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 June 30, 2004
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: 0-30260
eGain Communications Corporation
(Exact name of registrant as specified in its charter)
Delaware 77-0466366 | 77-0466366 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices, including zip code) | (Registrant’s telephone number, including area code) |
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 $0.001 per share
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨
The aggregate market value of the Common Stockvoting and non-voting common equity held by non-affiliates, (based on the closing sale priceOTC Bulletin Board on the Nasdaq National Market on September 20, 2002)December 31, 2003 (the last business day of registrants second quarter of fiscal 2004), was approximately $1,501,697.$1,346,422. For purposes of the foregoing calculation only, the registrant has included in the shares owned by affiliates the beneficial ownership of Common Stockvoting and non-voting common equity of officers and directors, and affiliated entities, of the registrant and members of their families. Such inclusion shall not be construed as an admission that any such person is an affiliate for any other purpose.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes¨ Nox
As of September 20, 2002,22, 2004, there were 36,657,3133,695,739 shares of Common Stock, $0.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11, 12, 13 and 1314 of Part III incorporate by reference information from the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrant’s 20022004 Annual Meeting of Stockholders to be held on November 1, 2002.
20022004 FORM 10-K
Item No. | Page | |||
PART I | ||||
1. | 1 | |||
2. | 11 | |||
3. | 11 | |||
4. | 11 | |||
PART II | ||||
5. | 12 | |||
6. | 13 | |||
7. | 14 | |||
7A. | 36 | |||
8. | 37 | |||
9. | 63 | |||
PART III | ||||
10. | 63 | |||
11. | 64 | |||
12. | 64 | |||
13. | 64 | |||
PART IV | ||||
14. | 65 |
This report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements that involve risks and uncertainties. These statements may be identified by the use of the words such as “anticipates,” “believes,” “continue,” “could,” “would,” “estimates,” “forecasts,” “expects,” “intends,” “may,” “might,” “plans,” “potential,” “predicts,” “should,” or “will” and similar expressions or the negative of those terms. The forward-looking statements include, but are not limited to, risks stemming from strategic and operational choices in recent quarters, our equity structure and the significant risk of dilution, the adequacy of our capital resources and need for additional financing, our technological leadership and product development capabilities, the expansion of eGain’s eService platform, the continued expansion of globalour strategic relationships and distribution capabilities and our corresponding ability to grow revenue, the developmentcompetitive landscape of eGain’s strategic relationships, the factors influencing competition in eGain’s market, eGain’sour industry, our continued net losses since inception, our limited operating history, expected net losses,liquidation preferences related to our preferred stock, continued lengthy and delayed sales cycles, broad economic and political instability around the adequacy of capital resources,world affecting the market for our goods and services, the continued need for eServicecustomer service and contact center software solutions and the continued acceptance of eGain’sour Web-native architecture, eGain’s levelsthe effects of investmentcost reductions on our workforce and ability to service customers, risks from our substantial international operations, adverse results in researchpending litigation, legal and developmentregulatory uncertainties and sales and marketingother risks related to protection of our intellectual property assets and the overall volatilityoperational integrity and maintenance of technology companies. eGain’sour systems. Our actual results could differ materially from those discussed in statements relating to eGain’sour future plans, product releases, objectives, expectations and intentions, and other assumptions underlying or relating to any of these statements. Factors that could contribute to such differences include those discussed in “Factors“Additional Factors That May Affect Future Results” and elsewhere in this document. These forward-looking statements speak only as of the date hereof. eGainWe expressly disclaimsdisclaim any obligation or understanding to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in eGain’sour expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Overview
We are a leading provider of Internet-based eServicecustomer service and contact center software, that enables Global 2000 companies to transform traditional customer call centers into multi-channel contact centers.used by global enterprises for over a decade. eGain software solutions are designed to measurably improve operational efficiency and customer retention. eGain eService Enterprise, the Company’s integratedService 6™, our software suite, available through licensed or hosted models, includes integrated, best-in-class applications for customer email management, live web collaboration, virtual agent customer service, knowledge management, self-service, emailand web self-service. These robust applications are built on the eGain Service Management Platform (eGain SMP™), a scalable next-generation framework that includes end-to-end service process management, multi-channel, multi-site contact center management, a flexible integration approach, and Web collaboration that enable online customers to communicate through each of the three primary eService channels—email, real-time and self-service. Built using a 100% Web-native architecture, eGain’s comprehensive solutions are designed to provide robust scalability, global access, diverse integration capabilities and rapid deployment. In addition, eGain’s solution is designed to integratecertified out-of-the-box integrations with leading call center infrastructure and business systems, enabling customers to leverage investments in existing systems and providing an enterprise-wide solution.
Recent Developments
On May 20, 2002, eGainMarch 31, 2004, we entered into a note and warrant purchase agreement with Ashutosh Roy, our Chief Executive Officer, Oak Hill Capital Partners L.P., Oak Hill Capital Management Partners L.P., and FW Investors L.P. (the “lenders”) pursuant to which the lenders loaned to us $2.5 million evidenced by secured promissory notes and received a letter from Nasdaq indicating thatwarrants to purchase shares of our common stock had failedin connection with such loan. The secured promissory notes have a term of five years and bear interest at an effective annual rate of 12% due and payable upon the maturity of such notes. We have the option to maintain a minimum bidprepay the notes at any time subject to the prepayment penalties set forth in such notes. The warrants allow the lenders to purchase up to 312,500 shares at an exercise price of $1.00$2.00 per share for 30 consecutive business days,share. The warrants become exercisable as to fifty percent (50%) of the warrant shares nine months after issuance of the warrants and as to one hundred percent (100%) of the warrant shares on the first anniversary of the issuance of the warrants. We recorded $2.28 million in related party notes payable and $223,000 of discount on the notes related to the relative value of the warrants issued in the transaction that we needwill
be amortized to complyinterest expense over the five year life of the notes. The fair value of these warrants was determined using the Black-Scholes valuation method with the requirements for continued listing within 90 calendar days from such notification or face the possibilityfollowing assumptions: an expected life of being3 years, an expected stock price volatility of 75%, a risk free interest rate of 1.93%, and a dividend yield of 0%.
In February 2004, we were delisted from the Nasdaq National Market. On August 20, 2002, eGain received another letterSmallCap Market due to noncompliance with Marketplace Rule 4310(c)(2)(B), which requires companies listed to have a minimum of $2,500,000 in stockholders’ equity or $35,000,000 market value of listed securities or $500,000 of net income from Nasdaq indicating that eGain’scontinuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. Our common stock had failed to achieve compliance withnow trades in the $1.00 per share minimum bid price andover-the-counter market on the OTC Bulletin Board owned by The Nasdaq Stock Market, Inc., which was established for securities that do not meet the common stock was therefore subject to delisting. On August 26, 2002, eGain issued a press release announcing receipt of this letter from Nasdaq and eGain’s intention to appeal the delisting
Industry Background
The Internet has fundamentally changed the manner in which businesses and customers interact. CustomersToday’s customers demand instant access to customer service and expect immediate responses to questions and issues. Accordingly, successful companies are implementing multi-channel online interaction solutions—solutions that are increasingly known as eService software.
The ability to address eService requirementsdeliver consistent customer service in a multi-channel contact center has become a necessity in today’s competitive business environment. Integrated eService capabilities have become a significant part of any customer service strategy seeking to deliver a quality customer experience. Failure to address the communicationmulti-channel service needs of customers can result in diminished customer loyalty increased difficulty in acquiring new customers, and a deterioration ofdeteriorating competitive position and brand reputation, all potentially resulting in a loss of current and future revenue.
Over the past few years, numerous software vendors have developed and marketed point solutions, or software packages designed to handle online customer communications through a specific channel such as email, real-time Web collaboration or self-service. However, point solutions do not meet the demands of customerscompanies who want flexibility in how they communicate with companiescustomers based on the nature of their inquiry. Point solutions also are difficult to integrate with other programs,create interaction silos, making it difficult for customer service agents to easily reference a customer’s past communications that originated from multiple channels. Nor cando they use a common knowledge base to deliver consistent accurate responses. Moreover, many of these solutions do not integrate easily with a company’s existing legacy systems. This lack of integration makes these applications expensivesystem, making it difficult to implement and maintain especially for companies with significant existing call center operations.
To meet the demands of the modern customer, businesses need a comprehensive, functionally rich, yet deeply integrated customer service suite to serve customers across the phone, web, and email. eGain believes that providing customers with a full rangehas designed its suite of intergrated eService product offerings has become a strategic imperative, and that the demand for an integrated multi-channel interaction platform will continuesoftware applications to grow accordingly.
The eGain Solution
Our application suite, eGain provides software products that enable online customersService 6™, is available licensed or hosted, and businesses to interact through each of the three primary channelsincludes integrated, best-in-class applications for online customer interaction—email real-timemanagement, live web collaboration, virtual agent customer service, knowledge management, and web self-service. These robust applications
Our applications and platform are built withbased on a 100% Web-nativeInternet architecture that allows companiesand open standards such as J2EE, XML, HTTP, JDBC and Java and are designed to leverage the unique advantages of the Internet. All of eGain’s software products can be deployed either as a licensed application installed on servers at the customer location or a hosted application service maintainedeasily integrated and operated by eGain’s hosted operations.
We provide companies with the following benefits:
• | Develop |
• | Reduce |
• | Reduce |
• | Provide |
The eGain Strategy
Our objective is to further enhance itsour position as a leading provider of eServicecustomer service and contact center software. The key elements of eGain’sour strategy include:
Enhance and Expand the Leading Integrated, Multi-Channel eService PlatformCustomer Service Platform.. eGain believes it is We believe we are one of the few companies that provide software to enable integrated communication across the three primary channels of online interaction—email, real-time web channels such as chat and self-service. eGain hasco-browsing, and web self-service, in addition to the phone through seamless telephony integration. We have a strong track record of successfully extending itsour platform through internal development and acquisitions and continuescontinue to invest substantial resources in research and development
Provide Demonstrable Return on Investment to Customers. Especially in these challenging economic times when many companies are dramatically scaling back their investments in information technology, eGain believes thatwe believe customers will only buy enterprise class software if they are convinced that theyit will experienceresult in real return on investment (“ROI”), in both the short and long run. A central element of eGain’sour strategy is the ability to provide companies with demonstrable ROI from the purchase of eGain’sour software applications. Among the factors that canways in which our products are designed to provide this ROI are: increased revenues from enhanced customer loyalty; the relatively lower cost of customer retention (as opposed to customer acquisition) initiatives;loyalty, timely pre-sales help via live web collaboration, and contextual upselling/cross-selling in a service context; decreased headcount and associated costs, improved agent productivity in the call center and customer support areas; enabling new paradigms such as call center consolidation and off-shoring; providing customers with access to lower cost
lower-cost service alternatives than traditional telephone support; and preserving and leveraging existing information technology investments by using eGain’sour easily-integrated products. By focusing on theseOur comprehensive ROI assessment tools make it easier for our customers and other factors, eGain works with existing and prospective customersprospects to establish that investinginvest in eGain products will prove a wise investment.
Technology Leadership. With itsthe creation of our flagship product, eGain Mail, eGain wasEmail, we were the first company to introduce a 100% Web-nativeweb-native solution to address the need for online customer interaction management. Since inception, eGain haswe have designed itsour products withfrom the specific characteristics of the Web in mindground up for easy browser access from anywhere at any time, and intendsrapid, flexible deployment via in-house or hosted options. We intend to maintain itsour technology leadership by building all of its products oncontinuing to fine-tune our applications and user interfaces to a 100% Web-native architecture. eGain believesweb architecture for maximum performance, user adoption and productivity. We believe that its Web-nativeour web-native architecture provides true global access, improved scalability, easier integration with existing enterprise applications and systems, and lower deployment costs.costs than alternative products.
Flexible Delivery Options. eGain believesWe believe that offering itsour solution on a hosted or licensed basis provides customers with a meaningful choice of deployment options. Customers can choose to license applications for deployment at their facilities, or employ eGain’sour hosted operations. They may also choose an in-house implementation managed remotely by our managed services program. Customers choosing to receive hosted access to eGain’sour solutions can focus on other aspects of their business while benefiting from the rapid deployment, 24x7 reliability and support, scalability on demand, and lower up-front investment that the hosting option offers. We believe that we offer the highest level of deployment flexibility among enterprise-class customer service software vendors.
Expand Global Distribution Capabilities. eGain intends to attemptWe intend to expand itsour global distribution capabilities through eGain’sour direct sales efforts as well as strategic relationships. eGain maintainsWe maintain a sales presence in 1819 countries including the United Kingdom, AustraliaIndia and Japan. With the introduction of multi-lingual versions of itsour products (Asian and Western European language capabilities), eGainwe may attempt to further penetrate international markets. In addition to itsour direct sales and marketing efforts, eGain iswe are engaged in a number of formal and informal strategic relationships with system integrators, consulting firms, technology partners and solutionssolution providers.
Products and Services
eGain eService Enterprise andService 6 Suite of Applications
eGain provides multi-channel, eService solutions to the Global 2000. eGain’s solutions are built on a scalable, Web-native architecture based on industry standards and are designed to meet the growth of online communications. eGain’s products are available on multiple platforms, and deployment is available either as a hosted application service or as locally installed software. Although each product may be purchased separately, eGain’s products are designed to work closely with each other and to integrate with customers’ existing databases and applications.
The individual applications categorized by channel,in the suite are described below:
• | eGain |
• |
eGain Campaignis a high volume, outbound email management solution used for targeted service and retention marketing campaigns. eGain Campaign enables businesses to engage in one-to-one email-based customer interactions, leading to profitable, long-term relationships. |
• | eGain , allows an agent to access information stored in external systems. eGain KnowledgeAgent is an integral part of the eGain Service 6 suite. |
• | eGain |
• | eGain |
• | eGain |
• | eGain |
|
Our hosted customers receive access to the full functionality of eGain’sour applications through a standard Webweb browser and Internet connection. Through a network of eGainour service centers and hosting partners linked by high-speed Internet connections, eGain provides itswe provide our customers with multiple redundant paths to access their hosted customer service applications. eGainWe remotely managesmanage these applications which reside on server machines housed at leading co-location facilities. eGainWe also offersoffer value-added services to itsour hosted customers, including application management, database maintenance, mail hosting and anti-virus protection. eGain hasWe have also developed proprietary Web-basedweb-based hosted service management systems, enabling eGainour service professionals to efficiently administer and manage large numbers of hosted customer applications.
Furthermore, the multi-tenant capability of eGain Service 6 allows us to more effectively serve multiple customers at reduced cost of ownership.
Professional Services
Our worldwide professional services organization provides consulting, hosting, technical support and education services designed to ensure customer success and build customer loyalty.
• | Consulting Services. |
• | Hosted Services. |
• | Support Services. |
• | Education Services. |
As of fiscal year ended June 30, 2002, eGain2004, we had approximately 12278 professionals providing worldwide services for systems installation, solutions development, application management, and education and support.
Sales and Marketing
Sales Strategy
Our sales strategy is to pursue targeted accounts through a combination of itsour direct sales force and strategic alliances. eGain targets itsWe target our sales efforts at Global 2000 companies.
The direct sales force is organized into teams that include both sales representatives and systems engineers. eGain’ssales consultants. Our direct sales force is complemented by telemarketing representatives based at headquarters in Sunnyvale, California.
We further complements itscomplement our direct sales force with a series of reseller and sales alliances. Through these alliances, eGain iswe are able to leverage additional sales, marketing and deployment capabilities.
Marketing and Partner Strategy
Our marketing strategy is to build brandmarket awareness as a leading provider of eServicecustomer service and contact center software that enableenables Global 2000 companies to transform traditional call centers into multi-channel contact centers.
We employ a wide range of marketing avenues to deliver itsour message, including print and Internet advertising, targeted directelectronic and postal mailing, email newsletters and a variety of trade shows, seminars and interest groups.
Our marketing group also provides the sales team with lists of prospects and qualified leads for further follow up. This group also produces sales tools, including product collateral, customer case studies, demonstrations, presentations and competitive analyses. In addition, eGain’sour marketing group performs market analyses and conducts focus group and customer reviews to identify and develop key partnership opportunities and product requirements.
We believe that its strategic relationshipsour partners help extend the breadth and depth of itsour product offerings, drive market penetration, and augment itsour professional service capabilities. eGain believesWe believe these relationships are important to delivering successful, integrated products and services to itsour customers.
As of strategic relationships: consulting alliances, technology alliances, solution provider alliances, outsourcing alliancesfiscal year ended June 30, 2004, there were approximately 44 employees engaged in worldwide sales and global distribution alliances.
Customers
We serve a worldwide customer base across a wide variety of industry sectors. No customer accounted for 10% or more of total revenue in the fiscal year just ended. The following is a representative list of companies that have entered into license agreements for one or more eGainof our products:
Telecommunications AT&T Charter Communication Verizon Virgin Mobile Vodafone Group Zone Telecommunication Outsourced Services Harte-Hanks Software Spectrum Spherion Media Emirates Airlines Inphonic News Interactive Novartis Pharmaceuticals Snapfish | Retail Crate and Barrel Gymboree HMV Timberland Financial Services ABN AMRO Bank ANZ Banking Group Barclays Bank Charles Schwab Freddie Mac GE Capital HSBC Bank Janus Quick and Reilly Paymentech | Technology Epson Hewlett-Packard IBM Manufacturing GE Appliances Lockheed Martin |
The market for eServicecustomer service and contact center software remains relatively new andis intensely competitive. Other than product development,innovation and existing customer relationships, there are no substantial barriers to entry in this market, and established or new entities may enter this market in the near future. eGain competes with companies that develop and maintain internallyWhile home-grown software developed eService software applications. eGainby enterprises represents indirect competition, we also competescompete directly with companies that provide licensed eServicepackaged application software vendors in the customer service arena, including AskJeeves, Inc., Avaya, Inc., E.piphany, Inc., Firepond, Inc., Genesys Telecommunications (a wholly-owned subsidiary of Alcatel), Kana Software, Inc., Primus Knowledge Solutions, Inc., RightNow Technologies, Inc., Serviceware, and Talisma Corp. eGain also facesIn addition, we face actual or potential competition from larger front office software companies such as Amdocs Limited (which recently acquired the Clarify,Siebel Systems, Inc. business from Nortel Networks), Onyx Software Corporation, PeopleSoft, Inc., Pivotal Corp., and Siebel Systems, Inc. Furthermore, established enterprise software companies, including IBM, Microsoft Corporation, Oracle Corporation, SAP Inc., and similar companies that may seekattempt to leveragesell customer service software to their existing relationshipsinstalled base.
We believe competition will continue to be fierce and capabilities to offer eService solutions.
greater financial, sales, marketing technical and other resources. Some of eGain’s currentWith more established and futurebetter-financed competitors, these companies may be able to devote greater resources toundertake more extensive marketing and promotional campaigns, adopt more aggressive pricing policies, and make more attractive offers to businesses to induce them to use their products or devote substantially greater resourcesservices.
Further, any delays in the general market acceptance of our applications would likely harm our competitive position by allowing our competitors additional time to improve their product development. It is possible thatand service offerings, and also provide time for new competitors or alliances among existing competitors, may emergeto develop applications and rapidly acquire significantsolicit prospective customers within our target markets. Increased competition could result in pricing pressures, reduced operating margins and loss of market share. eGain also believes that competition will continue to intensify as a result of ongoing industry consolidation.
Product Development
The market for eGain’sour products changes rapidly and is characterized by evolving industry standards, swift changes in customer requirements and frequent new product introductions and enhancements. eGain believesWe believe that strong product development capabilities are essential to itsour strategy of maintaining technology leadership. This includes enhancing current technology, providing excellent quality, performance, and functionality, as well as developing additional applications and maintaining the competitiveness of eGain’sour product and service offerings. eGain hasWe have invested significant time and resources to create a structured process for undertaking all product development. This process involves several functional groups at all levels within eGain’sour organization and is designed to provide a framework for defining and addressing the activities required in bringing product concepts and development projects to market successfully.
In addition, eGainwe continuously analyzesanalyze market and customer requirements and evaluatesevaluate technology that eGain believeswe believe will enhance platform acceptance in the market. eGainWe selectively chooseschoose partners with superior technology to enhance features and functionality of itsour product offerings.
As of fiscal year ended June 30, 2002,2004, there were approximately 14366 employees engaged in worldwide product development activities. Of this amount, approximately 91 were located at eGain’s office in Pune, India.
Intellectual Property
We regard our copyrights, service marks, trademarks and similar intellectual property as critical to itsour success. eGain reliesWe rely on patent, trademark, copyright, trade secret and other laws, as well as confidentiality procedures and licensing arrangements, to protect the proprietary aspects of itsour technology and business. eGain
We are continually assessing the propriety of seeking patent and other intellectual property protectionsprotection for those aspects of eGain’sour technology that it believeswe believe constitute innovations providing significant competitive advantages. Pending and future applications may or may not receive the issuance of valid patents and trademarks.
We routinely requires itsrequire our employees, customers, and potential business partners to enter into confidentiality and nondisclosure agreements before eGainwe will disclose any sensitive aspects of itsour products, technology, or business plans. In addition, eGain requireswe require employees to agree to surrender to eGainus any proprietary information, inventions or other intellectual property they generate or come to possess while employed by eGain.us. Despite eGain’sour efforts to protect itsour proprietary rights through confidentiality and license agreements, unauthorized parties may attempt to copy or otherwise obtain and use eGain’sour products or technology. These precautions may not prevent misappropriation or infringement of eGain’sour intellectual property. In addition, some of eGain’sour license agreements with certain customers and partners require eGainus to place the source code for itsour products into escrow. These agreements typically provide that some party will have a limited, non-exclusive right to access and use this code as authorized by the license agreement if there is a bankruptcy proceeding instituted by or against eGain,us, or if eGainwe materially breachesbreach a contractual commitment to provide support and maintenance to the party.
Third parties may infringe or misappropriate eGain’sour copyrights, trademarks and similar proprietary rights. In addition, other parties may assert infringement claims against eGain. eGain’sus. Our products may infringe issued patents that may relate to itsour products. In addition, because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to eGain’sour software products. eGainWe may be subject to legal proceedings and claims from time to time in the ordinary course of itsour business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties. Intellectual property litigation is expensive and time-consuming and could divert management’s attention away from running eGain’sour business. This litigation could also require eGainus to develop non-infringing technology or enter into royalty or license agreements. These royalty or license agreements, if required, may not be available on acceptable terms, if at all, in the event of a successful claim of infringement. eGain’sOur failure or inability to develop non-infringing technology or license the proprietary rights on a timely basis would harm itsour business.
Employees
As of fiscal year ended June 30, 2002, eGain2004, we had 405223 full-time employees, of which 14366 were in product development, 12281 in services and support, 8644 in sales and marketing, and 5432 in finance and administration. Of the total number of full-time employees, 144 were located at eGain’s office in Pune, India, 91 of whom are in product development, 35 in services and support, six in sales and marketing, and 12 in finance and administration.
None of eGain’sour employees isare covered by collective bargaining agreements. While eGain believes itswe believe our relations with its employees are good, eGain’sour future performance depends in large partlargely upon the continued service of itsour key technical, sales and marketing, and senior management personnel, none of whichwhom are bound by employment agreements requiring service for a defined period of time. The loss of services of one or more of eGain’sour key employees could have a material adverse effect on itsour business.
We may not be successful in attracting, training and retaining qualified personnel, and the failure to do so, particularly in key functional areas such as product development and sales, could materially and adversely affect eGain’sour business, results of operations and financial condition. eGain’sOur future success will likely depend in large partlargely on itsour ability to attract and retain experienced sales, technical, marketing and management personnel.
We lease all facilities used in itsour business. The following table summarizes eGain’sour principal properties.
Location | Principal Use | Approximate Square Footage | Lease Expiration Date | |||
Sunnyvale, California | Corporate Headquarters | 34,000 | 2005 | |||
Pune, India | Corporate Offices | 21,000 | 2003 | |||
Slough, England | European Headquarters | 15,000 | 2003 |
Location | Principal Use | Approximate Square Footage | Lease Expiration Date | |||
Mountain View, California | Corporate Headquarters | 16,000 | 2011 | |||
Pune, India | Corporate Offices | 21,000 | 2007 | |||
Slough, England | European Headquarters | 7,000 | 2008 |
We believe our facilities are suitable for itsour uses and are generally adequate to support the current level of operations for the next 12 months.
OnBeginning on October 25, 2001, a federalnumber of securities class action complaint wascomplaints were filed against us, and certain of our then officers and directors and underwriters connected with our initial public offering of common stock in the United StatesU.S. District Court for the Southern District of New York against eGain, certain of its officers, and the lead underwriters for eGain’s initial public offering.(Rennel Trading Corp. v. eGain Communications Corp., et al.consolidated into In re Initial Public Offering Sec. Litig., No. 01-CIV-9414 (SAS)). The complaint alleges violationscomplaints alleged generally that the prospectus under which such securities were sold contained false and misleading statements with respect to discounts and excess commissions received by the underwriters as well as allegations of Section 11, 12(a)(2) and Section 15“laddering” whereby underwriters required their customers to purchase additional shares in the aftermarket in exchange for an allocation of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,IPO shares. The complaints sought an unspecified amount in damages on behalf of a alleged class of plaintiffspersons who purchased eGainthe common stock between September 23, 1999 and December 6, 2000. Specifically,Similar complaints were filed against 55 underwriters and more than 300 other
companies and other individuals. The over 1,000 complaints were consolidated into a single action. We reached an agreement with the plaintiffs to resolve the cases as to our liability and that of our officers and directors. The settlement involved no monetary payment or other consideration by us or our officers and directors and no admission of liability. The Court has not yet approved the settlement.
On December 13, 2002, Mindfabric, Inc. filed an action for patent infringement against us. The suit was settled and resolved in April, 2004 with no cash payments and the execution of a cross-licensing agreement between the parties.
On February 26, 2003, Golden Gate Plaza, LLC filed a complaint alleges thatfor unlawful detainer against us. On December 23, 2003 we entered into a settlement agreement with the prospectus eGainplaintiff to resolve the case (see Notes to Condensed Consolidated Financial Statements, Note 13: Litigation). A Request for Dismissal was entered by the court on January 12, 2004 and the settlement was later approved.
On February 12, 2004, we filed suit against Insight Enterprises, Inc., the acquirer of Comark, Inc., a value-added reseller of our software, claiminginter alia breach of contract and failure to pay in connection with the initial public offering was materially false and misleading because it faileda sale of our software to disclose that the underwriter defendants solicited and received excessive and undisclosed commissions from certain investors in exchange for shares of eGain stock, and that the underwriters entered into agreements with certain investors in which these investors agreed to purchase additional shares of Company common stock in the aftermarket in exchange for receiving shares of eGain common stock in the initial public offering.one customer. The lawsuit is being prosecuted by the Plaintiffs’ Executive Committeeseeks inIn re: Initial Public Offering Securities Litigation, 21 MC 92 (SAS), pending before the Honorable Shira A. Scheindlin. The Company believes it has good and valid defenses excess of $600,000 in damages.
From time to these allegations, and eGain intends to defend the action vigorously. However, these claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
MATTERS
(a) Common Stock Price RangeMarket Information
In Fiscal Year 2003, our common stock began trading on the Nasdaq SmallCap Market giving effect to a one-for-ten reverse stock split on August 20, 2003. In February 2004 eGain’s Common Stock is quotedbegan trading on The Nasdaq National Marketthe OTC Bulletin Board under the symbol “EGAN.”“EGAN.OB”. The following table sets forth, for the periods indicated, high and low sale prices for eGain’s Common Stock as reported by the Nasdaq SmallCap Market or the OTC Bulletin Board. The Nasdaq National Market.
High | Low | |||||
Year Ended June 30, 2002 | ||||||
First Quarter | $ | 2.76 | $ | 1.01 | ||
Second Quarter | 1.94 | 0.90 | ||||
Third Quarter | 2.15 | 0.66 | ||||
Fourth Quarter | 1.19 | 0.24 | ||||
Year Ended June 30, 2001 | ||||||
First Quarter | $ | 15.38 | $ | 6.94 | ||
Second Quarter | 8.25 | 2.06 | ||||
Third Quarter | 5.75 | 2.31 | ||||
Fourth Quarter | 3.91 | 1.69 |
High | Low | |||||
Year Ended June 30, 2004 | ||||||
First Quarter | $ | 6.40 | $ | 2.62 | ||
Second Quarter | 4.39 | 1.75 | ||||
Third Quarter | 4.60 | 1.65 | ||||
Fourth Quarter | 2.10 | 1.03 | ||||
Year Ended June 30, 2003 | ||||||
First Quarter | $ | 4.90 | $ | 1.20 | ||
Second Quarter | 3.80 | 1.00 | ||||
Third Quarter | 2.50 | 1.70 | ||||
Fourth Quarter | 7.20 | 1.80 |
(b) Holders
As of September 20, 2002,22, 2004, there were approximately 350380 stockholders of record. This number does not include stockholders whose shares are held in trust by other entities. eGain estimatesWe estimate that there were approximately 12,0009,100 beneficial stockholders of itsour common stock as of September 20, 2002.
(c) Dividends
We have never declared or paid any cash dividends on itsour common stock. eGainWe currently anticipatesanticipate that itwe will retain all available funds for use in the operation of itsour business and doesdo not intend to pay any cash dividends in the foreseeable future.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan Information
Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column a) | |||||
Plan Category | Column a | Column b | Column c | ||||
Equity compensation plans approved by security holders | 4,801,428 | (1) | $2.56 | 2,504,716 | |||
Equity compensation plans not approved by security holders | 1,245,284 | (2) | $6.19 | 757,108 | |||
Total | 6,046,712 | $3.07 | 3,261,824 | ||||
Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining under equity compensation plans (excluding securities reflected in column a) | ||||||
Plan Category | Column a | Column b | Column c | |||||
Equity compensation plans approved by security holders | 344,733 | (1) | $ | 16.67 | 286,278 | |||
Equity compensation plans not approved by security holders | 117,786 | (2) | $ | 24.11 | 80,903 | |||
Total | 462,519 | $ | 18.57 | 367,181 | ||||
(1) | Includes the aggregate number of securities to be issued upon exercise of |
(2) | Includes the aggregate number of securities to be issued upon exercise of outstanding options assumed in connection with |
(e) Recent Sales of Unregistered Securities, Use of Proceeds from Registered Securities
(1) Notes and Warrants issued in March 2004
(2) Notes and Warrants issued in October 2003
(3) Notes and Warrants issued in December 2002
The proceeds from such issuances were used by eGain for general working capital purposes.
The selected consolidated financial data set forth on the following page should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” theour Consolidated Financial Statements of the Company and Notes thereto, and other financial information included elsewhere in this Form 10-K. Historical results are not necessarily indicative of results that may be expected for future periods.
