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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-27975
eLoyalty Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-4304577
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
150 Field Drive, Suite 250
Lake Forest, Illinois 60045
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847) 582-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of March 12, 2001 (based upon the closing price per share of
registrant's Common Stock on March 12, 2001 as reported by the NASDAQ National
Market System) was approximately $147,043,154.
The number of shares of the registrant's Common Stock, $0.01 par value per
share, outstanding as of March 12, 2001 was 49,959,740.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of eLoyalty's Annual Report to Stockholders for the fiscal year
ended December 30, 2000 are incorporated herein by reference in Parts I, II
and IV where indicated.
Portions of eLoyalty's Proxy Statement for its 2001 Annual Meeting of
Stockholders, to be filed within 120 days after the end of eLoyalty's
fiscal year, are incorporated herein by reference into Part III where
indicated.
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TABLE OF CONTENTS
PART I
Item Page
- ---- ----
1. Business................................................................... 1
2. Properties................................................................. 5
3. Legal Proceedings.......................................................... 5
4. Submission of Matters to a Vote of Security Holders........................ 5
4A. Executive Officers of the Company.......................................... 5
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters...... 7
6. Selected Financial Data.................................................... 8
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 8
7A. Quantitative and Qualitative Disclosures about Market Risk................. 8
8. Financial Statements and Supplementary Data................................ 8
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................. 8
PART III
10. Directors and Executive Officers of the Registrant......................... 8
11. Executive Compensation..................................................... 8
12. Security Ownership of Certain Beneficial Owners and Management............. 8
13. Certain Relationships and Related Transactions............................. 9
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 9
Signatures................................................................. 10
Report of Independent Accountants on Financial Statement Schedule.......... F-1
Schedule II -- Valuation and Qualifying Accounts........................... F-2
Exhibit Index.............................................................. I-1
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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 elsewhere in this Form 10-K. Readers
should also carefully review the risk factors described in other documents that
eLoyalty Corporation files from time to time with the SEC.
Readers are cautioned not to place undue reliance on forward-looking
statements. They reflect opinions, assumptions and estimates only as of the date
they are made, and eLoyalty Corporation undertakes no obligation to publicly
update or revise any forward-looking statements in this report, whether as a
result of new information, future events or circumstances or otherwise.
INTRODUCTION
eLoyalty Corporation (together with its subsidiaries "eLoyalty," "we"
or the "Company") was incorporated in Delaware in May 1999 as a wholly-owned
subsidiary of Technology Solutions Company ("TSC"). The Company's business was
initiated in May 1994 as a call center business unit within TSC. This unit
within TSC was subsequently renamed the Enterprise Customer Management ("ECM")
business unit, and later the eLoyalty division. Since its inception and under
its various names, this business unit has developed management consulting and
technology capabilities in an effort to lead the development of, and stay at the
forefront of, the customer relationship management or "CRM" market, with the
specific focus on incorporating new technologies into CRM solutions.
While the growth of the Company's business primarily was organic during
its ownership by TSC, in 1997 TSC acquired and incorporated into its ECM unit
The Bentley Group, a business and operations consulting firm, for total
consideration of $17.5 million, and Geising International, a German-based
business consulting firm, for $1.4 million. Further, in 1996, TSC acquired Aspen
Consultancy Ltd., a privately owned consulting firm based in the United Kingdom
for $3.4 million. The purpose of each of these acquisitions was to expand the
range of the business's competencies in the CRM space in order to more
effectively serve its clients' needs.
In May 1999, TSC's ECM business unit was renamed eLoyalty and a new
subsidiary by the same name formed in anticipation of a spin-off of eLoyalty. In
February 2000, TSC transferred the businesses of its eLoyalty division to the
Company and declared a dividend, payable to the stockholders of record of TSC,
based upon a ratio of one share of the Company's common stock, par value of
$0.01 per share (the "Common Stock"), for every one share of TSC Common Stock
held. Effective February 15, 2000, all of the outstanding shares of Common Stock
were distributed to TSC's stockholders. eLoyalty became a separate publicly
traded company as of the same date.
Our executive offices are located at 150 Field Drive, Suite 250, Lake
Forest, Illinois 60045 (telephone number 847-582-7000).
