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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-22317
ESHARE COMMUNICATIONS, INC.
(Exact Name of Registrant Specified in Its Charter)
GEORGIA 58-1378534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5051 PEACHTREE CORNERS CIRCLE 30092-2500
NORCROSS, GEORGIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(770) 239-4000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None N/A
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
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Common Stock, no par value 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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing price for the Common Stock on March 21,
2001 as reported by the Nasdaq Stock Market, was $5,694,457. The shares of
Common Stock held by each officer and director and by each person known to the
company who owns 10% or more of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 21, 2001, Registrant had 21,799,626 outstanding shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE 2001 ANNUAL MEETING OF
SHAREHOLDERS, CURRENTLY EXPECTED TO BE HELD ON OR ABOUT MAY 22, 2001, IS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K TO THE EXTENT STATED
HEREIN.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Business to customer interaction is no longer a luxury. Customer
communication is one of the most critical transactions a business can perform on
a daily basis. If the interactions are positive, a business may grow; one
misstep and a dissatisfied customer may be created. In a world where a
dissatisfied customer can take their business elsewhere with the click of a
mouse, businesses must more effectively identify, contact, acquire, and maintain
customers using new tools and methodologies. At eshare communications, Inc., we
provide Customer Interaction Management ("CIM") solutions that deliver the right
information to the right people at the right time.
eshare communications, Inc. ("eshare", the "Company", "we", "us", or "our")
is a leading provider of CIM solutions. We help businesses overcome the
challenge of effectively communicating with customers by providing integrated
CIM solutions. These solutions help both Internet-based and traditional
businesses establish and maintain high-quality relationships with their
customers, while streamlining the entire customer interaction process and
reducing operating inefficiencies. Our product offerings consist of a suite of
CIM software applications that enable our customers to effectively manage both
new and existing customers across multiple communication channels, including
voice, e-mail, interactive Web chat, and Voice-over-Internet Protocol ("VoIP").
Our blended CIM solutions bring the strength of traditional call centers
together with the flexibility and 24 hours per day, 7 days a week ("24x7")
availability of the Internet. We believe our applications deliver some of the
most effective and innovative customer interaction solutions to companies and
customers around the globe. These applications allow our customers to
potentially improve their customer relationships, acquire new customers, improve
retention of current customers, increase revenues, improve bottom-line earnings,
and more effectively utilize valuable resources.
We have been a provider of telephony call center solutions for over 20
years. As an innovator of predictive dialing software, we believe we have
established our Conversations(TM) product as one of the industry standards for
outbound calling and campaign management for some of the world's largest
financial service centers, retailers, and utilities.
Our Internet applications enable real-time, 24x7 interactive communications
and customer service over the Web. Our NetAgent(TM) Suite and other Internet
applications provide Internet-based e-mail management, collaborative media chat,
enterprise customer service and support, standard telephony Private Branch
Exchange/Automatic Call Distribution ("PBX/ACD") support, customer self-service,
instant messaging, live conferencing, distance learning, community chat,
threaded discussion forums and a variety of integration tools.
eshare's success in the market place can be measured best by the customers
that include eshare products in their CIM solutions. 8 of the top ten Fortune 50
and 6 of the top ten Global 50 companies currently use eshare products. In
addition, eshare has built a customer base that includes more than 2500 customer
sites in over 30 countries.
INDUSTRY BACKGROUND
Many of today's successful business models place the customer at the center
of the their business strategy. The dynamics of today's marketplace are
radically changing the way businesses must service their customers. Businesses
must learn to listen to, respond to, and interact with customers faster and more
cost effectively than ever. Most companies are feeling intensified competition,
as well as increased pressure for profitability. These companies understand that
they must focus on improving customer service and support to retain existing
customers, win new customers and turn them into repeat buyers.
