| (Mark One) | ||
 |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
| (Mark One) | ||
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 29, 2002
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 (State or Other Jurisdiction of Incorporation or Organization) |
36-4304577 (I.R.S. Employer Identification No.) |
150 Field Drive
Suite 250
Lake Forest, Illinois 60045
(847) 582-7000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant’s Principal Executive Offices)
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
No
The number of outstanding shares of the registrant’s common stock, $0.01 par value per share, as of August 6, 2002 was 6,301,194.
TABLE OF CONTENTS
| Page | |||
| Part I. Financial Information | |||
| Item 1. | Financial Statements | 1 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | |
| Item 3. | Qualitative and Quantitative Disclosures About Market Risk | 20 | |
| Part II. Other Information | |||
| Item 4. | Submission of Matters to a Vote of Security Holders | 21 | |
| Item 6. | Exhibits and Reports on Form 8-K | 21 | |
| Signatures | 22 | ||
Part I. Financial Information
Item 1. Financial Statements
eLoyalty Corporation
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| June 29, | December 29, | |||||||||
| 2002 | 2001 | |||||||||
| (unaudited) | ||||||||||
ASSETS: |
||||||||||
Current Assets: |
||||||||||
Cash and cash equivalents |
$ | 48,107 | $ | 42,653 | ||||||
Restricted cash |
10,800 | 9,448 | ||||||||
Receivables (less allowances of $1,642 and $2,400, respectively) |
17,139 | 22,934 | ||||||||
Deferred income taxes |
2,160 | 2,451 | ||||||||
Prepaid expenses |
2,087 | 1,190 | ||||||||
Refundable income taxes |
429 | 6,597 | ||||||||
Other current assets |
938 | 2,300 | ||||||||
Total current assets |
81,660 | 87,573 | ||||||||
Equipment and leasehold improvements, net |
16,622 | 17,889 | ||||||||
Goodwill, net |
2,135 | 2,135 | ||||||||
Deferred income taxes |
20,202 | 20,059 | ||||||||
Long-term receivables and other |
113 | 358 | ||||||||
Total assets |
$ | 120,732 | $ | 128,014 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
||||||||||
Current Liabilities: |
||||||||||
Short-term debt |
$ | 8,600 | $ | 8,600 | ||||||
Accounts payable |
2,349 | 2,154 | ||||||||
Accrued compensation and related costs |
6,564 | 8,274 | ||||||||
Other current liabilities |
6,286 | 8,750 | ||||||||
Total current liabilities |
23,799 | 27,778 | ||||||||
Long-term liabilities |
2,671 | 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 $24,132 and $23,318 at June 29, 2002 and December 29, 2001,
respectively |
23,268 | 19,499 | ||||||||
STOCKHOLDERS’ EQUITY: |
||||||||||
Preferred stock, $0.01 par value; 35,000,000 shares authorized;
none issued and outstanding |
— | — | ||||||||
Common stock, $0.01 par value; 50,000,000 shares authorized;
6,321,090 and 5,629,218 shares issued and outstanding, respectively |
63 | 56 | ||||||||
Additional paid-in capital |
150,253 | 150,071 | ||||||||
Accumulated deficit |
(64,550 | ) | (61,490 | ) | ||||||
Unearned compensation |
(10,521 | ) | (6,749 | ) | ||||||
Other |
(4,251 | ) | (4,541 | ) | ||||||
Total stockholders’ equity |
70,994 | 77,347 | ||||||||
Total liabilities and stockholders’ equity |
$ | 120,732 | $ | 128,014 | ||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information.