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OVERVIEW
eLoyalty is a global management consulting and systems integration
company focused exclusively on building customer loyalty. We offer a range
of CRM-related services including evaluating and developing business strategy,
designing and implementing technical architecture, selecting, implementing and
integrating appropriate CRM software applications and providing ongoing support
for multi-vendor systems. We refer to the solutions that we provide our clients
to enhance their customer relations as "loyalty solutions," in that they are
designed to create long-term customer loyalty measured by factors including an
increase in repeat sales, reduction of the cost of sales and increase in
customer referrals. We help companies identify and measure the impact of
improved customer relationships on profitability. Our customized solutions align
many isolated customer contact channels, including the Internet, e-mail, call
centers, field sales and field service. The solutions we design and implement
enable our clients to sustain higher levels of success with their customers.
Our revenues are generated primarily from professional services, which
are billed principally on a time and materials basis and, occasionally, on a
fixed fee basis. These services generally include the following:
- Evaluating our clients' efficiency and effectiveness in
handling customer interactions. We capture and analyze the
performance measures of each customer interaction, including
the number of legacy systems used to handle the situation,
interaction time, reason for interaction and actions taken to
resolve any customer issues.
- Assisting our clients in identifying their most valuable
customers through detailed segmentation of their customer
base. This allows our clients to target high-value customers
to receive special offers or service levels.
- Performing detailed financial analysis to calculate the
expected return on investment for the implementation of
various loyalty solutions. This process helps our clients
establish goals, alternatives and priorities and assigns
client accountability throughout resulting projects.
- Selecting the appropriate loyalty solution for our client. The
implementation of our loyalty solutions can lead to
significant organizational, structural, operational and
staffing changes and we assist our clients in determining the
steps they need to take in this regard.
- Implementing the technical aspects of our loyalty solutions,
including the integration of a variety of software
applications from third-party vendors and our own software.
In addition, we generate revenues from licensing of our proprietary
Loyalty Suite(TM) software, which ties together the critical components of a
loyalty solution. This software provides sophisticated real-time information
regarding a customer's various contacts with the client's organization, allowing
the client to handle each customer interaction in a consistent manner throughout
the enterprise. Other sources of revenue include maintenance and support of our
solutions, the provision of purpose-built hosted solutions and services relating
to e-PROFILE(TM) internet banking products. These licensing and "managed
services" offerings, in the aggregate, accounted for less than 10% of our
revenues in each of the last three years.
Information regarding domestic and foreign revenues and long-term
assets is incorporated herein by reference to Note 14 to the Consolidated
Financial Statements of eLoyalty, filed as Exhibit 13.1 to this Annual Report on
Form 10-K.
INTELLECTUAL PROPERTY RIGHTS
A majority of our clients require that we grant to them all proprietary
and intellectual property rights with respect to the original work product
resulting from our services, including the intellectual property rights to any
custom software developed for them. While each grant of proprietary and
intellectual property rights limits our ability to reuse work product components
with other clients, it is our practice to retain the rights in the underlying
core intellectual property on which it is based, including methodologies,
workplans and software.
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We regard these software and methodologies as proprietary and intend to protect
our rights, where appropriate, with registered copyrights, patents, registered
trademarks, trade secret laws and contractual restrictions on disclosure and
transferring title. Further, in a limited number of situations, we have
obtained, and will continue to attempt to obtain, an ownership interest or a
license from our clients to permit us to market custom software to other
clients. These arrangements may be nonexclusive or exclusive, and licensors to
us may retain the right to sell products and services that compete with those of
eLoyalty. In addition, to protect our proprietary information, we rely upon a
combination of trade secret and common law, employee nondisclosure policies and
third-party confidentiality agreements.
SEASONALITY
The Company typically experiences seasonal revenue and earnings
fluctuations globally in the fourth quarter, as the total number of billing days
is reduced due to holidays. Additionally, our European operations historically
have experienced decreased revenues and earnings in the third quarter because of
extended vacation periods. These decreases, while not significant in the past,
may increase in the future, especially as we expand our international
operations.
CLIENTS
During fiscal 2000, our five and twenty largest clients accounted for
37.7% and 66.2%, respectively, of our revenues. Only one client, Agilent
Technologies, accounted for more than 10% of our total revenues during the year,
contributing 15% of total annual revenues. For the fiscal year ended December
30, 2000, 44 clients each accounted for over $1 million of revenues. While the
Company's focus, consistent with the focus of its services, is on developing
long-term relationships with its clients, the nature of its business is such
that its activities with specific clients will fluctuate periodically as
individual projects are initiated and progress through their life span. As a
result, the percentage of revenue contributed by any particular client can be
expected to vary, perhaps significantly, among periods.
