to and as contemplated by the terms and provisions of this Agreement.
7.10. ERISA Obligations. All Employee Plans of the Borrower meet the minimum funding standards of Section 302 of ERISA where applicable and each such Employee Plan that is intended to be qualified within the meaning of Section 401 of the Internal Revenue Code of 1986 is qualified. No withdrawal liability has been incurred under any such Employee Plans and no "Reportable Event" or "Prohibited Transaction" (as such terms are defined in ERISA), has occurred with respect to any such Employee Plans, unless approved by the appropriate governmental agencies. The Borrower has promptly paid and discharged all obligations and liabilities arising under the Employee Retirement Income Security Act of 1974 ("ERISA") of a character which if unpaid or unperformed might result in the imposition of a Lien against any of its properties or assets.
7.11. Adverse Circumstances. No condition, circumstance, event, agreement, document, instrument, restriction, litigation or proceeding (or threatened litigation or proceeding or basis therefor) exists which (a) could adversely affect the validity or priority of the Liens granted to the Bank under the Loan Documents, (b) could materially adversely affect the ability of the Borrower to perform its obligations under the Loan Documents, (c) would constitute a default under any of the Loan Documents, or (d) would constitute such a default with the giving of notice or lapse of time or both.
7.12. Lending Relationship. The Borrower acknowledges and agrees that the relationship hereby created with the Bank is and has been conducted on an open and arm's length basis in which no fiduciary relationship exists and that the Borrower has not relied and is not relying on any such fiduciary relationship in executing this Agreement and in consummating the Loans. The Bank represents that it will receive the Note payable to its order as evidence of a bank loan.
7.13. Intentionally Omitted.
7.14. Compliance with Regulation U. No portion of the proceeds of the Loans shall be used by the Borrower, or any affiliates of the Borrower, either directly or indirectly, for the purpose of purchasing or carrying any margin stock, within the meaning of Regulation U as adopted by the Board of Governors of the Federal Reserve System.
7.15. Governmental Regulation. The Borrower is not, or after giving effect to any Loan, will not be, subject to regulation under the Public Utility Holding Company Act of
1935, the Federal Power Act or the Investment Company Act of 1940 or to any federal or state statute or regulation limiting its ability to incur indebtedness for borrowed money.
7.16. Bank Accounts. The account numbers and locations of all Deposit accounts and other bank accounts of the Borrower and its Subsidiaries are listed on Schedule 7.16.
7.17. Place of Business. The principal place of business of the Borrower is 150 Field Drive, Lake Forest, Illinois 60045 and the Borrower shall promptly notify the Bank of any change in such location.
7.18. Complete Information. This Agreement and all financial statements, schedules, certificates, confirmations, agreements, contracts, and other materials submitted to the Bank in connection with or in furtherance of this Agreement by or on behalf of the Borrower fully and fairly state the matters with which they purport to deal.
8. NEGATIVE COVENANTS.
8.1. Indebtedness. The Borrower shall not, either directly or indirectly, create, assume, permit to exist, incur or have outstanding any Indebtedness (including purchase money indebtedness), or become liable, whether as endorser, guarantor, surety or otherwise, for any debt or obligation of any other Person, except:
(a) the Obligations;
(b) endorsement for collection or deposit of any commercial paper secured in the ordinary course of business;
(c) obligations of the Borrower for taxes, assessments, municipal or other governmental charges;
(d) obligations of the Borrower for accounts payable, other than for money borrowed, incurred in the ordinary course of business;
(e) obligations existing on the date hereof which are disclosed on Schedule 8.1;
(f) obligations arising under Capital Leases or purchase money financing for fixed assets acquired (or deemed to be acquired) by the Borrower, so long as the aggregate outstanding amount of such obligations (whether or not described on Schedule 8.2) at any time does not exceed $500,000;
(g) unfunded pension fund and other employee benefit obligations and liabilities to the extent they are permitted to remain unfunded under applicable law;
(h) obligations with respect to warranty and indemnity claims arising in the ordinary course of the Borrower's business in connection with services provided by the Borrower to its customers;
(i) intercompany loans made by a Subsidiary to the Borrower;
(j) guaranties by the Borrower of indebtedness of any Subsidiary; and
(k) guaranties by the Borrower of obligations of its employees in the ordinary course of the Borrower's business.
8.2. Encumbrances. The Borrower shall not, either directly or indirectly, create, assume, incur or suffer or permit to exist any Lien or charge of any kind or character upon any asset of the Borrower, whether owned at the date hereof or hereafter acquired except:
(a) Liens for taxes, assessments or other governmental charges not yet due or which are being contested in good faith by appropriate proceedings in such a manner as not to make any property of Borrower forfeitable and for which adequate reserves for such contest are maintained by the Borrower;
(b) Liens arising out of judgments and pre-judgment attachments not constituting an Event of Default under Section 11.8 to which it shall concurrently therewith be prosecuting a timely appeal or proceeding for review and with respect to which it shall have secured a stay of execution pending such appeal or proceedings for review;
(c) pledges or deposits to secure obligations under worker's compensation laws or similar legislation;
(d) good faith deposits in connection with contracts (other than contracts for the payment of money) or leases to which the Borrower is a party;
(e) carriers,' warehousemen's, suppliers' or similar possessing liens existing in the ordinary course of Borrower's business;
(f) Liens existing on the date hereof and disclosed on Schedule 8.2 referred to in Section 7;
(g) Liens on fixed assets acquired in connection with incurring obligations permitted under Section 8.1(f), to secure such obligations;
(h) zoning restrictions, easements, licenses, or other restrictions on the use of any real estate or other minor irregularities in title (including leasehold title) thereto, so long as the same do not materially impair the use, value, or marketability of such real estate; and
(i) Liens granted to the Bank.
8.3. Investments. The Borrower shall not, either directly or indirectly, make or have outstanding any investments (whether through purchase of stocks, obligations or otherwise) in, or loans or advances to, any other Person, except:
(a) investments in direct obligations of the United States;
(b) existing and future investments in Subsidiaries existing as of the date hereof;
(c) intercompany loans made by the Borrower to any Subsidiary;
(d) investments in certificates of deposit issued by the Bank or any bank with assets greater than One Hundred Million and No/100 Dollars ($100,000,000.00); or
(e) investments in Prime Commercial Paper (for purposes hereof, Prime Commercial Paper shall mean short-term unsecured promissory notes sold by large corporations and rated A-1/P-1 by Standard & Poor's Ratings Group, a division of McGraw Hill, Inc., and Moody's Investment Service, Inc.).
8.4. Transfer; Merger. The Borrower shall not, either directly or indirectly, (a) purchase or acquire any Subsidiary, (b) merge with, consolidate with, acquire all or substantially all of the assets, business, capital sock or beneficial ownership of or otherwise combine with or acquire, any Person, or (c) sell, transfer, assign, convey, license, lease or otherwise dispose of any of its property; provided, that so long as no Event of Default exists, Borrower may dispose of any of its obsolete or unusable equipment in the ordinary course of its business.
8.5. Distributions. The Borrower shall not, either directly or indirectly, purchase or redeem any shares of its stock, or declare or pay any dividends (other than stock dividends), whether in cash or otherwise, or set aside any funds for any such purpose or make any distribution to its shareholders; provided, that the Borrower may pay dividends to holders of its 7% Series B Convertible Preferred Stock on the terms described in the Registration Statement in Form S-3/A filed on November 13, 2001.
8.6. Affiliate Transactions. The Borrower shall not enter into or be a party to any transaction with any affiliate of the Borrower except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's business and upon fair and reasonable terms that are no less favorable to the Borrower than would be obtained in a comparable arm's length transaction with a Person not an affiliate of the Borrower.
8.7. Capital Structure and Business. The Borrower shall not (a) make any changes in any of its business objectives, purposes or operations that could in any way adversely affect the repayment of the Loans or any of the other Obligations, or (b) amend its charter or bylaws in a manner that would adversely affect Lender or the Borrower's duty or ability to repay the Obligations. The Borrower shall not engage in any business other than the business currently engaged in by it.
8.8. Sale-Leasebacks. The Borrower shall not engage in any sale-leaseback, synthetic lease or similar transaction involving any of its assets.
8.9. Use of Proceeds. Neither the Borrower nor any of its Subsidiaries or affiliates shall use any portion of the proceeds of the Loans, either directly or indirectly, for the purpose of purchasing any securities underwritten by ABN AMRO Incorporated, an affiliate of the Bank.
8.10. Bank Accounts. The Borrower shall not establish any new deposit accounts or other bank accounts, other than bank accounts established at or with the Bank, without the prior written consent of the Bank.
8.11. Change of Legal Status. The Borrower shall not change its name, its organizational identification number, if it has one, its type of organization, its jurisdiction of organization or other legal structure.
9. AFFIRMATIVE COVENANTS.
9.1. Compliance with Bank Regulatory Requirements. Upon demand by the Bank, the Borrower shall reimburse the Bank for the Bank's additional costs and/or reductions in the amount of principal or interest received or receivable by the Bank if at any time after the date of this Agreement any law, treaty or regulation or any change in any law, treaty or regulation or the interpretation thereof by any governmental authority charged with the administration thereof or any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank or the Loans, whether or not having the force of law, shall impose, modify or deem applicable any reserve (except reserve requirements taken into account in calculating the LIBOR Rate and/or special deposit requirement against or in respect of assets held by or deposits in or for the account of the Loans by the Bank or impose on the Bank any other condition with respect to this Agreement or the Loans, the result of which is to either increase the cost to the Bank of making or maintaining the Loans or to reduce the amount of principal or interest received or receivable by the Bank with respect to such Loans. Said additional costs and/or reductions will be those which directly result from the imposition of such requirement or condition on the making or maintaining of such Loans. All Loans shall be deemed to be match funded for the purposes of the Bank's determination in the previous sentence. Notwithstanding the foregoing, the Borrower shall not be required to pay any such additional costs which could be avoided by the Bank with the exercise of reasonable conduct and diligence.
9.2. Corporate Existence. The Borrower shall at all times preserve and maintain its corporate existence, rights, franchises and privileges, and shall at all times continue as a going concern in the business which the Borrower is presently conducting. If the Borrower does not have a state issued identification number and later obtains one, the Borrower shall promptly notify the Bank of such organizational identification number.
9.3. Maintain Property. The Borrower shall at all times maintain, preserve and keep its plant, properties and equipment, in good repair, working order and condition, normal wear and tear excepted, and shall from time to time make all needful and proper repairs, renewals, replacements, and additions thereto so that at all times the efficiency thereof shall
be fully preserved and maintained. The Borrower shall permit the Bank to examine and inspect such plant, properties and equipment at all reasonable times.
9.4. Maintain Insurance. The Borrower shall at all times insure and keep insured in insurance companies acceptable to the Bank, all insurable property owned by it which is of a character usually insured by companies similarly situated and operating like properties, against loss or damage from fire and such other hazards or risks as are customarily insured against by companies similarly situated and operating like properties; and shall similarly insure employers', public and professional liability risks. Prior to the date of the funding of the Note, the Borrower shall deliver to the Bank a certificate setting forth in summary form the nature and extent of the insurance maintained by the Borrower pursuant to this Section 9. All such policies of insurance must be reasonably satisfactory to the Bank in relation to the amount and term of the Obligations and type and value of the assets of the Borrower, and shall identify the Bank as sole lender's loss payee (to the extent the Bank has a Lien on such assets) and as an additional insured. This insurance coverage (i) may, but need not, protect the Borrower's interest in the such property and (ii) may not pay any claim made by, or against, the Borrower in connection with such property. The Borrower may later cancel any such insurance purchased by the Bank, but only after providing the Bank with evidence that the Borrower has obtained the insurance coverage required by this Section. The costs of such insurance obtained by the Bank, through and including the effective date such insurance coverage is canceled or expires, shall be payable on demand by the Borrower to the Bank, together with interest at the Default Rate on such amounts until repaid and any other charges by the Bank in connection with the placement of such insurance. The costs of such insurance, which may be greater than the cost of insurance which the Borrower may be able to obtain on its own, together with interest thereon at the Default Rate and any other charges by the Bank in connection with the placement of such insurance may be added to the total Obligations due and owing.
9.5. Tax Liabilities. The Borrower shall at all times pay and discharge all property and other taxes, assessments and governmental charges upon, and all claims (including claims for labor, materials and supplies) against the Borrower or any of its properties before the same shall become delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith by appropriate proceedings and are insured against or bonded over to the satisfaction of the Bank.
9.6. ERISA Liabilities; Employee Plans. The Borrower shall (i) keep in full force and effect any and all Employee Plans which are presently in existence or may, from time to time, come into existence under ERISA, and not withdraw from any such Employee Plans, unless such withdrawal can be effected or such Employee Plans can be terminated without liability to the Borrower; (ii) make contributions to all of such Employee Plans in a timely manner and in a sufficient amount to comply with the standards of ERISA; including the minimum funding standards of ERISA; (iii) comply with all material requirements of ERISA which relate to such Employee Plans; (iv) notify the Bank immediately upon receipt by the Borrower of any notice concerning the imposition of any withdrawal liability or of the institution of any proceeding or other action which may result in the termination of any such Employee Plans or the appointment of a trustee to administer such Employee Plans; (v)
promptly advise the Bank of the occurrence of any "Reportable Event" or "Prohibited Transaction" (as such terms are defined in ERISA), with respect to any such Employee Plans; and (vi) amend any Employee Plan that is intended to be qualified within the meaning of Section 401 of the Internal Revenue Code of 1986 to the extent necessary to keep the Employee Plan qualified, and to cause the Employee Plan to be administered and operated in a manner that does not cause the Employee Plan to lose its qualified status.