Years Ended June 30, | Period from Inception (September 10, 1997) to June 30, 1998 | |||||||||||||||||||
2002 | 2001 | 2000 | 1999 | |||||||||||||||||
(in thousands, except per share information) | ||||||||||||||||||||
Revenue: | ||||||||||||||||||||
Hosting | $ | 5,624 | $ | 10,549 | $ | 3,534 | $ | 137 | $ | — | ||||||||||
License | 10,015 | 24,285 | 5,053 | 473 | — | |||||||||||||||
Services | 14,790 | 18,603 | 4,775 | 409 | 2 | |||||||||||||||
Total revenue | 30,429 | 53,437 | 13,362 | 1,019 | 2 | |||||||||||||||
Cost of revenue—direct | 16,861 | 29,402 | 14,550 | 1,772 | 52 | |||||||||||||||
Cost of revenue—acquisition related | 1,448 | 1,448 | 103 | — | — | |||||||||||||||
Gross profit (loss) | 12,120 | 22,587 | (1,291 | ) | (753 | ) | (50 | ) | ||||||||||||
Operating costs and expenses: | ||||||||||||||||||||
Research and development | 11,395 | 22,877 | 11,752 | 2,096 | 314 | |||||||||||||||
Sales and marketing | 25,147 | 46,995 | 27,893 | 4,182 | 246 | |||||||||||||||
General and administrative | 8,940 | 16,389 | 7,211 | 1,235 | 214 | |||||||||||||||
Impairment of long-lived assets | 36,779 | — | — | — | — | |||||||||||||||
Amortization of goodwill and other intangible assets | 35,064 | 36,816 | 10,945 | 1,217 | — | |||||||||||||||
Amortization of deferred compensation | 961 | 3,291 | 10,553 | 1,817 | 58 | |||||||||||||||
Restructuring | 8,964 | 1,443 | 71 | — | — | |||||||||||||||
Total operating costs and expenses | 127,250 | 127,811 | 68,425 | 10,547 | 832 | |||||||||||||||
Loss from operations | (115,130 | ) | (105,224 | ) | (69,716 | ) | (11,300 | ) | (882 | ) | ||||||||||
Interest income | 601 | 3,417 | 2,047 | 111 | 2 | |||||||||||||||
Interest and other expenses | (1,291 | ) | (845 | ) | (762 | ) | (116 | ) | (58 | ) | ||||||||||
Net loss | (115,820 | ) | (102,652 | ) | (68,431 | ) | (11,305 | ) | (938 | ) | ||||||||||
Dividends on convertible preferred stock | (6,447 | ) | (5,433 | ) | — | — | — | |||||||||||||
Beneficial conversion feature on convertible preferred stock | (43,834 | ) | (19,335 | ) | — | — | — | |||||||||||||
Net loss applicable to common stockholders | $ | (166,101 | ) | $ | (127,420 | ) | $ | (68,431 | ) | $ | (11,305 | ) | $ | (938 | ) | |||||
Per share information: | ||||||||||||||||||||
Basic and diluted net loss per common share | $ | (4.58 | ) | $ | (3.62 | ) | $ | (2.92 | ) | $ | (2.14 | ) | $ | (17.78 | ) | |||||
Shares used in computing basic and diluted net loss per common share | 36,229 | 35,164 | 23,440 | 5,295 | 53 | |||||||||||||||
June 30, | ||||||||||||||||||||
2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Cash, cash equivalents and short-term investments | $ | 9,892 | $ | 42,613 | $ | 30,192 | $ | 1,265 | $ | 3,831 | ||||||||||
Working capital | 2,281 | 37,758 | 11,909 | (756 | ) | 3,691 | ||||||||||||||
Total assets | 35,544 | 158,151 | 175,900 | 23,965 | 3,990 | |||||||||||||||
Long-term debt | 831 | 1,720 | 1,072 | 221 | — |
Fiscal Years Ended June 30, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(in thousands, except per share information) | ||||||||||||||||||||
Revenue: | ||||||||||||||||||||
License | $ | 4,058 | $ | 6,095 | $ | 10,015 | $ | 24,285 | $ | 5,053 | ||||||||||
Support and Services | 15,545 | 15,989 | 20,414 | 29,152 | 8,309 | |||||||||||||||
Total revenue | 19,603 | 22,084 | 30,429 | 53,437 | 13,362 | |||||||||||||||
Cost of license | 1,646 | 1,772 | 858 | 782 | — | |||||||||||||||
Cost of support and services | 6,462 | 8,738 | 16,003 | 28,620 | 14,550 | |||||||||||||||
Cost of revenue—acquisition related | — | 827 | 1,448 | 1,448 | 103 | |||||||||||||||
Gross profit (loss) | 11,495 | 10,747 | 12,120 | 22,587 | (1,291 | ) | ||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||
Research and development | 2,942 | 5,869 | 11,395 | 22,877 | 11,752 | |||||||||||||||
Sales and marketing | 8,284 | 9,598 | 25,147 | 46,995 | 27,893 | |||||||||||||||
General and administrative | 3,447 | 4,816 | 8,940 | 16,389 | 7,211 | |||||||||||||||
Impairment of long-lived assets | — | — | 36,779 | — | — | |||||||||||||||
Amortization of goodwill | — | — | 33,212 | 34,964 | 10,881 | |||||||||||||||
Amortization of intangible assets | 1,203 | 1,307 | 1,852 | 1,852 | 64 | |||||||||||||||
Amortization of deferred compensation | — | 157 | 961 | 3,291 | 10,553 | |||||||||||||||
Restructuring and other | 23 | 620 | 8,964 | 1,443 | 71 | |||||||||||||||
Total operating costs and expenses | 15,899 | 22,367 | 127,250 | 127,811 | 68,425 | |||||||||||||||
Loss from operations | (4,404 | ) | (11,620 | ) | (115,130 | ) | (105,224 | ) | (69,716 | ) | ||||||||||
Interest income | 16 | 76 | 601 | 3,417 | 2,047 | |||||||||||||||
Interest expense and other income (expense) | (506 | ) | 68 | (1,291 | ) | (845 | ) | (762 | ) | |||||||||||
Net loss | (4,894 | ) | (11,476 | ) | (115,820 | ) | (102,652 | ) | (68,431 | ) | ||||||||||
Dividends on convertible preferred stock | (7,384 | ) | (6,890 | ) | (6,447 | ) | (5,433 | ) | — | |||||||||||
Beneficial conversion feature on convertible preferred stock | — | — | (43,834 | ) | (19,335 | ) | — | |||||||||||||
Net loss applicable to common stockholders | $ | (12,278 | ) | $ | (18,366 | ) | $ | (166,101 | ) | $ | (127,420 | ) | $ | (68,431 | ) | |||||
Per share information: | ||||||||||||||||||||
Basic and diluted net loss per common share | $ | (3.33 | ) | $ | (5.01 | ) | $ | (45.85 | ) | $ | (36.24 | ) | $ | (29.19 | ) | |||||
Shares used in computing basic and diluted net loss per common share | 3,688 | 3,664 | 3,623 | 3,516 | 2,344 | |||||||||||||||
June 30, | ||||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Consolidated Balance Sheet Data: | ||||||||||||||||||||
Cash, cash equivalents and short-term investments | $ | 5,181 | $ | 4,407 | $ | 9,892 | $ | 42,613 | $ | 30,192 | ||||||||||
Working capital | 2,009 | (172 | ) | 2,281 | 37,758 | 11,909 | ||||||||||||||
Total assets | 15,161 | 19,038 | 35,544 | 158,151 | 175,900 | |||||||||||||||
Long-term debt | 6,607 | 1,974 | 831 | 1,720 | 1,072 |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements that involve risks and uncertainties. These statements may be identified by the use of the words such as “anticipates,” “believes,” “continue,” “could,” “would,” “estimates,” “forecasts,” “expects,” “intends,” “may,” “might,” “plans,” “potential,” “predicts,” “should,” or “will” and similar expressions or the negative of those terms. The forward-looking statements include, but are not limited to, risks stemming from strategic and operational choices in recent quarters, our equity structure and the significant risk of dilution, the adequacy of our capital resources and need for additional financing, our technological leadership and product development capabilities, the expansion of eGain’s eService platform, the continued expansion of globalour strategic relationships and distribution capabilities and our corresponding ability to grow revenue, the developmentcompetitive landscape of eGain’s strategic relationships, the factors influencing competition in eGain’s market, eGain’sour industry, our continued net losses since inception, our limited operating history, expected net losses,liquidation preferences related to our preferred stock, continued lengthy and delayed sales cycles, broad economic and political instability around the adequacy of capital resources,world affecting the market for our goods and services, the continued need for eServicecustomer service and contact center software solutions and the continued acceptance of eGain’sour Web-native architecture, eGain’s levelsthe effects of investmentcost reductions on our workforce and ability to service customers, risks from our substantial international operations, adverse results in researchpending litigation, legal and developmentregulatory uncertainties and sales and marketingother risks related to protection of our intellectual property assets and the overall volatilityoperational integrity and maintenance of technology companies. eGain’sour systems. Our actual results could differ materially from those discussed in statements relating to eGain’sour future plans, product releases, objectives, expectations and intentions, and other assumptions underlying or relating to any of these statements. Factors that could contribute to such differences include those discussed in “Factors“Additional Factors That May Affect Future Results” and elsewhere in this document. These forward-looking statements speak only as of the date hereof. eGainWe expressly disclaimsdisclaim any obligation or understanding to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in eGain’sour expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Overview
We are a leading provider of eServicecustomer service and contact center software, used by global enterprises for Global 2000 companies. eGain’s solutions enable companies to transform traditionalover a decade. eGain Service 6™, our software suite, available through licensed or hosted models, includes integrated, best-in-class applications for customer call centers into multi-channel contact centers. The company’s solutions have a proven track record of helping businesses deliver a superior customer experience and establishing profitable, long-term customer relationships, while reducing operating and technology costs. eGain offers an integrated platform that enables companies to offer both assisted (emailemail management, live web collaboration, virtual agent customer service, knowledge management, and web self-service. These robust applications are built on the eGain Service Management Platform (eGain SMP™), a scalable next-generation framework that includes end-to-end service process management, multi-channel, multi-site contact center management, a flexible integration approach, and certified out-of-the-box integrations with leading call center integration tools) and unassisted (integrated set of self-service solutions) online customer service. Built using a Java-based, 100% Web-native architecture, eGain’s comprehensive eService solutions are designed to provide robust scalability, global access, diverse integration capabilitiesbusiness systems. We market and rapid deployment. In addition, eGain’s solution is designed to integrate with leading CRM, ERP and call center systems, enabling customers to leverage investments in existing systems and providing an enterprise wide solution.
We were founded in September 1997. Since inception, we have incurred substantial costs developing our proprietary technological solutions, recruiting and added its real-time Web collaboration product to eGain’s product suite. This product, eGain Live, is an application that allows companies to interact, in real-time, with visitors to their Web sites. eGain acquired Sitebridge in exchange for common stock,compensating personnel, and purchasing operating assets. As a result of these efforts, and the transaction was accounted for underdecline in technology spending by our customers in recent years we have incurred significant losses and had an accumulated deficit of $315.5 million as of June 30, 2004, which includes approximately $80.3 million related to goodwill charges.
In response to our revenues declining over the purchase methodlast three years we have repeatedly taken actions to reduce expense rates. As a result of accounting.
product development and technology to enhance our current products and services, develop new products and services and further advance our solution offerings. We have not achieved profitability on a quarterly or annual basis. In view of the purchase methodrapidly evolving nature of accounting.
In April 2001, eGainwe obtained final regulatory approval from the government of India to complete the acquisition of eGain Communications Private Limited (“eGain India”), formerly Nitman Software Private Limited, a software development company located in Pune, India. Effective April 23, 2001, eGainwe acquired all of the outstanding capital stock of eGain India for cash. The acquisition has been at the cornerstone of eGain’sour strategy of developing a global operating model that allows the company to maintain its commitment to the eServicecustomer service and contact center market and innovation while remaining fiscally prudent. The transaction was accounted for under the purchase method of accounting.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally
Revenue Recognition
We derive revenues from three sources, hosting fees, license fees and services. Services include software maintenance and support, training and system implementation consulting. Maintenance and support consists of technical support and software upgrades and enhancements. Significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if different conditions were to prevail.
We apply the provisions of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” to all transactions involving the sale of software products.
We recognize license revenue when persuasive evidence of an arrangement exists, the product has been delivered, no significant obligations remain, the fee is fixed or determinable, and collection of the resulting receivable is probable. In software arrangements that include rights to multiple software products and/or services, we use the residual method under which revenue is allocated to the undelivered elements based on vendor specific objective evidence of the fair value of such undelivered elements. The residual amount of revenue is allocated to the delivered elements and recognized as revenue. Such undelivered elements in these arrangements typically consist of services.
We recognize hosting services revenue ratably over the period of the applicable agreement as services are provided. Hosting agreements are typically for a period of one year and automatically renew unless either party cancels the agreement.
We use a signed software license and services agreementagreements and order formforms as evidence of an arrangement for sales of software, hosting, maintenance and support. We use a signed engagement letterletters to evidence an arrangement for system implementation consulting and training.
Software is delivered to customers electronically or on a CD-ROM. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. Our standard payment terms are generally less than 90 days. In instances where payments are subject to extended payment terms, revenue is deferred until payments become due. We assess collectibilitycollectability based on a number of factors, including the customer’s past payment history and its current creditworthiness. If we determine that collection of a fee is not reasonably assured, we defer the revenue and recognize it at the time collection becomes reasonably assured, which is generally upon receipt of cash payment. If an acceptance period is required, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period.
When licenses are sold together with consulting and implementation services, license fees are recognized upon shipment, provided that (1) the above criteria have been met, (2) payment of the license fees is not dependent upon the performance of the consulting and implementation services, and (3) the services are not essential to the functionality of the software. For arrangements that do not meet the above criteria, both the product license revenues and services revenues are recognized in accordance with the provisions of SOP 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts.” When reliable estimates are available for the costs and efforts necessary to complete the implementation services, we account for the arrangements under the percentage of completion method pursuant to SOP 81-1. When such estimates are not available, the completed contract method is utilized.
The majority of our consulting and implementation services and accompanying agreements qualify for separate accounting. We use vendor-specific objective evidence of fair value for the services and maintenance to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Our consulting and implementation service contracts are bid either on a fixed-fee basis or on a time-and-materials basis. For a fixed-fee contract, we recognize revenue upon completion of specific contractual milestones or using the percentage of completion method. For time-and-materials contracts, we recognize revenue as services are performed.
Maintenance and support revenue is recognized ratably over the term of the maintenance contract, which is typically one year. Training revenue is recognized when training is provided.
Revenue from sales to resellers areis recognized either upon delivery to the reseller or on a sell-through basis, depending on the facts and circumstances of the transaction, such as our understanding of the reseller’s use of our software, the reseller’s financial status and our past experience with the particular reseller. Accordingly the decision whether to recognize revenue to resellers either upon delivery or on a sell-through basis requires significant management judgement.judgment. This judgementjudgment can materially impact the timing of revenue recognition.
Valuation of Long-Lived Assets
Effective July 1, 2002, we adopted SFAS No. 142 and ceased amortization of goodwill and began reviewing it annually (or more frequently if impairment indicators arise) for impairment. In addition, we evaluated our remaining purchased intangible assets to determine that all such assets have determinable lives. We periodicallyoperate under a single reporting unit and accordingly, all of our goodwill is associated with the entire company. Prior to the adoption of SFAS No. 142, we amortized goodwill on a straight-line basis over its estimated useful life of three years.
In connection with the transitional goodwill impairment evaluation provisions of SFAS 142, we performed a goodwill impairment review as of July 1, 2002 and found no impairment. We also performed our annual goodwill impairment review as of April 1, 2004 and found no impairment.
As of July 1, 2002, in accordance with the provisions of Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), we review long-lived assets, certain identifiable intangiblesincluding property and goodwill related to theseequipment and intangible assets, for possible impairment whenever events or changes in business circumstances indicate that the carrying amountamounts of a long-lived assetthe assets may not be fully recoverable. AssumptionsUnder
SFAS 144, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and estimatesits eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows. Significant management judgment is required in the forecasting of future operating results which are used in the evaluationpreparation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Significant assumptions and estimates include the projected discounted cash flows based upon estimated revenue and, expense growth rates and the discount rate applied to expected cash flows.should different conditions prevail or judgments be made, material write-downs of net intangible assets and/or goodwill could occur. In addition, our depreciation and amortization policies reflect judgments on the estimated useful lives of assets.
Restructuring
We have taken restructuring charges related to excess facilities and have established reserves at the low end of the range of estimable cost (as required by accounting standards) against outstanding commitments for leased properties that we have abandoned. These reserves are based upon our estimate of triggering events, such as the time required to sublease the property and the amount of sublease income that might be generated from the date of abandonment and the expiration of the lease. These estimates are reviewed based on changes in these triggering events. Adjustments to the restructuring charge will be made in future periods, if necessary, should different conditions prevail from those anticipated in our original estimate.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts to reserve for potential uncollectibleuncollectable trade receivables. We review our trade receivables by aging category to identify specific customers with known disputes or collectibilitycollectability issues. We exercise judgment when determining the adequacy of these reserves as we evaluate historical bad debt trends, general economic conditions in the U.S. and internationally, and changes in customer financial conditions. If we made different judgments or utilized different estimates, material differences may result in additional reserves for trade receivables, which would be reflected by charges in general and administrative expenses for any period presented.
Results of Operations
The following table sets forth certain items reflected in eGain’sour consolidated statements of operations expressed as a percent of total revenues for the periods indicated.
Fiscal Year | |||||||||
2002 | 2001 | 2000 | |||||||
Revenue: | |||||||||
Hosting | 18 | % | 20 | % | 26 | % | |||
License | 33 | % | 45 | % | 38 | % | |||
Services | 49 | % | 35 | % | 36 | % | |||
Total revenue | 100 | % | 100 | % | 100 | % | |||
Cost of revenue—direct | 55 | % | 55 | % | 109 | % | |||
Cost of revenue—acquisition related | 5 | % | 3 | % | — | ||||
Gross profit (loss) | 40 | % | 42 | % | (10 | )% | |||
Research and development | 37 | % | 43 | % | 88 | % | |||
Sales and marketing | 83 | % | 88 | % | 208 | % | |||
General and administrative | 29 | % | 30 | % | 54 | % | |||
Impairment of long-lived assets | 121 | % | — | — | |||||
Amortization of goodwill and other intangible assets | 115 | % | 69 | % | 82 | % | |||
Amortization of deferred compensation | 3 | % | 6 | % | 79 | % | |||
Restructuring | 30 | % | 3 | % | 1 | % | |||
Total operating costs and expenses | 418 | % | 239 | % | 512 | % | |||
Loss from operations | (378 | )% | (197 | )% | (522 | )% | |||
Fiscal Year | |||||||||
2004 | 2003 | 2002 | |||||||
Revenue: | |||||||||
License | 21 | % | 28 | % | 33 | % | |||
Support and Services | 79 | % | 72 | % | 67 | % | |||
Total revenue | 100 | % | 100 | % | 100 | % | |||
Cost of license | 8 | % | 8 | % | 3 | % | |||
Cost of support | 33 | % | 39 | % | 52 | % | |||
Cost of revenue—acquisition related | — | 4 | % | 5 | % | ||||
Gross profit (loss) | 59 | % | 49 | % | 40 | % | |||
Research and development | 15 | % | 27 | % | 37 | % | |||
Sales and marketing | 42 | % | 43 | % | 83 | % | |||
General and administrative | 18 | % | 22 | % | 29 | % | |||
Impairment of long-lived assets | — | — | 121 | % | |||||
Amortization of goodwill and other intangible assets | 6 | % | 6 | % | 115 | % | |||
Amortization of deferred compensation | — | 1 | % | 3 | % | ||||
Restructuring and other | — | % | 3 | % | 30 | % | |||
Total operating costs and expenses | 81 | % | 102 | % | 418 | % | |||
Loss from operations | (22 | )% | (53 | )% | (378 | )% | |||
Revenue
Overall revenue, which consists of license revenue and support and services revenue, was $19.6 million, $22.1 million and $30.4 million in fiscal years 2004, 2003 and 2002, respectively. In fiscal year 2004, overall revenue decreased 43%11%, or $23.0$2.5 million compared to fiscal 2001,year 2003. Overall revenue was relatively flat quarter over quarter throughout fiscal year 2004 so the relative decrease was attributable to the steep revenue decline in the first quarter of fiscal year 2004 where overall revenue decreased by 15% compared to the last quarter of fiscal year 2003. For fiscal year 2003, overall revenue decreased 27%, or $8.3 million compared to fiscal year 2002. The reduction in overall revenue over the last two fiscal years was primarily due to the weakeningcontinuing weak economic environment, and in particular spending in technology, and its adverse impact on sales of enterprise software. The weakness was particularly pronounced in the North American market in fiscal 2003 as both existing and prospective customers postponed purchases or made smaller purchases than in previous years. Revenuesyears, but stabilized in fiscal 2004. Revenue from North America declined from $38.6$1.0 million or 9% in fiscal year 2004 compared to fiscal year 2003 and declined $6.2 million, or 36% in fiscal year 2003 compared to fiscal year 2002.
License revenue was $4.1 million, $6.1 million and $10.0 million in fiscal 2001 to $17.4years 2004, 2003 and 2002, respectively. This represents a decreased 33%, or $2.0 million in fiscal 2002. During fiscal year 2001, total revenue increased 300%, or $40.1 million as2004 compared to fiscal 2000. The increase during this period was primarily attributable to increases in eGain’s customer base, the average sizeyear 2003 and a decrease of new customer orders and follow-on orders from existing customers. Factors that contributed to these increases primarily include expanded direct sales and marketing efforts, the introduction of new products and increased market acceptance of eGain’s products. In addition, a significant portion of the revenue increase in fiscal 2001 was due to the acquisition of Inference Corporation on June 29, 2000 and the inclusion of its revenue from the effective date of the merger.
Support and Services revenue increased 381%, or $19.2was $15.5 million, $16.0 million and $20.4 million in fiscal 2001years 2004, 2003 and 2002, respectively. This represents a decrease of 3%, or $444,000 in fiscal year 2004 compared to fiscal 2000. This increase was attributable to the increases in unit sales volumesyear 2003 and the average sizea decrease of new customer orders.
In fiscal 2002, 20012004, 2003 and 2000,2002, no single customer accounted for more than 10% of total revenue.
Cost of Revenue—DirectLicense
Cost of revenue—directlicense primarily includes the amortization of prepaid third-party software royalties and delivery costs for shipments to customers. Cost of license decreased 7%, or $126,000 in fiscal year 2004 compared to fiscal year 2003. Cost of license increased 107%, or $914,000 in fiscal year 2003 compared to fiscal year 2002. The decrease in fiscal year 2004 was primarily due to the extension of one royalty agreement with a third-party vendor that resulted in a reduction of $172,000 in the amortization of prepaid royalties. We expect cost of license to continue to decline in future periods with the expiration or renewal of other third party royalty agreements.
Cost of Support and Services
Cost of support and services includes personnel costs for eGain’sour hosting services, consulting services and
customer support. It also includes depreciation of capital equipment used in eGain’sour hosted network, cost of support for the third-party software royalties and lease costs paid to remote co-location centers. Cost of revenue—directsupport and services was $16.9
$6.5 million, $29.4$8.7 million and $14.6$16.0 million in fiscal years 2002, 20012004, 2003 and 2000,2002, respectively. The significant decrease in fiscal 2002years 2003 and 2004 was primarily due to the reduction in worldwide workforce, as well as a decline in outside contractor services and co-location lease costs. Additionally, there was a reduction in facilities-related expenses resulting fromcosts as well as the migration of resources to eGain India. Our occupancy costs and related overhead were also reduced due to the consolidation of eGain’s excess facilities, in North America in the firstasset write-offs related to the reduction of work force and fourth quartersthe closure of fiscal 2002. The increaseoffices in fiscal 2001 compared toyear 2002 and fiscal 2000 was primarily attributable to the rapid expansion of the hosting, services and support organizations in addition to theyear 2003. We do not anticipate a significant increases in royalties paid to third-party vendors for technology embedded in eGain’s product offerings. Due to certain third-party software royalty obligations under renegotiation, eGain may experience a substantial increase in absolute dollarsor decrease in cost of revenuesupport and services in fiscal 2003.
Cost of Revenue—Acquisition Related
Cost of revenue—acquisition related costs is a fixed amount ofwas $0, $827,000 and $1.4 million in both fiscal yearsyear 2004, 2003 and 2002, and 2001.respectively. The decrease was primarily due to a discontinuance of the amortization of acquired workforce intangibles that was reclassified to goodwill as of July 1, 2002 in accordance with SFAS 142. These amounts consisted of amortization of developed technology resulting from eGain’sour business combinations in fiscal year 2000.
Research and Development
Research and development expenses primarily consist of compensation and benefits for eGain’sour engineering, product management and quality assurance personnel and, to a lesser extent, occupancy costs and related overhead. Research and development expense was $11.4$2.9 million, $22.9$5.9 million and $11.8$11.4 million in fiscal years 2002, 20012004, 2003 and 2000,2002, respectively. The decreasedecreases in fiscal 2002 wasyear 2003 and 2004 were primarily due to the significant headcount reduction, a decline in outside contractor services and the migration of development resources to eGain India. Additionally, there was a reduction in facilities-related expenses resulting fromOur occupancy costs and related overhead were also reduced due to the consolidation of eGain’s excess facilities, the asset write-offs related to the reduction of work force and the closure of offices in North Americafiscal year 2002 and fiscal year 2003. We do not anticipate a significant increase or decrease in the first and fourth quarters of fiscal 2002. eGain anticipates that the research and development expenses will decrease in absolute dollars in fiscal 2003. The increase in fiscal 2001 compared to fiscal 2000 was primarily attributable to significant growth in the research and development organization associated with the enhancement of existing products and the development of new products.
Sales and Marketing
Sales and marketing expenses primarily consist of compensation and benefits for eGain’sour sales, marketing and business development personnel, advertising, trade show and other promotional costs and, to a lesser extent, occupancy costs and related overhead. Sales and marketing decreased 47% or $21.9expense was $8.3 million, $9.6 million and $25.1 million in fiscal 2002.year 2004, 2003 and 2002, respectively. The decreasedecreases in fiscal 2002 wasyear 2003 and 2004 were primarily due to a decline in headcount through planned workforce reductions to reflect a tough market and internal reorganization and a decrease in spending on advertising and marketing programs. Additionally, there was a reductionThe reduced sales-related expenses in facilities-related expenses resulting fromfiscal year 2003 and 2004 included personnel costs, commission and travel expenses. Our occupancy costs and related overhead were also reduced due to the consolidation of eGain’s excess facilitiesfacilities. We do not anticipate a significant increase or decrease in North America in the first and
General and Administrative
General and administrative expenses primarily consist of compensation and benefits for eGain’sour finance, human resources, administrative and legal services personnel, fees for outside professional services, provision for doubtful accounts and, to a lesser extent, occupancy costs and related overhead. General and administrative expense decreased 46%, or $7.5was $3.4 million, $4.8 million and $8.9 million in fiscal 2002.year 2004, 2003 and 2002, respectively. The decreasedecreases in fiscal 2002 was2003 and 2004 were primarily due to a decline in headcount through planned workforce reductions, a declineincreased efficiencies, migration of certain accounting and human resource functions to India, the reduction in outside professional services fees related to the change in accounting firm, reduced depreciation expense due to assets being fully depreciated, the discontinuance of certain software maintenance contracts and a significant decrease in bad debt expense. The bad debt expense comparedwas $21,000, $(103,000) and $1.8 million in fiscal 2004, 2003 and 2002, respectively. The decrease was due to fiscal 2001. Additionally, there was athe improvement in our collection efforts, the quality of customer base and an overall reduction in facilities-related expenses resulting fromaccounts receivables. Our occupancy costs and related overhead were also reduced due to the consolidation of eGain’s excess facilitiesfacilities. We do not anticipate a significant increase or decrease in North America in the first and fourth quarters of fiscal 2002. eGain anticipates that the general and administrative expenses will decrease in absolute dollars in fiscal 2003. 2005.
Goodwill and Other Intangible Assets
In fiscalJune 2001, generalthe FASB issued SFAS 141 “Business Combinations” and administrative expense increased 127%, or $9.2 million comparedSFAS 142 “Goodwill and Other Intangible Assets.” SFAS 141 requires business combinations initiated after June 30, 2001 to fiscal 2000. This increase was primarily attributable to increased personnel to managebe accounted for using the purchase method of accounting. SFAS 141 also included guidance on the initial recognition and support the growthmeasurement of eGain’s business, in addition to an increase in legalgoodwill and other outside professional services fees.
Effective July 1, 2002, we adopted SFAS No. 142 and ceased amortization of goodwill and began reviewing it annually (or more frequently if impairment indicators arise) for impairment. In addition, we evaluated our remaining purchased intangible assets to determine that all such assets have determinable lives. We operate under a single reporting unit and accordingly, all of our goodwill is associated with the entire company. Prior to the adoption of SFA No. 142, we amortized goodwill on a straight-line basis over its estimated useful life of three years. The purchased intangible assets including customer base and acquired technology are being amortized over the assets estimated useful life, which ranges from three to four years. The amortizable intangibles were fully amortized in fiscal year 2004 and remaining intangibles are for goodwill only.
Impairment of Long Lived Assets
In connection with the transitional goodwill impairment evaluation provisions of SFAS 142, we performed a goodwill impairment review with the assistance of a third party valuation firm as of July 1, 2002 and found no impairment. We also performed our annual goodwill impairment review with the assistance of a third party valuation firm as of April 1, 2004 and April 1, 2003 and found no impairment.
As of July 1, 2002, in accordance with the provisions of Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets
In the fourth quarter of fiscal year 2002, the Company observedin accordance with SFAS No. 121, we determined that impairment indicators that our acquired intangible assetswere present and goodwill were possibly impaired. In addition to observing a continued deterioration of industry and market conditions, the Company was not able to meet operating plans for several quarters resulting in a revision of the Company’s cash flow forecast. These events were considered to be indicators of potential impairment and the Companytherefore evaluated the carrying value of its long-livedour goodwill and other intangible assets. The Company’s forecast of future cash flows indicated that the long-lived assets were impaired. The Company estimated the fair value of long-lived assets by discounting theevaluation was based on a cash flow forecast using a discountfor five years ending June 30, 2007, and discounted at the rate of 34%, which represented the Company’sour estimated weighted average cost of capital. As a result of the evaluation, the Companywe concluded that the book value of long-lived assets exceeded fair value by $36.8 million. The Company wrote off $36.8 million of unamortized goodwill whichand accordingly, this amount was charged to operations as impairment of long-lived assets in the fourth quarter of 2002.
Valuation and Amortization of Goodwill and Other Intangible Assets
Stock-based compensation is recorded in connection with grants of stock options to employees on the date of grant when the deemed fair value of the underlying common stock exceeds the exercise price for stock options. DeferredStock-based compensation is amortized on a graded vesting method over the vesting period of the individual grants. In addition, eGain recordswe record compensation expense in connection with grants of stock options to non-employees pursuant to “Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation” (“SFAS 123”). These grants are periodically revalued as they vest in accordance with SFAS 123 and EITF 96-18,
Restructuring and 2000,Other Expense
Net restructuring expense was $186,000, $620,000 and $9.0 million in fiscal years 2004, 2003 and 2002, respectively.
Beginning in fiscal 2001 and continuing through the first quarter of fiscal 2004, economic conditions in North America and many of the other countries in which we operate either deteriorated or stabilized at depressed levels. This continuing weak economic environment, and in particular spending in technology, has had an adverse impact on sales of enterprise software. As a result, we have seen a decline in our revenues over the last three fiscal years. In response to this decline, we initiated a series of steps to streamline operations and better align operating costs and expenses with revenue trends. Specifically this included establishing restructuring plans in fiscal years 2001, 2002, eGain initiated2003 and 2004.
Fiscal 2004 plan
In fiscal year 2004, the plantotal restructuring charge relating to the Fiscal 2004 Plan was $80,000. This charge related to workforce reductions in Europe and was completed and paid in full in fiscal 2004.