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Today's customer is not only more informed than in years before, but is
also more demanding. The evolution of the Internet has caused customers to
demand 24x7 service. Customers expect quick and accurate responses independent
of the time when they make their inquiry. We believe the Internet is
dramatically altering the essence of CIM. Customer expectations are continually
changing and companies must recognize and adapt to this shift if they are to be
successful. When communications between businesses and customers were conducted
solely by telephone, the management of customer relationships was a relatively
straightforward matter. With a single communications channel, plus the
occasional fax, service agents were generally able to give customers the feeling
that they were receiving personal attention. With the rise of the Internet,
businesses need to meet the demand of their customers for Web based services,
self-service, e-mail as well as interactive and assisted communications.
While e-mail, Web chat, Web collaboration and other Internet communication
channels are rapidly gaining in popularity, the phone is still the number one
way in which business and consumers communicate. The acceptance of the telephone
as a means of customer service fueled the growth of the call center industry. We
believe that customers are beginning to expect a unified front in which all
communications channels supported by the business work in concert. When a
customer picks up the telephone to dial an 800 number, a service agent should
have access to previous e-mails, faxes, and other customer transaction and
interaction history. Similarly, a customer who prefers to contact a business via
e-mail or the Web may expect that communication to be as effective as a phone
call. Meeting these expectations is key to customer satisfaction, and failure to
do so may effectively drive customers away.
Moving forward, we believe quality CIM will require integrating live,
telephony-based customer service with the ability to process Web-based and
e-mail transactions. This dynamic applies equally to traditional
brick-and-mortar businesses that have embraced the Web and also to the newer
breed of e-commerce players whose customers may still desire contact via
traditional telephone means. For both, the integration must be as seamless and
transparent to the customer as possible. As a result, traditional call centers
are transforming into integrated contact centers.
STRATEGY
We have established a focused strategy with the goals of returning the
Company to profitability and positioning the Company as a leading provider of
multi-channel CIM software solutions. Our strategy to achieve these goals
includes:
- Seamlessly integrate all eshare products
- Expand our Expert Services
- Leverage our installed base customers
- Expand sales both direct and indirect
- Expand business partnerships
Seamlessly integrate all eshare products: We continue to focus our product
development towards providing software applications that are modular, yet
integrate seamlessly. All eshare's products in development are being designed to
"plug-and-play" allowing customers to easily interface our products with their
existing front and back-office applications. We are leveraging our technological
expertise to develop solutions that incorporate multi-channel customer contact
across the enterprise. Our solutions are offered such that customers can choose
to implement capabilities as their business demands, and can be integrated
quickly by our Expert Services team.
Expand our Expert Services: As the CIM industry continues to grow, eshare
will continue to invest in the people and processes to expand our professional
services, which we refer to as "Expert Services". eshare's professional staff
has a wealth of experience gained by working with hundreds of contact centers
around the world. We have traditionally provided system design, application
configuration, integration, training and consulting services. We believe the
demand for our Expert Services is growing. eshare intends to make the investment
in personnel and training to ensure that all our customer's service needs are
being met.
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Leverage our installed base of customers: We believe our global installed
customer base represents a potential market for future sales of products and
Expert Services. We will continue to use our strong customer relationships to
sell new products and services to multiple divisions, offices and business units
of a customer's organization.
eshare's traditional telephone based contact centers need to enhance their
existing technologies and offer multiple channels of contact to keep customers
satisfied, maximize the value of each customer interaction and keep operating
costs to a minimum. Purchasing eshare's Internet products, such as the NetAgent
suite provides these businesses with a closely integrated, multi-channel
offering, offering these businesses the opportunity to lower costs in servicing
their customers.
In addition, contact centers solely using Internet contact tools are
realizing that many of their customers may prefer to be contacted by phone,
creating opportunities to present our Conversations or XChange(TM) telephony
solutions.
Expand sales both direct and indirect: We currently sell our products
through a combination of direct sales force and indirect channels composed of
value added resellers ("VARs"), software integrators and other distributors. We
intend to commit additional resources to increase our direct sales force
worldwide where appropriate. We also currently have relationships with VARs and
other distributors in Europe, Latin America and Asia and intend to expand our
international operations through the addition of appropriate personnel and
forming new relationships in these territories.
