1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
[ ] 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 0-22317
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ESHARE TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 58-1378534
(State or other Jurisdiction of Incorporation (I.R.S. Employer Identification
or Organization) Number)
5051 PEACHTREE CORNERS CIRCLE
NORCROSS, GEORGIA 30092-2500
(770) 239-4330
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common stock, no par value,
outstanding as of May 4, 2,000 21,759,637 shares.
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PART 1 - FINANCIAL INFORMATION
Page
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Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3
Unaudited Consolidated Statements of Operations for the three 4
months ended March 31, 2000 and 1999
Unaudited Consolidated Statement of Cash Flows for the three months ended March 5
31, 2000 and 1999
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits 14
Signatures 15
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3
ESHARE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(unaudited)
March 31, December 31,
2000 1999(A)
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 15,239 $ 14,873
Accounts receivable, net of allowance for doubtful
accounts of $2,504 at March 31, 2000 and $3,014 at December 31, 1999 38,987 32,863
Inventories 1,924 1,967
Deferred taxes 4,921 4,921
Prepaid expenses and other 652 612
-------- --------
Total current assets 61,723 55,236
Property and equipment, net of accumulated depreciation 10,771 10,963
Other assets 127 98
Intangible assets, net 4,012 4,254
-------- --------
Total assets $ 76,633 $ 70,551
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,870 $ 3,343
Accrued liabilities 8,547 4,879
Deferred revenue 10,355 8,265
Other current liabilities 641 12
Current portion of notes payable 108 141
-------- --------
Total current liabilities 22,521 16,640
Notes payable, excluding current portion 59 74
Stockholders' Equity Common Stock, no par value, 100,000,000
shares authorized 21,735,420 issued and outstanding at March
31, 2000 and 21,386,714 issued and outstanding at December 31, 1999 69 69
Additional paid-in capital 60,932 59,505
Accumulated other comprehensive income (416) (28)
Retained earnings (6,532) (5,709)
-------- --------
Total stockholders' equity 54,053 53,837
-------- --------
Total liabilities and stockholders' equity $ 76,633 $ 70,551
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
(A) Amounts have been restated to reflect the acquisition of eShare.com which
was accounted for using the pooling-of-interest method (see Note 1).
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ESHARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per share amounts)
(unaudited)
For the three months ended
March 31,
2000 1999(A)
-------- --------
Net revenues:
Product $ 12,667 $ 21,111
Service 7,789 7,995
-------- --------
Total revenues 20,456 29,106
Cost of revenues:
Product 2,852 6,191
Service 4,160 4,019
-------- --------
Total cost of revenues 7,012 10,210
-------- --------
Gross margin 13,444 18,896
Operating expenses:
Research and development 2,675 3,464
Selling, general and
administrative 12,166 11,210
-------- --------
Total operating expenses 14,841 14,674
-------- --------
(Loss) Income from operations (1,397) 4,222
Other income, net 113 239
-------- --------
(Loss) Income before income taxes (1,284) 4,461
Income tax (benefit) provision (462) 1,987
-------- --------
Net (loss) income after income tax (822) 2,474
Preferred stock preference -- (5,850)
-------- --------
Loss applicable to common shareholders $ (822) $ (3,376)
======== ========
Net (loss) income per share
Basic $ (0.04) $ (0.16)
======== ========
Diluted $ (0.04) $ (0.16)
======== ========
Weighted average common and common
equivalent shares
Basic 21,435 20,567
Diluted 21,435 20,567
The accompanying notes are an integral part of these consolidated statements.
(A) Amounts have been restated to reflect the acquisition of eShare.com which
was accounted for using the pooling-of-interest method (see Note 1).