COMPETITION
We operate in a highly competitive and rapidly changing market and
compete with a variety of organizations that offer services similar to those we
offer. The market includes a variety of participants that compete with us at
various levels of our business, including strategic consulting firms, systems
integrators, web-consulting firms, online agencies and firms that provide both
consulting and systems integration services. In our opinion, few competitors
offer the full range of CRM services that we can provide. We believe that our
principal competitors are the "Big 5" consultancies: Accenture, Cap Gemini Ernst
& Young, Deloitte Consulting, KPMG Consulting and PricewaterhouseCoopers.
Many of our competitors have longer operating histories, more clients,
longer relationships with their clients, greater brand or name recognition and
significantly greater financial, technical, marketing and public relations
resources than we do. As a result, our competitors may be in a better position
to respond quickly to new or emerging technologies and changes in client
requirements. They may also develop and promote their products and services more
effectively than we do. New market entrants also pose a threat to our business.
Existing or future competitors may develop or offer solutions that are
comparable or superior to ours at a lower price. In addition, several
competitors have announced their intention to offer a broader range of services
than they currently provide.
RESEARCH AND DEVELOPMENT
The market in which we operate is constantly evolving and we believe
that it is necessary to invest in research and development to remain
competitive. In 1998, we formally established our Loyalty Lab(TM) in Austin,
Texas as a center for our research and development group. Its activities
include the research and evaluation of emerging technologies, working with
technology partners to decrease the time and difficulty of integrating various
CRM software products, developing and enhancing our Loyalty Suite(TM) software,
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acting as a center for demonstrating loyalty solutions to our current and
prospective clients and training our employees on our solutions.
Our research and development expenditures for the years ended December
30, 2000, December 31, 1999 and December 31, 1998 were approximately $9.3
million, $5.6 million and $3.9 million, respectively.
EMPLOYEES
As of December 30, 2000, eLoyalty employed 1,018 persons. Of the 1,018
employees, 689 were located in North America, with the balance in Europe and
Australia. As our business consists primarily of the provision of professional
services, it is inherently people intensive. We believe we have a satisfactory
relationship with our employees. Our average annualized turnover of billable
employees was 22% in 2000. None of our employees is represented by a union. Most
of our Vice Presidents and European employees generally have employment
agreements requiring three months' notice of termination by us. In addition, the
laws and regulations of the foreign countries in which we operate may increase
the cost of terminating employees in those countries. We maintain various
programs and strategies to retain and recruit employees.
FACTORS THAT MAY AFFECT FUTURE RESULTS OR MARKET PRICE OF STOCK
Some of the factors that may affect eLoyalty's future results or the
market price of its stock and cause or contribute to material differences
between actual results and those reflected in forward-looking statements
contained in this report include the following:
- uncertainties associated with the attraction of new clients,
the continuation of existing and new engagements with existing
clients and the timing of related client commitments,
including potential client delays or deferrals of new
engagements or existing project extensions in light of
prevailing general economic conditions and uncertainties;
- reliance on major clients and suppliers, and maintenance of
good relations with key business partners;
- management of the risks associated with increasingly complex
client projects in general as well as new services offerings,
including risks relating to the variability and predictability
of the number, size, scope, cost and duration of, and revenues
from, client engagements, unanticipated cancellations or
deferrals of client projects or follow-on phases of
engagements in process, collection of billed amounts, shifts
from time and materials-based engagements to alternative
pricing or value-based models and variable employee
utilization rates, project personnel costs and project
requirements;
- management of growth, expansion into new geographic and market
areas and development and introduction of new services
offerings, including the timely and cost-effective
implementation of enhanced operating, financial and other
infrastructure systems and procedures;
- challenges in attracting, training, motivating and retaining
highly skilled management, strategic, technical, product
development and other professional employees in a competitive
information technology labor market;
- continuing intense competition in the information technology
services industry generally and, in particular, among those
focusing on the provision of CRM services and software,
including both firms with significantly greater financial and
technical resources than eLoyalty and new entrants;
- the rapid pace of technological innovation in the information
technology services industry, including frequent technological
advances and new product introductions and enhancements, and
the ability to create innovative and adaptable solutions that
are consistent with evolving standards and responsive to
client needs, preferences and expectations;
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- access in tightening capital and credit markets to sufficient
debt and/or equity capital to meet eLoyalty's future operating
and financial needs;
- protection of eLoyalty's technology, proprietary information
and other intellectual property rights or challenges to
eLoyalty's intellectual property by third parties;
- future legislative or regulatory actions relating to the
information technology or information technology services
industries;
- risks associated with global operations, including those
relating to the economic conditions in each country, potential
currency exchange and credit volatility, compliance with a
variety of foreign laws and regulations and management of a
geographically dispersed organization;
- the overall demand for CRM services and software and
information technology generally; and
- the continued impact of the current economic slowdown, as well
as other future general business, capital market and economic
conditions and volatility.