Expand business partnerships: A significant part of the Company's sales
and marketing strategy is to build and develop relationships with companies that
will play an important role in the successful marketing of eshare products. We
believe that our focus on "plug-and-play" components will enhance our ability to
integrate with other Customer Relationship Management ("CRM") solution providers
and give our customers an integrated customer interaction solution. These
relationships may range from OEM agreements where eshare products will be an
embedded component within a company's product to co-marketing efforts.
SOLUTIONS AND SERVICES
We believe that the optimum customer interaction management solution that
will maximize customer satisfaction and company investments consists of a blend
of traditional call center and Internet technologies capable of providing fully
integrated customer care and consistent quality across all contact channels and
touch points. The solutions we offer to address this include:
Inbound/Outbound Voice Contact Management
We have provided voice-based contact management solutions for over 20
years. Customers worldwide use our contact management solutions to manage their
inbound and outbound voice-based contacts for proactive customer service,
collections, teleservice, mortgage services, fund raising, and other contact
pursuits. These contact solutions help businesses manage the complete customer
lifecycle from acquiring new customers to servicing and retaining existing ones,
maximizing each customer's value to the business.
We were among the first companies to introduce inbound/outbound contact
blending so that both ingoing and outgoing voice calls could be handled by the
same group of service agents. Contact blending helps a company establish higher
levels of agent productivity and improves agent response times for improved
customer service levels. Additionally, contact blending provides companies with
the ability to better manage customer needs in situations where inbound and
outbound calls are part of a multi-transaction. Our Conversations contact
management solution is highly integrated with other key components of a typical
call center, including host business applications/data bases, leading PBX/ACD
telephone systems, digital recording devices, reader board display devices, Web
servers, email servers and other network based CRM solutions.
Our call center solutions utilize industry standard IBM RISC, NT platforms,
and Windows/NT operating systems. Our mixed media server platform supports both
CTI links to leading PBX/ACD (software
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only solutions) and telephony links through industry standard call processing
hardware/software to perform call processing across multiple protocols for
multiple countries.
Web-based Customer Service
Designed to enhance communication between a business and its Web site
visitors, Web-based communication is provided by our NetAgent Suite. This
collection of customer care applications also integrates inbound/outbound e-mail
traffic and directs questions and comments to the appropriate personnel.
Customer care agents can monitor Web visitor activity, proactively engage
visitors in real-time discussions and interactions, respond to customer e-mail,
and manage multiple sessions concurrently.
To allow agents to interact knowledgeably with customers, our NetAgent
Suite provides immediate access to complete customer interaction histories,
including listings of previous e-mail exchanges and transcripts of live chat
interactions. Agents can assist in two-way, dynamic form preparation, add notes
from voice calls, and access other records from telephony-based interactions.
Our Internet solutions are highly scaleable, require no additional software
or other downloads for visitor use, and integrate seamlessly with many leading
CRM applications, PBX/ACD, customer care, and legacy systems. These solutions
currently support the Windows NT operating environment.
Our NetAgent Suite enables our customers to maximize online revenues,
improve service levels, and earn customer loyalty, all while reducing the costs
of managing the total customer service experience.
e-mail Management
Our NetAgent Suite EMAIL(TM) helps companies manage a large volume of
e-mails that Web sites typically generate, while minimizing the agent time
required to handle them. EMAIL also determines if the message can be responded
to automatically and, if it can, the application sends an automated response
while the original e-mail is being processed. As with other NetAgent Suite
applications, EMAIL provides agents with immediate access to complete customer
interaction histories.
Our EMAIL enables agents to answer customer e-mail inquiries accurately and
cost-effectively, allowing companies to retain satisfied, loyal customers,
increase service levels, and generate incremental revenue.
On-line Community Chat
Our Expressions(TM) product provides a turnkey solution for building
communities, providing interactive chat capability, threaded discussion forums,
and online presentations to visitors and participants. Expressions promotes
community collaboration and dynamic real-time interaction between users by
providing the means for conducting virtual meetings, moderated events, live
training, conferencing, distance learning, and interactive chat sessions.