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ESHARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------
2000 1999(A)
--------- ---------
Cash used by operating activities:
Net Loss $ (822) $(3,376)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Preferred stock preference -- 5,850
Depreciation & amortization 1,205 658
Non cash financing charges -- 16
Deferred interest expense -- 38
Non cash compensation expense -- 94
Changes in assets and liabilities:
Inventories 43 818
Accounts receivable net (6,124) (4,763)
Prepaid expenses & other current assets (40) (52)
Deferred revenue 2,090 1,574
Accounts payable & accrued expenses 3,195 (47)
Customer deposits 629 408
Current portion of long term debt 33 --
Other assets (29) (59)
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Total adjustments 1,002 4,535
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Net cash provided by operating activities 180 1,159
Cash flows from investing activities
Purchases of property & equipment (779) (1,041)
Proceeds from sale of marketable securities 4,420 (211)
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Net cash provided (used) by investing activities 3,641 (1,252)
Cash flows from financing activities
Issuance of convertible notes -- 500
Deferred offering cost (35) --
Net proceeds from issuance of common stock 1,403 4,709
Repayment of debt (15) (49)
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Net cash provided by financing activities 1,353 5,160
Effect of foreign currency translation (388) --
Net increase/decrease in cash & cash equivalents 4,786 5,067
Cash & cash equivalents at the beginning of the period 3,558 8,027
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Cash & cash equivalents at the end of the period 8,344 13,094
Short term investments 6,895 22,917
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Cash, cash equivalents & marketable securities $15,239 $36,011
======= =======
Supplemental disclosures of cash flow information:
Income taxes paid $ 11 $ 1,261
======= =======
The accompanying notes are an integral part of these consolidated statements.
(A) Amounts have been restated to reflect the acquisition of eShare.com which
was accounted for using the pooling-of-interest method (see Note 1).
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ESHARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands)
(unaudited)
1. Basis of Presentation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of the Company's management, these
consolidated financial statements contain all adjustments (which comprise only
normal and recurring accruals) necessary to present fairly the financial
position as of March 31, 2000 and 1999. The interim results for the three months
ended March 31, 2000 are not necessarily indicative of the results to be
expected for the full year. These statements should be read in conjunction with
the Company's consolidated financial statements for the fiscal year ended
December 31, 1999, as filed in its Annual Report on Form 10-K.
On September 1, 1999, the Company acquired eShare Technologies, Inc., a Delaware
corporation ("eShare.com") for 6,050 shares of its common stock. The acquisition
was accounted for using the pooling-of-interests method of accounting and
accordingly, all prior period financial statements have been restated to reflect
that the acquisition had been completed as of the start of each period.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
3. Revenue Recognition
The Company generates product revenues primarily from the sale of integrated
systems, which are comprised of both hardware and software and software
licenses. The Company's service revenues are generated from maintenance
contracts which include support, parts and labor, and software update rights.
Service revenues also include fee-based installation, training, and consulting
services.
The Company recognizes product revenues when a contract has been executed, the
product has been shipped and the Company has no significant obligations yet to
be satisfied. The Company's sales contracts provide for certain payment terms
normally based upon signing the contract, customer receipt of the product, and
commencement of operation of the customer's system.
Revenues from maintenance contracts are recognized ratably over the term of the
contractual support period which may range up to four years. If maintenance is
included in the original integrated product contract, such amounts are unbundled
from the license fee based on the value established by independent sale of such
maintenance to customers. Consulting revenues are primarily related to
implementation services performed under separate service arrangements related to
installation. Revenues from consulting, installation, and training services are
recognized as the services are performed.
4. Acquisitions
a. eShare.com
On September 1, 1999, the Company acquired eShare.com for 6,050 shares of common
stock. The acquisition was accounted for using the pooling-of-interests method
of accounting and accordingly, all prior period financial statements have been
restated to reflect that the acquisition had been completed as of the start of
each period.
b. smallwonder! softworks, Inc.
On June 15,1999, the Company acquired smallwonder!softworks, Inc.
("smallwonder") for $4,600 in cash and a prospective earnout of up to an
additional $1,000, based on achievement of certain defined criteria. The
acquisition was accounted for using the purchase method of accounting. The
excess of the cost over the fair value of net assets acquired of $4,759 is being
amortized over 5 years.
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5. Preferred Stock Preference
Included in results of operations for the three months ended March 31, 1999, is
a non-recurring, non-cash charge of $5,850 which represents the difference
between the estimated fair value of common stock of eShare.com at February 19,
1999 and the purchase price of certain Series C Preferred Stock issued on that
date. As part of the acquisition, the Series C Preferred Stock was converted to
common stock.