ITEM 2. PROPERTIES.
Our principal physical properties consist of our headquarters offices,
representing approximately 23,500 square feet of leased office facilities in
Lake Forest, Illinois (north of Chicago), and the facilities that house our
Loyalty Lab and related offices, comprising approximately 41,000 square feet
located in Austin, Texas. We also lease office facilities in other locations
throughout the United States, including Atlanta, Georgia, Dallas, Texas, New
York, New York, San Francisco, California, and Washington, D.C., and in various
international locations, including Toronto (Ontario), Canada, London, England,
Frankfurt, Germany, Paris, France and Sydney, Australia. We believe that our
leased facilities are appropriate for our current and anticipated business
requirements.
ITEM 3. LEGAL PROCEEDINGS.
As of the date of this report, we are not a party to any pending legal
proceedings, other than ordinary routine litigation or other legal proceedings
incidental to our business, none of which we believe would constitute material
legal proceedings for which disclosure is required under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of our fiscal
year ended December 30, 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The following table includes the name, age, current position and term
of office of each of eLoyalty's executive officers, as of March 12, 2001.
NAME AGE CURRENT POSITION HELD SINCE
- ---- --- ---------------- ----------
Kelly D. Conway* 44 President and Chief Executive Officer 1999
Timothy J. Cunningham 47 Senior Vice President, Chief Financial Officer 1999
and Corporate Secretary
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Craig D. Lashmet 41 Senior Vice President, North American Operations 1999
N. Vaughan Thomas 44 Senior Vice President, International Operations 2000
Jay A. Istvan 41 Senior Vice President, Strategy and Marketing 2001
Jackie L. Hilt 44 Senior Vice President, Employee Loyalty 1999
Christopher J. Danson 33 Senior Vice President, Research and Development 1999
Deidra D. Gold 46 Vice President and General Counsel 2000
Mark D. Kuchel 46 Senior Vice President (Area Practice Leader, East 1999
Region)
Robert W. Albo 42 Senior Vice President (Area Practice Leader, West 1999
Region)
* Member of the Board of Directors
Except as required by individual employment agreements between
executive officers and the Company, there exists no arrangement or understanding
between any executive officer and any other person pursuant to which such
executive officer was elected. Each executive officer serves until his or her
successor is elected and qualified or until his or her earlier removal or
resignation.
The principal business experience of the executive officers for at
least the last five years is as follows:
Kelly D. Conway has been the President and Chief Executive Officer and
a Director of eLoyalty since its incorporation in May 1999. Mr. Conway joined
TSC in November 1993 as Senior Vice President, assumed the position of Executive
Vice President in July 1995 and became Group President in October 1998. From
1991 until joining TSC, Mr. Conway served as a Partner in the management
consulting firm of Spencer, Shenk and Capers. Prior thereto, he held various
management positions with Telcom Technologies, a manufacturer of automatic call
distribution equipment, including President and Chief Executive Officer from
1989 to 1991, and Vice President of Finance and Marketing from 1984 to 1989.
Timothy J. Cunningham has served as eLoyalty's Senior Vice President,
Chief Financial Officer and Corporate Secretary since November 1999. From
October 1998 until November 1999, he was the Vice President -- Finance and Chief
Financial Officer of CTS Corporation, a publicly traded electronics and
communications company. Mr. Cunningham was Vice President -- Finance of the
Moore Document Solutions division of Moore Corporation from July 1996 until
September 1998, and Group Controller for the ConAgra Refrigerated Foods group of
ConAgra, Inc. from 1995 to 1996.
Craig B. Lashmet has served as eLoyalty's Senior Vice President of
Operations from May 1999 until June 2000 and its Senior Vice President, North
American Operations since July 2000. From October 1995 until May 1999, Mr.
Lashmet was a Senior Vice President of TSC. Prior to joining TSC, he was a
Partner with Grant Thornton LLP, an international accounting and consulting
firm, where he managed the firm's advanced technology consulting practice for
nine years.
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N. Vaughan Thomas has been eLoyalty's Senior Vice President,
International Operations since July 2000. From July 1998 until June 2000, Mr.