1
eLoyalty Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| For the | For the | ||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||
| June | June | ||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||
Revenues |
$ | 21,731 | $ | 38,267 | $ | 47,590 | $ | 91,954 | |||||||||
Operating Expenses: |
|||||||||||||||||
Cost of services |
14,375 | 29,336 | 31,183 | 71,580 | |||||||||||||
Selling, general, administrative and
research and development |
6,934 | 17,838 | 15,020 | 42,064 | |||||||||||||
Severance and related costs |
— | 10,719 | 2,410 | 22,194 | |||||||||||||
Depreciation expense |
1,387 | 1,230 | 2,735 | 2,844 | |||||||||||||
Goodwill amortization |
— | 1,241 | — | 2,485 | |||||||||||||
Total operating expenses |
22,696 | 60,364 | 51,348 | 141,167 | |||||||||||||
Operating loss |
(965 | ) | (22,097 | ) | (3,758 | ) | (49,213 | ) | |||||||||
Other income |
175 | 692 | 481 | 1,232 | |||||||||||||
Loss before income taxes |
(790 | ) | (21,405 | ) | (3,277 | ) | (47,981 | ) | |||||||||
Income tax provision (benefit) |
185 | 8,508 | (217 | ) | (1,591 | ) | |||||||||||
Net loss |
$ | (975 | ) | $ | (29,913 | ) | $ | (3,060 | ) | $ | (46,390 | ) | |||||
Dividends and accretion related to Series B preferred stock |
(2,143 | ) | — | (4,584 | ) | — | |||||||||||
Net loss available to common stockholders |
$ | (3,118 | ) | $ | (29,913 | ) | $ | (7,644 | ) | $ | (46,390 | ) | |||||
Basic net loss per common share |
$ | (0.61 | ) | $ | (5.98 | ) | $ | (1.50 | ) | $ | (9.29 | ) | |||||
Diluted net loss per common share |
$ | (0.61 | ) | $ | (5.98 | ) | $ | (1.50 | ) | $ | (9.29 | ) | |||||
Shares used to calculate basic net loss per common share |
5,100 | 4,998 | 5,081 | 4,996 | |||||||||||||
Shares used to calculate diluted net loss per common share |
5,100 | 4,998 | 5,081 | 4,996 | |||||||||||||
Noncash compensation included in individual line items above: |
|||||||||||||||||
Cost of services |
$ | 212 | $ | 367 | $ | 357 | $ | 630 | |||||||||
Selling, general, administrative and
research and development |
764 | 547 | 1,284 | 1,044 | |||||||||||||
Total noncash compensation |
$ | 976 | $ | 914 | $ | 1,641 | $ | 1,674 | |||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information.
2
eLoyalty Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For the Six Months | ||||||||||||||||
| Ended June | ||||||||||||||||
| 2002 | 2001 | |||||||||||||||
| (unaudited) | ||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||||||
Net loss |
$ | (3,060 | ) | $ | (46,390 | ) | ||||||||||
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
||||||||||||||||
Depreciation, goodwill amortization and noncash compensation |
4,376 | 7,003 | ||||||||||||||
Uncollectible amounts |
(400 | ) | 2,908 | |||||||||||||
Severance and related costs, net of cash payments |
(2,038 | ) | 14,821 | |||||||||||||
Deferred income taxes |
501 | 2,624 | ||||||||||||||
Changes in assets and liabilities: |
||||||||||||||||
Receivables |
6,561 | 32,547 | ||||||||||||||
Sales of trading securities related to deferred compensation program |
— | 328 | ||||||||||||||
Refundable income taxes |
6,984 | 700 | ||||||||||||||
Other current assets |
(904 | ) | (6,305 | ) | ||||||||||||
Accounts payable |
139 | (1,330 | ) | |||||||||||||
Accrued compensation and related costs |
(1,184 | ) | (8,008 | ) | ||||||||||||
Deferred compensation |
— | (378 | ) | |||||||||||||
Other liabilities |
(2,921 | ) | (3,956 | ) | ||||||||||||
Long-term receivables and other |
245 | 224 | ||||||||||||||
Net cash provided by (used in) operating activities |
8,299 | (5,212 | ) | |||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Capital expenditures |
(1,452 | ) | (5,527 | ) | ||||||||||||
Net cash used in investing activities |
(1,452 | ) | (5,527 | ) | ||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
Proceeds from revolving credit agreement |
— | 9,000 | ||||||||||||||
Required deposit on revolving credit agreement |
(1,352 | ) | — | |||||||||||||
Repayments on revolving credit agreement |
— | (400 | ) | |||||||||||||
Proceeds from stock compensation plans |
89 | 1,022 | ||||||||||||||
Net cash (used in) provided by financing activities |
(1,263 | ) | 9,622 | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
(130 | ) | (369 | ) | ||||||||||||
Increase (decrease) in cash and cash equivalents |
5,454 | (1,486 | ) | |||||||||||||
Cash and cash equivalents, beginning of period |
42,653 | 41,138 | ||||||||||||||
Cash and cash equivalents, end of period |
$ | 48,107 | $ | 39,652 | ||||||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||||||||||
| Cash paid for interest | $ | 96 | $ | 128 | ||||||||||||
Cash (refunded) paid for income taxes |
$ | (6,732 | ) | $ | 1,140 | |||||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of this financial information.