Our Expressions helps companies build community, increase customer loyalty,
and facilitate business-to-business ("B2B"), business-to-employee,
business-to-consumer ("B2C"), and consumer-to-consumer ("C2C") collaborations.
Instant Messaging
Our Connections(TM) product provides a company the power to customize and
create its own branded Instant Messenger for its Web site's community of users.
As an organization-centric instant messaging application, Connections enables
user communities to interact directly in a chat-like process. Connections allows
users to search for other members and communicate with one another in real time,
while also bookmarking Web pages, storing conversation notes, and providing
alerts when specific associates log on.
With Connections Instant Messaging, businesses and organizations can
achieve greater productivity and time-savings, and can build customer loyalty,
thereby increasing its Web site traffic.
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Customer Self-service
The initial focus of Internet-based commerce was to be a self-service
mechanism for the consumer to purchase goods and services. However, the
traditional brick-and-mortar companies wishing to adopt this strategy have been
challenged by a customer base accustomed to an assisted service model. Our
NetAgent Suite provides the capability to transform those customers into a
self-servicing group. This is accomplished in part by Web enabling current
business processes and then migrating them to the company Web as self-service
pages. NetAgent Suite is integrated with Clarify, Primus, Siebel and other
industry-leading solutions that facilitate Web-based customer self-service.
NetAgent Suite also includes features such as Auto-Pilot and Frequently Used
Pages that enable a company to push information to on-line customers, using this
opportunity to train customers on how to use the site's self-service
capabilities.
Multi-Channel Administrator and Agent Desktops
As contact channels are added to the telephony call center or Web-based
contact center, these customer interaction channels must be capable of being
administered and managed from a single desktop. In addition, agent desktops must
be able to switch between the various duty modes, supporting voice, live
collaborations, live chat, e-mail, and assisted forms, among others.
Our e360(TM) CIM Suite enables customers who have our Conversations,
NetAgent Suite, and Connections applications to administer these from a single
desktop. The e360 CIM Suite allows agents to switch between the various
interactive voice, chat, e-mail, and messaging duty modes.
Expert Services
We provide Expert Services including comprehensive business analysis,
solutions planning, implementation, training, application integration and
customizations, staff augmentation, and project management to our customers. We
also offer other special customer services such as custom application
development and custom project management. These services enable our customers
to develop, maintain, and grow their customer contact centers while increasing
call center productivity and reducing operational costs.
Installation and integration services consist of configuration and
documentation along with the physical installation and integration of the
product suite. Training includes introductory training classes that are provided
as part of each initial suite purchase, and additional advanced classes that are
delivered for additional fees.
We also supplement our applications offerings with maintenance services,
including help desk support. Customers that receive maintenance services are
entitled to customer and technical support 24x7. Maintenance paying customers
also receive ongoing system support and baseline software upgrades.
Our customer service group is composed of an Expert Services group which
provides services for a fee when contracted by a customer, and a Global Support
Services group, which manages the help desk, technical support, maintenance,
purchasing, testing and ongoing relations with customers. Services personnel are
located throughout the USA, Canada, Mexico, Brazil, UK, France, Singapore and
the Philippines. Our VARs and distribution partners provide additional services.
Web Customer Service Hosting
NetAgent Live(TM), eshare's hosting service, enables our customers to
eliminate software, hardware and configuration costs from their Internet
customer service strategies by hosting our CIM solutions. Using NetAgent Live,
our customers can minimize up-front costs and maximize the return on their
investments. The NetAgent Live service gets our NetAgent Suite and other
application software up-and-running on a dedicated server within 48 hours of
order. With remote access to our applications data and reports, the customer can
configure services 24x7.