Thomas was a Partner of PricewaterhouseCoopers LLP and, from April 1998 until
his departure, a member of the firm's Global Management Consultancy Leadership
team, which had responsibility for global strategy and investment management for
the firm. Mr. Thomas was a Partner with Coopers & Lybrand UK from 1993 until
June 1998, prior to the merger of Coopers & Lybrand with Price Waterhouse, and
was the Chairman of the Commerce & Industry Collection of practices from January
1996 until March 1998.
Jay A. Istvan has been the Senior Vice President, Strategy and
Marketing, of eLoyalty since February 2001. Mr. Istvan was affiliated with The
Boston Consulting Group, Inc., a global strategic consulting firm, for more than
fourteen years prior to joining eLoyalty. He was a Vice President of Boston
Consulting Group from 1993 and was Midwest Regional Leader of its Healthcare
Practice from 1997 until joining eLoyalty and Regional Leader of its High
Technology and Convergence Practice from 1993 to 1997.
Jackie L. Hilt has been eLoyalty's Senior Vice President of Employee
Loyalty since May 1999, with responsibility for recruiting and human resources
functions with a specific focus on employee relationships. Previously, Ms. Hilt
had been with TSC for more than ten years, most recently as the Senior Vice
President in charge of its international recruiting organization, a role she
assumed in 1994.
Christopher J. Danson has been the Senior Vice President, Research and
Development, of eLoyalty since May 1999, with current responsibility for
its Loyalty Lab in Austin, Texas and its Managed Services offerings (including
Loyalty Support(TM), purpose-built hosted solutions and e-PROFILE(TM)). From
February 1993 until the time he joined eLoyalty, Mr. Danson held various
positions with TSC in its ECM/Call Center practice, including Senior Vice
President from September 1998 until May 1999, Vice President from June 1996
until September 1998 and Senior Principal for TSC Europe from June 1995 until
June 1996.
Deidra D. Gold has served as eLoyalty's Vice President and General
Counsel since July 2000. Her former positions include: Counsel and Corporate
Secretary of Ameritech Corporation, a publicly traded communications company,
from March 1998 through December 1999; Principal (Partner) of Goldberg, Kohn et
al, a Chicago law firm, from August 1997 until March 1998; Vice President and
General Counsel of Premier Industrial (renamed Premier Farnell) Corporation, a
publicly traded electronics and industrial distribution company, from November
1991 to June 1997; and Partner, Jones, Day, Reavis & Pogue, an international law
firm, from January 1988 until November 1991.
Mark D. Kuchel has been a Senior Vice President of eLoyalty since
May 1999 and the Area Practice Leader for the Eastern Region of North America
since November, 2000. Prior to such time, Mr. Kuchel had been a Senior Vice
President of TSC since March 1996.
Robert W. Albo has acted as a Senior Vice President of eLoyalty since
May 1999 and the Area Practice Leader for the Western Region of North America
since November, 2000. From June 1997 until May 1999, Mr. Albo was a Senior Vice
President of TSC. From 1993 until joining TSC, he was associated with Axiom
Management Consulting, Inc., a management consulting subsidiary of Cambridge
Technology Partners, most recently as a Vice President and Regional Manager, a
position he assumed in 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information in "Common Stock Information" on page 23 of eLoyalty's
Annual Report to Stockholders is incorporated herein by reference in response to
this item. There were approximately 279 owners of record of eLoyalty Common
Stock, par value $0.01 per share, as of March 12, 2001.
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ITEM 6. SELECTED FINANCIAL DATA.
The information in "Selected Financial Data" and in "Common Stock
Information -- Dividends" on pages 22-23 of eLoyalty's 2000 Annual Report to
Stockholders is incorporated herein by reference in response to this item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 24 through 32 of eLoyalty's 2000 Annual Report
to Stockholders is incorporated herein by reference in response to this item.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information relating to market risk is included in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the captions "Qualitative and Quantitative Disclosures about Market Risk" on
page 31 of eLoyalty's 2000 Annual Report to Stockholders and is incorporated
herein by reference in response to this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of Independent Accountants, Consolidated Balance Sheets,
Consolidated Statements of Operations, Consolidated Statements of Cash Flows,
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income (Loss), and Notes to Consolidated Financials Statements on pages 33
through 50 of eLoyalty's 2000 Annual Report to Stockholders are incorporated
herein by reference in response to this item.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
For information about our executive officers, see "Executive Officers
of the Company" included as Item 4A of Part I of this report. The information
contained under the captions "Director Election - General" and "Security
Ownership of Certain Beneficial Owners and Management --- Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement to be filed by
eLoyalty for its 2001 Annual Meeting of Stockholders is incorporated herein by
reference in response to this item.