9.7. Financial Statements. The Borrower shall at all times maintain a standard and modern system of accounting, on the accrual basis of accounting and in all respects in accordance with GAAP, and shall furnish to the Bank or its authorized representatives such information regarding the business affairs, operations and financial condition of the Borrower, including, but not limited to:
(a) as soon as available, and in any event, within one hundred twenty (120) days after the close of each of its fiscal years, a copy of the annual audited financial statements of the Borrower, including balance sheet, statement of income and retained earnings, statement of cash flows for the fiscal year then ended and such other information (including nonfinancial information) as the Bank may request, in reasonable detail, prepared and certified by an independent certified public accountant acceptable to the Bank, containing an unqualified opinion; and
(b) as soon as available, and in any event within thirty (30) days following the end of each fiscal month, a copy of the financial statements of the Borrower regarding such fiscal month, including balance sheet, statement of income and retained earnings, statement of cash flows for the fiscal month then ended and such other information (including nonfinancial information) as the Bank may request, in reasonable detail, prepared and certified as accurate by the Borrower.
No change with respect to such accounting principles shall be made by the Borrower without giving prior notification to the Bank. The Borrower represents and warrants to the Bank that the financial statements delivered to the Bank at or prior to the execution and delivery of this Agreement and to be delivered at all times thereafter accurately reflect and will accurately reflect the financial condition of the Borrower. The Bank shall have the right at all times during business hours to inspect the books and records of the Borrower and make extracts therefrom. The Borrower agrees to advise the Bank immediately of any material adverse change in the financial condition, the operations or any other status of the Borrower.
9.8. Supplemental Financial Statements. The Borrower shall immediately upon receipt thereof, provide to the Bank copies of interim and supplemental reports if any, submitted to the Borrower by independent accountants in connection with any interim audit or review of the books of the Borrower.
9.9. Intentionally Omitted.
9.10. Intentionally Omitted.
9.11. Intentionally Omitted.
9.12. Other Reports. The Borrower shall, within such period of time as the Bank may specify, deliver to the Bank such other schedules and reports as the Bank may reasonably require.
9.13. Notice of Proceedings. The Borrower shall, immediately after knowledge thereof shall have come to the attention of any officer of the Borrower, give written notice to the Bank of all threatened or pending actions, suits, and proceedings before any court or governmental department, commission, board or other administrative agency which may have a material effect on the business, property or operations of the Borrower.
9.14. Notice of Default. The Borrower shall, immediately after the commencement thereof, give notice to the Bank in writing of the occurrence of an Event of Default or of any event which, with the lapse of time, the giving of notice or both, would constitute an Event of Default hereunder.
9.15. Banking Relationship. The Borrower covenants and agrees, at all times during the term of this Agreement, to utilize the Bank as its primary bank of account and depository for all financial services, including all receipts, disbursements, funds management, cash management (global) and related service.
10. FINANCIAL COVENANTS.
10.1. Cash Collateral. At all times, the amount of Cash Collateral shall not be less than one hundred percent (100%) of the aggregate outstanding Obligations.
11. EVENTS OF DEFAULT.
The Borrower, without notice or demand of any kind, shall be in default under this Agreement upon the occurrence of any of the following events (each an "Event of Default").
11.1. Nonpayment of Obligations. Any amount due and owing on the Note or any of the Obligations, whether by its terms or as otherwise provided herein, is not paid when due.
11.2. Misrepresentation. Any oral or written warranty, representation, certificate or statement in this Agreement, the Loan Documents or any other agreement with the Bank shall be false in any material respect when made or at any time.
11.3. Nonperformance. Any failure to perform or default in the performance of any covenant, condition or agreement contained in this Agreement, or in the Loan Documents or any other agreement with the Bank; provided, that any failure to perform or default in the performance of Sections 9.2, 9.3, 9.5, 9.6, 9.13 or 9.14 shall not constitute an Event of Default unless such failure or default is not cured within thirty (30) days of the date such failure or default first occurred.
11.4. Default under Other Agreements. Any default in the payment of principal, interest or any other sum for any other obligation in excess of Five Hundred Thousand and No/100 Dollars ($500,000.00) beyond any period of grace provided with respect thereto or in the performance of any other term, condition or covenant contained in any agreement (including, but not limited to any capital or operating lease or any agreement in connection with the deferred purchase price of property) under which any such obligation in excess of Five Hundred Thousand and No/100 Dollars ($500,000.00) is created, the effect of which default is to cause or permit the holder of such obligation (or the other party to such other agreement) to cause such obligation to become due prior to its stated maturity or terminate such other agreement.
11.5. Assignment for Creditors. Any Obligor makes an assignment for the benefit of creditors, fails to pay, or admits in writing its inability to pay its debts as they mature; or if a trustee of any substantial part of the assets of any Obligor is applied for or appointed.
11.6. Bankruptcy. Any proceeding involving any Obligor, is commenced by or against such Obligor under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law or statute of the federal government or any state government, and in the case of any such proceeding being instituted against such Obligor, (i) such Obligor, by any action or failure to act indicates its approval of, consent to or acquiescence therein, or (ii) an order shall be entered approving the petition in such proceedings and such order is not vacated, stayed on appeal or otherwise shall not have ceased to continue in effect within forty-five (45) days after the entry thereof.
11.7. Judgments. The entry of any judgment, decree, levy, attachment, garnishment or other process, or the filing of any Lien against any Obligor involving an excess of Five Hundred Thousand and No/100 Dollars ($500,000.00) which is not fully covered by insurance.
12. REMEDIES.
Upon the occurrence of an Event of Default, the Bank shall have all
rights, powers and remedies set forth in the Loan Documents, in any written
agreement or instrument (other than this Agreement or the Loan Documents)
relating to any of the Obligations or any security therefor, or as otherwise
provided at law or in equity. Without limiting the generality of the foregoing,
the Bank may, at its option upon the occurrence of an Event of Default, declare
its commitments to the Borrower to be terminated or reduced and all Obligations
to be immediately due and payable, provided, however, that upon the occurrence
of an Event of Default under either Section 11.5, "Assignment for Creditors", or
Section 11.6, "Bankruptcy", all commitments of the Bank to the Borrower shall
immediately terminate and all Obligations shall be automatically due and
payable, all without demand, notice or further action of any kind required on
the part of the Bank. The Borrower hereby waives any and all presentment,
demand, notice of dishonor, protest, and all other notices and demands in
connection with the enforcement of Bank's rights under the Loan Documents, and
hereby consents to, and waives notice of release, with or without
consideration, of any Collateral, notwithstanding anything contained herein or in the Loan Documents to the contrary. In addition to the foregoing:
12.1. Offset Rights. The Bank may exercise, from time to time, any and all rights and remedies available to it under the UCC or under any other applicable law in addition to, and not in lieu of, any rights and remedies expressly granted in this Agreement or in any other agreements between any Obligor and the Bank, and may, without demand or notice of any kind, appropriate and apply toward the payment of such of the Obligations, whether matured or unmatured, including costs of collection and attorneys' and paralegals' fees, and in such order of application as the Bank may, from time to time, elect, any indebtedness of the Bank to any Obligor, however created or arising, including, but not limited to, balances, credits, deposits, accounts or moneys of such Obligor in the possession, control or custody of, or in transit to the Bank. The Borrower, on behalf of itself and each Obligor, hereby waives the benefit of any law that would otherwise restrict or limit the Bank in the exercise of its right, which is hereby acknowledged, to appropriate at any time hereafter any such indebtedness owing from the Bank to any Obligor.
12.2. Attorney-in-Fact. The Borrower hereby irrevocably makes, constitutes and appoints the Bank (and any officer of the Bank or any Person designated by the Bank for that purpose) as the Borrower's true and lawful proxy and attorney-in-fact (and agent-in-fact) in the Borrower's name, place and stead, with full power of substitution, to (i) take such actions as are permitted in this Agreement, (ii) execute such financing statements and other documents and to do such other acts as the Bank may require to perfect and preserve the Bank's security interest in, and to enforce such interests in the Collateral, and (iii) after the occurrence and during the continuance of an Event of Default carry out any remedy provided for in this Agreement, including, without limitation, endorsing the Borrower's name to checks, drafts, instruments and other items of payment, and proceeds of the Collateral, executing change of address forms with the postmaster of the United States Post Office serving the address of the Borrower, changing the address of the Borrower to that of the Bank, opening all envelopes addressed to the Borrower and applying any payments contained therein to the Obligations. The Borrower hereby acknowledges that the constitution and appointment of such proxy and attorney-in-fact are coupled with an interest and are irrevocable. The Borrower hereby ratifies and confirms all that said attorney-in-fact may do or cause to be done by virtue of any provision of this Agreement.
12.3. No Marshaling. The Bank shall not be required to marshal any present or future collateral security (including but not limited to the Collateral) for, or other assurances of payment of, the Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order. To the extent that it lawfully may, the Borrower hereby agrees that it will not invoke any law relating to the marshaling of collateral which might cause delay in or impede the enforcement of the Bank's rights under this Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, the Borrower hereby irrevocably waives the benefits of all such laws.
12.4. Application of Proceeds. The Bank will immediately after receipt of cash or solvent credits from collection of items of payment, proceeds of Collateral or any other source, apply the whole or any part thereof against the Obligations secured hereby. The Bank shall further have the exclusive right to determine how, when and what application of such payments and such credits shall be made on the Obligations, and such determination shall be conclusive upon the Borrower. Any proceeds of any disposition by the Bank of all or any part of the Collateral may be first applied by the Bank to the payment of expenses incurred by the Bank in connection with the Collateral, including attorneys' fees and legal expenses as provided for in Section 13 hereof.
12.5. No Waiver. No Event of Default shall be waived by the Bank except in writing. No failure or delay on the part of the Bank in exercising any right, power or remedy hereunder shall operate as a waiver of the exercise of the same or any other right at any other time; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. There shall be no obligation on the part of the Bank to exercise any remedy available to the Bank in any order. The remedies provided for herein are cumulative and not exclusive of any remedies provided at law or in equity. The Borrower agrees that in the event that the Borrower fails to perform, observe or discharge any of its Obligations or liabilities under this Agreement or any other agreements with the Bank, no remedy of law will provide adequate relief to the Bank, and further agrees that the Bank shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.
13. MISCELLANEOUS.
13.1. Obligations Absolute. None of the following shall affect the Obligations of the Borrower to the Bank under this Agreement or the Bank's rights with respect to the Collateral:
(a) acceptance or retention by the Bank of other property or any interest in property as security for the Obligations;
(b) release by the Bank of all or any part of the Collateral or of any party liable with respect to the Obligations;
(c) release, extension, renewal, modification or substitution by the Bank of the Note, or any note evidencing any of the Obligations, or the compromise of the liability of any guarantor of the Obligations; or
(d) failure of the Bank to resort to any other security or to pursue the Borrower or any other obligor liable for any of the Obligations before resorting to remedies against the Collateral.
13.2. Entire Agreement. This Agreement (i) is valid, binding and enforceable against the Borrower and the Bank in accordance with its provisions and no conditions exist
as to its legal effectiveness; (ii) constitutes the entire agreement between the parties; and (iii) is the final expression of the intentions of the Borrower and the Bank. No promises, either expressed or implied, exist between the Borrower and the Bank, unless contained herein. This Agreement supersedes all negotiations, representations, warranties, commitments, offers, contracts (of any kind or nature, whether oral or written) prior to or contemporaneous with the execution hereof.
13.3. Amendments; Waivers. No amendment, modification, termination, discharge or waiver of any provision of this Agreement or of the Loan Documents, or consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only for the specific purpose for which given.
13.4. WAIVER OF DEFENSES. THE BORROWER WAIVES EVERY PRESENT AND FUTURE DEFENSE, CAUSE OF ACTION, COUNTERCLAIM OR SETOFF WHICH THE BORROWER MAY NOW HAVE OR HEREAFTER MAY HAVE TO ANY ACTION BY THE BANK IN ENFORCING THIS AGREEMENT. THE BORROWER WAIVES ANY IMPLIED COVENANT OF GOOD FAITH AND RATIFIES AND CONFIRMS WHATEVER THE BANK MAY DO PURSUANT TO THE TERMS OF THIS AGREEMENT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK GRANTING ANY FINANCIAL ACCOMMODATION TO THE BORROWER.