In addition, during fiscal 2004 we made provisional adjustments to both Fiscal 2003 and Fiscal 2002 Plans as follows:
The total payments in fiscal year 2004 of $1.2 million consisted of $80,000, $336,000, $725,000 and $92,000 of expenses accrued in Fiscal 2004, 2003, 2002 and 2001 Plans, respectively.
Fiscal 2003 Plan
In fiscal year 2003, the total restructuring charge relating to the Fiscal 2003 Plan was $2.3 million. The $2.3 million expense included $772,000 related to the closure of local offices in Holland, France, Germany, Australia and Singapore, $225,000 for additional consolidation of excess facilities in North America, resulting$1.2 million in employee severance payments and $61,000 in professional services and miscellaneous charges related to the restructuring. Both the employee severance and professional charges have been paid in full in fiscal year 2003. We expect to pay the remaining balance of restructuring accrual related to excess facilities by the end of fiscal year 2006.
In addition, during fiscal 2003 we made a provisional adjustment to the Fiscal 2002 Plan by reversing $1.7 million, previously recorded as a restructuring expense in fiscal 2002. The reversal related to the early termination of a facility lease agreement in Sunnyvale, California.
The total payments of $3.3 million in fiscal year 2003 consisted of $1.9 million, $1.4 million and $40,000 of expenses accrued in fiscal year 2003, 2002 and 2001, respectively. The $1.9 million included $1.3 million for employee severance payments, professional services and miscellaneous charges related to the restructuring and $613,000 for excess worldwide facilities recorded in fiscal year 2003.
Fiscal 2002 Plan
In fiscal year 2002, the total restructuring charge relating to the Fiscal 2002 Plan was $9.0 million. These charges included $6.4 million for the consolidation of $4,336,000. This amount included estimated future net rental payments on exitedour facilities of $3,511,000, as well as $810,000in North America, $1.3 million in write-offs of leasehold improvementsimprovement and $15,000 in professional services and miscellaneous charges associated with the exited facilities.
Total payments of $4.0 million in fiscal year 2002 consisted of $1.5 million for excess facilities in North America, $1.3 million in write-offs of leasehold improvement and $1.2 million in employee severance, professional services and miscellaneous charges accrued in the same fiscal year. Of the total payments, $88,000 was applied to the excess facilities accrued in the Fiscal 2001 eGain recordedPlan.
At the end of fiscal year 2004, the remaining accrual for the Fiscal 2002 Plan includes estimated contingent payments related to two lease settlements for excess facilities that were originally included in the Fiscal 2002 Plan. As part of separate settlement agreements with the two landlords, in the event we make a distribution of cash, stock or other consideration to holders of our Series A Preferred with respect to the shares of Series A Preferred held by such Series A Preferred holders, each of the two landlords would receive a payment equal to the lesser of (i) $1.0 million or (ii) the amount payable to a holder of shares of Series A Preferred with an aggregate stated value of $1.0 million. At the end of fiscal year 2004, we estimated the combined value of these two contingent payments to be $1.2 million.
Fiscal 2001 Plan
In fiscal year 2001, the total restructuring charges totaling $1,443,000.charge relating to the Fiscal 2001 Plan was $1.4 million. These charges primarily related to a reduction in eGain’sour worldwide workforce byof 141 employees across all departments and office closures in North America pursuant to the adoption of eGain’sour expense management strategy. The total charges were primarily comprised of $917,000 related to severance costs, $263,000 related to office closure costs and $263,000 related to legalprofessional services and professional costsmiscellaneous charges associated with the employee terminations. Of the total charges, $132,000, whichTotal payments of $1.2 million were made in fiscal year 2001. This plan was primarily related to legalcompleted and professional costs, remained unpaidpaid in full as of June 30, 2002.
The following table sets forth an analysis of the cumulative restructuring charges duringaccrual activity for the fiscal yearyears ended June 30, 2004, 2003, 2002 are as followsand 2001 (in thousands):
Cash/Non-cash | FY01 Remaining Balance | FY02 Charges | Amount Paid/Used | Balance at 06/30/02 | |||||||||||
Excess facilities | Cash | $ | — | $ | 6,412 | $ | (1,449 | ) | $ | 4,963 | |||||
Leasehold improvement write-offs | Non-cash | — | 1,315 | (1,315 | ) | — | |||||||||
Employee severance | Cash | — | 1,222 | (1,222 | ) | — | |||||||||
Professional services | Cash | 220 | 15 | (103 | ) | 132 | |||||||||
Total restructuring charges | $ | 220 | $ | 8,964 | $ | (4,089 | ) | $ | 5,095 | ||||||
Fiscal 2004 plan | Fiscal 2003 plan | Fiscal 2002 plan | Fiscal 2001 plan | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Facilities related | Severance | Other | Facilities related | Severance | Other | Facilities related | Severance | Other | Facilities related | Severance | Other | |||||||||||||||||||||||||||||||||||||||
Restructuring provision in fiscal 2001: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Excess facilities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 263 | $ | — | $ | — | $ | 263 | ||||||||||||||||||||||||
Employee severance | — | — | — | — | — | — | — | — | — | — | 917 | — | 917 | |||||||||||||||||||||||||||||||||||||
Professional and miscellaneous charges | — | — | — | — | — | — | — | — | — | — | — | 263 | 263 | |||||||||||||||||||||||||||||||||||||
Total charges in fiscal 2001 | — | — | — | — | — | — | — | — | — | 263 | 917 | 263 | 1,443 | |||||||||||||||||||||||||||||||||||||
Cash paid | — | — | — | — | — | — | — | — | — | (43 | ) | (917 | ) | (263 | ) | (1,223 | ) | |||||||||||||||||||||||||||||||||
Balance as of June 30, 2001 | — | — | — | — | — | — | — | — | — | 220 | — | — | 220 | |||||||||||||||||||||||||||||||||||||
Restructuring provision in fiscal 2002: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Excess facilities | — | — | — | — | — | — | 6,412 | — | — | — | — | — | 6,412 | |||||||||||||||||||||||||||||||||||||
Leasehold improvement write-offs | — | — | — | — | — | — | 1,315 | — | — | — | — | — | 1,315 | |||||||||||||||||||||||||||||||||||||
Employee severance | — | — | — | — | — | — | — | 1,222 | — | — | — | — | 1,222 | |||||||||||||||||||||||||||||||||||||
Professional and miscellaneous charges | — | — | — | — | — | — | — | — | 15 | — | — | — | 15 | |||||||||||||||||||||||||||||||||||||
Total charges in fiscal 2002 | — | — | — | — | — | — | 7,727 | 1,222 | 15 | — | — | — | 8,964 | |||||||||||||||||||||||||||||||||||||
Cash paid | — | — | �� | — | — | — | (1,449 | ) | (1,222 | ) | (15 | ) | (88 | ) | — | — | (2,774 | ) | ||||||||||||||||||||||||||||||||
Non-cash paid | — | — | — | — | — | — | (1,315 | ) | — | — | — | — | — | (1,315 | ) | |||||||||||||||||||||||||||||||||||
Balance as of June 30, 2002 | — | — | — | — | — | — | 4,963 | — | — | 132 | — | — | 5,095 | |||||||||||||||||||||||||||||||||||||
Restructuring provision in fiscal 2003: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Excess facilities | — | — | — | 997 | — | — | — | — | — | — | — | — | 997 | |||||||||||||||||||||||||||||||||||||
Employee severance | — | — | — | — | 1,222 | — | — | — | — | — | — | — | 1,222 | |||||||||||||||||||||||||||||||||||||
Professional and miscellaneous charges | — | — | — | — | — | 61 | — | — | — | — | — | — | 61 | |||||||||||||||||||||||||||||||||||||
Provision adjustment | — | — | — | — | — | — | (1,660 | ) | — | — | — | — | — | (1,660 | ) | |||||||||||||||||||||||||||||||||||
Total charges in fiscal 2003 | — | — | — | 997 | 1,222 | 61 | (1,660 | ) | — | — | — | — | — | 620 | ||||||||||||||||||||||||||||||||||||
Cash paid | — | — | — | (613 | ) | (1,222 | ) | (61 | ) | (1,382 | ) | — | — | (40 | ) | — | — | (3,318 | ) | |||||||||||||||||||||||||||||||
Balance as of June 30, 2003 | — | — | — | 384 | — | — | 1,921 | — | — | 92 | — | — | 2,397 | |||||||||||||||||||||||||||||||||||||
Restructuring provision in fiscal 2004: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Excess facilities | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Employee severance | — | 80 | — | — | — | — | — | — | — | — | — | — | 80 | |||||||||||||||||||||||||||||||||||||
Professional and miscellaneous charges | — | — | — | — | — | — | — | — | — | — | — | — | 0 | |||||||||||||||||||||||||||||||||||||
Provision adjustment | — | — | — | (74 | ) | — | 41 | 139 | — | — | — | — | — | 106 | ||||||||||||||||||||||||||||||||||||
Total charges in fiscal 2004 | — | 80 | — | (74 | ) | — | 41 | 139 | — | — | — | — | — | 186 | ||||||||||||||||||||||||||||||||||||
Cash paid | — | (80 | ) | — | (295 | ) | — | (41 | ) | (711 | ) | — | — | (92 | ) | — | — | (1,219 | ) | |||||||||||||||||||||||||||||||
Non-cash paid | — | — | — | — | — | — | (14 | ) | — | — | — | — | — | (14 | ) | |||||||||||||||||||||||||||||||||||
Balance as of June 30, 2004 | $ | — | $ | — | $ | — | $ | 15 | $ | — | $ | — | $ | 1,335 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,350 |
Loss from Operations
Loss from operations decreased to $4.4 million in fiscal 2000, eGain incurred $71,000year 2004 from $11.6 million in fiscal year 2003 and $115.1 million in fiscal year 2002. The decreases were primarily due to our actions in reducing our operating expenses which included worldwide planned reduction in workforce, closure of restructuring charges related tointernational offices and consolidation of excess facilities in North America, as well as the acquisitionimpact of Inference, all of which was paid as of June 30, 2002. eGain abandoned plans to occupy new office spaceno longer amortizing goodwill in the United Kingdomfiscal 2003 and expensed professional services fees incurred in the design phase of the office space.
Interest Income
Interest income consists of interest earned on cash, cash equivalents, and short-term investments. Interest income decreased 81%79%, or $2.8 million$60,000 in fiscal 20022004 compared to 2003. Interest income decreased 87%, or $525,000 in fiscal 2003 compared to fiscal 2001.2002. The significant decrease in fiscal 20022004 and 2003 was primarily due to a decline in eGain’sour average cash balance associated with lower interest rates. In fiscal
Interest Expense and Other ExpensesIncome (Expense)
Interest and other expensesexpense increased 59%, or $495,000to $612,000 in fiscal 2002 compared to2004 from $359,000 in fiscal 2001.2003. Interest expense decreased by $92,000 in fiscal 2003 from $451,000 in fiscal 2002. The increase in fiscal 20022004 was primarily due to the interest of $489,000 from borrowings from related party notes payable and $72,000 related to discount on warrants compared to the decrease in fiscal 2003 related to the decrease in interest rates and reduced bank borrowing.
Other income was $106,000 in fiscal 2004 compared to other income of $427,000 in fiscal 2003 and other expenses of $840,000 in fiscal 2002. The other income in fiscal 2004 consisted of the benefits of $340,000 from the reversal of an outstanding liability related to an internal use license agreement, $48,000 from the reduction of the buyout amount for one of our capital equipment leases and partially offset by tax expense. The decrease in other expenses in fiscal 2003 was principally due to a risegain related to a real estate settlement, reduction in interest expense resulting from increased bank borrowingstax expenses and losses ona decrease in the disposal of property and equipment. A $526,000 loss on disposal of propertyassets.
Related Party Transactions
During fiscal year 2003, we entered into a note and equipmentwarrant purchase agreement, discussed further in this section under the heading “Liquidity and Capital Resources,” with Ashutosh Roy, our Chief Executive Officer, pursuant to which Mr. Roy loaned to us $2.0 million in fiscal 2002 was associated with the headcount reduction. In addition, eGain experienced an increase in state taxesyear 2003 and foreign currency transaction losses.
On March 31, 2004, we entered into a note and warrant purchase agreement with Ashutosh Roy, our Chief Executive Officer, Oak Hill Capital Partners L.P., Oak Hill Capital Management Partners L.P., and FW Investors L.P. (the “lenders”) pursuant to a risewhich the lenders loaned to us $2.5 million evidenced by secured promissory notes and received warrants to purchase shares of our common stock in interest expense resulting from increased bank borrowingsconnection with such loan as further discussed under the heading “Liquidity and losses on the disposal of property and equipment. The increase was partially offset by a decrease in foreign exchange losses.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 141,Business Combinations, and No. 142,Goodwill and Other Intangible Assets, effective for our fiscal year beginning July 1, 2002. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with SFAS No. 142. Other intangibles will continue to be amortized over their useful lives. We will adopt SFAS No. 142 in our first quarter of fiscal 2003. Upon adoption, we will stop the amortization of goodwill and intangible assets deemed to have indefinite lives with a net carrying value of approximately $8.2 million as of June 30, 2002. As a result of the discontinuance of the amortization of goodwill existing as of June 30, 2002 and excluding the impact of potential impairment charges, the application of SFAS No. 142 is expected to result in an increase in our results of operations of approximately $4.9 million during fiscal 2003. During the first six months of fiscalMay 2003, we will perform the first of the required impairment tests of goodwill and intangible assets deemed to have indefinite lives as of July 1, 2002, using the two-step process required under SFAS 142. We have not yet determined what effect these tests will have on our earnings and financial position.
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which was amended by FIN 46R issued in December 2003. This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities (VIEs) that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) for which the equity investors lack an essential characteristic of a controlling financial interest. This Interpretation applies immediately to VIEs created after January 31, 2003. It also applies in the first fiscal year or interim period ending after March 15, 2004, to VIEs created before February 1, 2003 in which an enterprise holds a variable interest. FIN 46 requires disclosure of VIEs in financial statements issued after January 31, 2003, if it is reasonably possible that as of the transition date: (1) the company will be the primary beneficiary of an existing VIE that will require consolidation or, (2) the company will hold a significant variable interest in, or have significant involvement with, an existing VIE. We have completed our review of the requirements of FIN 46. As a result of our review, no entities were identified requiring disclosure or consolidation under FIN 46.
Liquidity and Capital Resources
In response to our revenues declining over the last fiscal year eGain hasthree years we have repeatedly taken actions to reduce its expense rates, it expectsrates. As a result of these actions net cash used in operations decreased to incur additional operating losses, at least through the second quarter$2.3 million in fiscal 2004 from $5.9 million in 2003 and $27.5 million in 2002. With this progress on expense reduction and securing $4.5 million in long-term debt during fiscal year 2004, our cash and cash equivalents increased to $5.2 million on June 30, 2004 from $4.4 million on June 30, 2003.
As of fiscal 2003 if not longer. eGain’sJune 30, 2004, we have working capital requirementsof $2.0 million, compared to a working capital deficit of $172,000 at June 30, 2003. We believe that existing capital resources will enable us to maintain current and planned operations for the next 12 months.
On March 31, 2004, we entered into a note and warrant purchase agreement with Ashutosh Roy, our Chief Executive Officer, Oak Hill Capital Partners L.P., Oak Hill Capital Management Partners L.P., and FW Investors L.P. (the “lenders”) pursuant to which the lenders loaned to us $2.5 million evidenced by secured promissory notes and received warrants to purchase shares of our common stock in connection with such loan. The secured promissory notes have a term of five years and bear interest at an effective annual rate of 12% due and payable upon the foreseeable future will depend on a varietymaturity of factors and assumptions, in particular that revenue growth rates remain stable and that customers continuesuch notes. We have the option to pay on a timely basis, and isprepay the notes at any time subject to numerous risks. If eGain does not significantly reduce its net cash outflowthe prepayment penalties set forth in such notes. The warrants allow the near term,lenders to purchase up to 312,500 shares at an exercise price of $2.00 per share. The warrants become exercisable as compared to fiscal 2002, eGain will require additional credit facilities, additional equity and/or debt financings and/or will needfifty percent (50%) of the warrant shares nine months after issuance of the warrants and as to pursue strategic alternatives in fiscal year 2003. eGain is currently focusedone hundred percent (100%) of the warrant shares on reducing its expenses and pursuing such alternatives in the near term, and/or will need to pursue strategic alternatives. If additional funds are raised throughfirst anniversary of the issuance of equity securities, eGain stockholders may experience significant dilution. Furthermore, there can be no assurancethe warrants. We recorded $2.28 million in related party notes payable and $223,000 of discount on the notes related to the relative value of the warrants issued in the transaction that additional financing will be available when neededamortized to interest expense over the five year life of the notes. The fair value of these warrants was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 1.93%, and a dividend yield of 0%.
During fiscal year 2003, we entered into a note and warrant purchase agreement with Ashutosh Roy, our Chief Executive Officer, pursuant to which Mr. Roy will make loans to us evidenced by one or more subordinated secured promissory notes and will receive warrants to purchase shares of our common stock in connection with each of such loans. The five year subordinated secured promissory note bears interest at all, oran effective annual rate of 12% due and payable upon the term of such note. We have the option to prepay each note at any time subject to the prepayment penalties set forth in such note. On December 31, 2002, Mr. Roy loaned to us $2.0 million under the agreement and received warrants that if available, such financingallow him to purchase up to 236,742 shares at an exercise price equal to $2.11 per share. In connection with this loan, we recorded $1.83 million in related party notes payable and $173,000 of discount on the note related to the relative value of the warrants issued in the transaction that will be on terms favorableamortized to interest expense over the five year life of the note. The fair value of these
warrants was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 2%, and a dividend yield of 0%. On October, 31, 2003, we entered into an amendment to the 2002 note and warrant purchase agreement with Mr. Roy, pursuant to which he loaned to us or our stockholders. If such financing is not available when required or is not availablean additional $2.0 million and received additional warrants to purchase up to 128,766 shares at $3.88 per share. In connection with this additional loan we recorded $1.8 million in related party notes payable and $195,000 of discount on acceptable terms, eGain maythe notes related to the relative value of the warrants issued in the transaction that will be unableamortized to meet operating obligations. These conditions raise substantial doubt aboutinterest expense over the Company’s ability to continue asfive year life of the note. The fair value of these warrants was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a going concern.
Prior to eGain’sour initial public offering eGainon the public markets, operations were primarily financed operations primarily through the private placement of convertible preferred stock, a bank line of credit, and financing for capital purchases. On September 28, 1999, eGainwe completed an initial public offering of common stock, in which 5.8 million shares of common stock were sold (including the exercise of an over-allotment option in October 1999), at a price of $12.00 per share. Net proceeds to us from the offering were $63.0 million.
On August 8, 2000, eGainwe raised and received net proceeds of $82.6 million through the issuance of shares of convertible preferred stock and warrants to purchase approximately 3.8 million383,000 shares of common stock in a private placement. The convertible preferred stock liquidation value accretes at a rate of 6.75% per annum. eGain has been usingDuring fiscal years 2002 and 2003, the net proceeds from this private placement for general corporate purposes.
On September 20, 2002, eGain had cash and cash equivalents of $9.9 million, a decrease of $32.7 million since June 30, 2001. Working capital at June 30, 2002 was $2.3 million, a decrease of $35.5 million since June 30, 2001. In fiscal 2002, eGain regularly invested excess funds in short-term money market funds and commercial paper.
At fiscal year end 2004, cash and cash equivalents were $5.2 million, an increase of $774,000 since fiscal year end 2003. Working capital at fiscal year end 2004 was $2.0 million representing an increase of $2.1 million since fiscal year end 2003.
Net cash used in operating activities was $2.3 million, $5.9 million and $27.5 million $70.7 million and $38.6 million for thein fiscal years ended June 30,2004, 2003 and 2002, 2001 and 2000, respectively. Cash used in operating activities was primarily the result of our net loss, partially offset by non-cash charges.
Net cash used in investing activities was $178,000 in fiscal year 2004 compared to $270,000 provided by investing activities in the fiscal year 2003 and $2.0 million $2.5 million and $4.4 million for theused in investing activities in fiscal years ended June 30, 2002, 2001 and 2000, respectively.2002. Cash used in investing activities in both fiscal years 2004 and 2002 waswere primarily due to the purchases of property and equipment, while net cash usedprovided by investing activities in fiscal 2001year 2003 consisted of sale of property and equipment purchases, partially offset by proceeds from the sales of short-term securities.
Net cash provided by financing activities was $88.6$3.3 million and $68.9 million in the years ended June 30, 2001 and 2000, respectively. Net cash provided by financing$375,000 in fiscal years 20012004 and 20002003, respectively. Cash provided from financing activities was primarily due to the proceeds from the related party notes, bank borrowings and the issuance of preferred stock and common stock, including net proceeds of $82.6 million generatedpartially offset by the private placementpayments on August 8, 2000bank borrowings and $63.0capital leases, accrued interest and amortization of discount on related party notes. The $3.4 million fromspending in fiscal year 2002 was primarily due to the initial public offeringpayment on September 29, 1999.
The following table summarizes oureGain’s contractual obligations excluding interest payments as of June 30, 20022004 and the effect such obligations are expected to have on ourits liquidity and cash flow in future periods (in thousands):
Year Ended June 30, | |||||||||||||||
2003 | 2004 | 2005 | 2006 | Total | |||||||||||
Capital leases | $ | 431 | $ | 47 | $ | 10 | $ | — | $ | 488 | |||||
Operating leases | 4,671 | 3,113 | 2,058 | 31 | 9,873 | ||||||||||
Bank borrowings and notes payable | 2,155 | 779 | — | — | 2,934 | ||||||||||
$ | 7,257 | $ | 3,939 | $ | 2,068 | $ | 31 | $ | 13,295 | ||||||
Year Ended June 30, | |||||||||||||||||||||
2005 | 2006 | 2007 | 2008 | 2009 | Thereafter | Total | |||||||||||||||
Capital leases | $ | 9 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 9 | |||||||
Operating leases | 657 | 560 | 574 | 437 | 171 | 343 | 2,742 | ||||||||||||||
Bank borrowings | 506 | — | — | — | — | — | 506 | ||||||||||||||
Related party notes payable | — | — | — | 2,000 | 4,500 | — | 6,500 | ||||||||||||||
Total | 1,172 | 560 | 574 | 2,437 | 4,671 | 343 | 9,757 | ||||||||||||||
The table excludes potential contingent payments of $2.0 million related to two lease settlements. These contingent payments will be paid in the event we make a distribution of cash, stock or other consideration to holders of our Series A Preferred with respect to the shares of Series A Preferred held by such Series A Preferred holders. In such event, each of the two landlords would receive a payment equal to the lesser of (i) $1.0 million or (ii) the amount payable to a holder of shares of Series A Preferred with an aggregate stated value of $1.0 million.
Quarterly Results of Operations
The following tables set forth certain unaudited consolidated statement of operations data for the eight quarters ended June 30, 2002.2004. This data has been derived from unaudited consolidated financial statements that, in the opinion of management, include all adjustments consisting only of normal recurring adjustments, necessary for a fair presentation of such information when read in conjunction with the Consolidated Financial Statements and Notes thereto.
The unaudited quarterly information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein on this Form 10-K. eGain believesWe believe that period-to-period comparisons of itsour financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.
Quarters Ended | ||||||||||||||||||||||||||||||||
Sept. 30, 2000 | Dec. 31, 2000 | Mar. 31, 2001 | June 30, 2001 | Sept. 30, 2001 | Dec. 31, 2001 | Mar. 31, 2002 | June 30, 2002 | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Consolidated Statements of Operations Data: | ||||||||||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||
Hosting | $ | 2,295 | $ | 3,222 | $ | 2,539 | $ | 2,493 | $ | 2,041 | $ | 1,531 | $ | 931 | $ | 1,121 | ||||||||||||||||
License | 4,604 | 6,275 | 5,930 | 7,476 | 2,060 | 4,437 | 1,242 | 2,276 | ||||||||||||||||||||||||
Services | 5,159 | 4,340 | 4,951 | 4,153 | 3,939 | 4,199 | 3,737 | 2,915 | ||||||||||||||||||||||||
Total revenue | 12,058 | 13,837 | 13,420 | 14,122 | 8,040 | 10,167 | 5,910 | 6,312 | ||||||||||||||||||||||||
Cost of revenue—direct | 8,724 | 7,783 | 7,580 | 5,315 | 5,068 | 3,784 | 3,592 | 4,417 | ||||||||||||||||||||||||
Cost of revenue—acquisition related | 362 | 362 | 362 | 362 | 362 | 362 | 362 | 362 | ||||||||||||||||||||||||
Gross profit (loss) | 2,972 | 5,692 | 5,478 | 8,445 | 2,610 | 6,021 | 1,956 | 1,533 | ||||||||||||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||||||||||||||
Research and development | 6,079 | 5,866 | 5,615 | 5,317 | 4,574 | 2,032 | 2,452 | 2,337 | ||||||||||||||||||||||||
Sales and marketing | 12,461 | 13,001 | 11,599 | 9,934 | 8,602 | 5,493 | 6,003 | 5,049 | ||||||||||||||||||||||||
General and administrative | 4,228 | 4,290 | 4,221 | 3,650 | 3,805 | 1,127 | 2,401 | 1,607 | ||||||||||||||||||||||||
Impairment of long-lived assets | — | — | — | — | — | — | — | 36,779 | ||||||||||||||||||||||||
Amortization of goodwill and other intangible assets | 9,200 | 9,200 | 9,200 | 9,216 | 9,194 | 9,194 | 9,194 | 7,482 | ||||||||||||||||||||||||
Amortization of deferred compensation | 1,098 | 877 | 750 | 566 | 302 | 258 | 233 | 168 | ||||||||||||||||||||||||
Restructuring | — | — | 388 | 1,055 | 4,785 | 466 | 327 | 3,386 | ||||||||||||||||||||||||
Total operating costs and expenses | 33,066 | 33,234 | 31,773 | 29,738 | 31,262 | 18,570 | 20,610 | 56,808 | ||||||||||||||||||||||||
Loss from operations | (30,094 | ) | (27,542 | ) | (26,295 | ) | (21,293 | ) | (28,652 | ) | (12,549 | ) | (18,654 | ) | (55,275 | ) | ||||||||||||||||
Non-operating income (expense), net | 231 | 1,368 | 745 | 228 | 233 | (27 | ) | (352 | ) | (544 | ) | |||||||||||||||||||||
Net loss | (29,863 | ) | (26,174 | ) | (25,550 | ) | (21,065 | ) | (28,419 | ) | (12,576 | ) | (19,006 | ) | (55,819 | ) | ||||||||||||||||
Dividends on preferred stock | (884 | ) | (1,506 | ) | (1,513 | ) | (1,530 | ) | (1,598 | ) | (1,598 | ) | (1,617 | ) | (1,634 | ) | ||||||||||||||||
Beneficial conversion feature on preferred stock | (767 | ) | (18,568 | ) | — | — | (43,834 | ) | — | — | — | |||||||||||||||||||||
Net loss applicable to common stockholders | $ | (31,514 | ) | $ | (46,248 | ) | $ | (27,063 | ) | $ | (22,595 | ) | $ | (73,851 | ) | $ | (14,174 | ) | $ | (20,623 | ) | $ | (57,453 | ) | ||||||||
Per share information: | ||||||||||||||||||||||||||||||||
Basic and diluted net loss per common share | $ | (0.91 | ) | $ | (1.32 | ) | $ | (0.77 | ) | $ | (0.63 | ) | $ | (2.06 | ) | $ | (0.39 | ) | $ | (0.57 | ) | $ | (1.57 | ) | ||||||||
Shares used in computing basic and diluted net loss per common share | 34,474 | 35,129 | 35,353 | 35,699 | 35,916 | 36,176 | 36,318 | 36,506 | ||||||||||||||||||||||||
Quarters Ended | ||||||||||||||||||||||||||||||||
June. 30, 2004 | Mar. 31, 2004 | Dec. 31, 2003 | Sept. 30, 2003 | June 30, 2003 | Mar. 31, 2003 | Dec. 31, 2002 | Sept. 30, 2002 | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Consolidated Statements of Operations Data: | ||||||||||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||
License | $ | 743 | $ | 1,271 | $ | 1,254 | $ | 790 | $ | 1,476 | $ | 983 | $ | 1,819 | $ | 1,817 | ||||||||||||||||
Support and Services | 3,977 | 3,949 | 3,836 | 3,783 | 3,891 | 4,240 | 4,004 | 3,854 | ||||||||||||||||||||||||
Total revenue | 4,720 | 5,220 | 5,090 | 4,573 | 5,367 | 5,223 | 5,823 | 5,671 | ||||||||||||||||||||||||
Cost of license | 365 | 383 | 447 | 451 | 443 | 443 | 443 | 443 | ||||||||||||||||||||||||
Cost of support and services | 1,541 | 1,686 | 1,726 | 1,509 | 1,666 | 1,929 | 2,170 | 2,973 | ||||||||||||||||||||||||
Cost of revenue—acquisition related | — | — | — | — | — | 227 | 300 | 300 | ||||||||||||||||||||||||
Gross profit (loss) | 2,814 | 3,151 | 2,917 | 2,613 | 3,258 | 2,624 | 2,910 | 1,955 | ||||||||||||||||||||||||
Operating costs and expenses: | ||||||||||||||||||||||||||||||||
Research and development | 619 | 598 | 660 | 1,065 | 1,174 | 1,381 | 1,381 | 1,933 | ||||||||||||||||||||||||
Sales and marketing | 1,981 | 2,167 | 2,011 | 2,125 | 2,060 | 1,840 | 2,224 | 3,474 | ||||||||||||||||||||||||
General and administrative | 777 | 822 | 939 | 909 | 1,146 | 1,007 | 1,213 | 1,450 | ||||||||||||||||||||||||
Amortization of other intangible assets | 289 | 302 | 306 | 306 | 306 | 327 | 337 | 337 | ||||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | 21 | 31 | 39 | 66 | ||||||||||||||||||||||||
Restructuring and other | (135 | ) | (4 | ) | 35 | 127 | 346 | 512 | (1,285 | ) | 1,047 | |||||||||||||||||||||
Total operating costs and expenses | 3,531 | 3,885 | 3,951 | 4,532 | 5,053 | 5,098 | 3,909 | 8,307 | ||||||||||||||||||||||||
Loss from operations | (717 | ) | (734 | ) | (1,034 | ) | (1,919 | ) | (1,795 | ) | (2,474 | ) | (999 | ) | (6,352 | ) | ||||||||||||||||
Non-operating income (expense), net | (263 | ) | (218 | ) | 144 | (153 | ) | (61 | ) | 9 | 262 | (66 | ) | |||||||||||||||||||
Net loss | (980 | ) | (952 | ) | (890 | ) | (2,072 | ) | (1,856 | ) | (2,465 | ) | (737 | ) | (6,418 | ) | ||||||||||||||||
Dividends on convertible preferred stock | (1,867 | ) | (1,867 | ) | (1,825 | ) | (1,825 | ) | (1,747 | ) | (1,727 | ) | (1,708 | ) | (1,708 | ) | ||||||||||||||||
Net loss applicable to common stockholders | $ | (2,847 | ) | $ | (2,819 | ) | $ | (2,715 | ) | $ | (3,897 | ) | $ | (3,603 | ) | $ | (4,192 | ) | $ | (2,445 | ) | $ | (8,126 | ) | ||||||||
Per share information: | ||||||||||||||||||||||||||||||||
Basic and diluted net loss per common share | $ | (0.77 | ) | $ | (0.76 | ) | $ | (0.74 | ) | $ | (1.06 | ) | $ | (0.98 | ) | $ | (1.14 | ) | $ | (0.67 | ) | $ | (2.22 | ) | ||||||||
Shares used in computing basic and diluted net loss per common share | 3,695 | 3,692 | 3,688 | 3,676 | 3,666 | 3,664 | 3,663 | 3,660 | ||||||||||||||||||||||||
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
eGain expectsWe have a history of losses and expect continuing losses and may never achieve profitability which in turn may harm its future operating performance and may cause the market price of eGain common stock to decline
We incurred a net loss of $115.8$4.9 million for the year ended June 30, 2002.2004. As of June 30, 2002, eGain2004, we had an accumulated deficit of approximately $299.1$315.5 million. eGain doesWe do not know when or if itwe will become profitable.profitable in the foreseeable future. However, we must continue to spend resources on maintaining and strengthening our business, and this may, in the near term, have a continued negative effect on our operating results and our financial condition. If eGain doeswe continue to incur net losses in future periods, we may not be able to retain employees, or fund investments in capital equipment, sales and marketing programs, and research and development to successfully compete against our competitors. We also expect to continue to spend financial and other resources at reduced levels on developing and introducing product and service offerings. Accordingly, if our revenue declines despite such investments, our business and operating results could suffer. We also may never obtain sufficient revenues to exceed our cost structure and achieve profitability. If we do not become profitable within the timeframe expected by financial analysts or investors, the market price of eGainour common stock may further decline. Even if eGain doeswe achieve profitability, itwe may not be ableunable to sustain or increase profitability in the future.
eGain’s revenueIf we fail to expand and operating expensesimprove our sales and marketing activities, we may fluctuate as eGain builds itsbe unable to grow our business, and this increase may harm itsnegatively impacting our operating results and financial conditioncondition.