3
eLoyalty Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—General
In the opinion of management, the accompanying unaudited consolidated financial statements of eLoyalty Corporation (we or eLoyalty) include all normal and recurring adjustments necessary for a fair presentation of our consolidated financial position as of June 29, 2002, the consolidated results of our operations and cash flows for the three months and six months ended June 29, 2002 and June 30, 2001, and are in conformity with Securities and Exchange Commission (SEC) Rule 10-01 of Regulation S-X. Certain reclassifications have been made to the 2001 consolidated statements of operations to conform to the 2002 presentation. These reclassifications had no impact on net loss or stockholders’ equity. All share amounts have been adjusted to give effect to the one-for-ten reverse stock split effected December 19, 2001.
The results of operations for any interim period are not necessarily indicative of the results for the full year. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 29, 2001 and our Form 8-K filed on June 19, 2002.
Note 2—Severance and related costs
In the first quarter 2002, eLoyalty recognized a pre-tax charge of $2.4 million resulting from cost reduction actions of $2.1 million taken throughout the quarter as well as changes in estimates for prior accruals of $0.3 million. We did not record additional charges in the second quarter of 2002. The first quarter charges related to employee severance payments and related costs for the elimination of approximately 40 positions, in both the North American and International segments. 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 six months ended June 29, 2002, eLoyalty made cash payments of $4.4 million related to the foregoing actions. 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 following table represents the activity related to these charges for the six months ended June 29, 2002 (in thousands):
| Reserve Balance | Charge and | |||||||||||||||
| December 29, 2001 | Adjustments | Payments | June 29, 2002 | |||||||||||||
Employee Severance |
$ | 1,601 | $ | 1,874 | $ | 2,463 | $ | 1,012 | ||||||||
Facilities |
4,141 | 192 | 816 | 3,517 | ||||||||||||
Other |
2,174 | 344 | 1,169 | 1,349 | ||||||||||||
Total |
$ | 7,916 | $ | 2,410 | $ | 4,448 | $ | 5,878 | ||||||||
The remaining reserve for facilities reflects an estimate of costs for closed facilities for which subletting is not expected to result in the full recovery of our total contracted lease payments. If we are unable to sublet any of these facilities, the additional charge would be approximately $1.2 million. The charge/adjustments column reflects the charges and changes in expected payments for leases and severances.
4
Of the $5.9 million that remains reserved as of June 29, 2002, $2.7 million related to future lease payments, net of estimated sublease recoveries, is reflected in Long-term liabilities, $1.0 million related to severance payments is reflected in Accrued compensation and related costs and the balance of $2.2 million is reflected in Other current liabilities.
Note 3—Comprehensive Net Loss
Comprehensive net loss is comprised of the following (in thousands):
| For the Three | For the Six | ||||||||||||||||
| Months Ended | Months Ended | ||||||||||||||||
| June | June | ||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||
| (unaudited) | (unaudited) | ||||||||||||||||
Net loss |
$ | (975 | ) | $ | (29,913 | ) | $ | (3,060 | ) | $ | (46,390 | ) | |||||
Other comprehensive loss: |
|||||||||||||||||
Effect of currency translation |
478 | (287 | ) | 290 | (2,242 | ) | |||||||||||
Comprehensive net loss |
$ | (497 | ) | $ | (30,200 | ||||||||||||