13.5. WAIVER OF JURY TRIAL. THE BANK AND THE BORROWER, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, EACH KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE IRREVOCABLY, THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTE OR ANY OF THE OTHER OBLIGATIONS, THE COLLATERAL, OR ANY OTHER AGREEMENT EXECUTED OR CONTEMPLATED TO BE EXECUTED IN CONJUNCTION WITH THIS AGREEMENT, OR ANY COURSE OF CONDUCT OR COURSE OF DEALING IN WHICH THE BANK AND THE BORROWER ARE ADVERSE PARTIES. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK GRANTING ANY FINANCIAL ACCOMMODATION TO THE BORROWER.
13.6. LITIGATION. TO INDUCE THE BANK TO MAKE THE LOANS, THE BORROWER IRREVOCABLY AGREES THAT ALL ACTIONS ARISING, DIRECTLY OR INDIRECTLY, AS A RESULT OR CONSEQUENCE OF THIS AGREEMENT, THE NOTE, ANY OTHER AGREEMENT WITH THE BANK OR THE COLLATERAL, SHALL BE INSTITUTED AND LITIGATED ONLY IN COURTS HAVING THEIR SITUS IN THE CITY OF CHICAGO, ILLINOIS. THE BORROWER HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION AND VENUE OF ANY STATE OR FEDERAL COURT HAVING ITS SITUS IN SAID CITY, AND WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS. THE BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED MAIL,
RETURN RECEIPT REQUESTED, DIRECTED TO THE BORROWER AS SET FORTH HEREIN IN THE MANNER PROVIDED BY APPLICABLE STATUTE, LAW, RULE OF COURT OR OTHERWISE.
13.7. Assignability. The Bank may at any time assign the Bank's rights in this Agreement, the Note, the Obligations, or any part thereof and transfer the Bank's rights in any or all of the Collateral, and the Bank thereafter shall be relieved from all liability with respect to such Collateral. In addition, the Bank may at any time sell one or more participations in the Loans. The Borrower may not sell or assign this Agreement, or any other agreement with the Bank or any portion thereof, either voluntarily or by operation of law, without the prior written consent of the Bank. This Agreement shall be binding upon the Bank and the Borrower and their respective legal representatives and successors. All references herein to the Borrower shall be deemed to include any successors, whether immediate or remote. In the case of a joint venture or partnership, the term "Borrower" shall be deemed to include all joint venturers or partners thereof, who shall be jointly and severally liable hereunder.
13.8. Confidentiality. The Borrower and the Bank hereby agree and
acknowledge that any and all information relating to the Borrower which is (i)
furnished by the Borrower to the Bank (or to any affiliate of the Bank), and
(ii) non-public, confidential or proprietary in nature, shall be kept
confidential by the Bank or such affiliate in accordance with applicable law,
provided, however, that such information and other credit information relating
to the Borrower may be distributed by the Bank or such affiliate to the Bank's
or such affiliate's directors, officers, employees, attorneys, affiliates,
auditors and regulators, and upon the order of a court or other governmental
agency having jurisdiction over the Bank or such affiliate, to any other party.
The Borrower and the Bank further agree that this provision shall survive the
termination of this Agreement.
13.9. Binding Effect. This Agreement shall become effective upon execution by the Borrower and the Bank. If this Agreement is not dated or contains any blanks when executed by the Borrower, the Bank is hereby authorized, upon notice to the Borrower, to date this Agreement as of the date when it was executed by the Borrower, and to complete any such blanks according to the terms upon which this Agreement is executed.
13.10. Governing Law. This Agreement, the Loan Documents and the Note shall be delivered and accepted in and shall be deemed to be contracts made under and governed by the internal laws of the State of Illinois (but giving effect to federal laws applicable to national banks), and for all purposes shall be construed in accordance with the laws of such State, without giving effect to the choice of law provisions of such State.
13.11. Enforceability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by, unenforceable or invalid under any jurisdiction, such provision shall as to such jurisdiction, be severable and be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this
Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.
13.12. Survival of Borrower Representations. All covenants, agreements, representations and warranties made by the Borrower herein shall, notwithstanding any investigation by the Bank, be deemed material and relied upon by the Bank and shall survive the making and execution of this Agreement and the Loan Documents and the issuance of the Note, and shall be deemed to be continuing representations and warranties until such time as the Borrower has fulfilled all of its Obligations to the Bank, and the Bank has been paid in full. The Bank, in extending financial accommodations to the Borrower, is expressly acting and relying on the aforesaid representations and warranties.
13.13. Extensions of Bank's Commitment and Note. This Agreement shall secure and govern the terms of any extensions or renewals of the Bank's commitment hereunder and the Note pursuant to the execution of any modification, extension or renewal note executed by the Borrower and accepted by the Bank in its sole and absolute discretion in substitution for the Note.
13.14. Time of Essence. Time is of the essence in making payments of all amounts due the Bank under this Agreement and in the performance and observance by the Borrower of each covenant, agreement, provision and term of this Agreement.
13.15. Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument.
13.16. Facsimile Signatures. The Bank is hereby authorized to rely upon and accept as an original any Loan Documents or other communication which is sent to the Bank by facsimile, telegraphic or other electronic transmission (each, a "Communication") which the Bank in good faith believes has been signed by Borrower and has been delivered to the Bank by a properly authorized representative of the Borrower, whether or not that is in fact the case. Notwithstanding the foregoing, the Bank shall not be obligated to accept any such Communication as an original and may in any instance require that an original document be submitted to the Bank in lieu of, or in addition to, any such Communication.
13.17. Notices. Except as otherwise provided herein, the Borrower waives all notices and demands in connection with the enforcement of the Bank's rights hereunder. All notices, requests, demands and other communications provided for hereunder shall be in writing, sent by certified or registered mail, postage prepaid, by facsimile, telegram or delivered in person, and addressed as follows:
If to the Borrower: eLoyalty Corporation 150 Field Drive Lake Forest, Illinois 60045 Attention: Rob Wert
If to the Bank: LaSalle Bank National Association
135 South LaSalle Street
Chicago, Illinois 60603
Attention: June Courtney
|
or, as to each party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this subsection. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances.
13.18. Indemnification. The Borrower agrees to defend (with counsel satisfactory to the Bank), protect, indemnify and hold harmless each Indemnified Party from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and distributions of any kind or nature (including, without limitation, the disbursements and the reasonable fees of counsel for each Indemnified Party thereto, which shall also include, without limitation, attorneys' fees and time charges of attorneys who may be employees of the Bank, any parent corporation or affiliated corporation of the Bank), which may be imposed on, incurred by, or asserted against, any Indemnified Party (whether direct, indirect or consequential and whether based on any federal, state or local laws or regulations, including, without limitation, securities, Environmental Laws and commercial laws and regulations, under common law or in equity, or based on contract or otherwise) in any manner relating to or arising out of this Agreement or any of the Loan Documents, or any act, event or transaction related or attendant thereto, the preparation, execution and delivery of this Agreement and the Loan Documents, including, but not limited to, the making or issuance and management of the Loans, the use or intended use of the proceeds of the Loans, the enforcement of the Bank's rights and remedies under this Agreement, the Loan Documents, the Note, any other instruments and documents delivered hereunder, or under any other agreement between the Borrower and the Bank; provided, however, that the Borrower shall not have any obligations hereunder to any Indemnified Party with respect to matters caused by or resulting from the willful misconduct or gross negligence of such Indemnified Party. To the extent that the undertaking to indemnify set forth in the preceding sentence may be unenforceable because it violates any law or public policy, the Borrower shall satisfy such undertaking to the maximum extent permitted by applicable law. Any liability, obligation, loss, damage, penalty, cost or expense covered by this indemnity shall be paid to each Indemnified Party on demand, and, failing prompt payment, shall, together with interest thereon at the Default Rate from the date incurred by each Indemnified Party until paid by the Borrower, be added to the Obligations of the Borrower and be secured by the Collateral. The provisions of this Section 13.18 shall survive the satisfaction and payment of the other Obligations and the termination of this Agreement.
IN WITNESS WHEREOF, the Borrower and the Bank have executed this Loan and Security Agreement as of the date first above written.
eLOYALTY CORPORATION, a Delaware corporation
Agreed and accepted:
LASALLE BANK NATIONAL ASSOCIATION,
a national banking association,
SCHEDULE 3.1
(See attached Closing Checklist)
SCHEDULE 7.1
eLoyalty Corporation was spun off from Technology Solutions Company in February of 2000, and until that date was doing business as Technology Solutions Company.
SCHEDULE 7.16
(See attached list of Bank Accounts)
SCHEDULE 8.1
None.
SCHEDULE 8.2
(See attached Lien Search Summary)
AMENDMENT NO. 1 AND CONSENT TO
LOAN AGREEMENT
This Amendment No. 1 and Consent to Loan Agreement (the "Amendment") is dated as of the ____ day of February, 2002 and is by and between LASALLE BANK NATIONAL ASSOCIATION ("Lender") and eLOYALTY CORPORATION, a Delaware corporation (the "Borrower").
WITNESSETH:
WHEREAS, Lender and Borrower are parties to that certain Loan Agreement, dated as of December 17, 2001 (as the same may from time to time be amended or otherwise modified, the "Loan Agreement"; capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Loan Agreement); and
WHEREAS, the Borrower has requested that (i) Lender consent to Borrower's participation in a proposed exchange of its shares in YOUcentric, Inc. in part for shares of common stock of J.D. Edwards & Company ("YOUcentric Exchange") and in part for cash, which would otherwise violate Section 8.3 of the Loan Agreement (ii) Lender consent to Borrower's provision of its employees with bonus compensation in the form of forgivable loans (the "Bonus Loans") and the maintenance of Bonus Loans previously provided, which would otherwise violate Sections 8.3 and, in certain instances, Section 8.6 of the Loan Agreement and (iii) the Loan Agreement be amended in certain respects.
NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, each of Lender and Borrower hereby agree as follows:
1. Amendments to Loan Agreement. In reliance on the representations and warranties set forth in Section 3 of this Amendment and subject to the satisfaction of the conditions precedent set forth in Section 4 of this Amendment, the Loan Agreement is hereby amended as follows:
1.1. The following proviso is added to the end of the first sentence of Section 2.5 of the Loan Agreement:
;provided, however, that Bank may issue Letters of Credit with an expiration date on or before June 31, 2005 in an aggregate face amount not to exceed $200,000.
2. Consents. In reliance on the representations and warranties set forth in Section 3 of this Amendment and subject to the satisfaction of the conditions precedent set forth in Section 4 of this Amendment, Lender hereby consents to: (a) the YOUcentric Exchange, (b) the establishment and maintenance of the Bonus Loan program. These consents shall be deemed effective as of the date of the Agreement.
Except as expressly provided herein, the foregoing consents shall not constitute (a) a modification or alteration of the terms, conditions or covenants of the Loan Agreement or any document entered into in connection therewith, or (b) a waiver, release or limitation upon the exercise by Lender of any of its rights, legal or equitable, hereunder or under the Loan Agreement or any Loan Document. Except as set forth above, the Lender reserves any and all rights and remedies which it has had, has or may have under the Loan Agreement and each Loan Document.
3. Representations and Warranties. To induce the Lender to enter into this Amendment, the Borrower hereby represents and warrants to the Lender that:
3.1. the execution, delivery and performance by the Borrower of this Amendment and each of the other agreements, instruments and documents contemplated hereby are within its corporate power, have been duly authorized by all necessary corporate action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law applicable to the Borrower, the certificate of incorporation and by-laws of the Borrower (as amended to date), any order, judgment or decree of any court or governmental agency, or any agreement, instrument or document binding upon the Borrower or any of its property;
3.2. each of the Loan Agreement and the other Loan Documents, each as amended by this Amendment, are the legal, valid and binding obligation of the Borrower to the extent the Borrower is a party thereto, and the Loan Agreement and such Loan Documents are enforceable against the Borrower in accordance with their respective terms;
3.3. the representations and warranties of Borrower contained in the Loan Agreement and the Loan Documents, each as amended hereby, are true and correct in all material respects as of the date hereof, with the same effect as though made on the date hereof, except to the extent that such representations and warranties expressly relate to an earlier date, in which case such representations and warranties are true and correct as of such earlier date; and
3.4. Borrower has performed in all material respects all of its obligations under the Loan Agreement and the other Loan Documents to be performed by it on or before the date hereof and as of the date hereof, Borrower is in compliance with all applicable terms and provisions of the Loan Agreement and each of the other Loan Documents to be observed
and performed by it and, assuming the effectiveness of the consents set forth herein, no Event of Default has occurred and is continuing.
4. Conditions. The effectiveness of the amendments and consents set forth above is subject to the following conditions precedent:
4.1. Borrower shall have executed and delivered to Lender, or shall have caused to be executed and delivered to Lender, each in form and substance satisfactory to Lender, this Amendment and such other documents, instruments and agreements as Lender may reasonably request.
4.2. All proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be satisfactory to Lender and its legal counsel.
4.3. Assuming the effectiveness of the consents set forth herein, no Event of Default shall have occurred and be continuing.
5. References; Effectiveness. Each of the Lender and the Borrower hereby agree that all references to the Loan Agreement which are contained in any of the other Loan Documents shall refer to the Loan Agreement as amended by this Amendment.