Expansion and growth of our business is dependent on technologyour ability to develop a productive North American sales force. Moreover, many of our competitors have sizeable sales forces and infrastructure development. eGain expectsgreater resources to continuedevote to spend substantial financialsales and marketing, which results in their enhanced ability to develop and maintain customer relationships. Thus, failure to develop our sales force and/or failure of our sales and marketing investments to translate into increased sales volume and enhanced customer relationships may hamper our efforts to achieve profitability. This may impede our efforts to ameliorate operations in other resources on developingareas of the company and introducing product and service offerings. Accordingly, if eGain’s revenue does not correspondingly increase, its business and operating results could suffer.
Due to the emerging naturecomplexity of our eService platform and related products and services, we must utilize highly trained sales personnel to educate prospective customers regarding the eService marketuse and other factors, eGain’s revenuebenefits of our products and operating results may fluctuate from quarter to quarter. It is possible that eGain’s operating resultsservices as well as provide effective customer support. Because, in some quarters will be below the expectationspast, we have experienced turnover in our sales force and have fewer resources than many of financial analysts or investors. In this event, the market price of eGain’s common stock is likely to decline.
eGainWe must compete successfully in itsour market segment
The market for eServicecustomer service and contact center software remains relatively new andis intensely competitive. Other than product development and existing customer relationships, there are no substantial barriers to entry in this market, and established or new entities may enter this market in the near future. eGain competes with companies that develop and maintain internallyWhile home-grown software developed eService software applications. eGainby enterprises represents indirect competition, we also competescompete directly with companies that provide licensed eServicepackaged application software vendors in the customer service arena, including AskJeeves, Inc., Avaya, Inc., E.piphany, Inc., Firepond,Epiphany, Inc., Genesys Telecommunications (a wholly-owned subsidiary of Alcatel), Kana Software, Inc., Primus Knowledge Solutions, Inc., RightNow Technologies, Inc., Serviceware, and Talisma Corp. eGain also facesIn addition, we face actual or potential competition from larger front office software companies such as Amdocs Limited (which recently acquired the Clarify,Siebel Systems, Inc. business from Nortel Networks), Onyx Software Corporation, PeopleSoft, Inc., Pivotal Corp., and Siebel Systems, Inc. Furthermore, established enterprise software companies, including IBM, Microsoft Corporation, Oracle Corporation, SAP, Inc., and similar companies who may seekattempt to leveragesell customer service software to their existing relationships and capabilities to offer eService solutions.
We believe competition will continue to be fierce and increase as its current competitors increaseenhance the sophistication of their offerings and as new participants enter the market. Many of eGain’sour current and potential competitors have:
Further, any delays in the roll out or general market acceptance of eGain’s eServiceour applications would likely harm itsour competitive position. Any delay would allow eGain’sposition by allowing our competitors additional time to improve their eService
We face a variety of risks stemming from strategic and operational decisions we have made in recent quarters
In recent quarters we have made a series of key decisions relating to cost reduction, debt accrual and operational structure. Such decisions have posed challenges to and will continue to affect the infrastructure, debt and equity structure and the operations of the company. If such decisions have unanticipated consequences, they may have a material adverse effect on our financial condition and future results of operations. We have significantly cut the cost structure through reductions in force and the movement of certain key business functions to operations in India. We have also reduced our work force overall by 45% since fiscal year ended 2002. In addition, in excess of 50% of all employees and the majority of all software development is now done in India with an Indian workforce. As a result, our cash position, although sustainable to fund operations in the short term, leaves little room for error in the forecasting and achievement of revenue goals.
While we have achieved significant cost savings through such measures, we will be unable to quickly reverse the course of such actions and the initial costs associated with such restructuring may be lost if the infrastructure changes do not enhance our results. In addition, the continued and aggressive restructuring over time has reduced our personnel and resources to minimal levels where the margin of operational error is very low. To the extent we have made poor decisions about the cutting of certain resources, such loss of assets may contribute to an inability to effectively operate our company, properly serve customers or successfully achieve sales goals. Finally, a failure to meet our revenue forecasts despite such cost-cutting measures, will leave us with insufficient resources to fund growth initiatives and, accordingly, our results and future financial condition will likely suffer.
Due to our limited operating history and the emerging market for our products and services, revenue and operating expenses are unpredictable and may fluctuate, which may harm our operating results and financial condition
Due to the emerging nature of the multi-channel contact center market and other similar factors, our revenue and operating results may fluctuate from quarter to quarter. Our revenues in certain past quarters fell and could continue to fall short of expectations if we experience delays or cancellations of even a small number of orders. It is possible that our operating results in some quarters will be below the expectations of financial analysts or investors. In this event, the market price of our common stock is also likely to decline.
A number of factors are likely to cause fluctuations in our operating results, including, but not limited to, the following:
In addition, we base our expense levels in part on expectations regarding future revenue levels. In the short term, expenses, such as employee compensation and rent, are relatively fixed. If revenue for a particular quarter is below expectations, we may be unable to proportionately reduce our operating expenses for that quarter. Accordingly, such a revenue shortfall would have a disproportionate effect on expected operating results for that quarter. Moreover, we believe that any further significant reductions in expenses would be difficult to achieve given current operating levels. For this reason, period-to-period comparisons of our operating results may also not be a good indication of our future performance.
eGainWe may need additional capital, and raising such additional capital may be difficult or impossible and will likely significantly dilute existing stockholders
In response to declining revenues we have repeatedly taken actions to reduce its expense rates, it expectsrates. As a result of these actions net cash used in operations decreased to incur additional operating losses,$2.3 million in fiscal 2004 from $5.9 million in 2003 and $27.5 million in 2002. With this progress on expense reduction and securing $4.5 million in long term debt during fiscal year 2004, our cash and cash equivalents increased to $5.2 million on June 30, 2004 from $4.4 million on June 30, 2003.
As of June 30, 2004, we have working capital of $2.0 million, compared to a working capital deficit of $172,000 at least throughJune 30, 2003. We believe that existing capital resources will enable us to maintain current and planned operations for the second quarter of fiscal 2003 if not longer. eGain’snext 12 months. However, our working capital requirements in the foreseeable future are subject to numerous risks and will depend on a variety of factors, and assumptions, in particular, that revenue growth rates remain stablerevenues maintain at the levels achieved in fiscal year 2004 and that customers continue to pay on a timely basis, and is subject to numerous risks. If eGain does not significantly reduce its net cash outflow in the near term, as compared to fiscal 2002, eGain will require additional credit facilities, additional equity and/or debt financings and/or willwe may need to pursue strategic alternatives in fiscal year 2003. eGain is currently focused on reducing its expenses and pursuing such alternatives in the near term. If additional funds are raised through the issuance of equity securities, eGain stockholders may experience significant dilution. Furthermore, there can be no assurance thatsecure additional financing will be available when needed or at all, or that if available, such financing will be on terms favorable to us or our stockholders. If such financing is not available when required or is not available on acceptable terms, eGain may be unable to meet operating obligations.
On August 8, 2000, eGainwe issued 35.11 shares of non-voting Series A Cumulative Convertible Preferred Stock (“Series A”), $100,000 stated value per share, and 849.89 shares of non-voting Series B Cumulative Convertible Preferred Stock (“Series B”), $100,000 stated value per share in a private placement to certain investors. The Series B shares automatically converted into Series A shares upon stockholder approval on November 20, 2000 at the annual stockholders meeting. In addition, the investors received warrants to purchase 3.8 millionan aggregate of 383,000 shares of eGain’sour common stock with a current warrant exercise price of $5.6875$56.875 per share. The Series A shares have a liquidation preference of $100,000 per share, or an aggregate liquidation preference of $88.5 million, which increases on a daily basis at an annual rate of 6.75% from August 8, 2000, compounded on a semi-annual basis.basis (the “Liquidation Value”). The Series A shares are convertible into common stock (including all amounts accreted from August 8, 2000) at a conversion price of $5.6875$56.875 per share. By way of illustration, at the current conversion price of $5.6875 per share, the Series A shares would be convertible into 17.7 million shares of common stock.
To the extent the preferred shares are converted into common stock (including all amounts accreted from August 8, 2000), a very significant number of shares of common stock may be sold into the market, which could decrease the price of eGain’sour common stock.
We have been in discussions with the Series A holders and hope to renegotiate certain terms and conditions of the redemption of the preferred stock prior to August 8, 2005. Regardless of the timing or success of any such resolution, the result of any such conversion would nonetheless also cause significant dilution to the holders of the common stock. We can make no assurances as to when the renegotiation of certain terms of our Series A shares will occur, if at all.
eGain’sOur preferred stock carries a substantial liquidation preference
In the event of our liquidation, dissolution or winding up, the holders of Series A shares would be entitled to receive, prior to distribution of any proceeds to holders of common stock, proceeds equal to the greater of (i) $88.5 million (plus increases in such liquidation preference at an annual rate of 6.75% from August 8, 2000) or (ii) the amount the holders of the Series A shares would have received had they converted their shares into common stock immediately prior to such liquidation, dissolution or winding up. If we enter into a transaction pursuant to which we sell or transfer all or substantially all of our assets or we enter into a merger with another company, then at the option of the holder of Series A shares, (A) each share of Series A may be converted into convertible equity securities of the entity acquiring us, or (B) each Series A share may convert into shares of common stock based on the Liquidation Value, calculated as of the later of (x) the closing date of such transaction or (y) August 8, 2003. In the event that we entered into a merger or sale in which the total value of the transaction would be less than the Liquidation Value, a buyer would unlikely be willing to assume the liquidation preferences and other obligations represented by the Series A shares. Consequently, based on our current capital structure, we anticipate that a transaction resulting in such a sale would result in substantially all of the proceeds of such transaction being distributed to the holders of Series A shares with little, if any, consideration, available to our common stock holders.
Our common stock has been delisted and thus the price and liquidity of our common stock has been affected and our ability to obtain future equity financing may be further impaired
In February 2004, we were delisted from the Nasdaq SmallCap Market due to noncompliance with Marketplace Rule 4310(c)(2)(B), which requires companies listed to have a minimum of $2,500,000 in stockholders’ equity or $35,000,000 market value of listed securities or $500,000 of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years.
Our common stock now trades in the over-the-counter market on the OTC Bulletin Board owned by the Nasdaq Stock Market, Inc., which was established for securities that do not meet the listing requirements of the Nasdaq National Market or the Nasdaq SmallCap Market. The OTC Bulletin Board is generally considered less efficient than the Nasdaq SmallCap Market. Consequently, selling our common stock is likely more difficult because of diminished liquidity in smaller quantities of shares likely being bought and sold, transactions could be delayed, and securities analysts’ and news media coverage of us may be further reduced. These factors could result in lower prices and larger spreads in the bid and ask prices for shares of common stock.
Our listing on the OTC Bulletin Board, or further declines in our stock price, may be volatile
In addition, as our common stock is not listed on a principal national exchange, we are subject to Rule 15g-9 under the Securities and Exchange Act of 1934, as amended. That rule imposes additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell our common stock and affect
the ability of holders to sell their shares of our common stock in the secondary market. Moreover, investors may be less interested in purchasing low-priced securities because the brokerage commissions, as a percentage of the total transaction value, tend to be higher for such securities, and some investment funds will not invest in low-priced securities (other than those which focus on small-capitalization companies or low-priced securities).
Our lengthy sales cycles and the difficulty in predicting timing of sales or delays may impair our operating results
The long sales cycle for our products may cause license revenue and operating results to vary significantly from period to period. The sales cycle for our products can be six months or more and varies substantially from customer to customer. Because we sell complex and deeply integrated solutions, it can take many months of customer education to secure sales. While our potential customers are evaluating our products before, if ever, executing definitive agreements, we may incur substantial expenses and spend significant management effort in connection with the potential customer. Our multi-product offering and the increasingly complex needs of our customers contribute to a longer and unpredictable sales cycle. Consequently, we often face difficulty predicting the quarter in which expected sales will actually occur. This contributes to the uncertainty and fluctuations in our future operating results. In particular, the economic slowdown in North America and globally has caused and may continue to cause potential customers to delay or cancel major information technology purchasing decisions. In addition, general weakness in the global securities markets, recessionary corporate spending levels and the protracted slump in technology spending specifically, has caused our average sales cycle to further increase and, in some cases, has prevented deals from closing that we believed were likely to close. Consequently, we may miss our revenue forecasts and may incur expenses that are not offset by corresponding revenue.
Our failure to expand strategic and third-party distribution channels would impede our revenue growth
To grow our revenue base, we need to increase the number of our distribution partners, including software vendors and resellers. Our existing or future distribution partners may choose to devote greater resources to marketing and supporting the products of our competitors that could also harm our financial condition or results of operations. Our failure to expand third-party distribution channels would impede our future revenue growth. Similarly, to increase our revenue and implementation capabilities, we must continue to develop and expand relationships with systems integrators. We sometimes rely on systems integrators to recommend our products to their customers and to install and support our products for their customers. We likewise depend on broad market acceptance by these systems integrators of our product and service offerings. Our agreements generally do not prohibit competitive offerings and systems integrators may develop, market or recommend software applications that compete with our products. Moreover, if these firms fail to implement our products successfully for their customers, we may not have the resources to implement our products on the schedule required by their customers. To the extent we devote resources to these relationships and the partnerships do not proceed as anticipated or provide revenue or other results as anticipated our business may be harmed. Once partnerships are forged, there can be no guarantee that such relationships will be renewed in the future or available on acceptable terms. If we lose strategic third party relationships, fail to renew or develop new relationships, or fail to fully exploit revenue opportunities within such relationships, our results of operations and future growth may suffer.
We may experience a further decrease in market demand due to the slowed economy, which has also been further stymied by the concerns of terrorism, war, and social and political instability in the regions in which we do business
Spending on technology solutions by corporations and government enterprises has been markedly slow to rebound and the industry continues to be mired in an economic slump. In addition, the terrorist attacks in the United States and Europe and turmoil and war in the Middle East, Asia and elsewhere has increased the uncertainty in the United States, the European Union and Asian economies and may further add to the prolonged decline in the United States business environment. The war on terrorism, along with the effects of a terrorist attack and other similar events, the war in Iraq, military activities in Afghanistan, and hostilities between India
and Pakistan, could contribute further to the slowdown of the already slumping market demand for goods and services, including digital communications software and services. If the economy continues to decline as a result of the recent economic, political and social turmoil, or if there are further terrorist attacks in the United States and Europe, or as a result of the war in the Middle East and Asia, particularly India, we may experience further decreases in the demand for our products and services, which may harm our operating results.
We depend on broad market acceptance of our applications and of our business model
We depend on the widespread acceptance and use of our applications as an effective solution for businesses seeking to manage high volumes of customer communication over the Internet while providing improved customer service. While we believe the potential to be very large, we cannot accurately estimate the size or growth rate of the potential market for such product and service offerings generally, and we do not know whether our products and services in particular will achieve broad market acceptance. The market for eService software is relatively new and rapidly evolving, and concerns over the security and reliability of online transactions, the privacy of users and quality of service or other issues may inhibit the growth of the Internet and commercial online services. If the market for our applications fails to grow or grows more slowly than we currently anticipate, our business will be seriously harmed.
Furthermore, our business model is premised on business assumptions that are still evolving. Historically, customer service has been conducted primarily in person or over the telephone. Our business model assumes that both customers and companies will increasingly elect to communicate via the Internet (assisted and unassisted online service), as well as demanding integration of the online channels into the traditional telephone-based call center. Our business model also assumes that many companies recognize the benefits of a hosted delivery model and will seek to have their eService applications hosted by us. If any of these assumptions is incorrect, our business will be seriously harmed and our stock price will decline.
We may not be able to respond to the rapid technological change of the customer service and contact center industry
The eService industry is characterized by rapid technological change, changes in customer requirements and preferences, and the emergence of new industry standards and practices that could render our existing services, proprietary technology and systems obsolete. We must continually develop or introduce and improve the performance, features and reliability of our products and services, particularly in response to competitive offerings. Our success depends, in part, on our ability to enhance our existing services and to develop new services, functionality and technology that address the increasingly sophisticated and varied needs of prospective customers. If we do not properly identify the feature preferences of prospective customers, or if we fail to deliver product features that meet the standards of these customers, our ability to market our service and compete successfully and to increase revenues could be impaired. The development of proprietary technology and necessary service enhancements entails significant technical and business risks and requires substantial expenditures and lead-time. We may not be able to keep pace with the latest technological developments. We may also be unable to use new technologies effectively or adapt services to customer requirements or emerging industry standards or regulatory or legal requirements. More generally, if we cannot adapt or respond in a cost-effective and timely manner to changing industry standards, market conditions or customer requirements, our business and operating results will suffer.
Cost reduction initiatives may adversely affect the morale and performance of our personnel, which could affect our ability to retain high performers
To streamline operations and better align operating costs and expenses with revenue trends, we have restructured our organization several times in recent years. The result has been substantial reductions in our workforce over time and reductions in our employees’ salaries numerous times since the quarter ended December 31, 2001. Such reductions in workforce and salary levels may continue to affect employee morale, create concern
among existing employees about job security, and contribute to distractions that drain productivity. These issues may also lead to attrition beyond our planned workforce reductions and reduce our ability to meet the needs of our current and future customers. In addition, many of the employees who were terminated may have possessed specific knowledge or expertise and their absence may create significant difficulties. This personnel reduction may also subject us to the risk of litigation, which may adversely impact our ability to conduct our operations and may cause us to incur significant expense. In addition, the workforce reductions previously completed have increased our dependence on our remaining employees and senior management. Any attrition beyond our planned workforce reductions could reduce our ability to develop new products and services, provide acceptable levels of customer service and meet the needs of our current and future customers and harm our results of operations. In particular, increased levels of attrition in the Indian workforce on which we deeply rely for research and development and where we have moved significant resources in recent years would have significant effects on the company and its results of operations.
Our success will also depend in large part on the skills, experience and performance of highly motivated senior management, engineering, sales, marketing and other key personnel. The loss of the services of any of our senior management or other key personnel, including our Chief Executive Officer and co-founder, Ashutosh Roy, could harm our business.
Our international operations involve various risks
We derived 48% of our revenues from international sales for the fiscal year 2004 compared to 49% for the fiscal year 2003. Including those discussed above, our international sales operations are subject to a number of specific risks, such as:
In addition, we intend to continue to expand and move our operations into international environments and to spend significant amounts of resources to do so. Through eGain India, we currently have a significant number of employees representing in excess of 50% of our total workforce located in India, more than a half employed in research and development. Although the movement of certain operations internationally was principally motivated by cost cutting, the continued management of these remote operations will require significant management attention and financial resources that could adversely affect our operating performance. Our reliance on our workforce in India makes us particularly susceptible to disruptions in the business environment in that region. In particular, sophisticated telecommunications links, high speed data communications with other eGain offices and customers, and overall consistency and stability of our business infrastructure are vital to our day to day operations, and any impairment of such infrastructure will cause our financial condition and results to suffer. The maintenance of stable political relations between both the United States and the European Union, and India are also of great importance to our operations.
Any of these risks could have a significant impact on our product development, customer support or professional services. To the extent the benefit of maintaining these operations abroad does not exceed the expense of establishing and maintaining such activities, our operating results and financial condition will suffer.
Difficulties in implementing our products could harm our revenues and margins
We generally recognize revenue from a customer sale when persuasive evidence of an arrangement exists, the product has been delivered, the arrangement does not involve significant customization of the software, the license fee is fixed or determinable and collection of the fee is probable. If an arrangement requires significant customization or implementation services from us, recognition of the associated license and service revenue could be delayed. The timing of the commencement and completion of the these services is subject to factors that may be beyond our control, as this process requires access to the customer’s facilities and coordination with the customer’s personnel after delivery of the software. In addition, customers could delay product implementations. Implementation typically involves working with sophisticated software, computing and communications systems. If we experience difficulties with implementation or do not meet project milestones in a timely manner, we could be obligated to devote more customer support, engineering and other resources to a particular project. Some customers may also require us to develop customized features or capabilities. If new or existing customers have difficulty deploying our products or require significant amounts of our professional services, support, or customized features, revenue recognition could be further delayed or canceled and our costs could increase, causing increased variability in our operating results.
Our reserves may be insufficient to cover receivables we are unable to collect
We assume a certain level of credit risk with our customers in order to do business. Conditions affecting any of our customers could cause them to become unable or unwilling to pay us in a timely manner, or at all, for products or services we have already provided them. For example, if the current economic conditions continue to decline, our customers may experience financial difficulties and be unable to pay their bills. In the past, we have experienced collection delays from certain customers, and we cannot predict whether we will continue to experience similar or more severe delays in the future. Although we have established reserves to cover losses due to delays or inability to pay, there can be no assurance that such reserves will be sufficient to cover our losses. If losses due to delays or inability to pay are greater than our reserves, it could harm our business, operating results and financial condition.
Pending litigation and infringement claims could be costly to defend and distract our management team
We may be involved in legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the intellectual property or proprietary rights of third parties, employment claims and other commercial contract disputes. Third parties may also infringe or misappropriate our copyrights, trademarks and other proprietary rights for which we may be required to file suit to protect or mediate our rights. In the past we have had lawsuits brought or threatened against us in a variety of contexts including but not limited to claims related to issues associated with our initial public offering of common stock, breach of contract and litigation associated with the termination of employees.
From time to time, parties have also asserted or threatened infringement claims, and may continue to do so. Because the contents of patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our software products. In particular, intellectual property litigation is expensive and time-consuming and could also require us to develop non-infringing technology or enter into royalty or license agreements. These royalty or license agreements, if required, may not be available on acceptable terms, if at all, in the event of a successful claim of infringement. Our failure or inability to develop non-infringing technology or license the proprietary rights on a timely basis would harm our business.
Where appropriate, we intend to vigorously defend all claims. However, any actual or threatened claims, even if not meritorious or material, could result in the expenditure of significant financial and managerial resources. The continued defense of these claims and other types of lawsuits could result in and could divert management’s attention away from running our business. Negative developments in lawsuits could cause our stock price to decline as well. In addition, required amounts to be paid in settlement of any claims, and the legal
fees and other costs associated with such settlement cannot be estimated and could, individually or in the aggregate, materially harm our financial condition.
We rely on trademark, copyright, trade secret laws, contractual restrictions and patent rights to protect our intellectual property and proprietary rights and if these rights are impaired our ability to generate revenue will be harmed
We regard our patents, copyrights, service marks, trademarks, trade secrets and similar intellectual property as critical to our success, and rely on trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers and partners to protect our proprietary rights. We have numerous registered trademarks as well as common law trademark rights in the United States and internationally. In addition, we own several patents in the area of case-based reasoning. We will seek additional trademark and patent protection in the future. We do not know if our trademark and patent applications will be granted, or whether they will provide the protection eGain desires, or whether they will subsequently be challenged or invalidated. It is difficult to monitor unauthorized use of technology, particularly in foreign countries, where the laws may not protect our proprietary rights as fully as in the United States. Furthermore, our competitors may independently develop technology similar to our technology.
Despite our efforts to protect our proprietary rights through confidentiality and license agreements, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. These precautions may not prevent misappropriation or infringement of our intellectual property. In addition, we routinely require employees, customers, and potential business partners to enter into confidentiality and nondisclosure agreements before we will disclose any sensitive aspects of our products, technology, or business plans. In addition, we require employees to agree to surrender any proprietary information, inventions or other intellectual property they generate or come to possess while employed by us. In addition, some of our license agreements with certain customers and partners require us to place the source code for our products into escrow. These agreements typically provide that some party will have a limited, non-exclusive right to access and use this code as authorized by the license agreement if there is a bankruptcy proceeding instituted by or against us, or if we materially breach a contractual commitment to provide support and maintenance to the party.
Unknown software defects could disrupt our products and services and problems arising from our vendors’ products or services could disrupt operations, which could harm our business and reputation
Our product and service offerings depend on complex software, both internally developed and licensed from third parties. Complex software often contains defects or errors in translation or integration, particularly when first introduced or when new versions are released or localized for international markets. We may not discover software defects that affect our new or current services or enhancements until after they are deployed. It is possible that, despite testing by us, defects may occur in the software and we can give no assurance that our products and services will not experience such defects in the future. Furthermore, our customers generally use our products together with products from other companies. As a result, when problems occur in the integration or network, it may be difficult to identify the source of the problem. Even when our products do not cause these problems, these problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from product development efforts and cause significant customer relations problems. These defects or problems could result in damage to our reputation, lost sales, product liability claims, delays in or loss of market acceptance of our products, product returns and unexpected expenses, and diversion of resources to remedy errors.
We may need to license third-party technologies and may be unable to do so
To the extent we need to license third-party technologies, we may be unable to do so on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our products or services. Third-party licenses may expose us to increased risks, including risks associated with the
integration of new technology, the diversion of resources from the development of our own proprietary technology, and our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs. Our inability to obtain and successfully integrate any of these licenses could delay product and service development until equivalent technology can be identified, licensed and integrated. This in turn would harm our business and operating results.
Our stock price has demonstrated volatility and overall declines since being listed on the public market and continued market conditions may cause further declines or fluctuations
The price at which our common stock trades has been and will likely continue to be highly volatile and fluctuate substantiallyshow wide fluctuations and substantial declines due to factors such as the following:
actual or anticipated fluctuations in our operating results, our ability to meet announced or anticipated profitability goals and changes in or failure to meet securities analysts’ expectations; announcements of technological innovations and/or the introduction of new services by us or our competitors; developments with respect to intellectual property rights and litigation, regulatory scrutiny and new legislation; conditions and trends in the Internet and other technology industries; and general market and economic conditions. Furthermore, the stock market has in recent quarters experienced significant price and volume fluctuations that have affected the market prices for the common stock of technology companies, particularly Internet companies, regardless of the specific operating performance of the affected company. These broad market fluctuations |
In addition, in past periods of volatility in the market price of a particular company’s securities, securities class action litigation has been brought against that company following such declines. To the extent our stock price precipitously drops in the future, acquisitionswe may become involved in this type of litigation. Litigation of this kind, or investments that could dilute eGain’s existing stockholders, cause eGain to incur significant expenses or harm its business
eGain could incur additional non-cash charges associated with stock-based compensation arrangements
Our customers have, in the past experienced some interruptions with the eGain-hosted operations. We believe that these interruptions will continue to occur from time to time. These interruptions could be due to hardware and operating system failures. As a result, our business will suffer if we experience frequent or long system interruptions that result in the unavailability or reduced performance of our hosted operations or reduce our ability to provide remote management services. We expect to experience occasional temporary capacity constraints due to sharply increased traffic or other Internet wide disruptions, which may cause unanticipated system disruptions, slower response times, impaired quality, and degradation in levels of customer service. If this were to continue to happen, our business and reputation could be seriously harmed.
The recent growth in the use of the Internet has caused frequent interruptions and delays in accessing the Internet and transmitting data over the Internet. Interruptions also occur due to systems burdens brought on by
unsolicited bulk email or “Spam,” malicious service attacks and hacking into operating systems, viruses, worms and “Trojan” horses, the proliferation of which may be beyond our control and may seriously impact ours and our customers’ businesses.
Because eGain provideswe provide Internet-based eService software, interruptions or delays in Internet transmissions will harm eGainour customers’ ability to receive and respond to online interactions. Therefore, eGain’sour market depends on improvements being made to the entire Internet infrastructure to alleviate overloading and congestion.
Our success largely depends on the efficient and uninterrupted operation of our computer and communications hardware and network systems. Most of our computer and communications systems are located in Mountain View, California. Due to our locations, our systems and operations are vulnerable to damage or interruption from fire, earthquake, power loss, telecommunications failure and similar events.
We have entered into service agreements with some of our customers that require minimum performance standards, including standards regarding the availability and response time of our remote management services. If we fail to meet these standards, our customers could terminate their relationships with us, and we could be subject to contractual refunds and service credits to customers. Any unplanned interruption of services may harm our ability to attract and retain customers.
Governmental regulationWe may be liable for activities of customers or others using our hosted operations
As a provider of customer service and contact center software for the Internet, we face potential liability for defamation, negligence, copyright, patent or trademark infringement and other claims based on the actions of our customers, and their customers, or others using our solutions or communicating through our networks. This liability could result from the nature and content of the communications transmitted by customers through the hosted operations. We do not and cannot screen all of the communications generated by our customers, and we could be exposed to liability with respect to this content. Furthermore, some foreign governments, including Germany and China, have enforced laws and regulations related to content distributed over the Internet that are more strict than those currently in place in the United States. In some instances criminal liability may arise in connection with the content of Internet transmissions.
Although we carry general liability and umbrella liability insurance, our insurance may not cover claims of these types or may not be adequate to indemnify us for all liability that may be imposed. There is a risk that a single claim or multiple claims, if successfully asserted against us, could exceed the total of our coverage limits. There also is a risk that a single claim or multiple claims asserted against us may not qualify for coverage under our insurance policies as a result of coverage exclusions that are contained within these policies. Should either of these risks occur, capital contributed by our stockholders might need to be used to settle claims. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage could harm our reputation and business and operating results, or could result in the imposition of criminal penalties.
If our system security is breached, our business and reputation could suffer and we may face liability associated with disclosure of sensitive customer information
A fundamental requirement for online communications and transactions is the secure transmission of confidential information over public networks. Third parties may attempt to breach our security or that of our customers. We may be liable to our customers for any breach in our security and any breach could harm our business and reputation. Although we have implemented network security measures, our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, or loss of data. We may be required to expend significant capital and other resources to license encryption technology and additional technologies to protect against security breaches or to alleviate problems caused by any breach. Since our applications frequently manage sensitive and personally identifiable customer information, and we may also be subject to claims associated with invasion of privacy or inappropriate disclosure, use or loss
of this information and fraud and identity theft crimes associated with such use or loss. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could harm our reputation and our business and operating results.