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CUSTOMERS
We primarily license our products and services to companies that engage in
various CRM activities. Our products are licensed to leading companies in a
variety of industries including financial services, telecommunications and
technology, electronic commerce and Web-communities as well as government and
education. We provide solutions to call centers, Portals, Application Service
Providers ("ASPs"), Internet Service Providers ("ISPs"), dot.coms, Web
Exchanges, and Interactive Contact Centers.
We have a customer base for our voice contact management products of
approximately 600 contact center sites. Our Internet business has a customer
base of over 350 NetAgent, EMAIL solutions and approximately 1,500 Expressions
customer sites.
Our customers independently operate domestic and international user groups.
Each group conducts annual as well as regional user group meetings typically
focused on common applications and business opportunities. We participate as
invited in the user group conferences generally by conducting seminars, product
demonstrations and educational sessions.
SALES AND MARKETING
We license our voice contact management solutions through a direct sales
organization with offices worldwide. Additionally, we maintain a network of
distributors and VARs to re-license our products. We do business in the U.S.,
Canada, France and the United Kingdom primarily through direct channels, while
products and services are licensed in other countries through indirect channels.
We maintain strategic relationships with companies such as Cable &
Wireless/Mercury Communications, Manta Systems, Mitsubishi, and Williams
Communications.
Our Internet products are also licensed through a direct telemarketing
sales force and approximately 20 channel partnerships. We maintain strategic
relationships with companies such as Snickleways Interactive and Linkshare
Corporation to make NetAgent Suite available to approximately 200 online
merchants, as well as relationships with America Online and StarMedia to assist
in marketing NetAgent Suite to their merchant partners.
Our VARs and distributors are independent organizations that perform some
or all of the following functions for our products: sales and marketing, systems
implementation and integration, and ongoing consulting and technical support. We
believe that our VARs and distributors have a significant influence over product
choices made by our customers and that our VAR and distributor relationships are
an important element in our marketing, sales and implementation efforts.
Our marketing activities include product management, product marketing,
direct marketing, public relations, press and analyst communications, event
support and management of our Web site. Our business development group is
responsible for creating distribution relationships, strategic alliances,
joint-marketing agreements and co-development relationships with B2B, B2C, and
C2C industry providers.
As of December 31, 2000, eshare employed 134 people worldwide in our Sales
and Marketing groups.
TECHNOLOGY AND PRODUCT DEVELOPMENT
Our CIM architecture uses a standards-based framework to provide open
solution implementations for best-of-breed products. Our open approach also
helps assure that our CIM applications/components integrate easily with other
applications and services, when provided by third parties.
In particular, our CIM architecture offers the following benefits:
- proven, tested, robust business services and application components;
- off-the-shelf component development from heterogeneous technologies;
- reusable common application elements to shorten development cycles;
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- lower application development and implementation costs;
- faster development and deployment across multiple platforms; and
- interoperability with legacy systems and new emerging applications.
Our applications are based on an open architecture utilizing industry
standards and provide seamless integration with third-party systems or
customers' existing technology infrastructure. Our commitment to open
architecture leverages customers' investments in other customer interaction
management components by ensuring that these systems are adaptable for future
needs. We seek the continued development of products that adhere to existing and
emerging standards. However, there can be no assurance that we will be able to
successfully develop new products to address new customer requirements and
technological changes, or that such products will achieve market acceptance.
We intend to continue investment in research and development to maintain
our position as a leader in CIM solutions. In fiscal 2000, 1999 and 1998, our
research and development expenditures were approximately $10.7 million, $14.2
million and $11.8 million, respectively. All of our expenditures for research
and development costs have been expensed as incurred. As of December 31, 2000,
we employed 83 people in our research and development groups.
COMPETITION
We compete as part of the larger CRM market, which includes both voice
based and Internet based solutions. This market has been characterized by high
growth rates, converging technologies and rapid technological innovation. These
market dynamics represent both an opportunity and a competitive threat to
eshare.
We compete with numerous companies in each product category. Several of our
competitors compete across many of our product lines, while others offer a more
narrow solution. Some of our competitors include, in alphabetical order, Avaya
Communications, Cisco Systems, Inc., Davox Corporation, eGain Communications,
FaceTime, Genesys Telecommunications Laboratories, Kana Communications,
LivePerson, PeopleSupport, and Siebel Systems.