6. Counterparts. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment.
7. Continued Effectiveness. Except as specifically set forth herein, the Loan Agreement and each of the other Loan Documents shall continue in full force and effect according to their respective terms.
8. Governing Law. This Amendment shall be a contract made under and governed by the internal laws of the State of Illinois.
9. Costs and Expenses. Borrower hereby agrees that all expenses incurred by the Lender in connection with the preparation, negotiation and closing of the transactions contemplated hereby, including without limitation reasonable attorneys' fees and expenses, shall be part of the Obligations.
IN WITNESS WHEREOF, this Amendment has been executed as of, and is effective as of, the day and year first written above.
eLOYALTY CORPORATION, a Delaware corporation, as Borrower
LASALLE BANK NATIONAL ASSOCIATION, as
Lender
EXHIBIT 10.29
AMENDMENT NO. 1 TO SHARE PURCHASE AGREEMENT
THIS AMENDMENT NO. 1 TO SHARE PURCHASE AGREEMENT (this "Amendment") is made as of December 19, 2001, by and among eLOYALTY CORPORATION, a Delaware corporation (the "Company"), and the investors listed on Exhibit A hereto, each of which is herein referred to as an "Investor" and all of which are collectively referred to herein as the "Investors."
RECITALS
WHEREAS, the Company has entered into that certain Share Purchase Agreement, dated as of September 24, 2001, with the Investors (the "Share Purchase Agreement"); and
WHEREAS, the Company and the Investors desire to amend the Share Purchase Agreement to revise the allocation of Shares (as such term is defined in the Share Purchase Agreement) to be purchased by certain of the Investors pursuant to the Share Purchase Agreement and to reflect certain other agreements among them.
AGREEMENT
NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows:
1. Amendment of Exhibit A. Exhibit A to the Share Purchase Agreement is hereby amended and restated in its entirety to read as is set forth as Exhibit A to this Amendment.
2. Amendment of Exhibit B. Exhibit B to the Share Purchase Agreement is hereby amended and restated in its entirety to read as is set forth as Exhibit B to this Amendment.
3. Amendment of Section 7.6. Each reference to "December 31, 2002" in
Section 7.6 of the Share Purchase Agreement is hereby replaced in its entirety
by "December 15, 2002."
4. No Other Amendments. Except as amended hereby, the Share Purchase Agreement shall remain in full force and effect.
5. Governing Law. This Amendment shall be governed in all respects by the laws of the State of Illinois without regard to choice of laws or conflict of laws provisions thereof.
6. Counterparts. This Amendment may be executed in any number of counterparts and signatures may be delivered by facsimile, each of which may be executed by less than all Investors, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.
THE COMPANY:
eLOYALTY CORPORATION
By: /s/ Timothy J. Cunningham
---------------------------------------------
Name: Timothy J. Cunningham
Title: Senior Vice President and Chief Financial
Officer
|
Address: 150 Field Drive, Suite 250 Lake Forest, IL 60045
THE INVESTORS:
TCV IV, L.P., a Delaware limited partnership By: Technology Crossover Management IV, L.L.C. Its: General Partner
By: /s/ Carla S. Newell ----------------------------------------- Name: Carla S. Newell Title: Attorney in Fact |
TCV IV STRATEGIC PARTNERS, L.P., a Delaware limited partnership By: Technology Crossover Management IV, L.L.C. Its: General Partner
By: /s/ Carla S. Newell ----------------------------------------- Name: Carla S. Newell Title: Attorney in Fact |
TCV III (GP), a Delaware general partnership By: Technology Crossover Management III, L.L.C. Its: General Partner
By: /s/ Carla S. Newell ----------------------------------------- Name: Carla S. Newell Title: Attorney in Fact |
TCV III, L.P., a Delaware limited partnership By: Technology Crossover Management III, L.L.C. Its: General Partner
By: /s/ Carla S. Newell ----------------------------------------- Name: Carla S. Newell Title: Attorney in Fact |
TCV III (Q), L.P., a Delaware limited partnership By: Technology Crossover Management III, L.L.C. Its: General Partner
By: /s/ Carla S. Newell ----------------------------------------- Name: Carla S. Newell Title: Attorney in Fact |
TCV III STRATEGIC PARTNERS, L.P., a Delaware limited partnership By: Technology Crossover Management III, L.L.C. Its: General Partner
By: /s/ Carla S. Newell ----------------------------------------- Name: Carla S. Newell Title: Attorney in Fact |
SUTTER HILL VENTURES, a California limited partnership
By: Sutter Hill Ventures, LLC
Its: General Partner
By: /s/ Tench Coxe ----------------------------------------- Name: Tench Coxe Title: Managing Director |
SUTTER HILL ENTREPRENEURS FUND (AI), L.P.,
a California limited partnership
By: Sutter Hill Ventures, LLC
Its: General Partner
By: /s/ Tench Coxe ----------------------------------------- Name: Tench Coxe Title: Managing Director |
SUTTER HILL ENTREPRENEURS FUND (QP), L.P.,
a California limited partnership
By: Sutter Hill Ventures, LLC
Its: General Partner
By: /s/ Tench Coxe ----------------------------------------- Name: Tench Coxe Title: Managing Director |
SUTTER HILL ASSOCIATES, L.P., a California limited partnership
/s/ Tench Coxe
-----------------------------------------
By: Tench Coxe
Its: General Partner
|
EXHIBIT A
SCHEDULE OF INVESTORS
------------------------------------------------------------------------------------------------------------- The following are the "TCV Maximum Aggregate Investment: Percentage of TCV Investors" for the purposes of Shares: the Agreement (list continues on multiple pages): ------------------------------------------------------------------------------------------------------------- TCV IV, L.P., a Delaware $12,027,468.00 80.18312% limited partnership 528 Ramona Street Palo Alto, California 94301 Fax: 650-614-8222 (principal address) 56 Main Street, Suite 210 Millburn, New Jersey 07041 (copy) ------------------------------------------------------------------------------------------------------------- TCV IV STRATEGIC $452,658.00 3.01772% PARTNERS, L.P., a Delaware limited partnership 528 Ramona Street Palo Alto, California 94301 Fax: 650-614-8222 (principal address) 56 Main Street, Suite 210 Millburn, New Jersey 07041 (copy) ------------------------------------------------------------------------------------------------------------- TCV III (GP), a Delaware $18,298.50 .12199% general partnership 528 Ramona Street Palo Alto, California 94301 Fax: 650-614-8222 (principal address) 56 Main Street, Suite 210 Millburn, New Jersey 07041 (copy) ------------------------------------------------------------------------------------------------------------- |
------------------------------------------------------------------------------------------------------------- The following are the "TCV Maximum Aggregate Investment: Percentage of TCV Investors" for the purposes of Shares: the Agreement (list continues on multiple pages): ------------------------------------------------------------------------------------------------------------- TCV III, L.P., a Delaware $86,916.00 .57944% limited partnership 528 Ramona Street Palo Alto, California 94301 Fax: 650-614-8222 (principal address) 56 Main Street, Suite 210 Millburn, New Jersey 07041 (copy) ------------------------------------------------------------------------------------------------------------- TCV III (Q), L.P., a Delaware $2,310,078.00 15.40052% limited partnership 528 Ramona Street Palo Alto, California 94301 Fax: 650-614-8222 (principal address) 56 Main Street, Suite 210 Millburn, New Jersey 07041 (copy) ------------------------------------------------------------------------------------------------------------- TCV III STRATEGIC $104,581.50 .69721% PARTNERS, L.P., a Delaware limited partnership 528 Ramona Street Palo Alto, California 94301 Fax: 650-614-8222 (principal address) 56 Main Street, Suite 210 Millburn, New Jersey 07041 (copy) ------------------------------------------------------------------------------------------------------------- |
------------------------------------------------------------------------------------------------------------- The following are the "SH Maximum Aggregate Investment: Percentage of SH Investors" for the purposes of Shares: the Agreement (list continues on multiple pages): ------------------------------------------------------------------------------------------------------------- SUTTER HILL VENTURES, $7,169,888.00 71.69888% a California limited partnership 755 Page Mill Road Suite A-200 Palo Alto, California 94304 Fax: 650-858-1854 ------------------------------------------------------------------------------------------------------------- SUTTER HILL $70,913.00 .70913% ENTREPRENEURS FUND (AI), L.P., a California limited partnership 755 Page Mill Road Suite A-200 Palo Alto, California 94304 Fax: 650-858-1854 ------------------------------------------------------------------------------------------------------------- SUTTER HILL $179,551.00 1.79551% ENTREPRENEURS FUND (QP), L.P., a California limited partnership 755 Page Mill Road Suite A-200 Palo Alto, California 94304 Fax: 650-858-1854 ------------------------------------------------------------------------------------------------------------- SUTTER HILL $2,579,648.00 25.79648% ASSOCIATES, L.P., a California limited partnership 755 Page Mill Road Suite A-200 Palo Alto, California 94304 Fax: 650-858-1854 ------------------------------------------------------------------------------------------------------------- |
EXHIBIT B
CERTIFICATE OF DESIGNATIONS
OF
7% SERIES B CONVERTIBLE PREFERRED STOCK
OF ELOYALTY CORPORATION
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
The undersigned do hereby certify that the following resolution was duly adopted by the Board of Directors of eLoyalty Corporation, a Delaware corporation, on December 19th, 2001:
WHEREAS, the Certificate of Incorporation of eLoyalty Corporation, a Delaware corporation (the "Corporation"), authorizes the Corporation to issue a total of [___________] shares of preferred stock, par value $.01 per share ("Preferred Stock"), which may be divided into one or more series as the Board of Directors may determine;
WHEREAS, the Certificate of Incorporation of the Corporation expressly vests in the Board of Directors the authority to fix and determine the designations, powers, preferences and rights, and the qualifications, limitations and restrictions, of the Preferred Stock;
WHEREAS, the Board of Directors deems it advisable to designate a series of the Preferred Stock consisting of [__________] shares designated as 7% Series B Convertible Preferred Stock; and
WHEREAS, immediately prior to the filing of this Certificate of Designation with the Secretary of State of the State of Delaware, the Corporation filed an amendment to its Certificate of Incorporation which, among other things, gave effect to a one-for-ten reverse stock split of the Corporation's common stock, $.01 par value per share.
NOW, THEREFORE, IT IS HEREBY RESOLVED, that pursuant to Article IV of the Certificate of Incorporation of the Corporation, there be and hereby is authorized and created a series of Preferred Stock hereby designated as 7% Series B Convertible Preferred Stock, to consist of [_____________] shares, having a par value of $.01 per share, which series shall have the voting rights, designations, powers, preferences, relative and other special rights, and the qualifications, limitations and restrictions set forth below:
Series B Convertible Preferred Stock. [______________] of the authorized shares of Preferred Stock are hereby designated "7% Series B Convertible Preferred Stock" (the "Series B
Preferred Stock"). The rights, preferences, privileges, restrictions and other matters relating to the Series B Preferred Stock are as follows:
(a) Dividend Rights.
(i) Subject to the right of any other series of Preferred Stock that may from time to time come into existence and which is expressly senior to the rights of the Series B Preferred Stock, the holders of Series B Preferred Stock, in preference to the holders of common stock, par value $.01 per share, of the Corporation (the "Common Stock"), the Series A Junior Participating Preferred Stock, par value $.01 per share, of the Corporation and any other stock of the Corporation hereafter created which shall be junior to the Series B Preferred Stock (together, "Series B Junior Stock"), shall be entitled to receive dividends, when, as and if declared by the Board of Directors, but only out of funds that are legally available therefor, at the rate of 7% of the Series B Original Issue Price (as defined below) per annum (the "Series B Dividend Rate") on each outstanding share of Series B Preferred Stock (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares). For any share of Series B Preferred Stock, such dividends shall begin to accrue commencing upon the first date such share is issued and becomes outstanding and shall be payable semi-annually in cash on January 1 and July 1 of each year, beginning on July 1, 2002 (each, a "Dividend Payment Date"), provided, that, (i) if any such Dividend Payment Date is not a Business Day, then any such dividend shall be payable on the next Business Day, and (ii) any such dividend shall be payable only as the Board of Directors may from time to time determine, and only when, as and if declared by the Board of Directors. Subject to the foregoing, any such dividend shall be paid to the holders of record at the close of business on the date specified by the Board of Directors at the time such dividend is declared, provided, however, that such date may not be more than 60 days nor less than 10 days prior to the applicable dividend payment date. Such dividends shall accrue day by day and shall be cumulative, whether or not declared by the Board of Directors and whether or not there shall be funds legally available for the payment of dividends. The original issue price of the Series B Preferred Stock shall be $5.10 (the "Series B Original Issue Price"). Dividends payable for any period shorter or longer than a semi-annual dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. Dividends in arrears may be declared by the Board of Directors and paid on any date fixed by the Board of Directors, without reference to any regular Dividend Payment Date. Any dividend paid upon the Series B Preferred Stock at a time when any accrued dividends for any prior periods are delinquent shall be expressly declared as a dividend in whole or partial payment of the accrued dividend for the earliest period or periods for which dividends are then delinquent, and shall be so designated to each holder to whom payment is made thereof. The term "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in the City of Chicago, Illinois are authorized or required by law to be closed.