The regulatory environment for and certain legal uncertainties in the operation of our business and our customer’s business could impair theour growth of the Internet andor decrease demand for eGain’sour services or increase eGain’sour cost of doing business
Few laws currently apply directly to activity on the Internet and related services for businesses operating commercial online service. However new laws are frequently proposed and other laws made applicable to Internet communications every year both in the U.S. and internationally. In particular, in the operation of our business we face risks associated with privacy, confidentiality of user data and communications, consumer protection and pricing, taxation, content, copyright, trade secrets, trademarks, antitrust, defamation and other legal issues. In particular, legal concerns with respect to communication of confidential data have affected our financial services and health care customers due to newly enacted federal legislation. The growth of the Internet or commercial online services. This could decrease the demand for eGain’s products and services, increase its cost of doing business or otherwise harm its business and operating results. Although there are currently few laws and regulations directly applicable to the Internetindustry and the useproliferation of the Internet as a commercial medium, a numberecommerce services may prompt further legislative attention to our industry and thus invite more regulatory control of laws have been proposed involving the Internet. These proposed laws include laws addressing user privacy, pricing, content, copyrights, distribution, antitrust, and characteristics and quality of products and services.our business. Further, the growth and development of the
In addition, the applicability of laws and regulations directly applicable to the businesses of our customers, particularly customers in the fields of financial services, will continue to affect us. The security of information about our customers’ end-users continues to be an area where a variety of laws and regulations with respect to privacy and confidentiality are enacted. As our customers implement the protections and prohibitions with respect to the transmission of end-user data, our customers will look to us to assist them in remaining in compliance with this evolving area of regulation. In particular the Gramm-Leach-Bliley Act contains restrictions with respect to the use and protection of banking records for end-users whose information may pass through our system.
The imposition of more stringent protections and/or new regulations and the application of existing laws to our business could burden our company and those with which we do business. Further, the adoption of additional laws and regulations could limit the growth of our business and that of our business partners and customers. Any decreased generalized demand for our services, or the loss of or decrease, in business, by a key partner due to regulation or the expense of compliance with any regulation, could either increase the costs associated with our business or affect revenue, either of which could harm our financial condition or operating results.
Finally, we face increased regulatory scrutiny and potential criminal liability for our executives associated with various accounting and corporate governance rules promulgated under the Sarbanes-Oxley Act of 2002. We have reviewed and will continue to monitor all of our accounting policies and practices, legal disclosure and corporate governance policies under the new legislation, including those related to relationships with our independent accountants, enhanced financial disclosures, internal controls, board and board committee practices, corporate responsibility and loan practices, and intend to fully comply with such laws. Nevertheless, such increased scrutiny and penalties involve risks to both eGain and our executive officers and directors in monitoring and insuring compliance. A failure to properly navigate the legal disclosure environment and implement and enforce appropriate policies and procedures, if needed, could harm our business and prospects.
We may engage in future acquisitions or investments that could dilute our existing stockholders, cause us to incur significant expenses or harm our business
We may review acquisition or investment prospects that might complement our current business or enhance our technological capabilities. Integrating any newly acquired businesses or their technologies or products may
be expensive and time-consuming. To finance any acquisitions, it may be necessary for us to raise additional funds through public or private financings. Additional funds may not be available on terms that are favorable to us, if at all, and, in the case of equity financings, may result in dilution to our existing stockholders. We may not be able to operate acquired businesses profitably or otherwise implement our growth strategy successfully. If we are unable to integrate newly acquired entities or technologies effectively, our operating results could suffer. Future acquisitions by us could also result in large and immediate write-offs, the conversion of our preferred stock into common stock, incurrence of debt and contingent liabilities, or amortization of expenses related to goodwill and other intangibles, any of which could harm our operating results.
We develop products in the United States and India and sellssell these products internationally. Generally, sales are made in local currency. As a result, eGain’sour financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. To date, the effect of changes in foreign currency exchange rates on revenues and operating expenses has not been material. eGain doesWe do not currently use derivative instruments to hedge against foreign exchange risk.
Consolidated Financial Statements
June 30, 20022004 and 20012003
Index to Consolidated Financial Statements
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Board of Directors and Stockholders of
eGain Communications Corporations
Mountain View, California
We have audited the accompanying consolidated balance sheetssheet of eGain Communications Corporation as of June 30, 2002 and 2001,2004 and the related consolidated statements of operations, stockholders’ equity,deficit and comprehensive loss, and cash flows for each of the three yearsyear then ended. We have also audited the schedule listed in the period ended June 30, 2002.accompanying index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our auditsaudit in accordance with auditingthe standards generally accepted inof the United States.Public Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eGain Communications Corporation at June 30, 2004, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein.
As discussed in Note 3 to the consolidated financial statements, effective July 1, 2002, eGain Communications Corporation adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
/s/ BDO Seidman, LLP
San Francisco, California
August 5, 2004
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
eGain Communications Corporation
We have audited the accompanying consolidated balance sheet of eGain Communications Corporation as of June 30, 2003 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended June 30, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15 for the two years in the period ended June 30, 2003. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in all material respects, the consolidated financial position of eGain Communications Corporation at June 30, 2002 and 2001,2003 and the consolidated results of its operations and its cash flows for each of the threetwo years in the period ended June 30, 2002,2003, in conformity with accounting principlesU.S. generally accepted accounting principles. Also, in our opinion, the United States.
The accompanying financial statements have been prepared assuming that eGain Communications Corporation will continue as a going concern. As more fully described in Note 1, the Company has incurred significant operating losses and negative cash flows since inception. The Company has not achieved profitability and may not be able to realize sufficient revenues to achieve or sustain profitability in the future. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in fiscal 2003.
/s/ ErnstERNST & Young YOUNGLLP
Palo Alto, California
August 7, 2002
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30, | ||||||||
2002 | 2001 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 9,892 | $ | 42,613 | ||||
Accounts receivable, less allowance for doubtful accounts of $560 and $1,398 at June 30, 2002 and 2001, respectively | 4,968 | 13,803 | ||||||
Prepaid and other current assets | 4,472 | 7,365 | ||||||
Total current assets | 19,332 | 63,781 | ||||||
Property and equipment, net | 5,736 | 11,677 | ||||||
Goodwill, net | 4,130 | 74,616 | ||||||
Intangible assets, net | 4,087 | 6,890 | ||||||
Other assets | 2,259 | 1,187 | ||||||
$ | 35,544 | $ | 158,151 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 3,176 | $ | 5,397 | ||||
Accrued compensation | 2,494 | 6,309 | ||||||
Accrued liabilities | 5,278 | 3,395 | ||||||
Accrued acquisition-related costs | — | 65 | ||||||
Deferred revenue | 3,555 | 5,438 | ||||||
Current portion of bank borrowings | 1,999 | 4,268 | ||||||
Current portion of notes payable | 156 | 199 | ||||||
Current portion of capital lease obligations | 393 | 952 | ||||||
Total current liabilities | 17,051 | 26,023 | ||||||
Bank borrowings, net of current portion | 779 | 1,167 | ||||||
Notes payable, net of current portion | — | 161 | ||||||
Capital lease obligations, net of current portion | 52 | 392 | ||||||
Other long term liabilities | 2,193 | 597 | ||||||
Total liabilities | 20,075 | 28,340 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Series A Cumulative Convertible Preferred stock: $0.001 par value; 0.890 shares authorized, 0.885 issued and outstanding at June 30, 2002 and 2001; aggregate liquidation preference of $100,379 at June 30, 2002 | 94,481 | 88,034 | ||||||
Common stock, $0.001 par value, 100,000 shares authorized, 36,655 and 36,439 shares issued and outstanding at June 30, 2002 and 2001 | 37 | 36 | ||||||
Additional paid-in capital | 220,398 | 227,375 | ||||||
Notes receivable from stockholders | (103 | ) | (380 | ) | ||||
Deferred stock compensation | (257 | ) | (1,844 | ) | ||||
Accumulated other comprehensive gain (loss) | 59 | (84 | ) | |||||
Accumulated deficit | (299,146 | ) | (183,326 | ) | ||||
Total shareholders’ equity | 15,469 | 129,811 | ||||||
$ | 35,544 | $ | 158,151 | |||||
June 30, | ||||||||
2004 | 2003 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 5,181 | $ | 4,407 | ||||
Restricted cash | 12 | 791 | ||||||
Accounts receivable, less allowance for doubtful accounts of $138 and $185 at June 30, 2004 and 2003, respectively | 2,876 | 3,270 | ||||||
Prepaid and other current assets | 1,408 | 2,897 | ||||||
Total current assets | 9,477 | 11,365 | ||||||
Property and equipment, net | 473 | 1,192 | ||||||
Goodwill | 4,880 | 4,880 | ||||||
Intangible assets, net | — | 1,204 | ||||||
Other assets | 331 | 397 | ||||||
$ | 15,161 | $ | 19,038 | |||||
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 1,036 | $ | 1,486 | ||||
Accrued compensation | 765 | 864 | ||||||
Accrued liabilities | 1,335 | 1,918 | ||||||
Deferred revenue | 3,731 | 4,333 | ||||||
Current portion of accrued restructuring | 86 | 1,194 | ||||||
Bank borrowings | 506 | 1,649 | ||||||
Current portion of notes payable | — | 78 | ||||||
Current portion of capital lease obligations | 9 | 15 | ||||||
Total current liabilities | 7,468 | 11,537 | ||||||
Related party notes payable | 6,607 | 1,964 | ||||||
Capital lease obligations, net of current portion | — | 10 | ||||||
Accrued restructuring, net of current portion | 1,264 | 1,203 | ||||||
Other long term liabilities | 242 | 243 | ||||||
Total liabilities | 15,581 | 14,957 | ||||||
Commitments and contingencies (notes 8 and 13) | ||||||||
Stockholders’ (deficit) equity: | ||||||||
Series A Cumulative Convertible Preferred stock: $0.001 par value; 0.890 shares authorized, 0.885 issued and outstanding at June 30, 2004 and 2003; aggregate liquidation preference of $114,652 at June 30, 2004 | 108,755 | 101,371 | ||||||
Common stock, $0.001 par value, 100,000 shares authorized, 3,696 and 3,668 shares issued and outstanding at June 30, 2004 and 2003 | 4 | 37 | ||||||
Additional paid-in capital | 206,721 | 213,620 | ||||||
Notes receivable from stockholders | (94 | ) | (102 | ) | ||||
Deferred stock compensation | — | (38 | ) | |||||
Accumulated other comprehensive gain (loss) | (290 | ) | (185 | ) | ||||
Accumulated deficit | (315,516 | ) | (310,622 | ) | ||||
Total shareholders’ (deficit) equity | (420 | ) | 4,081 | |||||
$ | 15,161 | $ | 19,038 | |||||
See accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share information)
Years Ended June 30, | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Revenue: | ||||||||||||
Hosting | $ | 5,624 | $ | 10,549 | $ | 3,534 | ||||||
License | 10,015 | 24,285 | 5,053 | |||||||||
Services | 14,790 | 18,603 | 4,775 | |||||||||
Total revenue | 30,429 | 53,437 | 13,362 | |||||||||
Cost of revenue—direct | 16,861 | 29,402 | 14,550 | |||||||||
Cost of revenue—acquisition related | 1,448 | 1,448 | 103 | |||||||||
Gross profit (loss) | 12,120 | 22,587 | (1,291 | ) | ||||||||
Operating costs and expenses: | ||||||||||||
Research and development | 11,395 | 22,877 | 11,752 | |||||||||
Sales and marketing | 25,147 | 46,995 | 27,893 | |||||||||
General and administrative | 8,940 | 16,389 | 7,211 | |||||||||
Impairment of long-lived assets | 36,779 | — | — | |||||||||
Amortization of goodwill and other intangible assets | 35,064 | 36,816 | 10,945 | |||||||||
Amortization of deferred compensation | 961 | 3,291 | 10,553 | |||||||||
Restructuring | 8,964 | 1,443 | 71 | |||||||||
Total operating costs and expenses | 127,250 | 127,811 | 68,425 | |||||||||
Loss from operations | (115,130 | ) | (105,224 | ) | (69,716 | ) | ||||||
Interest income | 650 | 3,417 | 2,047 | |||||||||
Interest and other expenses | (1,340 | ) | (845 | ) | (762 | ) | ||||||
Net loss | (115,820 | ) | (102,652 | ) | (68,431 | ) | ||||||
Dividends on convertible preferred stock | (6,447 | ) | (5,433 | ) | — | |||||||
Beneficial conversion feature on convertible preferred stock | (43,834 | ) | (19,335 | ) | — | |||||||
Net loss applicable to common stockholders | $ | (166,101 | ) | $ | (127,420 | ) | $ | (68,431 | ) | |||
Per share information: | ||||||||||||
Basic and diluted net loss per common share | $ | (4.58 | ) | $ | (3.62 | ) | $ | (2.92 | ) | |||
Shares used in computing basic and diluted net loss per common share | 36,229 | 35,164 | 23,440 | |||||||||
Years Ended June 30, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Revenue: | ||||||||||||
License | $ | 4,058 | $ | 6,095 | $ | 10,015 | ||||||
Support and Services | 15,545 | 15,989 | 20,414 | |||||||||
Total revenue | 19,603 | 22,084 | 30,429 | |||||||||
Cost of license | 1,646 | 1,772 | 858 | |||||||||
Cost of support and services | 6,462 | 8,738 | 16,003 | |||||||||
Cost of revenue—acquisition related | — | 827 | 1,448 | |||||||||
Gross profit (loss) | 11,495 | 10,747 | 12,120 | |||||||||
Operating costs and expenses: | ||||||||||||
Research and development | 2,942 | 5,869 | 11,395 | |||||||||
Sales and marketing | 8,284 | 9,598 | 25,147 | |||||||||
General and administrative | 3,447 | 4,816 | 8,940 | |||||||||
Impairment of long-lived assets | — | — | 36,779 | |||||||||
Amortization of goodwill | — | — | 33,212 | |||||||||
Amortization of other intangible assets | 1,203 | 1,307 | 1,852 | |||||||||
Amortization of deferred compensation | — | 157 | 961 | |||||||||
Restructuring and other | 23 | 620 | 8,964 | |||||||||
Total operating costs and expenses | 15,899 | 22,367 | 127,250 | |||||||||
Loss from operations | (4,404 | ) | (11,620 | ) | (115,130 | ) | ||||||
Interest income | 16 | 76 | 601 | |||||||||
Interest expense and other income (expense) | (506 | ) | 68 | (1,291 | ) | |||||||
Net loss | (4,894 | ) | (11,476 | ) | (115,820 | ) | ||||||
Dividends on convertible preferred stock | (7,384 | ) | (6,890 | ) | (6,447 | ) | ||||||
Beneficial conversion feature on convertible preferred stock | — | — | (43,834 | ) | ||||||||
Net loss applicable to common stockholders | $ | (12,278 | ) | $ | (18,366 | ) | $ | (166,101 | ) | |||
Per share information: | ||||||||||||
Basic and diluted net loss per common share | $ | (3.33 | ) | $ | (5.01 | ) | $ | (45.85 | ) | |||
Shares used in computing basic and diluted net loss per common share | 3,688 | 3,664 | 3,623 | |||||||||
See accompanying notes.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY AND COMPREHENSIVE LOSS
(in thousands)
Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Notes Receivable From Stock- holders | Deferred Stock Compen- sation | Accumulated Other Compre- hensive Income (Loss) | Accum- ulated Deficit | Total Stock- holders’ Equity | Compre- hensive Loss | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||
BALANCES AT JUNE 30, 1999 | 9,566 | $ | 10 | 10,947 | $ | 11 | $ | 41,804 | $ | (144 | ) | $ | (8,956 | ) | $ | 1 | $ | (12,243 | ) | $ | 20,483 | |||||||||||||||||||
Issuance of Series D preferred stock for cash | 652 | — | — | — | 5,152 | — | — | — | — | 5,152 | ||||||||||||||||||||||||||||||
Issuance of preferred stock upon exercise of warrants | 289 | — | — | — | 108 | — | — | — | — | 108 | ||||||||||||||||||||||||||||||
Conversion of preferred stock to common stock under initial public offering | (10,507 | ) | (10 | ) | 10,507 | 10 | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Issuance of common stock under the initial public offering, net of issuance costs of $5.983 million | — | — | 5,750 | 6 | 63,011 | — | — | — | — | 63,017 | ||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, net of repurchases | — | — | 1,746 | 2 | 489 | (331 | ) | — | — | — | 160 | |||||||||||||||||||||||||||||
Issuance of common stock under employee stock purchase plan | — | — | 75 | — | 766 | — | — | — | — | 766 | ||||||||||||||||||||||||||||||
Issuance of common stock upon exercise of warrants | — | — | 175 | — | 141 | — | — | — | — | 141 | ||||||||||||||||||||||||||||||
Issuance of common stock in connection with Big Science Company acquisition | — | — | 740 | 1 | 32,258 | — | — | — | — | 32,259 | ||||||||||||||||||||||||||||||
Issuance of common stock in connection with Inference Corporation acquisition | — | — | 5,901 | 6 | 79,351 | — | — | — | — | 79,357 | ||||||||||||||||||||||||||||||
Deferred stock compensation | — | — | — | — | 7,194 | — | (7,194 | ) | — | — | — | |||||||||||||||||||||||||||||
Amortization of deferred stock compensation . | — | — | — | — | 1,201 | — | 9,352 | — | — | 10,553 | ||||||||||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (68,431 | ) | (68,431 | ) | $ | (68,431 | ) | |||||||||||||||||||||||||
Unrealized loss on debt and equity securities | — | — | — | — | — | — | — | (163 | ) | — | (163 | ) | (163 | ) | ||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | — | (31 | ) | — | (31 | ) | (31 | ) | ||||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | — | — | — | — | $ | (68,625 | ) | |||||||||||||||||||||||||||
BALANCES AT JUNE 30, 2000 | — | $ | — | 35,841 | $ | 36 | $ | 231,475 | $ | (475 | ) | $ | (6,798 | ) | $ | (193 | ) | $ | (80,674 | ) | $ | 143,371 | ||||||||||||||||||
Issuance of convertible preferred stock, net of issuance costs | 1 | 82,601 | — | — | — | — | — | — | — | 82,601 | ||||||||||||||||||||||||||||||
Dividends on convertible preferred stock | — | 5,433 | — | — | (5,433 | ) | — | — | — | — | — | |||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, net of repurchases | — | — | 210 | — | 1,410 | 95 | — | — | — | 1,505 | ||||||||||||||||||||||||||||||
Issuance of common stock under employee stock purchase plan | — | — | 388 | — | 1,544 | — | — | — | — | 1,544 | ||||||||||||||||||||||||||||||
Deferred stock compensation | — | — | — | — | (1,745 | ) | — | 1,745 | — | — | — | |||||||||||||||||||||||||||||
Amortization of deferred stock compensation | — | — | — | — | 124 | — | 3,209 | — | — | 3,333 | ||||||||||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (102,652 | ) | (102,652 | ) | $ | (102,652 | ) | |||||||||||||||||||||||||
Unrealized gain on debt and equity securities | — | — | — | — | — | — | — | 163 | — | 163 | 163 | |||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | — | (54 | ) | — | (54 | ) | (54 | ) | ||||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | — | — | — | — | $ | (102,543 | ) | |||||||||||||||||||||||||||
BALANCES AT JUNE 30, 2001 | 1 | $ | 88,034 | 36,439 | $ | 36 | $ | 227,375 | $ | (380 | ) | $ | (1,844 | ) | $ | (84 | ) | $ | (183,326 | ) | $ | 129,811 | ||||||||||||||||||
Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Notes Receivable From Stock- holders | Deferred Stock Compen- sation | Accumulated Other Compre- hensive Income (Loss) | Accum- Deficit | Total Stock- | Compre- Loss | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||
BALANCES AT JUNE 30, 2001 | 1 | $ | 88,034 | 3,644 | $ | 36 | $ | 227,375 | $ | (380 | ) | $ | (1,844 | ) | $ | (84 | ) | $ | (183,326 | ) | $ | 129,811 | |||||||||||||||||
Issuance of convertible preferred stock, net of issuance costs | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Dividends on convertible preferred stock | — | 6,447 | — | — | (6,447 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, net of repurchases | — | — | (7 | ) | — | (127 | ) | 277 | — | — | — | 150 | |||||||||||||||||||||||||||
Issuance of common stock under employee stock purchase plan | — | — | 29 | 1 | 223 | — | — | — | — | 224 | |||||||||||||||||||||||||||||
Deferred stock compensation | — | — | — | — | (703 | ) | — | 703 | — | — | — | ||||||||||||||||||||||||||||
Amortization of deferred stock compensation | — | — | — | — | 77 | — | 884 | — | — | 961 | |||||||||||||||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (115,820 | ) | (115,820 | ) | $ | (115,820 | ) | ||||||||||||||||||||||||
Unrealized gain on debt and equity securities | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | — | 143 | — | 143 | 143 | ||||||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | — | — | — | — | $ | (115,677 | ) | ||||||||||||||||||||||||||
BALANCES AT JUNE 30, 2002 | 1 | $ | 94,481 | 3,666 | $ | 37 | $ | 220,398 | $ | (103 | ) | $ | (257 | ) | $ | 59 | $ | (299,146 | ) | $ | 15,469 | ||||||||||||||||||
Issuance of convertible preferred stock, net of issuance costs | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Dividends on convertible preferred stock | — | 6,890 | — | — | (6,890 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, net of repurchases | — | — | 2 | — | 1 | 1 | — | — | — | 2 | |||||||||||||||||||||||||||||
Issuance of common stock under employee stock purchase plan | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Warrant on related party notes | — | — | — | — | 173 | — | — | — | — | 173 | |||||||||||||||||||||||||||||
Deferred stock compensation | — | — | — | — | (62 | ) | — | 62 | — | — | — | ||||||||||||||||||||||||||||
Amortization of deferred stock compensation | — | — | — | — | — | — | 157 | — | — | 157 | |||||||||||||||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (11,476 | ) | (11,476 | ) | $ | (11,476 | ) | ||||||||||||||||||||||||
Unrealized gain on debt and equity securities | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | — | (244 | ) | — | (244 | ) | (244 | ) | |||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | — | — | — | — | $ | (11,720 | ) | ||||||||||||||||||||||||||
BALANCES AT JUNE 30, 2003 | 1 | $ | 101,371 | 3,668 | $ | 37 | $ | 213,620 | $ | (102 | ) | $ | (38 | ) | $ | (185 | ) | $ | (310,622 | ) | $ | 4,081 | |||||||||||||||||
eGAIN COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—(DEFICIT) EQUITY AND COMPREHENSIVE LOSS—(Continued)
(in thousands)
Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Notes Receivable From Stockholders | Deferred Stock Compensation | Accumulated Other Comprehensive Income (Loss) | Accum- ulated Deficit | Total Stock- holders’ Equity | Compre- hensive Loss | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||
BALANCES AT JUNE 30, 2001 | — | $ | 88,034 | 36,439 | $ | 36 | $ | 227,375 | $ | (380 | ) | $ | (1,844 | ) | $ | (84 | ) | $ | (183,326 | ) | $ | 129,811 | |||||||||||||||||
Issuance of convertible preferred stock, net of issuance costs | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Dividends on convertible preferred stock | — | 6,447 | — | — | (6,447 | ) | — | — | — | — | — | ||||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, net of repurchases | — | — | (71 | ) | — | (127 | ) | 277 | — | — | — | 150 | |||||||||||||||||||||||||||
Issuance of common stock under employee stock purchase plan | — | — | 287 | 1 | 223 | — | — | — | — | 224 | |||||||||||||||||||||||||||||
Deferred stock compensation | — | — | — | — | (703 | ) | — | 703 | — | — | — | ||||||||||||||||||||||||||||
Amortization of deferred stock compensation | — | — | — | — | 77 | — | 884 | — | — | 961 | |||||||||||||||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (115,820 | ) | (115,820 | ) | $ | (115,820 | ) | ||||||||||||||||||||||||
Unrealized gain on debt and equity securities | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | — | 143 | — | 143 | 143 | ||||||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | — | — | — | — | $ | (115,677 | ) | ||||||||||||||||||||||||||
BALANCES AT JUNE 30, 2002 | 1 | $ | 94,481 | 36,655 | $ | 37 | $ | 220,398 | $ | (103 | ) | $ | (257 | ) | $ | 59 | $ | (299,146 | ) | $ | 15,469 | ||||||||||||||||||
Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Notes Receivable From Stock- holders | Deferred Stock Compen- sation | Accumulated Other Compre- hensive Income (Loss) | Accum- Deficit | Total Stock- holders’ Equity | Compre- hensive Loss | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||
Issuance of convertible preferred stock, net of issuance costs | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Adjustment due to stock split | — | — | — | (33 | ) | 33 | — | — | — | — | — | |||||||||||||||||||||||||||
Dividends on convertible preferred stock | — | 7,384 | — | — | (7,384 | ) | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock upon exercise of stock options, net of repurchases | — | — | 15 | — | 50 | 8 | — | — | — | 58 | ||||||||||||||||||||||||||||
Issuance of common stock under employee stock purchase plan | — | — | 13 | — | 22 | — | — | — | — | 22 | ||||||||||||||||||||||||||||
Warrant on related party notes | — | — | — | — | 418 | — | — | — | — | 418 | ||||||||||||||||||||||||||||
Deferred stock compensation | — | — | — | — | (38 | ) | — | 38 | — | — | — | |||||||||||||||||||||||||||
Amortization of deferred stock compensation | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Comprehensive loss: | ||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (4,894 | ) | (4,894 | ) | $ | (4,894 | ) | |||||||||||||||||||||||
Unrealized gain on debt and equity securities | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | — | (105 | ) | — | (105 | ) | (105 | ) | ||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | — | — | — | — | $ | (4,999 | ) | |||||||||||||||||||||||||
BALANCES AT JUNE 30, 2004 | 1 | $ | 108,755 | 3,696 | $ | 4 | $ | 206,721 | $ | (94 | ) | $ | — | $ | (290 | ) | $ | (315,516 | ) | $ | (420 | ) | ||||||||||||||||
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended June 30, | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (115,820 | ) | $ | (102,652 | ) | $ | (68,431 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation | 6,852 | 6,007 | 1,887 | |||||||||
Loss on disposal of fixed assets | 1,846 | 138 | — | |||||||||
Impairment of long-lived assets | 36,779 | — | — | |||||||||
Amortization of goodwill and other intangible assets | 36,510 | 38,264 | 11,048 | |||||||||
Amortization of deferred compensation. | 961 | 3,333 | 10,553 | |||||||||
Purchased in-process research and development. | — | — | 345 | |||||||||
Interest expense associated with warrants | — | — | 22 | |||||||||
Changes in operating assets and liabilities, net of effects from acquisition of eGain Communications Pvt. Ltd.: | ||||||||||||
Accounts receivable | 8,835 | (5,214 | ) | (3,102 | ) | |||||||
Prepaid and other current assets | (543 | ) | (2,819 | ) | (2,660 | ) | ||||||
Other assets | 1,603 | 157 | (761 | ) | ||||||||
Accounts payable | (2,221 | ) | 51 | 3,700 | ||||||||
Accrued compensation | (3,815 | ) | (2,200 | ) | 4,588 | |||||||
Other accrued liabilities | 1,818 | (4,388 | ) | 2,012 | ||||||||
Deferred revenue | (1,883 | ) | (1,848 | ) | 2,145 | |||||||
Other liabilities | 1,596 | 468 | 102 | |||||||||
Net cash used in operating activities | (27,483 | ) | (70,703 | ) | (38,552 | ) | ||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property and equipment | (1,966 | ) | (4,885 | ) | (8,652 | ) | ||||||
Net cash assumed in (paid for) acquisitions | — | (806 | ) | 7,391 | ||||||||
Purchases of short-term securities | — | — | (26,546 | ) | ||||||||
Proceeds from sale of property and equipment | 12 | 74 | — | |||||||||
Proceeds from sale of short-term securities | — | 3,154 | 23,392 | |||||||||
Net cash used in investing activities | (1,954 | ) | (2,463 | ) | (4,415 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Payments on borrowings | (7,013 | ) | (307 | ) | (555 | ) | ||||||
Payments on capital lease obligations | (940 | ) | (1,288 | ) | (263 | ) | ||||||
Proceeds from borrowings | 4,152 | 4,577 | 408 | |||||||||
Net proceeds from issuance of preferred stock | — | 82,601 | 5,152 | |||||||||
Net proceeds from issuance of common stock | 374 | 3,049 | 64,192 | |||||||||
Net cash (used in) provided by financing activities | (3,427 | ) | 88,632 | 68,934 | ||||||||
Effect of exchange rate differences on cash | 142 | (54 | ) | (31 | ) | |||||||
Net increase (decrease) in cash and cash equivalents | (32,721 | ) | 15,412 | 25,936 | ||||||||
Cash and cash equivalents at beginning of year | 42,613 | 27,201 | 1,265 | |||||||||
Cash and cash equivalents at end of year | $ | 9,892 | $ | 42,613 | $ | 27,201 | ||||||
Supplemental cash flow disclosures: | ||||||||||||
Cash paid for interest | $ | 422 | $ | 377 | $ | 278 | ||||||
Cash paid for income taxes | — | — | 279 | |||||||||
Equipment acquired under capital leases | 41 | 787 | 2,108 | |||||||||
Deferred compensation on stock options | (703 | ) | (1,745 | ) | 7,194 | |||||||
Net unrealized gain (loss) on debt and equity securities | — | 163 | (163 | ) | ||||||||
Conversion of line of credit to term loan | — | 1,000 | — |
Years Ended June 30, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (4,894 | ) | $ | (11,476 | ) | $ | (115,820 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation | 1,060 | 3,940 | 6,852 | |||||||||
Loss / (gain) on disposal of fixed assets | (163 | ) | 334 | 1,846 | ||||||||
Impairment of long-lived assets | — | — | 36,779 | |||||||||
Amortization of goodwill | — | — | 33,209 | |||||||||
Amortization of other intangible assets | 1,204 | 2,133 | 3,300 | |||||||||
Amortization of deferred compensation. | — | 157 | 961 | |||||||||
Accrued interest and amortization of discount on related party notes | 560 | 137 | — | |||||||||
Changes in operating assets and liabilities | ||||||||||||
Restricted cash | 779 | (791 | ) | — | ||||||||
Accounts receivable | 394 | 1,698 | 8,835 | |||||||||
Prepaid and other current assets | 1,489 | 1,575 | (543 | ) | ||||||||
Other assets | 66 | 1,862 | 1,603 | |||||||||
Accounts payable | (450 | ) | (1,690 | ) | (2,221 | ) | ||||||
Accrued compensation | (99 | ) | (1,630 | ) | (3,815 | ) | ||||||
Other accrued liabilities | (583 | ) | (244 | ) | (3,057 | ) | ||||||
Accrued restructuring | (1,047 | ) | (2,698 | ) | 4,875 | |||||||
Deferred revenue | (602 | ) | 778 | (1,883 | ) | |||||||
Other liabilities | (1 | ) | 29 | 1,596 | ||||||||
Other | 1 | — | — | |||||||||
Net cash used in operating activities | (2,286 | ) | (5,886 | ) | (27,483 | ) | ||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property and equipment | (217 | ) | (96 | ) | (1,966 | ) | ||||||
Proceeds from sale of property and equipment | 39 | 366 | 12 | |||||||||
Net cash (used in) provided by investing activities | (178 | ) | 270 | (1,954 | ) | |||||||
Cash flows from financing activities: | ||||||||||||
Payments on borrowings | (3,324 | ) | (3,366 | ) | (7,013 | ) | ||||||
Payments on capital lease obligations | (16 | ) | (420 | ) | (940 | ) | ||||||
Proceeds from borrowings | 2,103 | 2,159 | 4,152 | |||||||||
Proceeds from related party notes payable | 4,500 | 2,000 | — | |||||||||
Proceeds from issuance of common stock, net of repurchases | 80 | 2 | 374 | |||||||||
Net cash provided by (used in) financing activities | 3,343 | 375 | (3,427 | ) | ||||||||
Effect of exchange rate differences on cash | (105 | ) | (244 | ) | 143 | |||||||
Net increase (decrease) in cash and cash equivalents | 774 | (5,485 | ) | (32,721 | ) | |||||||
Cash and cash equivalents at beginning of year | 4,407 | 9,892 | 42,613 | |||||||||
Cash and cash equivalents at end of year | $ | 5,181 | $ | 4,407 | $ | 9,892 | ||||||
Supplemental cash flow disclosures: | ||||||||||||
Cash paid for interest | $ | 123 | $ | 327 | $ | 422 | ||||||
Equipment acquired under capital leases | — | — | 41 | |||||||||
Deferred compensation on stock options | — | — | (703 | ) |
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Nature of Business and Basis of Presentation
We are a leading provider of enterprise interaction management/eServicecustomer service and contact center software, used by global enterprises for over a decade. eGain Service 6™, our software suite, available through licensed or hosted models, includes integrated, best-in-class applications for customer email management, live web collaboration, virtual agent customer service, knowledge management, and web self-service. These robust applications are built on the eGain SMP™, a scalable next-generation framework that enables companiesincludes end-to-end service process management, multi-channel, multi-site contact center management, a flexible integration approach, and certified out-of-the-box integrations with leading call center and business systems.