6. Inventories
Inventories are stated at the lower of first-in, first-out (FIFO) cost or market
and consist of the following at:
March 31, 2000 December 31, 1999
-------------- -----------------
Raw materials $ 158 $ 212
Work in process 1,090 920
Finished goods 676 835
-------- --------
Total inventories $ 1,924 $ 1,967
======== ========
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7. Loss per share
Net loss per share is computed using the weighted-average number of
common stock and diluted common stock equivalents ("CSE") shares from stock
options (using the treasury stock method) outstanding during each period. CSE's
are not included in periods where they are antidilutive.
The following table presents the components of diluted weighted average shares
outstanding.
For the three months ended March 31,
2000 1999
-------- --------
Weighted average shares outstanding
Basic weighted average shares outstanding 21,435 20,567
Weighted average common equivalent shares -- --
-------- --------
Diluted weighted average shares outstanding 21,435 20,567
======== ========
8. Other Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. The changes in the components of other comprehensive income
are reported as follows (in thousands):
For the three months ended March 31,
2000 1999
-------- --------
Net loss as reported $ (822) $ (3,376)
======== ========
Other comprehensive income:
Foreign currency translation $ (406) $ 24
Unrealized gains (losses) on securities, net 18 (50)
-------- --------
Other comprehensive income $ (388) $ (26)
======== ========
9. Segment Information
The Company is a multinational business operating in two segments. The Company
has adopted Statement of Financial Accounting Standards No. 131, "Disclosure
about Segments of an Enterprise and Related Information" (SFAS 131). The
adoption of SFAS 131 requires the presentation of descriptive information about
reportable segments which is consistent with that made available to the
management of the Company to assess performance. The reportable business
segments are telephony and internet. The results of these segments are as
follows (in thousands):
For the three months ended March 31,
2000 1999
-------- --------
Revenues:
Telephony 16,334 27,544
Internet 4,122 1,562
-------- --------
Total Revenues 20,456 29,106
Income (loss) from operations:
Telephony (564) 5,230
Internet (833) (1,008)
-------- --------
Total income (loss) from operations (1,397) 4,222
Depreciation & amortization
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Telephony 1,095 584
Internet 110 74
-------- --------
Total depreciation & amortization 1,205 658
Deferred compensation expense:
Telephony -- --
Internet -- 94
-------- --------
Total deferred compensation expense -- 94
The following represents total revenues and long-lived assets of the
Company based on geographic location representing over 10% of the combined
totals for the three months ended March 31, 2000 and 1999:
For the three months ended March 31,
2000 1999
------ ------
United States:
Total revenues 16,578 20,834
Long-lived assets 10,363 7,962
Europe:
Total revenues 2,640 3,202
Long-lived assets 382 256
Mexico/Latin America:
Total revenues 626 3,386
Long-lived assets 25 64
Other:
Total revenues 612 1,684
Long-lived assets 1 2
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollar and share amounts in thousands)
Overview
eShare Technologies, Inc., f/k/a Melita International Corporation (the
"Company"), along with its recently acquired wholly-owned subsidiaries; eShare
Technologies, Inc. ("eShare.com") and smallwonder! softworks, Inc.
("smallwonder"), is a leading provider of unified web and telephony customer
communications solutions for customer contact centers, e-commerce and online
communities.
On September 1, 1999, the Company acquired eShare.com for 6,050 shares of common
stock. The acquisition was accounted for using the pooling-of-interests method
of accounting and accordingly, all prior period financial information has been
restated to reflect that the acquisition had been completed as of the start of
each period presented.
On June 15, 1999, the Company acquired smallwonder, for $4,600 in cash and a
prospective earnout of an additional $1,000, based on achievement of certain
defined criteria. The acquisition was accounted for utilizing the purchase
method of accounting and accordingly, results have been included from the date
of the acquisition. The excess of the cost over the fair value of net assets
acquired of $4,759 is being amortized over 5 years.