(ii) So long as any shares of Series B Preferred Stock shall be outstanding, without the prior written consent of the holders of a majority of the then issued and
outstanding shares of Series B Preferred Stock, no dividend (other than a
Common Stock dividend paid pro rata to the Corporation's stockholders),
whether in cash, securities or other property, shall be paid or declared,
nor shall any other distribution (other than a Common Stock dividend paid
pro rata to the Corporation's stockholders) be made, on any Series B
Junior Stock, nor shall any shares of any Series B Junior Stock of the
Corporation be purchased, redeemed or otherwise acquired for value by the
Corporation or any of its subsidiaries (except (A) for acquisitions of
Common Stock by the Corporation or its subsidiaries pursuant to
stock-based compensation arrangements or agreements that permit the
Corporation to repurchase such shares upon termination of services to the
Corporation or its subsidiaries for a price not greater than the cost
thereof to the applicable service provider, (B) for acquisitions by the
Corporation or its subsidiaries in whole or partial satisfaction of the
exercise price or applicable tax withholding requirements in respect of
any option, restricted stock or similar award made pursuant to any
compensation or benefit plan, agreement or arrangement maintained or
assumed by the Corporation or its subsidiaries and (C) by conversion into
or exchange for Series B Junior Stock or any security convertible into or
exchangeable for Series B Junior Stock) until all dividends (set forth in
Section (a)(i) above) then accrued on the Series B Preferred Stock shall
have been paid or declared and set apart. In the event that the
Corporation shall declare a dividend or distribution payable in securities
of the Corporation or of other persons (other than a dividend paid solely
in shares of Common Stock), evidences of indebtedness issued by the
Corporation or other persons, or options or rights to purchase any such
securities or evidences of indebtedness or other assets (including cash)
to the holders of the Common Stock, then the holders of the Series B
Preferred Stock shall be entitled to a proportionate share of any such
dividend or distribution as though the holders of the Series B Preferred
Stock were the holders of the number of shares of Common Stock into which
their respective shares of Series B Preferred Stock are convertible as of
the record date fixed for the determination of the holders of the Common
Stock entitled to receive such dividend or distribution (calculated as if
the Series B Preferred Stock were convertible upon the Series B Original
Issue Date and without consideration of the restriction on conversion
contained in Section (d)(i) hereof).
(b) Voting Rights.
(i) General Rights. Except as otherwise provided herein or as required by law, the Series B Preferred Stock shall be voted equally with the shares of the Common Stock of the Corporation and not as a separate class, at any annual or special meeting of stockholders of the Corporation, upon the following basis: each holder of shares of Series B Preferred Stock shall be entitled to such number of votes as shall be equal to the whole number of shares of Common Stock into which such holder's aggregate number of shares of Series B Preferred Stock are convertible pursuant to Section (d) hereof immediately after the close of business on the record date fixed for such meeting or the effective date of such written consent (calculated as if the Series B Preferred Stock were convertible upon the Series B Original Issue Date and without consideration of the restriction on conversion contained in Section (d)(i) hereof).
(ii) Separate Vote of Series B Preferred Stock. In addition to any other vote or consent required herein or by law, the vote of the holders of at least a majority of the outstanding Series B Preferred Stock shall be necessary for effecting or validating the following actions:
(A) any action that authorizes, creates or results in the issuance of any class or series of stock or any other securities convertible into or exercisable for equity securities of the Corporation having rights, preferences or privileges senior to or on a parity with the Series B Preferred Stock;
(B) any increase or decrease in the authorized number of shares of Series B Preferred Stock; or
(C) any amendment, waiver, alteration or repeal of any provisions of the Certificate of Incorporation (including without limitation by merger, consolidation or otherwise) or Bylaws of the Corporation in a way that, directly or indirectly, adversely affects the rights, preferences or privileges of the Series B Preferred Stock.
(iii) Special Voting Rights. During the period beginning on the Series B Original Issue Date (as defined below), and ending on the date which is six months after the Series B Original Issue Date, the Corporation shall not consummate any Sale Transaction to which it is a party unless such Sale Transaction has been approved by the affirmative vote of the holders of at least 85% of the Series B Preferred Stock present in person or by proxy and entitled to vote at a stockholder meeting called for the purpose of approving such Sale Transaction.
(c) Liquidation Rights.
(i) Upon any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any Series B Junior Stock, subject to the rights of any series of Preferred Stock that may from time to time come into existence and which is expressly senior to the rights of the Series B Preferred Stock, the holders of Series B Preferred Stock shall be entitled to be paid in cash out of the assets of the Corporation an amount per share of Series B Preferred Stock equal to 100% of the Series B Original Issue Price (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares), plus an amount equal to accrued but unpaid dividends (the "Liquidation Preference"), for each share of Series B Preferred Stock held by each such holder. If, upon any such liquidation, dissolution, or winding up, the assets of the Corporation shall be insufficient to make payment in full of the Liquidation Preference to all holders of Series B Preferred Stock, then such assets shall be distributed among the holders of Series B Preferred Stock at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled. After the payment of the foregoing full Liquidation Preference of the Series B Preferred Stock and any other distribution that may be required with respect to any
series of Preferred Stock that may from time to time come into existence,
the assets of the Corporation legally available for distribution, if any,
shall be distributed ratably to the holders of the Series B Junior Stock
and the Series B Preferred Stock, on an as converted basis; provided,
however, that if, in connection with a Sale Transaction (as defined
below), the holders of a share of the Common Stock (before giving effect
to the payment of the Liquidation Preference but after giving effect to
the payment of the liquidation preference of any other class of Preferred
Stock and assuming conversion in full of the outstanding shares of Series
B Preferred Stock into Common Stock) would receive consideration with a
value of at least four times the Series B Original Issue Price (as
adjusted for stock splits, stock dividends, combinations,
recapitalizations and the like), then in lieu of the Liquidation
Preference plus participation with the Series B Junior Stock provided for
above, the holders of the Series B Preferred Stock shall receive the
amount that they would be entitled to receive if all shares of Series B
Preferred Stock were converted to Common Stock immediately prior to the
Sale Transaction. The Corporation shall not enter into any Sale
Transaction that does not provide for the treatment of the holders of
Series B Preferred Stock in a manner consistent (assuming in the case of a
merger or consolidation that the assets of the Corporation legally
available for distribution equals the aggregate consideration to be
received by the Corporation's stockholders in such merger or
consolidation) with the provisions of this Section (c). In the event the
requirements of the immediately preceding sentence are not complied with
in connection with a Sale Transaction, the Corporation shall forthwith
either (A) cause the closing of such Sale Transaction to be postponed
until such time as such requirements have been complied with or (B) cancel
such Sale Transaction, in which event the rights, preferences and
privileges of the holders of the Series B Preferred Stock shall revert to
and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in Section
(c)(iv) hereof. Upon receipt by any holder of the full amount of the
distributions to such holder as contemplated by this Section (c)(i) in
respect of any share of Series B Preferred Stock, such share of Series B
Preferred Stock shall be deemed to be retired and shall no longer be
outstanding.
(ii) The following events (each a "Sale Transaction") shall be considered a liquidation under this Section:
(A) any consolidation or merger of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Corporation immediately prior to such consolidation, merger or reorganization, own less than 50% of the Corporation's voting power immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions to which the Corporation is a direct contracting party in which in excess of 50% of the Corporation's voting power is transferred, excluding any consolidation or merger effected exclusively to change the domicile of the Corporation (an "Acquisition"); or
(B) a sale, lease or other disposition of all or substantially all of the assets of the Corporation (an "Asset Transfer").
(iii) In any of the events set forth in subparagraph (ii), if the consideration received by the Corporation or its stockholders is other than cash, its value will be deemed its fair market value as determined in good faith by the Board of Directors. Any securities shall be valued as follows:
(A) Securities not subject to restrictions on free marketability covered by subparagraph (B) below:
(1) If traded on a securities exchange or through the Nasdaq National Market (or a similar national quotation system), the value shall be deemed to be the average of the closing prices of the securities on such quotation system over the 30 day period ending three days prior to the closing;
(2) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the 30 day period ending three days prior to the closing; and
(3) If there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board of Directors.
(B) The method of valuation of securities subject to restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder's status as an affiliate or former affiliate) shall be to make an appropriate discount from the market value determined as above in subparagraphs (iii)(A)(1), (2) or (3) to reflect the approximate fair market value thereof, as determined in good faith by the Board of Directors.
(iv) Written notice of any such liquidation, dissolution or winding up (or deemed liquidation, dissolution or winding up) of the Corporation within the meaning of this Section, which states the payment date, the place where said payments shall be made and the date on which conversion rights as set forth herein terminate as to such shares (which shall be not less than 10 days after the date of such notice), shall be given by first class mail, postage prepaid, or by telecopy or facsimile, not less than 20 days prior to the payment date stated therein, to the then holders of record of Series B Preferred Stock, such notice to be addressed to each such holder at its address as shown on the records of the Corporation.
(d) Conversion Rights. The holders of the Series B Preferred Stock shall have the following rights with respect to the conversion of the Series B Preferred Stock into shares of Common Stock:
(i) Optional Conversion. Subject to and in compliance with the provisions of this Section (d), any shares of Series B Preferred Stock may, at the option of the holder, be converted at any time on and after the date which is six months after the Series B Original
Issue Date into fully-paid and nonassessable shares of Common Stock. The number of shares of Common Stock to which a holder of Series B Preferred Stock shall be entitled upon conversion shall be the product obtained by multiplying the "Series B Preferred Conversion Rate" then in effect (determined as provided in subsection (ii)) by the number of shares of Series B Preferred Stock being converted.
(ii) Series B Preferred Conversion Rate. The conversion rate in effect at any time for conversion of the Series B Preferred Stock (the "Series B Preferred Conversion Rate") shall be the quotient obtained by dividing the Series B Original Issue Price by the "Series B Preferred Conversion Price," calculated as provided in subsection (iii) below.
(iii) Series B Preferred Conversion Price. The conversion price for the Series B Preferred Stock shall initially be the Series B Original Issue Price (the "Series B Preferred Conversion Price"). Such initial Series B Preferred Conversion Price shall be adjusted from time to time in accordance with this Section (d). All references to the Series B Preferred Conversion Price herein shall mean the Series B Preferred Conversion Price as so adjusted.
(iv) Mechanics of Conversion. Each holder of Series B Preferred Stock who desires to convert the same into shares of Common Stock pursuant to this Section (d) shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or any transfer agent for the Series B Preferred Stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same. Such notice shall state the number of shares of Series B Preferred Stock being converted. Thereupon, the Corporation shall promptly issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled and shall promptly pay in cash (at the Common Stock's fair market value determined by the Board of Directors as of the date of conversion) the value of any fractional share of Common Stock otherwise issuable to any holder of Series B Preferred Stock. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of Series B Preferred Stock to be converted, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date.
(v) Adjustment Upon Common Stock Event. Upon the happening of a Common Stock Event (as hereinafter defined) at any time or from time to time after the date that the first share of Series B Preferred Stock is issued (the "Series B Original Issue Date"), the Series B Preferred Conversion Price shall, simultaneously with the happening of such Common Stock Event, be adjusted by multiplying the Series B Preferred Conversion Price in effect immediately prior to such Common Stock Event by a fraction, (i) the numerator of which shall be the number of shares of Common Stock issued and outstanding immediately prior to such Common Stock Event, and (ii) the denominator of which shall be the number of shares of Common Stock issued and outstanding immediately after such Common Stock Event, and the product so obtained shall thereafter be the Series B Preferred Conversion
Price. The Series B Preferred Conversion Price shall be readjusted in the same manner upon the happening of each subsequent Common Stock Event. As used in this Section (d), the term "Common Stock Event" shall mean (i) the issue by the Corporation of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock, (ii) a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise), or (iii) a combination or consolidation, by reclassification or otherwise, of the outstanding shares of Common Stock into a smaller number of shares of Common Stock (unless the Series B Preferred Stock is combined, consolidated or reclassified on an equal basis).
(vi) Adjustment for Other Dividends and Distributions. If at any time or from time to time after the Series B Original Issue Date the Corporation pays a dividend or makes another distribution to the holders of the Common Stock (or fixes a record date for the determination of holders of Common Stock entitled to receive such dividend or other distribution) payable in securities of the Corporation or any of its subsidiaries other than shares of Common Stock, then in each such event provision shall be made so that the holders of Series B Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable upon conversion thereof, the amount of securities of the Corporation or such subsidiary which they would have received had their Series B Preferred Stock been converted into Common Stock (determined as if the Series B Preferred Stock were convertible upon the Series B Original Issue Date and without consideration of the restriction on conversion contained in Section (d)(i) hereof) on the date of such event (or such record date, as applicable) and had they thereafter, during the period from the date of such event (or such record date, as applicable) to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section (d) with respect to the rights of the holders of the Series B Preferred Stock or with respect to such other securities by their terms. Notwithstanding the foregoing, the adjustment provided by this Section (d)(vi) shall not be made if the holders of the Series B Preferred Stock shall have received a proportionate dividend as provided in Section (a)(ii).