ITEM 11. EXECUTIVE COMPENSATION.
The information under "Director Election - Compensation of Directors"
and "Executive Compensation - Summary Compensation Table", "--- Compensation
Committee Interlocks and Insider Participation", "--- Option Grants in Fiscal
2000", "--- Option Exercises in Fiscal 2000 and Option Values at December 30,
2000", "--- Option Repricings", "--- Employment Contracts and Employment
Termination and Change in Control Arrangements" in the Proxy Statement to be
filed by eLoyalty for its 2001 Annual Meeting of Stockholders is incorporated
herein by reference in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under the heading "Security Ownership of Certain
Beneficial Owners and Management --- Beneficial Ownership Information" in the
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Proxy Statement to be filed by eLoyalty for its 2001 Annual Meeting of
Stockholders is incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement to be filed by eLoyalty for its 2001 Annual
Meeting of Stockholders is incorporated herein by reference in response to this
item.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
(1) Financial Statements. You will find these financial statements
as indicated below:
Page
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Report of Independent Accountants.................................................. *
Consolidated Balance Sheets........................................................ *
Consolidated Statements of Operations.............................................. *
Consolidated Statements of Cash Flows.............................................. *
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income (Loss).................................................................. *
Notes to Consolidated Financial Statements......................................... *
* Located in our 2000 Annual Report to Stockholders at pages 33
through 50 and incorporated herein by reference. All of the
foregoing financial statements, other than the Consolidated Balance
Sheets, are for the years ended December 30, 2000 and December 31,
1999, as well as the seven month period June 1, 1998 to December 31,
1998 and the fiscal year ended May 31, 1998. The Consolidated
Balance Sheets are as of December 30, 2000 and December 31, 1999.
(2) Financial Statement Schedules. We have omitted financial statement
schedules other than that listed below because such schedules are
not required or applicable.
Report of Independent Accountants................................ F-1
Schedule II -- Valuation and Qualifying Accounts................. F-2
(3) The list of exhibits filed with or incorporated by reference into
this report is contained in the Exhibit Index to this report on Page
I-1, which is incorporated herein by reference.
We will furnish to a stockholder, on request, without charge, a copy
of this report (including the financial statements and financial
statement schedule), as well as our 2000 Annual Report to
Stockholders and the Notice of 2001 Annual Meeting and Proxy
Statement, portions of which are referred to in and considered part
of this report. Copies of our Annual Report to Stockholders will
also be available on eLoyalty's web site at www.eloyalty.com. We
will furnish any other exhibit to this report at cost.
(b) Reports on Form 8-K: eLoyalty did not file any Current Reports on Form 8-K
during the fourth quarter of 2000.
9
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
on March 19, 2001.
eLOYALTY CORPORATION
By /s/ KELLY D. CONWAY
------------------------------
Kelly D. Conway
President and
Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following persons
on behalf of the registrant in the capacities indicated on this 19th day of
March, 2001.