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including but not limited to statements related to plans for future business
development activities, anticipated costs of revenues, product mix and service
revenues, research and development and selling, general and administrative
activities, and liquidity and capital needs and resources. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Investors are cautioned that any
forward looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward looking statements. A discussion of certain
risk factors that may cause actual results to differ from these forward-looking
statements can be found in Exhibit 99.1 to eShare Technologies' Annual Report on
Form 10-K for the period ended December 31, 1999, on file with the SEC.
Results of Operations
Revenues
Product. For the three months ended March 31, 2000, product revenues
decreased $8,444 or 40.0% to $12,667 from $21,111 in the comparable prior year
period. Revenues from the Company's telephony products decreased $10,597, or
53.4%, to $9,231 principally due to continued slowdowns in purchasing and
ongoing pricing pressures within the call center industry. This reduction was
partially offset by an increase in Internet product revenues of $2,153, an
increase of 167.8%, to $3,436 resulting from increased market acceptance of our
Internet customer interaction products.
Service. Service revenues decreased by $206, or 2.6% to $7,789 for the
three months ended March 31, 2000 from $7,995 in the comparable prior year
period. The decline resulted from a decrease in installation and training
revenue as a result of reduced product sales in telephony products, partially
offset by increases in consulting services and hosting revenues.
Cost of Revenues
Product The cost of product revenues include the cost of material,
personnel-related cost for product assembly, fees paid to third parties for
outsourced product assembly and, in certain instances, the cost of sublicensing
third-party software. Cost of product revenues for the three months ended March
31, 2000 decreased to $2,852 or 22.5% from $6,191 or 29.3% of related product
revenues in the comparable prior year period. This decrease in absolute dollars
in the cost of product revenues was due to the decline in telephony product
revenues. This decrease as a percentage of product revenues was a result of a
higher percentage of Internet products in total product revenues from the prior
year. Cost of revenues for Internet products is much lower than telephony
products due to the fact that they do not include related hardware. The decrease
also reflects a higher software content in our telephony products.
Service The cost of service revenues primarily consist of
employee-related costs for customer support, consulting and field service
personnel and fees paid to third parties for installation services and post
installation hardware maintenance services. Cost of service revenues increased
to $4,160 or 53.4% of the related service revenues for the three months ended
March 31, 2000 from $4,019 or 50.3% of related service revenues for the
comparable prior year period. The increase in absolute dollars related to the
addition of personnel to support our expanding customer base. The increase as a
percentage of service revenues was due to the decline in related revenues.
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Operating Expenses
Engineering, research and development Engineering, research and
development expenses primarily consist of employee-related costs for engineering
personnel involved with Internet and telephony software development. Also
included are outside contractor costs for development projects. Engineering,
research and development costs decreased to $2,675, or 13.1% of total revenues
for the three months ended March 31, 2000 from $3,464, or 11.9% of total
revenues in the comparable prior year period. The decrease resulted primarily
from a reduced labor force in our telephony development efforts partially offset
by increases in our Internet development efforts. The increase as a percentage
of total revenues was primarily a factor of reduced telephony product revenues.
The Company intends to continue to invest heavily in product development
activities, especially for our Internet solutions. As a result, the Company
expects that engineering, research and development costs will increase in the
future.
Selling, general and administrative Selling, general and administrative
expenses consist primarily of employee-related costs for sales, marketing,
administrative, finance and human resources personnel. Also included are
marketing expenditures for trade shows, advertising and other promotional
expenditures. Selling, general and administrative costs increased to $12,166, or
59.5% of revenues for the three month period ended March 31, 2000 from $11,210,
or 38.5% of revenues in the comparable prior year period. This increase is
primarily related to the expansion of our sales and marketing resources and
increased levels of marketing activities. The Company intends to continue
expanding our sales, marketing and sales support operations principally related
to our Internet products and the introduction of our customer interaction
management suite of products. As a result, the Company expects selling, general
and administrative costs will increase in the future.
Other Income (Expense), Net Other income (expense), net decreased to
$113 for the three month period ended March 31, 2000 from $239 for the
comparable prior year period. These decreases resulted from reduced interest
income earned on lower average investments in marketable securities.