(vii) Adjustment for Reclassification, Exchange and Substitution. If
at any time or from time to time after the Series B Original Issue Date,
the Common Stock issuable upon the conversion of the Series B Preferred
Stock is changed into the same or a different number of shares of any
class or classes of stock, whether by recapitalization, reclassification
or otherwise (other than an Acquisition or Asset Transfer as defined in
Section (c) or a subdivision or combination of shares or stock dividend or
a reorganization, merger, consolidation or sale of assets provided for
elsewhere in this Section (d)), in any such event each holder of Series B
Preferred Stock shall have the right thereafter (to the extent such Series
B Preferred Stock is convertible as otherwise provided herein) to convert
such Series B Preferred Stock into the kind and amount of stock and other
securities and property receivable upon such recapitalization,
reclassification or other change by holders of the maximum number of
shares of Common Stock into which such shares of Series B Preferred Stock
could have been converted immediately prior to such recapitalization,
reclassification or change (determined as if the Series B Preferred Stock
were convertible upon the Series B Original Issue Date and without
consideration of the restriction on conversion contained in Section (d)(i)
hereof), all subject to further adjustment as provided herein or with
respect to such other securities or property by the terms thereof. In any
such case, appropriate adjustment shall be made in the application of the
provisions of this Section (d) with respect to the rights of the holders
of Series B Preferred Stock after such recapitalization, reclassification
or other change (including adjustment of the Series B Preferred Conversion
Price then in effect and the number of shares issuable upon conversion of
the Series B Preferred Stock), to the end that the provisions of this
Section (d) shall be applicable after that event and be as nearly
equivalent as practicable.
(viii) Adjustment for Reorganizations, Mergers or Consolidations. If at any time or from time to time after the Series B Original Issue Date, there is a capital reorganization of the Common Stock or the merger or consolidation of the Corporation with or into another corporation or another entity or person (other than an Acquisition or Asset Transfer as defined in Section (c) or a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for elsewhere in this Section (d)), as a part of such capital reorganization, merger or consolidation, provision shall be made so that the holders of the Series B Preferred Stock, if any shares thereof remaining outstanding thereafter, shall thereafter be entitled to receive upon conversion of the Series B Preferred Stock the number of shares of stock or other securities or property which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger or consolidation, subject to adjustment in respect of such stock or securities by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section (d) with respect to the rights of the holders of Series B Preferred Stock after the capital reorganization, merger or consolidation (including adjustment of the Series B Preferred Conversion Price then in effect and the number of shares issuable upon conversion of the Series B Preferred Stock), to the end that the provisions of this Section (d) shall be applicable after that event and be as nearly equivalent as practicable.
(ix) Notices of Record Date. Upon (i) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (ii) any Acquisition (as defined in Section (c)) or other capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation with or into any other entity, or any Asset Transfer (as defined in Section (c)), or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series B Preferred Stock at least 10 days prior to the record date specified therein (or such shorter period approved by a majority of the outstanding Series B Preferred Stock) a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or
winding up is expected to become effective, and (C) the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or winding up.
(x) Automatic Conversion.
(A) Each share of Series B Preferred Stock shall automatically be converted into shares of Common Stock, based on the then-effective Series B Preferred Conversion Price, (i) with respect to holders of the Series B Preferred Stock other than the Investors (as defined below), if at any time after six months from the Series B Original Issue Date the Common Stock has a Closing Price (as defined below) of at least five times the Series B Original Issue Price (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) for thirty consecutive trading days, and (ii) with respect to the Investors, if at any time after six months from the Series B Original Issue Date (y) the Common Stock has a Closing Price (as defined below) of at least five times the Series B Original Issue Price (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) for thirty consecutive trading days, and (z) the Shelf Registration as defined in and provided for in the Amended and Restated Investor Rights Agreement, dated as of December 19, 2001 (as the same may be amended from time to time, the "Investor Agreement"), between the Corporation and the investors named on Exhibit A thereto (collectively with the Holders, as such term is defined in the Investor Agreement, the "Investors") has become effective under the Securities Act of 1933, as amended, and is available for sales of Common Stock by the Investors thereunder (to the extent the requirement to maintain such Shelf Registration effective has not at such time lapsed pursuant to Section 5 of such Investor Agreement). For purposes of this Section (d)(x), the term "Closing Price" shall mean (1) if the Common Stock is traded on a securities exchange or through the Nasdaq National Market (or a similar national quotation system), the closing price of the Common Stock on such exchange or the last sale price of the Common Stock on such quotation system, and (2) if clause (1) is inapplicable, the closing bid or sale price (whichever is applicable) in the over-the-counter market.
(B) Upon the occurrence of any of the events specified in subparagraph (A), the applicable outstanding shares of Series B Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless the certificates evidencing such shares of Series B Preferred Stock are either delivered to the Corporation or its transfer agent as provided below, or the
holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Upon the occurrence of such automatic conversion of any of the Series B Preferred Stock, (y) the Corporation shall notify (the "Automatic Conversion Notice") each holder of such Series B Preferred Stock who is shown to be such a holder on the books of the Corporation as of the time immediately prior to such conversion, and (z) the holders of such Series B Preferred Stock shall surrender the certificates representing such shares at the office of the Corporation or any transfer agent for the Series B Preferred Stock, which shall be designated in the Automatic Conversion Notice. Thereupon, there shall be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of Series B Preferred Stock surrendered were convertible on the date on which such automatic conversion occurred. Until such time as a holder of shares of Series B Preferred Stock shall surrender his or its certificates therefor as provided above, such certificates shall be deemed to represent the shares of Common Stock to which such holder shall be entitled pursuant to the terms hereof.
(xi) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of Series B Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series B Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the Corporation shall, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the Common Stock's fair market value (as determined by the Board of Directors) on the date of conversion.
(xii) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series B Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series B Preferred Stock. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Preferred Stock, the Corporation will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.
(xiii) Notices. Any notice required by the provisions of this
Section (d) shall be in writing and shall be deemed effectively given: (i)
upon personal delivery to the party to be notified, (ii) when sent by
confirmed electronic mail or facsimile if sent during normal business
hours of the recipient; if not, then on the next business day, (iii) five
days after
having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Corporation.
(xiv) Payment of Taxes. The Corporation will pay all taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of Series B Preferred Stock, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Series B Preferred Stock so converted were registered.
(xv) No Impairment. The Corporation shall not avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but shall at all times in good faith assist in carrying out all such actions as may be reasonably necessary or appropriate in order to protect the conversion rights of the holders of the Series B Preferred Stock against impairment.
(xvi) Satisfaction of Accrued Dividends. Except as otherwise expressly provided, upon the conversion of any shares of Series B Preferred Stock into Common Stock as provided herein, the Corporation shall pay holders thereof all accrued but unpaid dividends out of funds legally available therefor.
(e) Waiver. Any rights of the holders of Series B Preferred Stock set forth herein, other than the voting rights set forth in Section (b)(iii), may be waived by the affirmative vote or consent of the holders of a majority of the shares of Series B Preferred Stock then outstanding.
(f) Limitation on Reissuance of Shares. No share of shares of Series B Preferred Stock acquired by the Corporation by reason of purchase, conversion or otherwise shall be reissued, and all such shares shall be cancelled, retired and eliminated from the shares of Series B Preferred Stock that the Corporation is authorized to issue.
(g) Limitation on Transfer. The Series B Preferred Stock shall not be eligible to be transferred on the books of the Corporation prior to the one year anniversary of the Series B Original Issue Date except for transfers: (i) in connection with a Sale Transaction, (ii) in any transaction in which a holder that is a partnership or limited liability company distributes Series B Preferred Stock solely to its affiliates (including affiliated fund partnerships), current or former partners or members thereof, or (ii) by will or by the laws of intestate succession. Certificates issued in respect of the Series B Preferred Stock within one year after the Series B Original Issue Date shall bear a legend referencing the restrictions set forth in this Section (g).
This Certificate of Designations, and the designations effected hereby, shall become effective upon filing.
IN WITNESS WHEREOF, eLoyalty Corporation has caused this certificate to be signed by Kelly D. Conway, its President and Chief Executive Officer, and the same to be attested to by Timothy J. Cunningham, its Senior Vice President and Chief Financial Officer, this 19th day of December, 2001.
eLOYALTY CORPORATION
By: ________________________________________
Name: Kelly D. Conway
Title: President and Chief Executive Officer
Attest:
By:_______________________________
Name: Timothy J. Cunningham
Title: Senior Vice President and Chief Financial Officer
EXHIBIT 10.30
AMENDED AND RESTATED
INVESTOR RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (this "Agreement") is entered into as of December 19, 2001, by and among eLOYALTY CORPORATION, a Delaware corporation (the "Company"), and the persons set forth on the Schedule of Investors attached hereto as Exhibit A (the "Investors").
RECITALS
1. The Company entered into a Common Stock Purchase Agreement, dated May 26, 2000 (the "Common Purchase Agreement") with each of TCV IV, L.P., TCV IV Strategic Partners, L.P., TCV III (GP), TCV III, L.P., TCV III (Q), L.P. and TCV III Strategic Partners, L.P. (together, the "Common Stock Investors") pursuant to which the Company sold to the Common Stock Investors shares of the Company's Common Stock, par value $0.01 per share (the "Common Stock").
2. In connection with the Common Purchase Agreement, the Company and the Common Stock Investors entered into the Investor Rights Agreement, dated May 26, 2000 (the "Investor Rights Agreement"), for the purpose of granting certain registration and other rights to the Common Stock Investors.
3. The Company entered into a Share Purchase Agreement, dated as of September 24, 2001 (the "Series B Purchase Agreement") with each of the Investors pursuant to which the Company shall sell to the Investors and the Investors shall purchase from the Company shares of the Company's 7% Series B Convertible Preferred Stock, par value $0.01 per share (the "Series B Preferred").
4. As a condition to each of the Investor's obligations under the Series B Purchase Agreement, the Company will grant the Investors certain registration and other rights.
5. The Company and the Common Stock Investors have agreed to amend the Investor Rights Agreement to extend certain registration and other rights to the Investors.
NOW, THEREFORE, in consideration of the covenants and promises set forth herein, and for other good and valuable consideration, intending to be legally bound hereby the parties agree as follows:
SECTION 1. Certain Definitions. As used in this Agreement, the capitalized terms identified in the Preamble and the Recitals shall have the meanings identified therein and the following terms shall have the following respective meanings:
"Closing" has the meaning set forth in the Series B Purchase Agreement.
"Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.
"Common Purchase Agreement" has the meaning set forth in the Recitals hereto.
"Common Stock" has the meaning set forth in the Recitals hereto.
"Common Stock Investors" has the meaning set forth in the Recitals hereto.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute, and the rules and regulations thereunder, all as the same shall be in effect from time to time.
"Holder" shall mean (i) any Investor holding Registrable Securities and (ii) any person or entity holding Registrable Securities to whom the rights under this Agreement have been transferred in accordance with Section 14 hereof.
"Investors" has the meaning set forth in the Preamble hereto.
The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the Company in complying with Sections 5 and 6 hereof, including, without limitation, all registration, qualification, listing and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company).
"Registrable Securities" shall mean (i) any Common Stock issued pursuant to the Common Purchase Agreement, (ii) any Common Stock issued upon conversion of the Series B Preferred issued pursuant to the Series B Purchase Agreement and (iii) any Common Stock issued or issuable with respect to the Shares upon any stock split, stock dividend, recapitalization, or similar event, or any securities otherwise issued or issuable with respect to the Shares in such an event; provided, however, that shares of Common Stock or other securities shall only be treated as
Registrable Securities if and so long as they (A) have not been sold to or
through a broker or dealer or underwriter in a public distribution or a public
securities transaction, (B) have not been transferred in a transaction pursuant
to which the registration rights are not also assigned in accordance with
Section 14 hereof, and (C) with respect to Registrable Securities that were
issued in connection with or related to the Common Purchase Agreement, are not
eligible for public sale pursuant to Rule 144(k).
"Restricted Securities" shall mean the shares of Common Stock and
Series B Preferred and other securities required to bear the legend set forth in
Section 3 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder or any similar federal statute and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the securities registered by the Holders.
"Series B Preferred" has the meaning set forth in the Recitals hereto.
"Series B Purchase Agreement" has the meaning set forth in the Recitals hereto.
"Shares" shall mean all shares of Common Stock purchased by the Common Stock Investors pursuant to the Common Purchase Agreement, all shares of Series B Preferred purchased by the Series B Investors pursuant to the Series B Purchase Agreement and all shares of Common Stock issued or issuable upon conversion of the Series B Preferred issued pursuant to the Series B Purchase Agreement.
SECTION 2. Restrictions. The Shares, and any Common Stock or other securities issued or issuable with respect to the Shares upon any stock split, stock dividend, recapitalization, or similar event, shall not be sold, assigned, transferred or pledged except upon the conditions specified in Section 4, which conditions are intended to ensure compliance with the provisions of the Securities Act. Notwithstanding anything in this Agreement, a Holder which is a partnership or limited liability company shall not be prohibited by any provision of this Agreement from distributing Restricted Securities solely to its affiliates (including affiliated fund partnerships), partners or members thereof for no consideration (it being understood that, notwithstanding the foregoing, the rights to cause the Company to register securities pursuant hereto may be assigned only pursuant to and in accordance with Section 14).