Name Capacity
- ---- --------
/s/ KELLY D. CONWAY Director, President and Chief Executive Officer
- --------------------------------- (Principal Executive Officer)
Kelly D. Conway
*
- --------------------------------- Chairman of the Board and Director
Tench Coxe
*
- --------------------------------- Director
Jay C. Hoag
*
- --------------------------------- Director
John T. Kohler
*
- --------------------------------- Director
Michael J. Murray
*
- --------------------------------- Director
John R. Purcell
- ---------------------------------
/s/ TIMOTHY J. CUNNINGHAM Senior Vice President, Chief Financial
- --------------------------------- Officer and Corporate Secretary
Timothy J. Cunningham (Principal Financial and Accounting Officer)
*By: /s/ TIMOTHY J. CUNNINGHAM
----------------------------------------
Timothy J. Cunningham, Attorney-in-Fact
10
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REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of eLoyalty Corporation:
Our audits of the consolidated financial statements referred to in our
report dated January 30, 2001 appearing in the 2000 Annual Report to
Stockholders of eLoyalty Corporation (which report and consolidated
financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the financial statement
schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, the
financial statement schedule presents fairly, in all material respects,
the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 30, 2001
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14
eLoyalty Corporation
Schedule II -- Valuation and Qualifying Accounts
For the Years Ended December 30, 2000 and December 31, 1999,
the Seven-Month Period Ended December 31, 1998
and the Year Ended May 31, 1998
(In thousands)
BALANCE AT BALANCE AT
DESCRIPTION OF BEGINNING END OF
ALLOWANCE AND RESERVES OF PERIOD ADDITIONS DEDUCTIONS PERIOD
- ------------------------------------------ ---------- ---------- ---------- --------
Year ended May 31, 1998
Receivable reserves for potential losses.................... $ 198 $ 531 $ (254) $ 475
Seven month period ended December 31, 1998
Receivable reserves for potential losses.................... $ 475 $ 2,652 $ (489) $2,638
Year ended December 31, 1999
Receivable reserves for potential losses.................... $2,638 $ 2,059 $(2,613) $2,084
Year ended December 30, 2000
Receivable reserves for potential losses.................... $2,084 $ 4,064 $(4,543) $1,605
F-2
15
EXHIBIT INDEX
We are including as exhibits to this Annual Report on Form 10-K certain
documents that we have previously filed with the SEC as exhibits, and we are
incorporating such documents as exhibits herein by reference from the respective
filings identified in parentheses below. The management contracts and
compensatory plans or arrangements required to be filed as exhibits to this
Annual Report on Form 10-K pursuant to Item 14(c) are those listed below as
Exhibits 10.14 through 10.30, inclusive.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
2.1 Form of Reorganization Agreement between Technology Solutions
Company ("TSC") and eLoyalty Corporation ("eLoyalty")
(included as Exhibit 2.1 to eLoyalty's Registration Statement
on Form S-1 (Registration No. 333-94293) (the "S-1"))
3.1 Certificate of Incorporation of eLoyalty, as amended (filed as
Exhibit 3.1 to the S-1)
3.2 Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company (included as Exhibit 4.2 to
Amendment No. 1 to eLoyalty's Registration Statement on Form
8-A (File No. 0-27975) filed with the SEC on March 24, 2000
(the "8-A Amendment"))
3.2 By-Laws of eLoyalty (filed as Exhibit 3.2 to the S-1)
4.1 Rights Agreement, dated as of March 17, 2000, between eLoyalty
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent
(filed as Exhibit 4.1 to the 8-A Amendment)
10.1 Common Stock Purchase and Sale Agreement, dated as of August
13, 1999, among TSC, eLoyalty Corporation, Sutter Hill
Ventures, TCV III (GP), TCV III, L.P., TCV III (Q), L.P. and
TCV III Strategic Partners, L.P. (filed as Exhibit 10.3 to the
S-1)
10.2 Common Stock Purchase Agreement, dated as of May 26, 2000,
among eLoyalty Corporation and TCV IV, L.P., TCV IV Strategic
Partners, L.P., TCV III (GP), TCV III (Q), L.P. and TCV III
Strategic Partners, L.P. (filed as Exhibit 10.1 to eLoyalty's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000 (File No. 0-27975))
10.3 Investor Rights Agreement, dated as of May 26, 2000, among
eLoyalty Corporation and TCV IV, L.P., TCV IV Strategic
Partners, L.P., TCV III (GP), TCV III (Q), L.P. and TCV III
Strategic Partners, L.P. (filed as Exhibit 10.2 to eLoyalty's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000 (File No. 0-27975))
10.4+ Amendment, dated as of February 12, 2001, to the Investor
Rights Agreement, dated as of May 26, 2000, among eLoyalty
Corporation and TCV IV, L.P., TCV IV Strategic Partners, L.P.,
TCV III (GP), TCV III (Q), L.P. and TCV III Strategic
Partners, L.P.
10.5+ Amended and Restated Business Loan Agreement, dated as of
December 30, 2000, between eLoyalty Corporation and Bank of
America, N.A.