Many of our current and potential competitors have greater financial,
marketing and technical resources than we do. As a result, they may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than we could.
We believe that the primary competitive factors affecting our markets
include the speed of application adaptability based on, flexibility,
scalability, interoperability, functionality and ease of use, as well as
reputation, quality, performance, price and customer service and support.
REGULATORY ENVIRONMENT
Federal, state and foreign law regulate certain uses of outbound call
management systems. The federal Telephone Consumer Protection Act ("TCPA")
prohibits the use of automatic dialing equipment to call emergency telephone
lines, health care and similar facility patient telephone lines, and telephone
lines where the called party is charged for incoming calls, such as those used
by pager and cellular phone services. The TCPA prohibits use of such equipment
to engage two or more lines of a multi-line business simultaneously, and
restricts the use of artificial or prerecorded voice messages in calls to
residential lines. Among other things, the TCPA required the Federal
Communications Commission ("FCC") to create regulations protecting residential
telephone subscribers from unwanted telephone solicitations. In addition, the
Telemarketing and Consumer Fraud and Abuse Prevention Act authorized the Federal
Trade Commission ("FTC") to prohibit a variety of deceptive and/or abusive
telemarketing practices, including, among other things, repetitive or harassing
calls and requests by telemarketers for payments before certain types of
services are provided. The rules adopted by the FCC and FTC prohibit calls to
persons who have indicated that they do not wish to be contacted, and the FCC
specifically requires telemarketers to maintain a company-specific "do-not-call
list" that contains the names and numbers of residential subscribers who do not
want to receive calls.
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The rules also require that telemarketers may call consumers only after 8:00
a.m. and before 9:00 p.m., local time. The FCC rules do not restrict calls made
to parties that have an "established business relationship" with the caller or
calls placed by tax-exempt nonprofit organizations.
The Telemarketing Fraud Prevention Act ("TFPA") adopted in June 1998,
imposes severe criminal penalties, including forfeiture of property, for fraud
committed through telemarketing calls. Certain states have enacted similar laws
limiting access to telephone subscribers who object to receiving solicitations.
The Fair Debt Collection Practices Act ("FDCPA") limits communication by certain
debt collectors with consumers only after 8:00 a.m. and before 9:00 p.m., local
time, and not at the consumer's place of business. Many of our customers are
exempt from the FDCPA. In addition, certain states have enacted laws regarding
debt collection practices, which in some cases may impose restrictions on
telephonic collection activities in addition to those of the FDCPA. Although
compliance with these laws may limit the potential use of our products in some
respects, we believe our systems can be programmed to operate automatically in
full compliance with these laws through the use of appropriate calling lists and
calling campaign time parameters.
The application of sales and other taxes by state and local governments to
online commerce is currently under discussion. In particular, the federal
government and a number of states are currently reviewing the appropriate tax
treatment of online commerce, and new federal laws or state tax regulations may
subject online commerce to additional state sales and use taxes. Any adverse
impact on the growth of online commerce may reduce the sales of our software and
adversely affect our revenues and earnings.
PROPRIETARY RIGHTS
We rely on a combination of patent, copyright, trade secret and trademark
laws, confidentiality procedures and contractual provisions to protect our
proprietary rights in our products and technology. We hold numerous U.S. and
foreign patents covering various processes and technologies utilized in
telephony based call management systems. These patents cover our proprietary
implementations of applications such as inbound/outbound call blending, call
progress analysis, screen pops of the called person's account information,
Cancel Dial(R) and Single System Image View(TM). We also have a number of
pending patent applications on customer interaction management innovations for
which patents have not yet issued. In many cases, we have also received or
applied for patents in other countries covering the innovations covered by
existing U.S. patents or patent applications. We have an extensive portfolio of
18 U.S. patents and 28 foreign patents worldwide; and more than 150 patents
pending in over 20 countries, including 12 U.S. patents and 140 related foreign
patents.