SECTION 3. Restrictive Legends. Each certificate representing Shares or any other securities issued or issuable with respect to Shares upon any stock split, stock dividend, recapitalization, or similar event (unless otherwise permitted by the provisions of Section 4 below), shall be stamped or otherwise imprinted with a legend in the following form (in addition to any
legend required under applicable state securities laws or, in the case of the Series B Preferred, the terms of the Series B Preferred):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION FROM SUCH REGISTRATION. SUCH SHARES ARE ALSO SUBJECT TO CERTAIN TRANSFERABILITY RESTRICTIONS AS SET FORTH IN THE AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT DATED AS OF DECEMBER 19, 2001, AMONG THE CORPORATION AND THE INVESTORS NAMED THEREIN. A COPY OF SUCH AGREEMENT IS ON FILE AND MAY BE INSPECTED AT THE CORPORATION'S PRINCIPAL EXECUTIVE OFFICES BY THE REGISTERED HOLDER OF THIS CERTIFICATE."
Each Investor consents to the Company making a notation on its
records and giving instructions to any transfer agent of the Restricted
Securities in order to implement the restrictions on transfer established in
Section 2 and Section 4 and, in the case of the Series B Preferred, by the terms
of the Series B Preferred.
SECTION 4. Restrictions on Transfers. Each holder of Restricted Securities, by acceptance thereof, agrees to comply in all respects with the provisions of this Section 4. Subject to the further limitations described in the Certificate of Designation of the Series B Preferred, prior to any proposed sale, assignment, transfer or pledge of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and shall be accompanied at such holder's expense by either (i) an unqualified written opinion of legal counsel who shall, and whose legal opinion shall, be satisfactory to the Company, addressed to the Company, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, or (iii) any other evidence satisfactory to counsel to the Company, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. The Company will not require such a notice or legal opinion or "no action" letter (a) in any customary transaction in compliance with Rule 144, (b) in any transaction in which a Holder which is a corporation distributes Restricted Securities solely to its majority owned subsidiaries or affiliates for no consideration, or (c) in any transaction in which a Holder which is a partnership or
limited liability company distributes Restricted Securities solely to its affiliates (including affiliated fund partnerships), partners or members thereof for no consideration. Each certificate evidencing the Restricted Securities transferred as above provided shall bear the appropriate restrictive legend set forth in Section 3 above, except that such certificate shall not bear such restrictive legend if, in the opinion of counsel for such holder and the Company, such legend is not required in order to establish compliance with any provisions of the Securities Act.
SECTION 5. Requested Registration. The Company shall use its reasonable
best efforts to register the sale or distribution by the Holders, on a delayed
or continuous basis, of all of the Registrable Securities on a Form S-3
registration statement (or any successor form to Form S-3) (the "Shelf
Registration") by the date which is 180 days after the date of the Closing
(including, without limitation, the execution of an undertaking to file
post-effective amendments, appropriate qualification under applicable blue sky
or other state securities laws and appropriate compliance with applicable
regulations issued under the Securities Act and any other governmental
requirements or regulations). Once declared effective, the Company shall use its
reasonable best efforts to cause (x) the Shelf Registration to remain effective
until such time as all of the Registrable Securities issued in connection with
or related to the Series B Purchase Agreement can be resold to the public within
any and all three month periods under Rule 144 or another similar exemption
under the Securities Act (without giving effect to Rule 144(k)), and (y) the
Shelf Registration to be useable by the Holders during the entire relevant
period, except that the Shelf Registration may be unuseable (including by way of
notice sent pursuant to Section 10(d)) for an aggregate of 90 days in any twelve
month period (provided, however, that for the period consisting of the first 12
months following the date the Shelf Registration is initially declared effective
under the Securities Act such 90-day period shall be reduced by the number of
days the effectiveness of the Shelf Registration was delayed pursuant to clause
(2) below of this Section). The Company shall not be obligated to take any
action to effect the Shelf Registration: (1) in any particular jurisdiction in
which the Company would be required to execute a general consent to service of
process in effecting such registration, qualification or compliance unless the
Company is already subject to service in such jurisdiction and except as may be
required by the Securities Act; or (2) if the Company shall furnish to such
Holders a certificate, signed by the President or Chief Executive Officer of the
Company, stating that in the good faith judgment of the Board of Directors it
would be seriously detrimental to the Company for a registration statement to be
declared effective in the near future, then the date by which the Company shall
have the Shelf Registration effective may be extended by up to 90 days.
SECTION 6. Company Registration.
(a) Notice of Registration. If at any time or from time to time, the Company shall determine to register any of its equity securities, either for its own account or the account of a security holder or holders other than (i) a registration relating solely to employee benefit plans, (ii) a registration relating solely to a Commission Rule 145 transaction, or (iii) a registration on any registration form that does not permit secondary sales (such as a "universal shelf" Form S-3), the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) subject to Section 6(b) below, include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests made within 15 days after receipt of such written notice from the Company by any Holder.
(b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 6(a)(i). In such event, the right of any Holder to registration pursuant to this Section 6 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into and perform its obligations under an underwriting agreement in customary form with the managing underwriter selected for such underwriting by the Company (or by the holders who have demanded such registration). Notwithstanding any other provision of this Section 6, if the managing underwriter provides written notice to the Holders that it has determined that the inclusion of all of the shares requested to be included in the offering would adversely effect the price at which the shares can be sold, the managing underwriter shall include in the offering the maximum number of shares that may be included in the offering without such adverse effect as follows (i) first, the shares requested to be sold by the Company or the holder of securities initiating the registration, (ii) second, the shares requested to be included in the offering by the Holders pro rata based on the number of Registrable Securities held, and (iii) third, any other shares requested to be included. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder or other holder to the nearest 100 shares. If any Holder or other holder disapproves of the terms of any such underwriting, he or she may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration.
(c) Right to Terminate Registration. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 6 prior to the effectiveness of such registration, whether or not any
Holder has elected to include securities in such registration.
SECTION 7. Notice of Sales. Following the second anniversary of the effective date of the Shelf Registration, no Holder may make offers or sales pursuant to the Shelf Registration prior to the date which is three business days after the date upon which a notice of the proposed offer or sale (a "Distribution Notice") is delivered to the Company. Each Distribution Notice shall state that the Holder giving such Distribution Notice desires to offer and sell Registrable Securities pursuant to
the Shelf Registration and shall include a description of the manner in which such sale is to be made. Each Distribution Notice shall be effective for 45 days from the date of delivery and any sales after that time must be made pursuant to another Distribution Notice. The Holders covenant that each Distribution Notice shall be given in good faith and accurately reflect the Holders' intent at the time such Distribution Notice is delivered. Each offer and sale undertaken and carried out by any Holder shall be made in a manner consistent in all material respects with the description thereof set forth in the related Distribution Notice.
SECTION 8. Limitations on Subsequent Registration Rights. From and after the date hereof, the Company shall not enter into any agreement granting any holder or prospective holder of any securities of the Company registration rights with respect to such securities that are inconsistent with the rights granted to the Holders herein, without the consent of Holders of at least a majority of the Registrable Securities outstanding at such time.
SECTION 9. Expenses of Registration. All Registration Expenses incurred in connection with any registration pursuant to Sections 5 and 6 and the reasonable cost of one special legal counsel to represent all of the Holders together in any such registration (not to exceed $10,000) shall be borne by the Company. All Selling Expenses relating to securities registered on behalf of the Holders shall be borne by the Holders of the registered securities included in such registration pro rata on the basis of the number of shares so sold.
SECTION 10. Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to Section 5 and 6, the Company will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof and, at its expense, the Company will:
(a) Prepare and file with the Commission a registration statement with respect to such securities;
(b) Furnish to the Holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities;
(c) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statements as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement;
(d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing; provided, that after the second anniversary of the effective date of the Shelf Registration, the Company shall be required to provide such notice only if it has received a Distribution Notice that is still in effect and shall be obligated only to the Holder that delivered such Distribution Notice; and at the request of any such seller, prepare promptly and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchaser of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing;
(e) Use reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions;
(f) Make available for inspection by any Holder participating in such registration, any underwriter participating in any disposition pursuant to such registration, and any attorney or accountant retained by any such Holder or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers and directors to supply all information reasonably requested by any such Holder, underwriter, attorney or accountant in connection with such registration statement; provided, however, that such Holder, underwriter, attorney or accountant shall agree to hold in confidence and trust all information so provided; and
(g) Use reasonable efforts to furnish, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and (ii) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters.
SECTION 11. Indemnification.
(a) The Company will indemnify each Holder, each of its current and former officers and directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who
controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act, Exchange Act or state securities laws applicable to the Company in connection with any such registration, qualification or compliance, and the Company will reimburse each such Holder, each of its current and former officers and directors, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, as such expenses are incurred, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omission, made in reliance upon and in conformity with written information furnished to the Company by such Holder, controlling person or underwriter and stated to be specifically for use therein. The indemnity agreement contained in this section shall not apply to amounts paid in settlement of any loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable to a Holder in any such case for any such loss, claim, damage, liability or action (1) to the extent that it arises our of or is based upon a violation of any state or federal law which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of such Holder, or (2) in the case of a sale directly by a Holder of Registrable Securities (including a sale of such Registrable Securities through any underwriter retained by such Holder engaging in a distribution solely on behalf of such Holder), such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, and such Holder failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Registrable Securities to the person asserting any such loss, claim, damage or liability in any case in which such delivery is required by the Securities Act.
(b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors, officers and partners, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers and directors and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering
circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, as such expenses are incurred, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder and stated to be specifically for use therein; provided that in no event shall any indemnity under this Section 11(b) exceed in the aggregate the net proceeds (after Selling Expenses) received by such Holder from the sale of securities included in such registration.
(c) Each party entitled to indemnification under this Section 11
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense; provided, however, that an Indemnified Party (together with all
other Indemnified Parties which may be represented without conflict by one
counsel) shall have the right to retain one separate counsel, with the fees and
expenses to be paid by the Indemnifying Party, if representation of such
Indemnified Party by the counsel retained by the Indemnifying Party would be
inappropriate due to actual or potential differing interests between such
Indemnified Party and any other party represented by such counsel in such
proceeding. The failure of any Indemnified Party to give notice as provided
herein shall relieve the Indemnifying Party of its obligations under this
Section 11 only to the extent that the failure to give such notice is materially
prejudicial to an Indemnifying Party's ability to defend such action. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. The
indemnity agreements contained in this Section 11 shall not apply to amounts
paid in settlement of any loss, claim, damage, liability or action if such
settlement is effected without the consent of the Indemnifying Party, which
consent shall not be unreasonably withheld.
(d) If the indemnification provided for in this Section 11 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party, other than pursuant to its terms, with respect to any claim, loss, damage, liability or action referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such claim, loss, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and the Indemnified Party on the other in connection with the actions that resulted in such
claims, loss, damage, liability or action, as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact related to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 11(d) were based solely upon the number of entities from whom contribution was requested or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 11(d). In no event shall any Holder's contribution obligation under this Section 11(d) exceed in the aggregate the net proceeds (after Selling Expenses) received by such Holder from the sale of securities included in such registration.
(e) The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages and liabilities referred to above in this Section 11 shall be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim, subject to the provisions of Section 11 hereof. Notwithstanding the provisions of this Section 11, no Holder shall be required to contribute any amount or make any other payments under this Agreement which in the aggregate exceed the net proceeds (after selling expenses) received by such Holder. No person guilty of fraudulent misrepresentation (within the meaning of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
SECTION 12. Information by Holder. The Holder or Holders of Registrable Securities included in any registration shall furnish to the Company such information regarding such Holder or Holders, the Registrable Securities held by them and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Agreement.
SECTION 13. Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Restricted Securities to the public without registration, the Company agrees to use its reasonable best efforts to:
(a) Make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act;
(b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements); and
(c) So long as a Holder owns any Restricted Securities, furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration.
SECTION 14. Transfer of Registration Rights. The rights to cause the
Company to register securities granted to any party hereto under this Agreement
may be assigned to a transferee or assignee in connection with any transfer or
assignment of Registrable Securities by such party; provided that (a) such
transfer may otherwise be effected in accordance with applicable securities
laws, (b) notice of such assignment is given to the Company (which notice shall
include the name and address of the transferee or assignee and identify the
Registrable Securities with respect to which rights are to be transferred or
assigned), and the transferor complies with any applicable provisions of Section
4 hereof, (c) such transferee or assignee (i) is a subsidiary, affiliated
partnership, affiliate or partner or limited liability company member (including
limited partners, retired partners, withdrawn members, spouses and ancestors,
lineal descendants and siblings of such partners or spouses who acquire
Registrable Securities by gift, will or intestate succession) of such party, or
(ii) acquires from such party at least 250,000 (which number shall be adjusted
for stock splits, combinations, dividends and similar transactions occurring
after the signing hereof) Registrable Securities, and (d) such transferee or
assignee agrees in writing to be bound hereby (if so requested by the Company).