10.6 Form of Shared Services Agreement between TSC and eLoyalty
(filed as Exhibit 10.5 to the S-1)
10.7 Form of Tax Sharing and Disaffiliation Agreement between TSC
and eLoyalty (filed as Exhibit 10.6 to the S-1)
10.8 Form of TSC (Licensor) Intellectual Property License Agreement
(filed as Exhibit 10.7 to the S-1)
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16
10.9 Form of eLoyalty (Licensor) Intellectual Property License
Agreement (filed as Exhibit 10.8 to the S-1)
10.10 Office Lease -- Two Conway Park made as of December 6, 1999 by
and between Riggs & Company, a division of Riggs Bank, N.A.,
as Landlord, and eLoyalty Corporation, as Tenant (filed as
Exhibit 10.13 to the S-1)
10.11 River Place Point II Lease Agreement, dated March 17, 2000, by
and between Investors Life Insurance Company of North America,
as Landlord, and eLoyalty Corporation, as Tenant (filed as
Exhibit 10.15 to eLoyalty's Annual Report on Form 10-K for the
year ended December 31, 1999 (File No. 0-27975))
10.12 eLoyalty Ventures, L.L.C. Operating Agreement, dated as of
July 21, 2000, by and among Brookside Capital Partners Fund
LP, Sutter Hill Ventures L.P., TCV IV, L.P. and TCV Strategic
Partners IV, L.P. and eLoyalty Employee Investors, L.L.C.
(filed as Exhibit 10.2 to eLoyalty's Quarterly Report on Form
10-Q for the quarter ended September 30, 2000 (File No.
0-27975))
10.13+ eLoyalty Employee Investors, L.L.C. Operating Agreement,
entered into in July 2000, among eLoyalty Employee Investors,
L.L.C., eLoyalty Corporation as the initial member and Sarah
Faux as the manager.
10.14+ eLoyalty Corporation 1999 Stock Incentive Plan (as Amended and
Restated as of February 28, 2001)
10.15+ eLoyalty Corporation 2000 Stock Incentive Plan (as Amended and
Restated as of February 28, 2001)
10.16+ 1999 Employee Stock Purchase Plan (as Amended and Restated as
of February 28, 2001)
10.17 eLoyalty Corporation Executive Deferred Compensation Plan
dated January 1, 2000 (filed as Exhibit 10.14 to the S-1)
10.18+ Summary of Discretionary Cash Bonus Program for Executive
Officers
10.19 Employment Agreement, dated as of January 19, 1996, between
Kelly D. Conway and TSC (to which eLoyalty has succeeded)
(filed as Exhibit 10.9 to the S-1)
10.20 Promissory Note, dated November 12, 1998, by Kelly D. Conway
in favor of TSC (filed as Exhibit 10.12 to the S-1)
10.21+ Promissory Note, dated December 15, 1999, by Kelly D. Conway
in favor of TSC
10.22 Employment Agreement, dated as of October 20, 1998, between
Craig Lashmet and TSC (to which eLoyalty has succeeded) (filed
as Exhibit 10.11 to the S-1)
10.23 Employment Agreement, dated as of November 15, 1999, between
Timothy J. Cunningham and TSC (to which eLoyalty has
succeeded) (filed as Exhibit 10.10 to the S-1)
10.24+ Promissory Note, dated November 19, 1999, of Timothy J.
Cunningham in favor of TSC (to which eLoyalty has succeeded)
10.25 Contract of Employment, entered into May 12, 2000, between
eLoyalty (UK) Limited and Vaughan Thomas (filed as Exhibit
10.1 to eLoyalty's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 (File No. 0-27975))
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17
10.26 Form of Loan Note, dated July 1, 2000, of Vaughan Thomas in
favor of eLoyalty (UK) Ltd. (filed as Exhibit 10.3 to
eLoyalty's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 0-27975))
10.27+ Employment Agreement, dated as of June 1, 1995, between
Christopher J. Danson and TSC (to which eLoyalty has
succeeded)
10.28+ Promissory Note, dated September 13, 1999, of Christopher J.
Danson in favor of TSC (to which eLoyalty has succeeded),
together with the Amendment of such Promissory Note, dated
August 31, 1999
10.29+ Promissory Note, dated February 23, 1998, of Chrisopher J.
Danson in favor of TSC (to which eLoyalty has succeeded)
10.30 Form of Indemnification Agreement entered into between
eLoyalty Corporation and each of Tench Coxe and Jay C. Hoag
(filed as Exhibit 10.15 to the S-1)
13.1+ Excerpted portions of eLoyalty Corporation's 2000 Annual
Report to its shareowners, which are incorporated in response
to various items of this Annual Report on Form 10-K
21.1+ Subsidiaries of eLoyalty Corporation
23.1+ Consent of PricewaterhouseCoopers LLP, Independent Accountants
24.1+ Power of Attorney from Tench Coxe, Director
24.2+ Power of Attorney from Jay C. Hoag, Director
24.3+ Power of Attorney from John T. Kohler, Director
24.4+ Power of Attorney from Michael D. Murray, Director
24.5+ Power of Attorney from John R. Purcell, Director
- ----------------
+ Filed herewith
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