We have prepared the condensed consolidated financial statements pursuant to transform traditional customer call centers into multi-channel eService networks. To help businesses deliver a superior customer experiencethe rules and establish profitable, long-term customer relationships, while reducing operating and technology costs, eGain offers best-of-breed applications that enable online customers to communicate through eachregulations of the three primary channels for online customer interaction—email, real-timeSecurities and self-service. Built using a 100% Web-native architecture, eGain’s comprehensive eService solutions are designed to provide robust scalability, global access, diverse integration capabilitiesExchange Commission and rapid deployment. In addition, eGain’s solution is designed to integrate with leading CRM, ERPincluded the accounts of our wholly-owned subsidiaries. All significant intercompany balances and call center systems, enabling customers to leverage investments in existing systems and providing an enterprise wide solution.
In response to realize sufficientour revenues to achieve or sustain profitability in the future. Since inception eGain experienced substantial expenditures as it grew operations and personnel. Althoughdeclining over the last fiscal year eGain hasthree years we have repeatedly taken actions to reduce its expense rates, it expectsrates. As a result of these actions our net loss from operations decreased to incur additional$4.4 million in fiscal year 2004 from $11.6 million in fiscal year 2003 and $115.1 million in fiscal year 2002. In addition, net cash used in operating losses,activities decreased to $2.3 million in fiscal 2004 from $5.9 million in fiscal year 2003 and $27.5 million in fiscal year 2002. With this progress on expense reduction and securing $4.5 million in long-term debt financing in fiscal 2004, our cash and cash equivalents increased to $5.2 million on June 30, 2004 from $4.4 million on June 30, 2003. As of June 30, 2004, we had working capital of $2.0 million, compared to a working capital deficit of $172,000 at least throughJune 30, 2003. We believe that existing capital resources will enable us to maintain current and planned operations for the second quarter of fiscal 2003 if not longer. eGain’snext 12 months. However, our working capital requirements in the foreseeable future are subject to numerous risks and will depend on a variety of factors, and assumptions, in particular, that revenue growth rates remain stablerevenues maintain at the levels achieved in fiscal year 2004 and that customers continue to pay on a timely basis, and is subject to numerous risks. If eGain does not significantly reduce its net cash outflow in the near term, as compared to fiscal 2002, eGain will require additional credit facilities, additional equity and/or debt financings and/or willwe may need to pursue strategic alternatives in fiscal year 2003. eGain is currently focusedsecure additional financing due to unforeseen or unanticipated market conditions. Such financing may be difficult to obtain on reducing its expensesterms acceptable to us and pursuing such alternatives in the near term. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Principles of Consolidation
The consolidated financial statements include the accounts of eGain and itsour wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Reclassifications
Certain prior year amounts in the consolidated financial statements have been reclassified to conform with the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates are based upon information available as of the date of the financial statements. Actual results could differ from those estimates.
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Foreign Currency Translation
The functional currency of each of eGain’sour international subsidiaries is the local currency of the country in which it operates. Assets and liabilities of eGain’sour foreign subsidiaries are translated at month-end exchange rates, and revenues and expenses are translated at the average monthly exchange rates. The resulting cumulative translation adjustments are recorded as a component of accumulated other comprehensive income. Gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations and, to date, have not been significant.
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. eGain’sAs of June 30, 2004 and 2003, all of our investments were classified as cash equivalents, which consisted of the following (in thousands):
June 30, | ||||||
2002 | 2001 | |||||
Cash | $ | 2,623 | $ | 5,154 | ||
Money market funds | 4 | 1,425 | ||||
Certificates of deposit | 3,500 | 250 | ||||
Commercial paper | 3,765 | 35,784 | ||||
$ | 9,892 | $ | 42,613 | |||
June 30, | ||||||
2004 | 2003 | |||||
Cash | $ | 5,181 | $ | 4,159 | ||
Money market funds | — | 2 | ||||
Certificates of deposit | — | — | ||||
Commercial paper | — | 246 | ||||
$ | 5,181 | $ | 4,407 | |||
Restricted Cash
On September 20, 2002, we entered into a new accounts receivable purchase agreement with Silicon Valley Bank (“SVB”) (see note 6 to Consolidated Financial Statements), as part of this agreement a new loan facility in the amount of $2.6 million was secured by establishing a restricted certificate of deposit in the amount of $2.6 million. This restricted certificate of deposit is recorded as Restricted Cash. The amount of the restricted certificate of deposit is reduced as scheduled amortization payments on the term loan are made and as of February 29, 2004, the term loan was paid in full.
Collateralized Receivables
On September 20, 2002, eGain entered into an accounts receivable purchase agreement (the “AR Facility”) with SVB. The AR Facility originally provided for the sale of up to $5.0 million in certain qualified receivables. On March 25, 2003, eGain entered into a new modification agreement that reduced the amount to $1.9 million in certain qualified receivables. On June 25, 2004, eGain entered into a new modification agreement that extended the term of the agreement. As of June 30, 2004 the outstanding balance under the AR Facility was $506,000, collateralized by $632,000 of qualified receivables.
Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and debt. eGain doesWe do not have any derivative financial instruments. eGain believesWe believe the reported carrying amounts of its financial instruments approximate fair value, based upon their short-term nature and comparable market information available at the respective balance sheet dates.
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Concentration of Credit Risk
Financial instruments that subject eGainus to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. eGain isWe are exposed to credit risk in the event of default by these institutions to the extent of the amount recorded on the balance sheet. eGain investsWe invest excess cash primarily in commercial paper and money market funds, which are highly liquid securities that bear minimal risk. In addition, eGain haswe have investment policies and procedures that are reviewed periodically to minimize credit risk.
Our customer base extends across many different industries and geographic regions. eGain performsWe perform ongoing credit evaluations of our customers with outstanding receivables and generally doesdo not require collateral. In addition, eGain establisheswe established an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information. In the fiscal years ended June 30, 2002, 20012004, 2003 and 2000,2002, no single customer accounted for more than 10% of total revenue.
Sales to customers outside of North America accounted for $9.4 million, $10.9 million and $13.0 million of our total revenue in the fiscal years 2004, 2003 and 2002, respectively.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful life of the respective assets (3 years). Leasehold improvements are amortized over the lesser of their corresponding lease term or the estimated useful lives of the improvements (5 years).
Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS 141 “Business Combinations” and SFAS 142 “Goodwill and Other Intangible Assets.” SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. SFAS 141 also included guidance on the initial recognition and measurement of goodwill and other intangible assets are beingarising from business combinations and includes criteria that required intangible assets such as assembled workforce to be recognized as part of goodwill. As of July 1, 2002, eGain reclassified $750,000 of assembled workforce from intangibles to goodwill.
Effective July 1, 2002, we adopted SFAS No. 142 and ceased amortization of goodwill and began reviewing it annually (or more frequently if impairment indicators arise) for impairment. In addition, we evaluated our remaining purchased intangible assets to determine that all such assets have determinable lives. We operate under a single reporting unit and accordingly, all of our goodwill is associated with the entire company. Prior to the adoption of SFAS No. 142, we amortized using thegoodwill on a straight-line method.basis over its estimated useful life of three years. The amounts allocated to goodwill,purchased intangible assets including customer base and acquired technology workforce and trademark are being amortized over the assets’ estimatedasset’s useful lives,life, which rangeranges from three to four years. See Note 3 regarding
Impairment of Long-Lived Assets
In connection with the transitional goodwill impairment evaluation provisions of SFAS 142, we performed a substantialgoodwill impairment in the year ended June 30, 2002.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of July 1, 2002, in accordance with the provisions of Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets
In the fourth quarter of fiscal year 2002, in accordance with SFAS No. 121, we determined that impairment indicators were present and therefore evaluated the carrying value of our goodwill and other intangible assets. The evaluation was based on a cash flow forecast for five years ending June 30, 2007, and discounted at the assets is impaired. The reviews look forrate of 34%, which represented our estimated weighted average cost of capital. As a result of the existence of facts or circumstances, either internal or external, which indicateevaluation, we concluded that the carryingbook value of the asset cannot be recovered. Such indicators would include a lacklong-lived assets exceeded fair value by $36.8 million and accordingly, this amount was charged to operations as impairment of successful further development and integration of the acquired company’s technology into eGain’s operations, lack of market acceptance of the products and lower than expected cash flows from operations. If there is an indication of impairment and undiscounted expected future cash flows are less than the carrying amount of thelong-lived assets eGain measures the amount of the loss based on discounted expected future cash flows from the impaired assets. The cash flow calculations are based on management’s best estimates, using appropriate assumptions and projections at the time. See Note 3 regarding a substantial impairment in the year ended June 30,fourth quarter of 2002.
Revenue Recognition
We recognize revenue in accordance with Statement of Position 97-2, Software Revenue Recognition (“SOP 97-2”97- 2”), as amended. Under SOP 97-2, revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant eGain obligations remain, the fee is fixed or determinable, and collectibility is probable. License revenue in multiple element contracts is recognized using the residual method when there is vendor specific objective evidence of the fair value of all undelivered elements in an arrangement but vendor specific objective evidence of fair value does not exist for one or more of the delivered elements in an arrangement. Under the residual method, the total fair value of the undelivered elements, as indicated by vendor specific objective evidence, is deferred and the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. If sufficient vendor-specific objective evidence does not exist for undelivered elements in an arrangement, all revenue from the arrangement is deferred until the earlier of the point at which (a) such sufficient vendor-specific objective evidence does exist for the undelivered elements or (b) all elements of the arrangement without sufficient vendor-specific objective evidence have been delivered.
Support and service revenue is primarily derived from hosting services, consulting fees, maintenance agreements, and training. Revenue from hosting services is recognized ratably over the period of the agreement as services are provided. Hosting agreements are typically for a period of one year and automatically renew unless either party cancels the agreement.
In all cases, eGain assesseswe assess whether the service element of the arrangement is essential to the functionality of the other elements of the arrangement. In this determination, eGain focuseswe focus on whether the services include significant alterations to the features and functionality of the software, whether the services involve the building of complex interfaces, the timing of payments and the existence of milestones. In making this determination, eGain considerswe consider the following: (1) the relative fair value of the services compared to the software, (2) the amount of time and effort subsequent to delivery of the software until the interfaces or other modifications are completed, (3) the degree of
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
technical difficulty in building the interfaces or other modifications, and (4) any contractual cancellation, acceptance, or termination provisions for failure to complete the interfaces. In those instances where eGain determines that the service elements are essential to the other elements of the arrangement, eGain accounts for the entire arrangement in accordance with Accounting Research Bulletin (ARB) No. 45, “Long-Term
Revenue from sales to resellers are recognized either upon delivery to the reseller or on a sell-through basis, depending on the facts and circumstances of the transaction, such as our understanding of the reseller’s use of our software, the reseller’s financial status and our past experience with the particular reseller. Accordingly the decision whether to recognize revenue to resellers either upon delivery or on a sell-through basis requires significant management judgement.judgment. This judgementjudgment can materially impact the timing of revenue recognition.
Software Development Costs
We account for software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” whereby costs for the development of new software products and substantial enhancements to existing software products are included in research and development and are expensedexpense as incurred until technological feasibility has been established, at which time any additional costs are capitalized. Technological feasibility is established upon completion of the product is achieved.a working model. To date, software development costs incurred in the period between achieving technological feasibility and general availability of software have not been material and have been charged to operations as incurred.
Advertising Costs
We expense advertising costs as incurred. Total advertising expenses for the fiscal years ended June 30, 2004, 2003 and 2002 2001were $168,000, $53,000 and 2000 were $269,000, $2,629,000, $4,291,000, respectively.
Stock-Based Compensation
We account for itsour stock-based compensation arrangements with employees using the intrinsic valueintrinsic-value method as allowed underin accordance with Accounting Principles Board No. 25, (“APB 25”), Accounting for Stock Issued to Employees. Under APB 25, deferredDeferred stock-based compensation is recorded on the date of grant when the deemed fair value of the underlying common stock exceeds the exercise price for stock options. Pursuantoptions or the purchase price for the shares of common stock.
Deferred compensation is amortized on a graded vesting method over the vesting period of the individual grants. In addition, eGain records compensation expense in connection with grants of stock options to non-employees pursuant to “Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation” (“SFAS 123”). These grants are periodically revalued as they vest in accordance with SFAS 123 and “EITF 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”
As of June 30, 2004, the outstanding balance of deferred stock compensation was $0. We amortized $0, $157,000 and $884,000 of deferred compensation in fiscal years 2004, 2003 and 2002, respectively.
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
eGain has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123,148, Accounting for Stock-Based Compensation, (“SFAS 123”), eGain is required to disclose the proTransition and Disclosure. Pro forma effects on operating resultsinformation regarding net income (loss) has been determined as if eGainwe had elected to useaccounted for our employee stock options under the fair value approach to account for all of its stock-based employee compensation plans.
June 30, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
As Reported: | ||||||||||||
Net loss applicable to common stockholders | $ | (12,278 | ) | $ | (18,366 | ) | $ | (166,101 | ) | |||
Basic and diluted net loss per share | (3.33 | ) | (5.01 | ) | (45.85 | ) | ||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method | (588 | ) | (434 | ) | (3,339 | ) | ||||||
Add: Stock-based employee compensation expense included in reported net loss | 0 | 157 | 961 | |||||||||
Pro Forma: | ||||||||||||
Net loss applicable to common stockholders | $ | (12,866 | ) | $ | (18,643 | ) | $ | (168,479 | ) | |||
Basic and diluted net loss per share | (3.49 | ) | (5.09 | ) | (46.50 | ) |
Income Taxes
Income taxes are accounted for using the liability method in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS 109”). Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of differences between the carrying amounts and the tax bases of assets and liabilities.
Comprehensive Loss
eGain reports comprehensive loss and its components in accordance with Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (“SFAS 130”). Under SFAS 130, comprehensive income includes all changes in equity during a period except those resulting from investments by or distributions to owners. Total comprehensive loss for each of the three years ended June 30, 20022004 is shown in the statement of stockholders’ equity. Accumulated other comprehensive loss presented in the accompanying consolidated balance sheets at June 30, 20022004 consists solely of accumulated foreign currency translation adjustments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Net Loss Per Common Share
Basic net loss per common share is computed using the weighted-average number of shares of common stock outstanding.
The following table represents the calculation of basic and diluted net loss per common share (in thousands, except per share data):
Year ended June 30, | ||||||||||||
2002 | 2001 | 2000 | ||||||||||
Net loss applicable to common stockholders | $ | (166,101 | ) | $ | (127,420 | ) | $ | (68,431 | ) | |||
Basic and diluted: | ||||||||||||
Weighted-average common shares outstanding | 36,501 | 36,107 | 24,940 | |||||||||
Less weighted-average common shares subject to repurchase | (272 | ) | (943 | ) | (1,500 | ) | ||||||
Weighted-average common shares used in computing basic and diluted net loss per common share | 36,229 | 35,164 | 23,440 | |||||||||
Basic and diluted net loss per common share | $ | (4.58 | ) | $ | (3.62 | ) | $ | (2.92 | ) | |||
Year ended June 30, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
Net loss applicable to common stockholders | $ | (12,278 | ) | $ | (18,366 | ) | $ | (166,101 | ) | |||
Basic and diluted: | ||||||||||||
Weighted-average common shares outstanding | 3,688 | 3,666 | 3,650 | |||||||||
Less weighted-average common shares subject to repurchase | — | (2 | ) | (27 | ) | |||||||
Weighted-average common shares used in computing basic and diluted net loss per common share | 3,688 | 3,664 | 3,623 | |||||||||
Basic and diluted net loss per common share | $ | (3.33 | ) | $ | (5.01 | ) | $ | (45.85 | ) | |||
Outstanding options and warrants to purchase 6,208,000, 5,878,0001,210,660, 931,322 and 5,819,000620,800 shares of common stock at June 30, 2002, 20012004, 2003, and 2000,2002, respectively, and convertible preferred stock convertible into 17,649,0002,015,868, 1,886,050 and 1,764,900 shares of common stock at June 30, 2004, 2003 and 2002, respectively, were not included in the computation of diluted net loss per common share for the periods presented as a result of their anti-dilutive effect. Such securities could have a dilutive effect in future periods.
Segment Information
Operating segments are identified as components of an enterprise for which discrete financial information is available and regularly reviewed by the company’s chief operating decision-maker to make decisions about resources to be allocated to the segment and assess its performance. eGain’sOur chief operating decision-makers, as defined under SFAS No. 131, is itsare our executive management team. eGain’sOur chief operating decision makerdecision-maker reviews financial information presented on a consolidated basis, accompanied by separate information about operating results by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, eGain operateswe operate in one segment, the development, license, implementation and support of itsour customer service infrastructure software solutions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Information relating to eGain’sour geographic areas for the fiscal years ended June 30, 2002, 20012004, 2003 and 20002002 is as follows (in thousands):
Total Revenues | Operating Loss | Identifiable Assets | ||||||||
Year ended June 30, 2002: | ||||||||||
North America | $ | 17,393 | $ | (111,791 | ) | $ | 22,466 | |||
Europe | 11,354 | (186 | ) | 3,635 | ||||||
India | — | (2,119 | ) | 627 | ||||||
Asia Pacific | 1,682 | (1,034 | ) | 599 | ||||||
$ | 30,429 | $ | (115,130 | ) | $ | 27,327 | ||||
Year ended June 30, 2001: | ||||||||||
North America | $ | 38,555 | $ | (98,919 | ) | $ | 69,446 | |||
Europe | 12,417 | (3,261 | ) | 6,052 | ||||||
India | — | (398 | ) | 750 | ||||||
Asia Pacific | 2,465 | (2,646 | ) | 397 | ||||||
$ | 53,437 | $ | (105,224 | ) | $ | 76,645 | ||||
Year ended June 30, 2000: | ||||||||||
North America | $ | 12,208 | $ | (68,355 | ) | $ | 50,530 | |||
Europe | 1,134 | (784 | ) | 5,696 | ||||||
India | — | — | — | |||||||
Asia Pacific | 20 | (577 | ) | 45 | ||||||
$ | 13,362 | $ | (69,716 | ) | $ | 56,271 | ||||
Total Revenues | Operating Earning (Loss) | Identifiable Assets | ||||||||
Year ended June 30, 2004: | ||||||||||
North America | $ | 10,170 | $ | (3,545 | ) | $ | 6,499 | |||
Europe | 8,750 | 1,012 | 2,812 | |||||||
India | — | (2,047 | ) | 617 | ||||||
Asia Pacific | 683 | 176 | 353 | |||||||
$ | 19,603 | $ | (4,404 | ) | $ | 10,281 | ||||
Year ended June 30, 2003: | ||||||||||
North America | $ | 11,223 | $ | (9,319 | ) | $ | 8,237 | |||
Europe | 9,983 | 525 | 3,716 | |||||||
India | — | (2,407 | ) | 550 | ||||||
Asia Pacific | 878 | (419 | ) | 451 | ||||||
$ | 22,084 | $ | (11,620 | ) | $ | 12,954 | ||||
Year ended June 30, 2002: | ||||||||||
North America | $ | 17,393 | $ | (111,791 | ) | $ | 22,466 | |||
Europe | 11,354 | (186 | ) | 3,635 | ||||||
India | — | (2,119 | ) | 627 | ||||||
Asia Pacific | 1,682 | (1,034 | ) | 599 | ||||||
$ | 30,429 | $ | (115,130 | ) | $ | 27,327 | ||||
New Accounting Pronouncements
In July 2001,May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 establishes how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We do not expect this statement to have a material effect on our operating results or financial position.
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which was amended by FIN 46R issued in December 2003. This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities (VIEs) that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or FASB, issued SFAS No. 141,Business Combinations, and No. 142,Goodwill and Other Intangible Assets, effective(2) for ourwhich the equity investors lack an essential characteristic of a controlling financial interest. This Interpretation applies immediately to VIEs created after January 31, 2003. It also applies in the first fiscal year beginning Julyor interim period ending after March 15, 2004, to VIEs created before February 1, 2002. Under2003 in which an enterprise holds a variable interest. FIN 46 requires disclosure of VIEs in financial statements issued after January 31, 2003, if it is reasonably possible that as of the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized buttransition date: (1) the company will be subject to annual impairment teststhe primary beneficiary of an existing VIE that will require consolidation or, (2) the company will hold a significant variable interest in, accordanceor have significant involvement with, SFAS No. 142. Other intangibles will continue to be amortized over their useful lives.an existing VIE. We will adopt SFAS No. 142 inhave completed our first quarterreview of fiscal 2003. Upon adoption, we will stop the amortizationrequirements of goodwill and intangible assets deemed to have indefinite lives with a net carrying value of approximately $5.6 million as of June 30, 2002.FIN 46. As a result of the discontinuance of the amortization of goodwill existing as of June 30, 2002 and excluding the impact of potential impairment charges, the application of SFAS No. 142 is expected to result in an increase in our results of operations of approximately $4.9 million during fiscal 2003. During the first six months of fiscal 2003, we will perform the first of the required impairment tests of goodwill and intangible assets deemed to have indefinite lives as of July 1, 2002, using the two-step process requiredreview, no entities were identified requiring disclosure or consolidation under SFAS 142. We have not yet determined what effect these tests will have on our earnings and financial position.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. BUSINESS COMBINATIONS
In April 2001, eGain obtained final regulatory approval from the government of India to complete the acquisition of eGain Communications Private Limited (“eGain India”), formerly Nitman Software Private Limited, an ecommerce software development company located in Pune, India. Effective April 23, 2001, eGain acquired all of the outstanding capital stock of eGain India in exchange for a $921,000 cash payment and transaction costs totaling $65,000. The acquisition has been accounted for using the purchase method of accounting and the results of eGain India’s operations have been combined with those of eGain since the date of acquisition. This purchase resulted in $301,000 of goodwill which is being amortized, net of impairment charges, on a straight-line basis over a period of four years.goodwill. See Note 3 regarding a substantial impairment in the fiscal year ended June 30, 2002.
On June 29, 2000, eGain acquired all of the outstanding common stock of Inference Corporation (“Inference”), a developer of one-to-one sales, service and support solutions over the Web, for $80,100,000. eGain$80.1 million. We issued 5,900,000590,000 shares of itsour common stock in the acquisition and assumed options that can be exercised for 1,600,000161,000 shares of its common stock. The acquisition was accounted for under the purchase method of accounting and the results of Inference’s operations have been combined with those of eGain since the date of acquisition. This purchase resulted in $76,060,000$76.1 million of goodwill and other intangible assets that are being amortized, net of impairment charges, over estimated useful lives ranging from three to four years. See Note 3 regarding a substantial impairment in the year ended June 30, 2002.
On March 7, 2000, eGainwe acquired all of the assets and liabilities of Big Science Company (“Big Science”), a developer of self-service software products for $34,200,000. eGain$34.2 million. We issued 740,00074,000 shares of itsour common stock in the acquisition and assumed options that can be exercised for 50,0005,000 shares of itsour common stock. The acquisition was accounted for under the purchase method of accounting and the results of Big Science’s operations have been combined with those of eGain since the date of acquisition. This purchase resulted in $34,423,000$34.4 million of goodwill and other intangible assets that are being amortized over an estimated useful life of three years. See Note 3 regarding a substantial impairment in the fiscal year ended June 30, 2002.
In June 2001, the FASB issued SFAS 141 “Business Combinations” and SFAS 142 “Goodwill and Other Intangible Assets.” SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. SFAS 141 also included guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations and includes criteria that required intangible assets such as assembled workforce to be recognized as part of goodwill. As of July 1, 2002, eGain reclassified $750,000 of assembled workforce from intangibles to goodwill.
Effective July 1, 2002, we adopted SFAS No. 142 and ceased amortization of goodwill and began reviewing it annually (or more frequently if impairment indicators arise) for impairment. In addition, we evaluated our remaining purchased intangible assets to determine that all such assets have determinable lives. We operate under a single reporting unit and accordingly, all of our goodwill is associated with the entire company. Prior to the adoption of SFAS No. 142, we amortized goodwill on a straight-line basis over its estimated useful life of three years. The purchased intangible assets including customer base and acquired technology are being amortized over the assets’ useful life, which ranges from three to four years.
In connection with the transitional goodwill consisted of the following (in thousands):
June 30, | ||||||||
2002 | 2001 | |||||||
Goodwill | $ | 121,188 | $ | 121,188 | ||||
Customer base | 4,901 | 4,901 | ||||||
Assembled workforce | 2,255 | 2,255 | ||||||
Developed technology | 3,694 | 3,694 | ||||||
Total intangible assets including goodwill | $ | 132,038 | $ | 132,038 | ||||
Less accumulated amortization | (87,042 | ) | (50,532 | ) | ||||
Less impairment charge | (36,779 | ) | — | |||||
Intangible assets including goodwill, net | $ | 8,217 | $ | 81,506 | ||||
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of July 1, 2002, in fiscal 2003,accordance with the Company will reclassify assembled workforce to goodwill and will no longer amortize goodwill.
The following table provides a summary of the carrying amount of goodwill which includes amounts originally allocated to assembled workforce (in thousands):
June 30, 2004 | June 30, 2003 | |||||||
Gross carrying amount of goodwill after impairment charge | $ | 86,664 | $ | 86,664 | ||||
Accumulated amortization of goodwill | (81,784 | ) | (81,784 | ) | ||||
Net carrying amount of goodwill | $ | 4,880 | $ | 4,880 | ||||
Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally 3 to 4 years. The following table summarizes the carrying amount of other intangible assets that continue to be amortized and excludes amounts originally allocated to assembled workforce (in thousands):
June 30, 2004 | ||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||
Acquired customer base | $ | 4,901 | $ | (4,901 | ) | $ | — | |||
Acquired developed technology | 3,694 | (3,694 | ) | — | ||||||
Total | $ | 8,595 | $ | (8,595 | ) | $ | — | |||
June 30, 2003 | ||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||
Acquired customer base | $ | 4,901 | $ | (3,697 | ) | $ | 1,204 | |||
Acquired developed technology | 3,694 | (3,694 | ) | — | ||||||
Total | $ | 8,595 | $ | (7,391 | ) | $ | 1,204 | |||
The amortization expense on these intangible assets for the fiscal year ended June 30, 2004 was $1.2 million compared to $2.1 million for the fiscal year ended June 30, 2003 and $3.3 million for the fiscal year ended June 30, 2002. The intangible assets were fully amortized as of June 30, 2004.
Upon adoption of Statement of Financial Accounting Standards Number 142, “Goodwill and Other Intangible Assets”, (“SFAS 142”), in its fiscal year beginning July 1, 2002, we are required to present specific
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
disclosures under the transitional provisions of SFAS 142. The following table presents the loss for all periods presented, as adjusted, to exclude the amortization of goodwill (in thousands, except per share data; unaudited):
June 30, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
As Reported: | ||||||||||||
Net loss applicable to common stockholders | $ | (12,278 | ) | $ | (18,366 | ) | $ | (166,101 | ) | |||
Basic and diluted net loss per share | (3.33 | ) | (5.01 | ) | (45.85 | ) | ||||||
Add: | ||||||||||||
Amortization of goodwill | — | — | 33,212 | |||||||||
Amortization of acquired workforce intangible previously classified as purchased intangible | — | — | 750 | |||||||||
Pro Forma: | ||||||||||||
Net loss applicable to common stockholders | $ | (12,278 | ) | $ | (18,366 | ) | $ | (132,137 | ) | |||
Basic and diluted net loss per share | (3.33 | ) | (5.01 | ) | (36.47 | ) |
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, | ||||||||
2002 | 2001 | |||||||
Computers and equipment | $ | 16,143 | $ | 15,028 | ||||
Furniture and fixtures | 2,028 | 2,780 | ||||||
Leasehold improvements | 368 | 1,837 | ||||||
Total | 18,539 | 19,645 | ||||||
Accumulated depreciation and amortization | (12,803 | ) | (7,968 | ) | ||||
Property and equipment, net | $ | 5,736 | $ | 11,677 | ||||
June 30, | ||||||||
2004 | 2003 | |||||||
Computers and equipment | $ | 1,792 | $ | 14,029 | ||||
Furniture and fixtures | 195 | 1,258 | ||||||
Leasehold improvements | 239 | 653 | ||||||
Total | 2,226 | 15,940 | ||||||
Accumulated depreciation and amortization | (1,753 | ) | (14,748 | ) | ||||
Property and equipment, net | $ | 473 | $ | 1,192 | ||||
Depreciation expense was $6,852,000, $6,007,000$1.1 million, $3.9 million and $1,887,000$6.9 million for the years ended June 30, 2004, 2003 and 2002, 2001respectively. The decreased accumulated depreciation that resulted from disposal of fixed assets was $681,000 and 2000,$2.0 million at June 30, 2004 and 2003, respectively.
Included in computers and equipment at June 30, 2002, 20012004, 2003 and 20002002 are computer
5. BANK BORROWINGS ANDRELATED PARTY NOTES PAYABLE
During fiscal year 2003, we entered into a creditnote and warrant purchase agreement with Ashutosh Roy, our Chief Executive Officer, pursuant to which Mr. Roy will make loans to us evidenced by one or more subordinated secured promissory notes and will receive warrants to purchase shares of our common stock in connection with each of such loans. The five year subordinated secured promissory note bears interest at an effective annual rate of 12% due and payable upon the term of such note. We have the option to prepay each note
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
at any time subject to the prepayment penalties set forth in such note. On December 31, 2002, Mr. Roy loaned to us $2.0 million under the agreement and received warrants that allow him to purchase up to 236,742 shares at an exercise price equal to $2.11 per share. In connection with this loan, we recorded $1.83 million in related party notes payable and $173,000 of discount on the note related to the relative value of the warrants issued in the transaction that will be amortized to interest expense over the five year life of the note. The fair value of these warrants was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 2%, and a dividend yield of 0%. On October, 31, 2003, we entered into an amendment to the 2002 note and warrant purchase agreement with Mr. Roy, pursuant to which he loaned to us an additional $2.0 million and received additional warrants to purchase up to 128,766 shares at $3.88 per share. In connection with this additional loan we recorded $1.8 million in related party notes payable and $195,000 of discount on the notes related to the relative value of the warrants issued in the transaction that will be amortized to interest expense over the five year life of the note. The fair value of these warrants was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 2.25%, and a dividend yield of 0%.