SECTION 15. Termination of Rights. The rights of any particular Holder to cause the Company to register securities under Section 6 shall terminate with respect to such Holder at such time as Rule 144 or another similar exemption under the Securities Act is available for the sale of all such Holder's shares to the public in any and all three-month periods (disregarding, for this purpose with respect to any Registrable Securities that were issued in connection with or related to the Series B Purchase Agreement, sales which may be permitted under Rule 144(k)).
SECTION 16. Third Parties. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein.
SECTION 17. Governing Law. This Agreement shall be governed by and construed under the laws of the State of Illinois without regard to choice of laws or conflict of laws' provisions thereof.
SECTION 18. Counterparts. This Agreement may be executed in two or more counterparts and signature pages may be delivered by facsimile, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
SECTION 19. Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be (A) mailed by registered or certified mail, postage prepaid, return receipt requested, (B) delivered by a nationally recognized overnight courier, (C) sent by confirmed telecopy or (D) otherwise delivered by hand or by messenger, addressed (i) if to an Investor, at such Investor's address set forth on Exhibit A, or at such other address as such Investor shall have furnished to the Company in writing; (ii) if to the Company, at its address set forth on the signature page of this Agreement addressed to the attention of the Corporate Secretary, or at such other address as the Company shall have furnished to the Investors; or (iii) if to a Holder other than an Investor, at its address as specified in the notice provided to the Company under Section 14 hereof, or at such other address as such Holder shall have furnished to the Company. If notice is provided by mail, notice shall be deemed to be given 48 hours after proper deposit in a mailbox; if by overnight courier, notice shall be deemed to be given 24 hours after deposit; if by facsimile, upon completion of such facsimile transmission as conclusively evidenced by the transmission receipt; and if by hand or messenger, upon receipt by the addressee.
SECTION 20. Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, portions of such provisions, or such provisions in their entirety, to the extent necessary, shall be severed from this Agreement, and the balance of this Agreement shall be enforceable in accordance with its terms.
SECTION 21. Amendment and Waiver. Any provision of this Agreement may be amended or waived with the written consent of the Company and the Holders of at least a majority of the outstanding Registrable Securities provided that (i) no such amendment shall impose or increase any liability or obligation on a Holder without the consent of such Holder and (ii) no such amendment having a disproportionately adverse effect on any Holder in relation to the other holders may be made without consent of such Holder. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder and the Company. In addition, the Company may waive performance of any obligation owing to it, as to some or all of the holders, or agree to accept alternatives to such performance, without obtaining the consent of any holder. In the event that an underwriting agreement is entered into between the Company and any Holder, and such underwriting agreement contains terms differing from this Agreement, as to any such Holder the terms of such underwriting agreement shall govern.
SECTION 22. Rights of Holders. Each party to this Agreement shall have the absolute right to exercise or refrain from exercising any right or rights that such party may have by reason of this Agreement, including, without limitation, the right to consent to the waiver or modification of any obligation under this Agreement, and such party shall not incur any liability to any other party or
other Holder of any securities of the Company as a result of exercising or refraining from exercising any such right or rights.
SECTION 23. Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party to this Agreement, upon any breach or default of any other party, shall impair any such right, power or remedy of such non-breaching party nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, or by law or otherwise afforded to any party or holder, shall be cumulative and not alternative.
SECTION 24. Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
SECTION 25. Legal Fees. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements, including on appeal, in addition to any other relief to which such party may be entitled.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
THE COMPANY:
eLOYALTY CORPORATION
By: /s/ Timothy J. Cunningham --------------------------------------------------- Name: Timothy J. Cunningham Title: Senior Vice President & Chief Financial Officer |
Address: 150 Field Avenue, Suite 250 Lake Forest, Illinois 60045
THE INVESTORS:
TCV IV, L.P., a Delaware limited partnership
By: Technology Crossover Management IV, L.L.C. Its: General Partner
By: /s/ Carla S. Newell ----------------------------------------- Name: Carla S. Newell Title: Attorney in Fact |
TCV IV STRATEGIC PARTNERS, L.P., a Delaware limited partnership By: Technology Crossover Management IV, L.L.C. Its: General Partner
By: /s/ Carla S. Newell ----------------------------------------- Name: Carla S. Newell Title: Attorney in Fact |
TCV III (GP), a Delaware general partnership
By: Technology Crossover Management III, L.L.C. Its: General Partner
By: /s/ Carla S. Newell ----------------------------------------- Name: Carla S. Newell Title: Attorney in Fact |
TCV III, L.P., a Delaware limited partnership
By: Technology Crossover Management III, L.L.C. Its: General Partner
By: /s/ Carla S. Newell ----------------------------------------- Name: Carla S. Newell Title: Attorney in Fact |
TCV III (Q), L.P., a Delaware limited partnership By: Technology Crossover Management III, L.L.C. Its: General Partner
By: /s/ Carla S. Newell ----------------------------------------- Name: Carla S. Newell Title: Attorney in Fact |
TCV III STRATEGIC PARTNERS, L.P., a Delaware limited partnership By: Technology Crossover Management III, L.L.C.
Its: General Partner
By: /s/ Carla S. Newell ----------------------------------------- Name: Carla S. Newell Title: Attorney in Fact |
SUTTER HILL VENTURES, a California limited partnership By: Sutter Hill Ventures, LLC
Its: General Partner
By: /s/ Tench Coxe ----------------------------------------- Name: Tench Coxe Title: Managing Director |
SUTTER HILL ENTREPRENEURS FUND (AI), L.P., a California limited partnership By: Sutter Hill Ventures, LLC
Its: General Partner
By: /s/ Tench Coxe ----------------------------------------- Name: Tench Coxe Title: Managing Director |
SUTTER HILL ENTREPRENEURS FUND (QP), L.P., a California limited partnership By: Sutter Hill Ventures, LLC
Its: General Partner
By: /s/ Tench Coxe ----------------------------------------- Name: Tench Coxe Title: Managing Director |
SUTTER HILL ASSOCIATES, L.P., a California limited partnership
/s/ Tench Coxe ----------------------------------------- By: Tench Coxe Its: General Partner |
EXHIBIT A
SCHEDULE OF INVESTORS
TCV IV, L.P.
TCV IV STRATEGIC PARTNERS, L.P.
TCV III (GP)
TCV III, L.P.
TCV III (Q), L.P.
TCV III STRATEGIC PARTNERS, L.P.
Mailing Address:
Technology Crossover
Ventures 528 Ramona Street
Palo Alto, CA 94301
Attention: Jay C. Hoag
Phone: (650) 614-8210
Fax: (650) 614-8222
with a copy to:
Technology Crossover Ventures
56 Main Street, Suite 210
Millburn, NJ 07041
Attention: Robert C. Bensky
Phone: (973) 467-5320
Fax: (973) 467-5323
SUTTER HILL VENTURES
SUTTER HILL ENTREPRENEURS FUND (AI), L.P.
SUTTER HILL ENTREPRENEURS FUND (QP), L.P.
SUTTER HILL ASSOCIATES, L.P.
Mailing Address:
Sutter Hill Ventures
755 Page Mill Road
Suite A-200
Palo Alto, California 94304
Attention: Tench Coxe
Phone: (650) 493-5600
Fax: (650) 858-1854
EXHIBIT 21.1
eLOYALTY SUBSIDIARIES
Name of Company Jurisdiction of Incorporation --------------- ----------------------------- eLoyalty Europe Holding Corporation Delaware eLoyalty International Holding, Inc. Illinois Geising International, Ltd. New York eLoyalty (Netherlands) B.V. Netherlands eLoyalty (Canada) Corporation Canada eLoyalty de Venezuela, C.A. Venezuela eLoyalty de Mexico, S. de R.L. de C.V. Mexico eLoyalty do Brasil Ltda. Brazil eLoyalty (Switzerland) Ltd. Switzerland eLoyalty (Deutschland) GmbH Germany eLoyalty (UK) Limited England & Wales eLoyalty (France) S.A.R.L. France eLoyalty Corporation (Australia) Pty. Ltd. Australia eLoyalty International Limited Ireland |
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-68530), Form S-8 (No. 333-68540), Form S-8 (No. 333-30374) and Form S-3 (No. 333-70078) of eLoyalty Corporation of our report dated January 31, 2002, except for Note 18, as to which the date is February 28, 2002, relating to the financial statements and financial statement schedule, which appear in this Annual Report on Form 10-K for the year ended December 29, 2001.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 28, 2002
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of eLoyalty Corporation, a Delaware corporation (the "Company"), hereby constitutes and appoints each of Kelly D. Conway and Timothy J. Cunningham, signing singly, as the undersigned's true and lawful attorney-in-fact, with full power and authority and full power of substitution, re-substitution or revocation, to:
(a) execute for, in the name and on behalf of the undersigned, in the undersigned's capacity as a director and/or officer of the Company, the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001, together with any and all amendments thereto on Form 10-K/A deemed necessary, appropriate or desirable (collectively, the "Form 10-K"), pursuant to the Securities Exchange Act of 1934 and the rules thereunder;
(b) file the Form 10-K, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission and any stock exchange or market or similar authority on which the Company's Common Stock is listed for trading and any other governmental or regulatory authority, and otherwise to act for him or her and on his or her behalf in connection therewith; and
(c) take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be required, appropriate or desirable to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights and powers herein granted.
IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney as of this 15th day of March, 2002.
/s/ TENCH COXE
-------------------------
Signature
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EXHIBIT 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of eLoyalty Corporation, a Delaware corporation (the "Company"), hereby constitutes and appoints each of Kelly D. Conway and Timothy J. Cunningham, signing singly, as the undersigned's true and lawful attorney-in-fact, with full power and authority and full power of substitution, re-substitution or revocation, to:
(a) execute for, in the name and on behalf of the undersigned, in the undersigned's capacity as a director and/or officer of the Company, the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001, together with any and all amendments thereto on Form 10-K/A deemed necessary, appropriate or desirable (collectively, the "Form 10-K"), pursuant to the Securities Exchange Act of 1934 and the rules thereunder;
(b) file the Form 10-K, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission and any stock exchange or market or similar authority on which the Company's Common Stock is listed for trading and any other governmental or regulatory authority, and otherwise to act for him or her and on his or her behalf in connection therewith; and
(c) take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be required, appropriate or desirable to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights and powers herein granted.
IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney as of this 15th day of March, 2002.
/s/ JAY C. HOAG
----------------------------
Signature
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EXHIBIT 24.3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of eLoyalty Corporation, a Delaware corporation (the "Company"), hereby constitutes and appoints each of Kelly D. Conway and Timothy J. Cunningham, signing singly, as the undersigned's true and lawful attorney-in-fact, with full power and authority and full power of substitution, re-substitution or revocation, to:
(a) execute for, in the name and on behalf of the undersigned, in the undersigned's capacity as a director and/or officer of the Company, the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001, together with any and all amendments thereto on Form 10-K/A deemed necessary, appropriate or desirable (collectively, the "Form 10-K"), pursuant to the Securities Exchange Act of 1934 and the rules thereunder;
(b) file the Form 10-K, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission and any stock exchange or market or similar authority on which the Company's Common Stock is listed for trading and any other governmental or regulatory authority, and otherwise to act for him or her and on his or her behalf in connection therewith; and
(c) take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be required, appropriate or desirable to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights and powers herein granted.
IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney as of this 15th day of March, 2002.
/s/ JOHN T. KOHLER
----------------------------
Signature
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EXHIBIT 24.4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director and/or officer of eLoyalty Corporation, a Delaware corporation (the "Company"), hereby constitutes and appoints each of Kelly D. Conway and Timothy J. Cunningham, signing singly, as the undersigned's true and lawful attorney-in-fact, with full power and authority and full power of substitution, re-substitution or revocation, to:
(a) execute for, in the name and on behalf of the undersigned, in the undersigned's capacity as a director and/or officer of the Company, the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2001, together with any and all amendments thereto on Form 10-K/A deemed necessary, appropriate or desirable (collectively, the "Form 10-K"), pursuant to the Securities Exchange Act of 1934 and the rules thereunder;
(b) file the Form 10-K, with all exhibits thereto and other documents in connection therewith, with the U.S. Securities and Exchange Commission and any stock exchange or market or similar authority on which the Company's Common Stock is listed for trading and any other governmental or regulatory authority, and otherwise to act for him or her and on his or her behalf in connection therewith; and
(c) take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be required, appropriate or desirable to be done in the exercise of any of the rights and powers herein granted, as fully to all intents and purposes as the undersigned might or could do if personally present, hereby ratifying and confirming all that such attorney-in-fact, or such attorney-in-fact's substitute or substitutes, shall lawfully do or cause to be done by virtue of this Power of Attorney and the rights and powers herein granted.
IN WITNESS WHEREOF, the undersigned has signed this Power of Attorney as of this 15th day of March, 2002.
/s/ MICHAEL J. MURRAY
----------------------------
Signature
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