Income Tax Provision (Benefit) For the three months ended March 31,
2000, the Company recorded a tax benefit of $0.5 million as compared to a tax
provision of $2.0 million for the three months ended March 31, 1999.
FINANCIAL CONDITION
Total assets as of March 31, 2000, were $76,633, an increase over
total assets of $70,551 at December 31, 1999. This increase is primarily due to
an increase in cash and accounts receivable.
Current liabilities were $22,521 at March 31, 2000, up from $16,640 at
December 31, 1999. This increase is due primarily to an increase in accrued
liabilities which was impacted by the receipt of a $3.2 million refund of
estimated taxes in the first quarter of 2000 and an increase in deferred
revenues.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, the Company had $15,239 in cash, cash equivalents and
marketable securities, compared to $14,873 as of December 31, 1999. The increase
in cash is primarily due to the receipt of a refund of estimated taxes of $3.2
million and partially offset by an increase in accounts receivable. Cash
provided by investing activities included the sale of $4,420 of marketable
securities, offset by purchases of property and equipment of $779. Net cash
provided by financing activities of $1,353 was primarily due to the proceeds of
issuance of common stock through the company sponsored option program and
employee stock purchase plan. The Company's working capital was $39,202 for the
period ending March 31, 2000 as compared to $38,596 for period ending December
31, 1999. The Company anticipates that existing cash and cash equivalents will
be adequate to meet its cash requirements for the next twelve months.
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IMPACT OF THE YEAR 2000 ISSUE
We do not currently believe that the effects of any Year 2000 non-compliance in
our installed base of software will adversely affect our business, financial
condition and results of operations. However, no assurance can be given that we
will not be exposed to potential claims resulting from system problems
associated with the century change which have not manifested themselves. We
developed contingency plans for business functions that are susceptible to a
substantive risk of disruption resulting from a Year 2000 related event,
including installation of backup power generation capability at our corporate
headquarters. We did not experience any material failures in business functions
as a result of Year 2000.
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ITEM 3. Quantitative and Qualitative Disclaimers About Market Risk.
Foreign Exchange
During the three months ended March 31, 2000, total revenues for the
Company's international operations were approximately 19.0% of the Company's
total revenues for all operations.
The Company's international business is subject to risks typical of an
international business, including, but not limited to: differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors. The effect of foreign exchange rate fluctuations on
the Company during the first quarter of 2000 was not material.
Interest Rates
The Company invests its cash in a variety of financial instruments,
including taxable and tax-advantaged variable rate and fixed rate obligations of
corporations, municipalities, and local, state and national governmental
entities and agencies. These investments are denominated in U.S. dollars. Cash
balances in foreign currencies overseas are operating balances.
Interest income on the Company's investments is carried in "Other
income (expense), net" on the Consolidated Financial Statements. The Company
accounts for its investment instruments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). All of the cash equivalents and
short-term investments are treated as available-for-sale under SFAS 115.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates, or the Company
may suffer losses in principal if forced to sell securities which have seen a
decline in market value due to changes in interest rates. The weighted-average
interest rate on investment securities at March 31, 2000 was approximately 3.84%
based on predominately tax free instruments. The fair value of securities held
at March 31, 2000 was $6.9 million.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Many of the Company's installations involve products that are critical
to the operations of its clients' businesses. Any failure in a Company
product could result in a claim for substantial damages against the Company,
regardless of the Company's responsibility for such failure. Although the
Company attempts to limit contractually its liability for damages arising
from product failures or negligent acts or omissions, there can be no
assurance the limitations of liability set forth in its contracts will be
enforceable in all instances. The Company is not currently party to any
material legal proceedings.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None
Item 6. Exhibits.
(a) Exhibit 10.1 Lease Agreement between the Company and Heartland Associates dated March 31, 2000.
(b) Exhibit 27 Financial Data Schedule (for SEC use only).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ESHARE TECHNOLOGIES, INC.
Date: May 15, 2000 By: /s/ Aleksander Szlam
--------------------
Aleksander Szlam
Chairman and Chief Executive Officer
Date: May 15, 2000 By: /s/ George Landgrebe
---------------------
George Landgrebe
Vice President, Administration and
Chief Financial Officer
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