On March 31, 2004, we entered into a note and warrant purchase agreement with Ashutosh Roy, our Chief Executive Officer, Oak Hill Capital Partners L.P., Oak Hill Capital Management Partners L.P., and FW Investors L.P. (the “lenders”) pursuant to which the lenders loaned to us $2.5 million evidenced by secured promissory notes and received warrants to purchase shares of our common stock in connection with such loan. The secured promissory notes have a term of five years and bear interest at an effective annual rate of 12% due and payable upon the maturity of such notes. We have the option to prepay the notes at any time subject to the prepayment penalties set forth in such notes. The warrants allow the lenders to purchase up to 312,500 shares at an exercise price of $2.00. The warrants become exercisable as to fifty percent (50%) of the warrant shares nine months after issuance of the warrants and as to one hundred percent (100%) of the warrant shares on the first anniversary of the issuance of the warrants. We recorded $2.28 million in related party notes payable and $223,000 of discount on the notes related to the relative value of the warrants issued in the transaction that will be amortized to interest expense over the five year life of the notes. The fair value of these warrants was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 1.93%, and a dividend yield of 0%. The principal and interest due on the loan as of fiscal year end 2004 was $2.4 million. As of June 30, 2004, warrants to purchase 312,500 shares of common stock were outstanding but not yet vested.
6. BANK BORROWINGS
On September 20, 2002, we entered into a new accounts receivable purchase agreement (the “AR Facility”) with Silicon Valley Bank (“SVB”). Under (see Note 6 to Consolidated Financial Statements), which replaced the credit agreement, SVB provided eGain a term loan, an equipment loan and aexisting revolving line of credit (the “SVB Credit Facilities”).credit. The AR Facility provides for the sale of up to $5.0 million in certain qualified receivables, bears interest at a rate of prime plus 5.0% per annum and carries a 0.5% monthly administrative fee. In addition, when entering into the AR Facility, we also combined the existing term loan and equipment loan with SVB into one term loan facility in the amount of $1,962,717$2.6 million. This new term loan was secured by establishing a restricted certificate of deposit and was reduced by scheduled amortization payments until the equipmentterm loan was paid in full on February 27, 2004. There are no financial or operational covenant requirements under this agreement. On March 25, 2003, we entered into a modification agreement with SVB which extended the term of the AR Facility through June 30, 2003 and revised the sale amount of $304,431, are both secured byqualified receivables from $5.0 million to $1.9 million. On June 25, 2003, we entered into a modification agreement for the assetsAR Facility with SVB that extended the term of the Company AR Facility through September 30, 2003. On September 25, 2003, we entered into a modification agreement with SVB that extended the term of the AR Facility through December 31, 2003
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
and mature on February 29,revised the interest to a rate of 7% per annum or prime plus 3% or, whichever is greater. On December 19, 2003 we entered into a modification agreement with SVB that extended the term of the AR Facility through June 30, 2004. The revolvingOn June 25, 2004, we entered into a modification agreement that extended the term of the agreement for an additional 3 months. In September 2004, we expect to enter into a new line of credit is secured byagreement with SVB, or extend the Company’s accounts receivableterm of the AR Facility. At fiscal year end 2004, the outstanding balance and matures on March 25, 2003. The aggregate maximum proceeds available under the revolving lineAR Facility was $506,000, collateralized by $632,000 of credit are $5.0 million, of which $1,432,876 was outstanding on March 27, 2002. The SVB Credit Facilities are subject to certain financial covenants and restrictions with respect to, among others, the quick ratio, liquidity, and profitability.
7. INCOME TAXES
Net loss before income taxes consisted of the following (in thousands):
June 30, | ||||||||||||
2004 | 2003 | 2002 | ||||||||||
United States | $ | (5,248 | ) | $ | (10,276 | ) | $ | (108,374 | ) | |||
Foreign | 354 | (1,200 | ) | (7,446 | ) | |||||||
Total | $ | (4,894 | ) | $ | (11,476 | ) | $ | (115,820 | ) | |||
The following table reconciles the credit facility are collateralized by certain fixed assets and bear an imputed interestfederal statutory tax rate to the effective tax rate of 13.68%. At June 30, 2002 and 2001, $156,000 and $360,000, respectively, were outstanding under the credit facility. In conjunction with the credit facility, eGain issued warrants to purchase 75,000 shares of its Series A preferred stock, which was converted into a right to purchase eGain’s common stock upon eGain’s initial public offering, at $0.8055 per share.
June 30, | |||||||||
2004 | 2003 | 2002 | |||||||
Federal statutory income tax rate | 34.0 | % | 34.0 | % | 34.0 | % | |||
Current state taxes | (0.3 | ) | — | — | |||||
Permanent items | (0.2 | ) | (0.1 | ) | — | ||||
Net change in valuation allowance | (29.1 | ) | (28.5 | ) | (14.9 | ) | |||
Effective tax rate | 4.4 | % | 5.4 | % | 19.1 | % | |||
Fiscal Year | ||
2003 | $2,155 | |
2004 | 779 | |
$2,934 | ||
As of June 30, 2002, eGain2004, we had a federal net operating loss carryforward of approximately $172,200,000. eGain$195.9 million. We also had federal research and development credit carryforwards of approximately $1,700,000.$2.0 million. The net operating loss and credit carryforwards will expire at various dates beginning in 20032005 through 2022,2024, if not utilized.
Utilization of the net operating losses and credits may be subject to a substantial limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred tax assets and liabilities reflect the net tax effects of net operating loss and credit carryforwards and of temporary differences between the carrying amounts of assets and liabilities for financial reporting and the amounts used for income tax purposes. Significant components of eGain’sour deferred tax assets and liabilities for federal and state income taxes are as follows (in thousands):
June 30, | ||||||||
2002 | 2001 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 62,400 | $ | 52,200 | ||||
Research credits | 2,800 | 1,900 | ||||||
Capitalized research and development | 1,900 | 1,400 | ||||||
Other individual immaterial items | 5,800 | 5,300 | ||||||
Total deferred tax assets | 72,900 | 60,800 | ||||||
Valuation allowance for deferred tax assets | (71,300 | ) | (55,200 | ) | ||||
Net deferred tax assets | 1,600 | 5,600 | ||||||
Deferred tax liabilities: | ||||||||
Other intangibles | (1,600 | ) | (5,600 | ) | ||||
$ | — | $ | — | |||||
June 30, | ||||||||
2004 | 2003 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 70,800 | $ | 68,900 | ||||
Research credits | 4,400 | 3,000 | ||||||
Capitalized research and development | 1,500 | 1,800 | ||||||
Other individual immaterial items | 1,300 | 2,000 | ||||||
Total deferred tax assets | 78,000 | 75,700 | ||||||
Valuation allowance for deferred tax assets | $ | (75,800 | ) | $ | (74,200 | ) | ||
Subtotal | 2,200 | 1,500 | ||||||
Deferred tax liabilities: | ||||||||
Other intangibles
| $ | (2,200 | ) | $ | (1,500 | ) | ||
Net Deferred Tax Assets | $ | — | $ | — | ||||
Current | $ | 620 | $ | 900 | ||||
Non-Current | 75,180 | 73,300 | ||||||
Total valuation allowance | $ | 75,800 | $ | 74,200 | ||||
FASB No. 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes eGain’sour historical operating performance and the reported cumulative net losses in all prior years, eGain haswe have provided a full valuation allowance against itsour net deferred tax assets.
The net valuation allowance increased by $16.1$1.5 million, $2.9 million and $24.1$16.1 million during the fiscal years ended 2004, 2003 and 2002, and 2001, respectively.
7.eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
8. LEASE COMMITMENTS
We lease our facilities under noncancelable operating leases that expire at various dates through fiscal year 2006.2011. Rent expense for facilities under operating leases was $5,142,000, $5,364,000$1.3 million, $1.8 million and $1,553,000$5.1 million for the fiscal years ended June 30, 2002, 20012004, 2003 and 2000,2002, respectively. In addition, eGainwe generated sublease rental income of $839,000$162,000 and $370,000 for the year ended June 30, 2002. eGainfiscal years 2004 and 2003, respectively. We also leaseslease certain computer hardware and software under capital leases that expire at various dates through fiscal year 2005. A summary of future minimum lease payments is as follows (in thousands):
Fiscal Year | Capital Leases | Operating Leases | |||||
2003 | $ | 431 | $ | 4,671 | |||
2004 | 47 | 3,113 | |||||
2005 | 10 | �� | 2,058 | ||||
2006 | — | 31 | |||||
2007 | — | ||||||
Total minimum lease payments | 488 | $ | 9,873 | ||||
Less amount representing imputed interest | (43 | ) | |||||
Present value of net minimum capital lease payments | 445 | ||||||
Less current portion | (393 | ) | |||||
Capital leases, excluding current portion | $ | 52 | |||||
Fiscal Year | Capital Leases | Operating Leases | |||||
2005 | $ | 10 | $ | 657 | |||
2006 | — | 560 | |||||
2007 | — | 574 | |||||
2008 | — | 437 | |||||
2009 | — | 171 | |||||
Thereafter | — | 343 | |||||
Total minimum lease payments | 10 | $ | 2,742 | ||||
Less amount representing imputed interest | (1 | ) | |||||
Present value of net minimum capital lease payments | 9 | ||||||
Less current portion | (9 | ) | |||||
Capital leases, excluding current portion | $ | — | |||||
8.9. EMPLOYEE BENEFIT PLANS
We sponsor an employee savings and retirement plan (the “401(k) Plan”) as allowed under Section 401(k) of the Internal Revenue Code. The 401(k) Plan is available to all domestic employees who meet minimum age and service requirements, and provides employees with tax deferred salary deductions and alternative investment options. Employees may contribute up to 20%60% of their salary, subject to certain limitations. eGain, at the discretion of its Board of Directors, may make contributions to the 401(k) Plan. eGain hasWe have not contributed to the 401(k) Plan since its inception.
9.10. STOCKHOLDERS’ EQUITY
Convertible Preferred Stock
On August 8, 2000, eGainwe issued 35.11 shares of non-voting Series A Cumulative Convertible Preferred Stock (“Series A”), $100,000 stated value per share, and 849.89 shares of non-voting Series B Cumulative Convertible Preferred Stock (“Series B”), $100,000 stated value per share in a private placement to certain investors. The Series B shares automatically converted into Series A shares upon stockholder approval on November 20, 2000 at the annual stockholders meeting. In addition, the investors received warrants to purchase approximately 3,826,000382,600 shares of eGain’sour common stock (the “Warrants”). The total proceeds of the offering were $88,500,000.$88.5 million. The Series A shares have a liquidation preference of $100,000 per share which increases on a daily basis at an annual rate of 6.75% from August 8, 2000, compounded on a semi-annual basis. The Series A aggregate liquidation
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
preference was $100,379,000$114.7 million at June 30, 2002.2004. In the event of a liquidation, dissolution or winding up of eGain,our operations, before any distribution or payment to holders of common stock, Series A stockholders shall be entitled to be paid the greater of (i) the liquidation value, or (ii) an amount equal to the amount that Series A stock holdersstockholders would be entitled to receive if they had converted their shares to common stock immediately prior to the record date in connection with such liquidation, dissolution or winding up. A consolidation, merger or other business combination resulting in the holders of the issued and outstanding voting securities immediately prior to such transaction owning or controlling a majority of the voting securities of the continuing or surviving entity immediately following such transaction shall not be deemed to be a liquidation, dissolution or winding up (unless in connection therewith, the liquidation of eGainus is specifically approved). The Series A stockholders are entitled to cash dividends only when and if declared by the board of directors. The Series A shares are convertible at the option of the holder into common stock at any time.
Pursuant to the terms and conditions of the Series A agreement, on August 8, 2001, the conversion price of the Series A shares underwent a reset from the original conversion price of $9.2517$92.517 per share to $5.6875$56.875 per share. As a result of this adjustment of the conversion price, the currently outstanding Series A shares were convertible into approximately 16,635,000166,000 shares of common stock as of August 8, 2001. In addition, on August 8, 2001, pursuant to the terms and conditions of the Warrant agreement, the exercise price of the Warrants underwent an adjustment from the original exercise price of $9.2517$92.517 per share to $5.6875$56.875 per share. This adjustment to the exercise price of the Warrants will not result in the issuance of additional warrants or shares of common stock upon the exercise of the Warrants.
The net cash proceeds of the offering, after expenses, were $82,601,000.$82.6 million. In order to determine whether a beneficial conversion feature existed in connection with the offering, the proceeds were discounted by $25,300,000,$25.3 million, representing the valuation of the 3,826,000382,600 warrants issued in connection with the sale of Series A and B shares. After reducing the proceeds by the value of the warrants, the remaining proceeds were used to
We have the option to convert the Series A shares into common stock after August 8, 2003 if the closing bid price of eGain’sour common stock on 20 of the 30 consecutive trading days prior to the date of notice requesting conversion is equal to or greater than 250% of the initial conversion price (or $23.13$231.30 per share). If not sooner converted, on August 8, 2005 eGainwe must either, at itsour option, redeem the Series A shares for cash or convert the Series A shares into common stock at a price per share equal to 95% of the average closing bid price per share of eGain’sour common stock on the 20 consecutive trading days immediately prior to the redemption date.
Accrued dividends, representing the increase in liquidation value at the rate of 6.75% per annum, are charged against additional paid-in capital and are included in net loss applicable to common stockholders. InFor of the yearfiscal years ended June 30, 2004, 2003 and 2002, accrued dividends were $6,447,000.
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Common Stock
On September 28, 1999, eGain completed an initial public offering in which it sold 5,000,000500,000 shares of common stock at $12.00$120.00 per share for net proceeds of $54,700,000.$54.7 million. In October 1999, the underwriters exercised an over-allotment option of 750,00075,000 shares resulting in net proceeds of $8,300,000.
Certain option holders have exercised options to purchase shares of restricted common stock in exchange for five-year, full recourse promissory notes. The notes bear interest ranging from 5.0% to 6.0% and expire at various dates through June 2004. eGain has the right to repurchase all unvested shares at the original exercise price upon employee termination. The number of shares subject to this repurchase right decreases as the shares vest under the original option terms, generally four years. There were 75,940no shares subject to repurchase at June 30, 2004 and 485,0002003, and 7,594 and 48,500 shares subject to repurchase at June 30, 2002 and 2001, respectively.
We have reserved shares of common stock for issuance at June 30, 2004 as follows:
Stock Options: | ||
Options outstanding | 462,519 | |
Reserved for future grants | 367,181 | |
Employee Stock Purchase Plan | 111,987 | |
Warrants | 1,060,641 | |
Conversion of Preferred stock | 2,015,868 | |
4,018,196 | ||
Common Stock Warrants
In connection with the acquisition of Sitebridge on April 30, 1999, eGainwe assumed warrants to purchase 121,00012,100 shares of our common stock at a price of $0.9916$9.916 per share, which expireexpired in May 2003.2003 and were never exercised. In addition, eGainwe assumed warrants to purchase 30,0003,000 shares of our common stock at a price of $0.2754$2.754 per share, which expired in October 2001 and were never exercised.
On August 8, 2000, we issued 35.11 shares of non-voting Series A Cumulative Convertible Preferred Stock (“Series A”), $100,000 stated value per share, and 849.89 shares of non-voting Series B Cumulative Convertible Preferred Stock (“Series B”), $100,000 stated value per share in a private placement to certain investors. The Series B shares automatically converted into Series A shares upon stockholder approval on November 20, 2000 at the annual stockholders meeting. In addition, investors received warrants to purchase an aggregate of 383,000 shares of our common stock with a current warrant exercise price of $56.875 per share.
On December 24, 2002, we entered into a note and warrant purchase agreement with Ashutosh Roy, the Company’s Chief Executive Officer, pursuant to which Mr. Roy will make loans to us evidenced by one or more subordinated secured promissory notes and will receive warrants to purchase shares of the our common stock in connection with such loans. The fair value of these options was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 2%, and a dividend yield of 0%. We recorded $1.83 million in related party notes payable and $173,000 of discount on the notes related to the value of the warrants issued in the transaction that will be amortized to interest expense ratably over the five year life of the note with conformed charges.
On October 31, 2003, we entered into an amendment to the 2002 purchase agreement with Mr. Roy. The fair value of these options was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 2.25%, and a dividend yield of 0%. We recorded $1.8 million in related party notes payable and $195,000 of
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
discount on the notes related to the value of the warrants issued in the transaction that will be amortized to interest expense ratably over the five year life of the note with conformed charges.
On March 31, 2004, we entered into a note and warrant purchase agreement with Ashutosh Roy, our Chief Executive Officer, Oak Hill Capital Partners L.P., Oak Hill Capital Management Partners L.P., and FW Investors L.P. (the “lenders”) pursuant to which the lenders loaned to us $2.5 million evidenced by secured promissory notes and received warrants to purchase shares of our common stock in connection with such loan. The fair value of these warrants was determined using the Black-Scholes valuation method with the following assumptions: an expected life of 3 years, an expected stock price volatility of 75%, a risk free interest rate of 1.93%, and a dividend yield of 0%. We recorded $2.28 million in related party notes payable and $223,000 of discount on the notes related to the relative value of the warrants issued in the transaction that will be amortized to interest expense over the five year life of the notes.
Activity is summarized as follows:
Warrants Oustanding | Weighted Average Exercise Price | ||||
Beginning balance | 15,100 | 8.49 | |||
Warrants issued to preferred shareholders | 382,632 | 56.88 | |||
Warrants outstanding as of June 30, 2001 | 397,732 | 55.04 | |||
Expiration of warrants assumed at April 1999 | (3,000 | ) | 2.75 | ||
Warrants outstanding as of June 30, 2001 | 394,732 | 55.44 | |||
Expiration of warrants assumed at April 1999 | (12,100 | ) | 9.92 | ||
Warrants issued per Note & Warrant Agreement with Ashutosh Roy | 236,742 | 2.11 | |||
Warrants outstanding as of June 30, 2003 | 619,374 | 35.95 | |||
Warrants issued per Amendment to Note & Warrant Agreement with Ashutosh Roy | 128,766 | 3.88 | |||
Warrants issued per Note & Warrant Agreement with the lenders | 312,500 | 2.00 | |||
Warrants outstanding as of June 30, 2004 | 1,060,640 | 22.05 |
1999 Employee Stock Purchase Plan
The 1999 Employee Stock Purchase Plan (the “ESPP”) allows eligible employees to purchase common stock through payroll deductions of up to 15% of an employee’s compensation, subject to certain limitations. The ESPP has a one-year offering period that begins in May or November of each year, depending on which date the participant elects to enter the ESPP. The purchase price of the common stock will be equal to 85% of the lower of (1) the fair market value per share on the participant’s entry date into the offering period or (2) the fair market
Tender Offer
In May 2001, the Companywe announced a voluntary stock option exchange program for itsour employees. Under the program, eGainour employees were given the opportunity, if they chose, to cancel certain outstanding stock options
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
previously granted to them with an exercise price equal to or greater than $4.00$40.00 in exchange for an equal number of replacement options to be granted at a future date, at least six months and one day from the cancellation date, which was August 10, 2001. Those employees electing to participate in the exchange program were required to exchange all options granted to such employees during the six-month period prior to the cancellation date. Under the exchange program, options for 1,014,000101,400 shares of the Company’sour common stock were tendered and cancelled and 878,00087,800 shares were issued as replacement grants on February 11, 2002 at a price of $1.43.$14.30. There were 14,0001,400 untendered options associated with the exchange program that are subject to variable accounting. There was no compensation expense associated with these options recorded during fiscal 2004, 2003 and 2002.
2000 Stock Plan
In July 2000, the board of directors adopted the 2000 Non-Management Stock Option Plan (the “2000 Plan”), which provides for the grant of nonstatutory stock options to employees, advisors and consultants of eGain. Options under the 2000 Plan shall be granted at a price not less than 85% of the fair market value of the common stock on the date of grant. eGain’s board of directors determines the fair market value (as defined in the 2000 Plan) of the common stock, date of grant and vesting schedules of the options granted. The options generally vest ratably over 4 years and expire no later than 10 years from the date of grant.
The following table represents the activity under the 2000 Plan:
Shares Available for Grant | Options Outstanding | Weighted Average Price | |||||||
Shares authorized for issuance | 2,000,000 | ||||||||
Options granted | (2,300,000 | ) | 2,300,000 | $ | 9.32 | ||||
Options canceled | 886,000 | (886,000 | ) | $ | 9.48 | ||||
Balance at June 30, 2001 | 586,000 | 1,414,000 | $9.23 | ||||||
Options granted | (578,000 | ) | 578,000 | $ | 1.27 | ||||
Options canceled | 749,000 | (749,000 | ) | $ | 9.19 | ||||
Balance at June 30, 2002 | 757,000 | 1,243,000 | $5.55 | ||||||
Shares Available for Grant | Options Outstanding | Weighted Average Price | |||||||
Balance at June 30, 2001 | 58,611 | 141,389 | $ | 92.25 | |||||
Options granted | (57,780 | ) | 57,780 | $ | 12.71 | ||||
Options canceled | 74,880 | (74,880 | ) | $ | 91.91 | ||||
Balance at June 30, 2002 | 75,711 | 124,289 | $ | 55.48 | |||||
Options granted | (17,388 | ) | 17,388 | $ | 1.78 | ||||
Options exercised | — | (1,131 | ) | $ | 1.60 | ||||
Options canceled | 57,992 | (57,992 | ) | $ | 53.46 | ||||
Balance at June 30, 2003 | 116,315 | 82,554 | $ | 46.33 | |||||
Options granted | (60,245 | ) | 60,245 | $ | 3.19 | ||||
Options exercised | — | (253 | ) | $ | 1.60 | ||||
Options canceled | 24,833 | (24,833 | ) | $ | 47.55 | ||||
Balance at June 30, 2004 | 80,903 | 117,713 | $ | 24.10 | |||||
1998 Stock Plan
In June 1998, the board of directors adopted the 1998 Stock Plan (the “1998 Plan”), which provides for grant of stock options to eligible participants. Options granted under the 1998 Plan are either incentive stock options or nonstatutory stock options. Incentive stock options may be granted to employees with exercise prices of no less than the fair value of the common stock and nonstatutory options may be granted to eligible participants at exercise prices of no less than 85% of the fair value of the common stock on the date of grant. eGain’s board of directors determines the fair market value (as defined in the 1998 Plan) of the common stock, date of grant and vesting schedules of the options granted. The options generally vest ratably over a period of four years and expire no later than 10 years from the date of grant. Options are generally exercisable upon grant, subject to repurchase rights by eGain until vested.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table represents the activity under the 1998 Plan:
Shares Available for Grant | Options Outstanding | Weighted Average Price | |||||||
Balance at June 30, 1999 | 647,000 | 1,481,000 | $ | 0.32 | |||||
Additional authorization | 3,000,000 | ||||||||
Options granted | (4,179,000 | ) | 4,179,000 | $ | 19.25 | ||||
Options exercised | — | (1,154,000 | ) | $ | 0.47 | ||||
Options canceled | 638,000 | (638,000 | ) | $ | 19.39 | ||||
Repurchases | 153,000 | — | |||||||
Balance at June 30, 2000 | 259,000 | 3,868,000 | $ | 17.58 | |||||
Additional authorization | 2,000,000 | ||||||||
Options granted | (2,271,000 | ) | 2,271,000 | $ | 5.49 | ||||
Options exercised | — | (136,000 | ) | $ | 0.79 | ||||
Options canceled | 2,584,000 | (2,584,000 | ) | $ | 17.75 | ||||
Repurchases | 265,000 | — | |||||||
Balance at June 30, 2001 | 2,837,000 | 3,419,000 | $ | 10.09 | |||||
Options granted | (4,020,000 | ) | 4,020,000 | $ | 1.33 | ||||
Options exercised | — | (61,000 | ) | $ | 1.10 | ||||
Options canceled | 2,774,000 | (2,774,000 | ) | $ | 9.68 | ||||
Repurchases | 163,000 | — | |||||||
Balance at June 30, 2002 | 1,754,000 | 4,604,000 | $ | 2.81 | |||||
Shares Available for Grant | Options Outstanding | Weighted Average Price | |||||||
Balance at June 30, 2001 | 283,727 | 341,908 | $ | 100.93 | |||||
Options granted | (401,994 | ) | 401,994 | $ | 13.34 | ||||
Options exercised | — | (6,090 | ) | $ | 11.01 | ||||
Options canceled | 277,445 | (277,445 | ) | $ | 96.77 | ||||
Repurchases | 16,327 | — | |||||||
Balance at June 30, 2002 | 175,505 | 460,367 | $ | 28.14 | |||||
Options granted | (73,484 | ) | 73,484 | $ | 1.80 | ||||
Options exercised | — | (2,037 | ) | $ | 1.59 | ||||
Options canceled | 197,520 | (197,520 | ) | $ | 31.94 | ||||
Repurchases | 1,223 | — | |||||||
Balance at June 30, 2003 | 300,764 | 334,294 | $ | 20.26 | |||||
Options granted | (124,550 | ) | 124,550 | $ | 2.84 | ||||
Options exercised | — | (14,396 | ) | $ | 3.39 | ||||
Options canceled | 110,064 | (110,064 | ) | $ | 17.53 | ||||
Repurchases | — | — | |||||||
Balance at June 30, 2004 | 286,278 | 334,384 | $ | 15.40 | |||||
In connection with the acquisition of Sitebridge, eGain assumed options to purchase 1,114,000111,400 shares of common stock. During fiscal 2002, 31,000 optionsstock, of which none were exercised and 11,000 options were canceled at weighted average exercise prices of $0.14 and $0.14, respectively. As ofoutstanding as June 30, 2002, 6,000 options were outstanding.2004. In connection with the acquisitions of Big Science and Inference, eGain assumed options to purchase 50,0005,000 and 1,611,000161,000 shares of common stock, respectively, of which none and 194,000,10,422, respectively, were outstanding as of June 30, 2002.
The following table summarizes information about stock options outstanding and exercisable as of June 30, 2002:
Options Outstanding | Options Exercisable | |||||||||
Range of Exercise Prices | Number | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||
$0.10–$0.56 | 703,000 | 9.57 | $ 0.49 | 238,000 | $ 0.47 | |||||
$0.89–$1.00 | 641,000 | 8.50 | $ 0.98 | 304,000 | $ 0.98 | |||||
$1.02–$1.42 | 675,000 | 9.58 | $ 1.12 | 314,000 | $ 1.04 | |||||
$1.43–$1.43 | 763,000 | 9.63 | $ 1.43 | 319,000 | $ 1.43 | |||||
$1.58–$1.58 | 766,000 | 9.19 | $ .58 | 629,000 | $ 1.58 | |||||
$1.60–$2.07 | 557,000 | 9.32 | $ 2.04 | 66,000 | $ 2.05 | |||||
$2.22–$4.75 | 656,000 | 8.34 | $ 3.07 | 319,000 | $ 3.36 | |||||
$5.35–$8.66 | 293,000 | 7.55 | $ 7.03 | 218,000 | $ 7.04 | |||||
$8.68–$8.69 | 573,000 | 8.14 | $ 8.68 | 225,000 | $ 8.68 | |||||
$8.81–$47.63 | 420,000 | 7.92 | $16.20 | 77,000 | $18.41 | |||||
$0.10–$47.63 | 6,047,000 | 8.91 | $ 3.47 | 2,709,000 | $ 3.07 |
Options Outstanding | Options Exercisable | |||||||||||
Range of Exercise Prices | Number | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number | Weighted Average Exercise Price | |||||||
$1.60 | 46,378 | 8.31 | $ | 1.60 | 36,849 | $ | 1.60 | |||||
$1.70–$2.00 | 10,768 | 9.06 | $ | 1.90 | 4,878 | $ | 1.99 | |||||
$2.40–$2.40 | 79,925 | 9.44 | $ | 2.40 | 0 | $ | .00 | |||||
$3.32–$3.32 | 70,974 | 9.21 | $ | 3.32 | 13,460 | $ | 3.32 | |||||
$4.00–$9.30 | 53,161 | 7.99 | $ | 5.02 | 29,763 | $ | 5.20 | |||||
$10.00–$14.30 | 63,589 | 7.43 | $ | 12.90 | 49,923 | $ | 12.91 | |||||
$15.80–$20.70 | 63,898 | 7.38 | $ | 18.68 | 49,751 | $ | 18.10 | |||||
$22.20–$86.75 | 52,491 | 5.95 | $ | 61.83 | 45,792 | $ | 60.20 | |||||
$86.88–$405.00 | 20,585 | 6.09 | $ | 108.49 | 17,356 | $ | 100.60 | |||||
$408.13–$408.13 | 750 | 5.46 | $ | 408.13 | 500 | $ | 408.13 | |||||
$1.60–$408.13 | 462,519 | 8.01 | $ | 18.57 | 248,272 | $ | 26.26 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation
Pro forma information regarding net loss and net loss per share is required by SFAS 123 as if eGain had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of eGain’s stock-based awards to employees was estimated using the Black-Scholes multiple option pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. eGain’s stock-based awards to employees have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate. Therefore, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards to employees.
The fair value of eGain’s stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:
Options | ESPP | |||||||||||||||||
2002 | 2001 | 2000 | 2002 | 2001 | 2000 | |||||||||||||
Expected life (years) | 3.28 | 3.50 | 2.97 | 0.50 | 0.50 | 0.50 | ||||||||||||
Expected stock price volatility | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | ||||||||||||
Risk-free interest rate | 3.92 | % | 6.00 | % | 5.79 | % | 2.70 | % | 5.65 | % | 5.79 | % |
Options | ESPP | |||||||||||||||||
2004 | 2003 | 2002 | 2004 | 2003 | 2002 | |||||||||||||
Expected life (years) | 3.50 | 3.50 | 3.28 | 0.50 | 0.50 | 0.50 | ||||||||||||
Expected stock price volatility | .75 | 1.00 | 1.00 | 1.00 | 1.00 | 1.00 | ||||||||||||
Risk-free interest rate | 2.97 | % | 2.18 | % | 3.92 | % | 1.36 | % | 1.34 | % | 2.70 | % |
The weighted-average fair value of options granted in the fiscal years ended June 30, 2004, 2003 and 2002 2001was $1.54, $0.93 and 2000 was $0.70, $4.52 and $12.81,$7.00, respectively.
For purposes of pro forma disclosures, the estimated fair value of an option is amortized to expense over the vesting period of the option. eGain’s pro forma information, which includes the stock option plans and the ESPP, for the fiscal years ended June 30, 2002, 20012004, 2003 and 20002002 is as follows (in thousands except for basic and diluted net loss per common share information):
2002 | 2001 | 2000 | ||||||||||
Net loss applicable to common stockholders—actual | $ | (166,101 | ) | $ | (127,420 | ) | $ | (68,431 | ) | |||
Net loss applicable to common stockholders— pro forma | (168,478 | ) | (134,618 | ) | (80,271 | ) | ||||||
Net loss per common share: | ||||||||||||
Basic and diluted actual | $ | (4.58 | ) | $ | (3.62 | ) | $ | (2.92 | ) | |||
Basic and diluted pro forma | (4.65 | ) | (3.83 | ) | (2.96 | ) |
2004 | 2003 | 2002 | ||||||||||
Net loss applicable to common stockholders—actual | $ | (12,278 | ) | $ | (18,366 | ) | $ | (166,101 | ) | |||
Net loss applicable to common stockholders—pro forma | (12,866 | ) | (18,643 | ) | (168,479 | ) | ||||||
Net loss per common share: | ||||||||||||
Basic and diluted actual | $ | (3.33 | ) | $ | (5.01 | ) | $ | (45.85 | ) | |||
Basic and diluted pro forma | (3.49 | ) | (5.09 | ) | (46.50 | ) |
10.11. RESTRUCTURING COSTSEXPENSE
Background
Beginning in fiscal year 2002, eGain recorded restructuring charges totaling $8,964,000 pursuant to a plan approved by the required level of management necessary to execute its components. These charges were primarily related to the consolidation of eGain’s facilities in North America. In2001 and continuing through the first quarter of fiscal 2002, eGain initiated the plan of consolidation of facilities2004, economic conditions in North America resultingand many of the other countries in which we operate either deteriorated or stabilized at depressed levels. This continuing weak economic environment, and in particular spending in technology, has had an adverse impact on sales of enterprise software. As a chargeresult, we have seen a decline in our revenues over the last three fiscal years. In response to this decline, we initiated a series of $4,336,000. This amount included estimated future net rental payments on exited facilitiessteps to streamline operations and better align operating costs and expenses with revenue trends. Specifically, we took the following actions:
We reduced the discretionary portion of $3,511,000, as well as $810,000 in write-offsour operating costs through various cost control initiatives, including: (i) reducing marketing expenditures; (ii) movement of leasehold improvements and $15,000 in professional services associated with the exited facilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
North America to India; (iii) temporary reduction in salaries (fiscal 2002) in North America and Europe; (iv) eliminating the majority of bonuses or realigning bonuses more closely with achievement of financial objectives; (v) reducing depreciation, primarily through reduced capital expenditures; and (vi) reducing other discretionary expenditures, such as costs related to outside consultants, travel and recruiting. |
Fiscal 2004 plan
In fiscal year 2004, the total restructuring charge relating to extend the plan of facilities consolidation which resulted in an additionalFiscal 2004 Plan was $80,000. This charge of $2,763,000 related to workforce reductions in Europe and was completed and paid in full in fiscal 2004.
In addition, during fiscal 2004 we made provisional adjustments to both Fiscal 2003 and Fiscal 2002 Plans as follows:
The total payments in fiscal year 2004 of $1.2 million consisted of $80,000, $336,000, $725,000 and $92,000 of expenses accrued in Fiscal 2004, 2003, 2002 and 2001 Plans, respectively.
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fiscal 2003 Plan
In fiscal year 2003, the total restructuring charge relating to the Fiscal 2003 Plan was $2.3 million. The $2.3 million expense included $772,000 related to the closure of local offices in Holland, France, Germany, Australia and Singapore, $225,000 for additional consolidation of excess facilities in North America, $1.2 million in employee severance payments and $61,000 in professional services and miscellaneous charges related to the restructuring. Both the employee severance and professional charges have been paid in full in fiscal year 2003. We expect to pay the remaining balance of restructuring accrual related to excess facilities by the end of fiscal year 2006.
In addition, during fiscal 2003 we made a provisional adjustment to the Fiscal 2002 Plan by reversing $1.7 million, previously recorded as a restructuring expense in fiscal 2002. The reversal related to the early termination of a facility lease agreement in Sunnyvale, California.
The total payments of $3.3 million in fiscal year 2003 consisted of $1.9 million, $1.4 million and $40,000 of expenses accrued in fiscal year 2003, 2002 and 2001, respectively. The $1.9 million included $1.3 million for employee severance payments, professional services and miscellaneous charges related to the restructuring and $613,000 for excess worldwide facilities recorded in fiscal year 2003.
Fiscal 2002 Plan
In fiscal year 2002, the total restructuring charge relating to the Fiscal 2002 Plan was $9.0 million. These charges included $6.4 million for the consolidation of our facilities in North America, $1.3 million in write-offs of $575,000.
Total payments of $4.0 million in fiscal year 2002 consisted of $1.5 million for excess facilities in North America, $1.3 million in write-offs of leasehold improvement and $1.2 million in employee severance, professional services and miscellaneous charges accrued in the same fiscal year. Of the total payments, $88,000 was applied to the excess facilities accrued in the Fiscal 2001 eGain recordedPlan.
At the end of fiscal year 2004, the remaining accrual for the Fiscal 2002 Plan includes estimated contingent payments related to two lease settlements for excess facilities that were originally included in the Fiscal 2002 Plan. As part of separate settlement agreements with the two landlords, in the event we make a distribution of cash, stock or other consideration to holders of our Series A Preferred with respect to the shares of Series A Preferred held by such Series A Preferred holders, each of the two landlords would receive a payment equal to the lesser of (i) $1.0 million or (ii) the amount payable to a holder of shares of Series A Preferred with an aggregate stated value of $1.0 million. At the end of fiscal year 2004, we estimated the combined value of these two contingent payments to be $1.2 million.
Fiscal 2001 Plan
In fiscal year 2001, the total restructuring charges totaling $1,443,000.charge relating to the Fiscal 2001 Plan was $1.4 million. These charges primarily related to a reduction in eGain’sour worldwide workforce byof 141 employees across all departments and office closures in North America pursuant to the adoption of eGain’sour expense management strategy. The total charges were primarily comprised of $917,000 related to severance costs, $263,000 related to office closure costs and $263,000 related to legalprofessional services and professional costsmiscellaneous charges associated with the employee terminations. Of the total charges, $132,000, whichTotal payments of $1.2 million were made in fiscal year 2001. This plan was primarily related to legalcompleted and professional costs, remained unpaidpaid in full as of June 30, 2002.
The following table sets forth an analysis of the cumulative restructuring charges duringaccrual activity for the fiscal yearyears ended June 30, 2004, 2003, 2002 are as followsand 2001 (in thousands):
Cash/Non-cash | FY01 Remaining Balance | FY02 Charges | Amount Paid/Used | Balance at 06/30/02 | |||||||||||
Excess facilities | Cash | $ | — | $ | 6,412 | $ | (1,449 | ) | $ | 4,963 | |||||
Leasehold improvement write-offs | Non-cash | — | 1,315 | (1,315 | ) | — | |||||||||
Employee severance | Cash | — | 1,222 | (1,222 | ) | — | |||||||||
Professional services | Cash | 220 | 15 | (103 | ) | 132 | |||||||||
Total restructuring charges | $ | 220 | $ | 8,964 | $ | (4,089 | ) | $ | 5,095 | ||||||
Fiscal 2004 plan | Fiscal 2003 plan | Fiscal 2002 plan | Fiscal 2001 plan | Total | ||||||||||||||||||||||||||||||||||||||||||||||
Facilities related | Severance | Other | Facilities related | Severance | Other | Facilities related | Severance | Other | Facilities related | Severance | Other | |||||||||||||||||||||||||||||||||||||||
Restructuring provision in fiscal 2001: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Excess facilities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 263 | $ | — | $ | — | $ | 263 | ||||||||||||||||||||||||
Employee severance | — | — | — | — | — | — | — | — | — | — | 917 | — | 917 | |||||||||||||||||||||||||||||||||||||
Professional and miscellaneous charges | — | — | — | — | — | — | — | — | — | — | — | 263 | 263 | |||||||||||||||||||||||||||||||||||||
Total charges in fiscal 2001 | — | — | — | — | — | — | — | — | — | 263 | 917 | 263 | 1,443 | |||||||||||||||||||||||||||||||||||||
Cash paid | — | — | — | — | — | — | — | — | — | (43 | ) | (917 | ) | (263 | ) | (1,223 | ) | |||||||||||||||||||||||||||||||||
Balance as of June 30, 2001 | — | — | — | — | — | — | — | — | — | 220 | — | — | 220 | |||||||||||||||||||||||||||||||||||||
Restructuring provision in fiscal 2002: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Excess facilities | — | — | — | — | — | — | 6,412 | — | — | — | — | — | 6,412 | |||||||||||||||||||||||||||||||||||||
Leasehold improvement write-offs | — | — | — | — | — | — | 1,315 | — | — | — | — | — | 1,315 | |||||||||||||||||||||||||||||||||||||
Employee severance | — | — | — | — | — | — | — | 1,222 | — | — | — | — | 1,222 | |||||||||||||||||||||||||||||||||||||
Professional and miscellaneous charges | — | — | — | — | — | — | — | — | 15 | — | — | — | 15 | |||||||||||||||||||||||||||||||||||||
Total charges in fiscal 2002 | — | — | — | — | — | — | 7,727 | 1,222 | 15 | — | — | — | 8,964 | |||||||||||||||||||||||||||||||||||||
Cash paid | — | — | — | — | — | — | (1,449 | ) | (1,222 | ) | (15 | ) | (88 | ) | — | — | (2,774 | ) | ||||||||||||||||||||||||||||||||
Non-cash paid | — | — | — | — | — | — | (1,315 | ) | — | — | — | — | — | (1,315 | ) | |||||||||||||||||||||||||||||||||||
Balance as of June 30, 2002 | — | — | — | — | — | — | 4,963 | — | — | 132 | — | — | 5,095 | |||||||||||||||||||||||||||||||||||||
Restructuring provision in fiscal 2003: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Excess facilities | — | — | — | 997 | — | — | — | — | — | — | — | — | 997 | |||||||||||||||||||||||||||||||||||||
Employee severance | — | — | — | — | 1,222 | — | — | — | — | — | — | — | 1,222 | |||||||||||||||||||||||||||||||||||||
Professional and miscellaneous charges | — | — | — | — | — | 61 | — | — | — | — | — | — | 61 | |||||||||||||||||||||||||||||||||||||
Provision adjustment | — | — | — | — | — | — | (1,660 | ) | — | — | — | — | — | (1,660 | ) | |||||||||||||||||||||||||||||||||||
Total charges in fiscal 2003 | — | — | — | 997 | 1,222 | 61 | (1,660 | ) | — | — | — | — | — | 620 | ||||||||||||||||||||||||||||||||||||
Cash paid | — | — | — | (613 | ) | (1,222 | ) | (61 | ) | (1,382 | ) | — | — | (40 | ) | — | — | (3,318 | ) | |||||||||||||||||||||||||||||||
Balance as of June 30, 2003 | — | — | — | 384 | — | — | 1,921 | — | — | 92 | — | — | 2,397 | |||||||||||||||||||||||||||||||||||||
Restructuring provision in fiscal 2004: | ||||||||||||||||||||||||||||||||||||||||||||||||||
Excess facilities | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
Employee severance | — | 80 | — | — | — | — | — | — | — | — | — | — | 80 | |||||||||||||||||||||||||||||||||||||
Professional and miscellaneous charges | — | — | — | — | — | — | — | — | — | — | — | — | 0 | |||||||||||||||||||||||||||||||||||||
Provision adjustment | — | — | — | (74 | ) | — | 41 | 139 | — | — | — | — | — | 106 | ||||||||||||||||||||||||||||||||||||
Total charges in fiscal 2004 | — | 80 | — | (74 | ) | — | 41 | 139 | — | — | — | — | — | 186 | ||||||||||||||||||||||||||||||||||||
Cash paid | — | (80 | ) | — | (295 | ) | — | (41 | ) | (711 | ) | — | — | (92 | ) | — | — | (1,219 | ) | |||||||||||||||||||||||||||||||
Non-cash paid | — | — | — | — | — | — | (14 | ) | — | — | — | — | — | (14 | ) | |||||||||||||||||||||||||||||||||||
Balance as of June 30, 2004 | $ | — | $ | — | $ | — | $ | 15 | $ | — | $ | — | $ | 1,335 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,350 |
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
12. WARRANTIES
We generally warrant that the program portion of restructuring chargesour software will perform substantially in accordance with certain specifications for a period of 90 days. Our liability for a breach of this warranty is either a return of the license fee or providing a fix, patch, work-around or replacement of the software.
We also provide standard warranties against and indemnification for the potential infringement of third party intellectual property rights to our customers relating to the use of our products, as well as indemnification agreements with certain officers and employees under which we may be required to indemnify such persons for liabilities arising out of their duties to the company. The terms of such obligations vary. Generally, the maximum obligation is the amount permitted by law.
Historically, costs related to the acquisition of Inference, all of which was paid as of June 30, 2002. eGain abandoned plans to occupy new office spacethese guarantees have not been significant, however we cannot guarantee that a warranty reserve will not become necessary in the United Kingdom and expensed professional services fees incurred in the design phase of the office space.
11.13. LITIGATION
OnBeginning on October 25, 2001, a federalnumber of securities class action complaint wascomplaints were filed against us, and certain of our then officers and directors and underwriters connected with our initial public offering of common stock in the United StatesU.S. District Court for the Southern District of New York against eGain, certain of its officers, and the lead underwriters for eGain’s initial public offering.(Rennel Trading Corp. v. eGain Communications Corp., et al.consolidated into In re Initial Public Offering Sec. Litig., No. 01-CIV-9414 (SAS)). The complaint alleges violationscomplaints alleged generally that the prospectus under which such securities were sold contained false and misleading statements with respect to discounts and excess commissions received by the underwriters as well as allegations of Section 11, 12(a)(2) and Section 15“laddering” whereby underwriters required their customers to purchase additional shares in the aftermarket in exchange for an allocation of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,IPO shares. The complaints sought an unspecified amount in damages on behalf of a alleged class of plaintiffspersons who purchased eGainthe common stock between September 23, 1999 and December 6, 2000. Specifically,Similar complaints were filed against 55 underwriters and more than 300 other companies and other individuals. The over 1,000 complaints were consolidated into a single action. We reached an agreement with the plaintiffs to resolve the cases as to our liability and that of our officers and directors. The settlement involved no monetary payment or other consideration by us or our officers and directors and no admission of liability. The Court has not yet approved the settlement.
On December 11, 2002 we entered into a settlement with Synergism Investors to terminate an existing lease agreement for one of our excess facilities. Under this agreement, we agreed to pay $1,325,000 (the “Settlement Amount”) to Synergism. Of this obligation, $325,000 was secured through a certified deposit and paid in January 2003. The remaining balance will be paid to Synergism in the event we makes a distribution of cash, stock, or other consideration (each, a “Preferred Payment”) to the holders of eGain’s 6.75% Series A Cumulative Convertible Preferred Stock (the “Series A Preferred”) with respect to the shares of Series A Preferred held by them. Synergism will receive prior to any such Preferred Payment to holders of Series A Preferred a cash payment equal to the lesser of (i) an amount equal to $1,000,000 (the “Initial Payment Value”) plus an amount which would increase and accumulate at an annual rate equal to 6.75% of the Initial Payment Value; (ii) the portion of the Preferred Payment made with respect to 10 shares of Series A Preferred, which shares have an aggregated stated value of $1,000,000. As of June 30, 2004, we have accrued $1 million of the total potential contingent payment.
On December 13, 2002, Mindfabric, Inc. filed an action for patent infringement against us. The suit was settled and resolved in April, 2004 with no cash payments and the execution of a cross-licensing agreement between the parties.
On February 26, 2003, Golden Gate Plaza, LLC filed a complaint alleges thatfor unlawful detainer against us. On December 23, 2003 we entered into a settlement agreement with the prospectus eGainplaintiff to resolve the case. A Request for
eGAIN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Dismissal was entered by the court on January 12, 2004 and the settlement was later approved. Under this agreement, we agreed to pay up to $1.5 million (the “Settlement Amount”) to the landlord. Of this obligation, $456,000 was paid in January 2004. The remaining balance will be paid in the event we make a distribution of cash, stock, or other consideration to holders of our 6.75% Series A Cumulative Convertible Preferred Stock (the “Series A Preferred”) with respect to the shares of Series A Preferred held by such Series A Preferred holders. In such event, the landlord would receive a payment equal to the lesser of (i) $1.0 million or (ii) the amount payable to a holder of shares of Series A Preferred with an aggregate stated value of $1.0 million. As of December 31, 2003 we have accrued $247,000 of the total potential $1.0 million contingent payment based on our current estimate of the future payout under the lease settlement.
On February 12, 2004, we filed suit against Insight Enterprises, Inc., the acquirer of Comark, Inc., a value-added reseller of our software, claiminginter alia breach of contract and failure to pay in connection with the initial public offering was materially false and misleading because it faileda sale of our software to disclose that the underwriter defendants solicited and received excessive and undisclosed commissions from certain investors in exchange for shares of eGain stock, and that the underwriters entered into agreements with certain investors in which these investors agreed to purchase additional shares of Company common stock in the aftermarket in exchange for receiving shares of eGain common stock in the initial public offering.one customer. The lawsuit is being prosecuted by the Plaintiffs’ Executive Committeeseeks inIn re: Initial Public Offering Securities Litigation, 21 MC 92 (SAS), pending before the Honorable Shira A. Scheindlin. The Company believes it has good and valid defenses excess of $600,000 in damages.
From time to these allegations, and eGain intends to defend the action vigorously. However, these claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
12.14. SUBSEQUENT EVENTS—(Unaudited)EVENTS
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as of a date within 90 days prior to the filing date of this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared.
(b) Changes in internal controls. There were no significant changes in our internal controls or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
The information required by this item (with respect to Directors) is incorporated by reference from the information under the caption “Election of Directors” contained in eGain’s Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Company’s 20022004 Annual Meeting of Stockholders to be held on November 1, 2002 (the “Proxy Statement”).
The following table sets forth information regarding eGain’s current executive officers as of September 20, 2002:
Name | Age | Position | ||
Ashutosh Roy | Chief Executive Officer and Chairman | |||
Eric Smit | ||||
Chief Financial Officer | ||||
Promod Narang | ||||
Vice President of Products and Engineering | ||||
Ashutosh Roy co-founded eGain and has served as Chief Executive Officer and a director of eGain since September 1997.1997 and President since October 2003. From May 1995 through April 1997, Mr. Roy served as Chairman of WhoWhere? Inc., an Internet-service company co-founded by Mr. Roy. From June 1994 to April 1995, Mr. Roy co-founded Parsec Technologies, a call center company based in New Delhi, India. From August 1988, to August 1992, Mr. Roy worked as Software Engineer at Digital Equipment Corp. Mr. Roy holds a B.S. in Computer Science from the Indian Institute of Technology, New Delhi, a Masters degree in Computer Science from Johns Hopkins University and an M.B.A. from Stanford University.
Eric Smit has served as Chief Financial Officer since August 2002. From April 2001 to July 2002, Mr. Smit served as Vice President, Operations of eGain since April 2001.eGain. From June 1999 to April 2001, Mr. Smit served as Vice President, Finance and Administration of eGain. From June 1998 to June 1999, Mr. Smit served as Director of Finance of eGain. From December 1996 to May 1998, Mr. Smit served as Director of Finance for WhoWhere? Inc., an Internet services company. From April 1993 to November 1996, Mr. Smit served as Vice President of Operations and Chief Financial Officer of Velocity Incorporated, a software game developer and publishing company. Mr. Smit holds a Bachelor of Commerce in Accounting from Rhodes University, South Africa.
Promod Narang has served as Vice President of Engineering of eGain since March 2000. Mr. Narang joined eGain in October 1998, and served as Director of Engineering prior to assuming his current position. Prior to joining eGain, Mr. Narang served as President of VMpro, a system software consulting company from September 1987 to October 1998. Mr. Narang holds a Bachelors of Science in Computer Science from Wayne State University.
The information contained under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive Proxy Statement for the Company’s 20022004 Annual Meeting of Stockholders is incorporated herein by reference.
The information contained under the heading “Executive Compensation” and under the captions “Director Compensation,” and “Recent Option Grants” in the definitive Proxy Statement for eGain’s 20022004 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY | OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information contained under the heading “Security Ownership of Certain Beneficial Owners and Management” in the definitive Proxy Statement for eGain’s 20022004 Annual Meeting of Stockholders is incorporated herein by reference.
The information contained under the caption “Related Party Transactions” in the definitive Proxy Statement for eGain’s 20022004 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the heading “Principal Accounting Fees and Services” in the definitive Proxy Statement for eGain’s 2004 Annual Meeting of Stockholders is incorporated herein by reference.
(a) 1. Financial Statements
See Index to Financial Statements in Item 8 of this Report.
2. Financial Statement Schedule
Financial statement schedule, which is included at the end of this report:
Schedule II—Valuation and Qualifying Accounts
All other schedules have been omitted since they are either not required, not applicable or the information has been included in the consolidated financial statements or notes thereto.
3. Exhibits
See the exhibits listed under Item 14(c)15(c) or filed or incorporated by reference herein. Each management contract or compensation plan or arrangement required to be filed has been identified.
(b) Reports on Forms 8-K
Reports on Form 8-K:
1. Current Report on Form 8-K filed on September 16, 2004 relating to press release filed announcing quarter ended June 30, 2004 results of operations and financial condition.
(c) Exhibits
The exhibits listed below are filed or incorporated by reference herein.
Exhibit No. | Description of Exhibits | |
2.1(a) | Agreement and Plan of Reorganization among eGain, Sitebridge Corporation, ECC Acquisition Corporation, Wendell Lansford, Prakash Mishra and Chelsea M.C. LLC dated as of April 30, 1999. | |
| Agreement and Plan of Merger and Reorganization, dated as of February 7, 2000, by and among eGain, Big Science Corporation (“BSC”) and certain shareholders of | |
| Agreement and Plan of Merger, dated as of March 16, 2000, between Inference Corporation, Intrepid Acquisition Corporation, and eGain. | |
| Certificate of Correction of Restated Certificate of Incorporation filed with the Secretary of State of the state of Delaware on February 13, 2001. | |
| Certificate of Amendment of the Amended and Restated Certificate of Incorporation filed with the Secretary of State of the state of Delaware on August 19, 2003. | |
Amended and Restated Bylaws filed as Exhibit 3.3 to eGain’s Registration Statement on Form S-1, File No. 333-83439, originally filed with the Commission on July 22, 1999, as subsequently amended, and incorporated by reference herein. | ||
4.1(a) | Amended and Restated Investors’ Rights Agreement dated as of April 30, 1999. | |
4.2 | Registration Rights Agreement dated as of August 8, 2000, filed as Exhibit 10.2 to eGain’s Current Report on Form 8-K dated August 15, 2000, and incorporated by reference herein. | |
4.3 | Form of Common Stock Purchase Warrant, filed as Exhibit 4.1 to eGain’s Current Report on Form 8-K dated August 15, 2000, and incorporated by reference herein. |
Exhibit No. | Description of Exhibits | |
4.4 | Form of Warrant to Purchase Common Stock, filed as Exhibit 4.1 to eGain’s Current Report on Form 8-K dated April 4, 2004, and incorporated by reference herein. | |
10.1(a) | Form of Indemnification Agreement. | |
10.2(a)# | Social Science, Inc. 1997 Stock Option Plan (assumed by eGain in connection with Sitebridge acquisition). |
10.3(a)# | Amended and Restated 1998 Stock Plan and forms of stock option agreements thereunder. | ||
10.4(a)# | 1999 Employee Stock Purchase Plan. | ||
10.5(a) | Golden Gate Commercial Lease Agreement dated as of July 21, 1998 between Registrant and Golden Gate Commercial Company. | ||
10.6(a) | Starter Kit Loan and Security Agreement dated as of August 7, 1998 between Registrant and Imperial Bank. | ||
10.7(a) | Senior Loan and Security Agreement No. 6194 dated as of October 15, 1998 between Registrant and Phoenix Leasing Incorporated. | ||
10.8(a)# | Amendment to Common Stock Purchase Agreement dated as of June 24, 1998 between Registrant and Ashutosh Roy. | ||
10.9(a)# | Amendment to Common Stock Purchase Agreement dated as of June 24, 1998 between Registrant and Gunjan Sinha. | ||
Amended and Restated Inference Corporation 1993 Stock Option Plan assumed by eGain Communications Corporation (assumed by eGain in connection with Inference acquisition) | |||
eGain Communications Corporation 2000 Non-management Stock Option | |||
Inference Corporation 1998 Non-Management Stock Option | |||
Inference Corporation 1998 New Hire Stock Option Plan (assumed by eGain in connection with Inference acquisition) | |||
Inference Corporation Private Placement Stock Option Plan (assumed by eGain in connection with Inference acquisition) | |||
Inference Corporation Fourth Amended and Restated Incentive Stock Option Plan and Nonqualified Stock Option Plan (assumed by eGain in connection with Inference acquisition) | |||
10.16 | Securities Purchase Agreement, filed as Exhibit 10.1 to eGain’s Current Report on Form 8-K dated August 15, 2000, and incorporated by reference herein. |
Exhibit No. | Description of Exhibits | |
10.17 | Amended and Restated Starter Kit Loan and Security Agreement between Registrant and Imperial Bank dated as of March 29, 2001, filed as Exhibit 10.1 to eGain’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001, filed with the Commission on May 15, 2001, and incorporated by reference herein. | |
10.18 | Loan and Security Agreement between eGain and Silicon Valley Bank, dated March 27, 2002, filed as Exhibit 10.1 to eGain’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and incorporated by reference herein. | |
Waiver and Loan Modification Agreement between eGain and Silicon Valley Bank, dated May 16, 2002. | ||
Second Waiver and Loan Modification Agreement between eGain and Silicon Valley Bank, dated June 25, 2002. | ||
Third Waiver and Loan Modification Agreement between eGain and Silicon Valley Bank, dated August 30, 2002. | ||
10.22 | Accounts Receivable Purchase Agreement between eGain and Silicon Valley Bank, dated September 20, 2002, filed as Exhibit 10.2 to eGain’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002. | |
10.23 | Note and Warrant Purchase Agreement by and between eGain Communications Corporation and Ashutosh Roy dated as of December 24, 2002, filed as Exhibit 10.2 to eGain’s Current Report on Form 8-K filed with the Commission on December 27, 2002. | |
10.24 | Form of Subordinated Secured Promissory Note, filed as Exhibit 10.3 to eGain’s Current Report on Form 8-K filed with the Commission on December 27, 2002. | |
10.25 | Subordination Agreement and Consent by and between Ashutosh Roy and Silicon Valley Bank dated as of December 24, 2002, filed as Exhibit 10.4 to eGain’s Current Report on Form 8-K filed with the Commission on December 27, 2002. | |
10.26 | Accounts Receivable Purchase Modification Agreement between eGain and Silicon Valley Bank, dated March 25, 2003, filed on eGain’s annual report on 10-KA on October 16, 2003, and incorporated by reference herein. | |
10.27 | Accounts Receivable Purchase Modification Agreement between eGain and Silicon Valley Bank, dated September 19, 2003, filed on eGain’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, and incorporated by reference herein. | |
10.28 | Amendment #2 to Note and Warrant Purchase Agreement by and between eGain Communications Corporation and Ashutosh Roy dated October 31, 2003, filed on eGain’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, and incorporated by reference herein. | |
10.29 | Accounts Receivable Purchase Modification Agreement between eGain and Silicon Valley Bank, dated December 19, 2003, filed on eGain’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2003, and incorporated by reference herein. | |
10.30 | Note and Warrant Purchase Agreement by and between eGain Communications Corporation and the Lenders dated as of March 31, 2004, filed as Exhibit 10.1 to eGain’s Current Report on form 8-K on April 4, 2004, and incorporated by reference herein. | |
10.31 | Form of Subordinated Secured Promissory Note, filed as Exhibit 10.2 to eGain’s Current Report on form 8-K on April 4, 2004, and incorporated by reference herein. | |
10.32 | Subordination Agreement and Consent by and between the Lenders and Silicon Valley Bank dated as of March 31, 2004, filed as Exhibit 10.3 to eGain’s Current Report on form 8-K on April 4, 2004, and incorporated by reference herein. | |
16.1 | Letter from Ernst & Young LLP to the Securities and Exchange Commission, dated as of March 31, 2004, filed on eGain’s Current Report on form 8-K on April 1, 2004, and incorporated by reference herein. |
Exhibit No. | Description of Exhibits | |
21.1 | Subsidiaries of eGain Communications Corporation. | |
23.1 | Consent of BDO Seidman, LLP, Independent Registered Public Accounting Firm. | |
23.2 | Consent of Ernst & Young LLP, Independent | |
24.1 | Power of Attorney (see Signature Page). | |
31.1 | Rule 13a-15(e)/15d-15(e) Certification of Chief Executive Officer. | |
31.2 | Rule 13a-15(e)/15d-15(e) Certification of Chief Financial Officer. | |
32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 of Ashutosh Roy, Chief Executive Officer. | |
32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002 of Eric Smit, Chief Financial Officer. |
(a) | Incorporated by reference to eGain’s Registration Statement on Form S-1, File No. 333-83439, originally filed with the Commission on July 22, 1999, as subsequently amended. |
(b) |
Incorporated by reference to Appendix A to Proxy Statement Prospectus, dated May 22, 2000, that forms a part of eGain’s Registration Statement on Form S-4/A, filed with the Commission on May 15, 2000 (File No. 333-34848). |
Incorporated by reference to eGain’s Annual Report on Form 10-K for the fiscal year ended June 30, |
# | Indicates management contract or compensation plan or arrangement. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on September 30, 2002.28, 2004.
eGAIN COMMUNICATIONS CORPORATION | ||
By: | /S/ ASHUTOSH ROY | |
Ashutosh Roy Chief Executive Officer |
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ashutosh Roy Gunjan Sinha, William McGrath and Milind Kasbekar,Eric Smit, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this annual report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name | Title | Date | |||
/S/ ASHUTOSH ROY Ashutosh Roy | Chief Executive Officer and Director | September | |||
/S/ ERIC SMIT Eric Smit | Chief Financial Officer (Principal Financial Officer) | September | |||
/S/ MARK A. WOLFSON Mark A. Wolfson | Director | September | |||
/S/ DAVID BROWN David Brown | Director | September | |||
/S/ GUNJAN SINHA Gunjan Sinha | Director | September 28, 2004 | |||
Phiroz P. Darukhanavala | Director | September |
(in thousands)
Balance at Beginning of Period | Additions Charged to Expense | Amounts Written Off, Net of Recoveries | Balance at End of Period | |||||||||
Allowance for Doubtful Accounts: | ||||||||||||
Year ended June 30, 2002 | $ | 1,398 | $ | 1,794 | $ | 2,632 | $ | 560 | ||||
Year ended June 30, 2001 | $ | 714 | $ | 2,371 | $ | 1,687 | $ | 1,398 | ||||
Year ended June 30, 2000 | $ | 14 | $ | 734 | $ | 34 | $ | 714 |
Balance at Beginning of Period | Additions Charged to Expense | Amounts Written Off, Net of Recoveries | Balance at End of Period | ||||||||||
Allowance for Doubtful Accounts: | |||||||||||||
Year ended June 30, 2004 | $ | 185 | $ | 32 | $ | 79 | $ | 138 | |||||
Year ended June 30, 2003 | $ | 560 | $ | (103 | ) | $ | 272 | $ | 185 | ||||
Year ended June 30, 2002 | $ | 1,398 | $ | 1,794 | $ | 2,632 | $ | 560 |