EMPLOYEES
As of December 31, 2000, we had 443 full-time employees, (143 in
professional services and global support services, 134 in sales and marketing,
83 in research and development and 70 in administration), of whom 386 were based
in the U.S. and 57 were based in other countries. With the exception of our
employees in our Mexico City subsidiary, none of our employees are covered by a
collective bargaining agreement. We consider our employee relations to be good.
We believe our future success will depend in large part on our ability to
recruit and retain qualified employees, especially experienced software
engineering personnel. The competition for such personnel is intense, and we
cannot assure that we will be successful in retaining or recruiting key
personnel.
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EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their ages as of January 31,
2001, are as follows:
NAME AGE POSITION
- ---- --- --------
Aleksander Szlam........................... 49 Chairman of the Board and Chief Executive
Officer
George W. Landgrebe........................ 59 Chief Operating Officer
Glen Shipley............................... 50 Chief Financial Officer and Chief
Administrative Officer
William K. Dumont.......................... 51 President Worldwide Sales
Andrew J. Filipowski(1,2).................. 50 Director
Donald L. House(1,2)....................... 59 Director
Steven Jeffery(1).......................... 45 Director
Jack A. Pellicci(1,2)...................... 62 Director
James Tito................................. 44 Director
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(1) Member of the Audit Committee
(2) Member of the Compensation Committee
ALEKSANDER SZLAM founded eshare (formerly Melita International) in 1979 and
has served as our Chairman of the Board since its inception. Mr. Szlam was Chief
Executive Officer ("CEO") from 1979 until July 2000 and was again named CEO in
January 2001. Prior to founding eshare, Mr. Szlam worked as a design engineer
and scientist at Lockheed Corporation, Solid State Systems and NCR. Mr. Szlam
received a BSEE and a MSEE from Georgia Institute of Technology and holds over
40 world industry patents.
GEORGE W. LANDGREBE has served as our Chief Operating Officer since
December 1999, and as our Chief Financial Officer from February 2000 through
September 2000. Mr. Landgrebe was a Director of eShare.com, Inc. (formerly
eShare Technologies, Inc.) from its inception until its merger with us. Prior to
joining eShare.com, Inc., Mr. Landgrebe was managing partner in Performance
Leadership, LLC, a business consulting group. Mr. Landgrebe has also held
executive positions with AutEx Systems, an online, real time interactive equity
block trading firm, Thomson Financial Information (American Banker/Bond Buyer),
Robbins Research International, Infinite Possibilities LLC, WorkLife Solutions,
and Xerox Corporation.
GLEN SHIPLEY has served as our Chief Financial Officer since October 2000.
From October 1998 to September 2000, Mr. Shipley was Chief Financial Officer for
Vanishing Point, Inc., a venture backed start-up company. From 1996 to September
1998, Mr. Shipley was a corporate financial consultant and attorney in private
practice rendering legal and financial advice to commercial enterprises. Other
positions he has held include Chief Financial Officer and General Counsel of
Advanced Research Management and Chief Financial Officer of MCEG, Inc., where he
coordinated the company's initial public offering. Mr. Shipley received a M.B.A.
from UCLA and his J.D. from Seattle University. He also holds a certified public
accountant certificate.
WILLIAM K. DUMONT has served as President Worldwide Sales from February
2001. Mr. Dumont served as Executive Vice President, Business Development, from
January 2000 until September 2000 and as Executive Vice President Sales from
October 2000 through January 2001. Mr. Dumont was Chief Operating Officer of
eshare from January 1999 until December 1999. He was Senior Vice President,
Worldwide Sales from August 1998 until December 1999. Mr. Dumont also served as
Vice President, Sales from December 1996 until August 1998. Prior to joining
eshare, Mr. Dumont served as Regional Manager for Octel Communications
Corporation from 1994 to 1996, and from 1990 to 1994 he served as Regional Vice
President of VMX, Inc., both of which are voice-processing companies.
ANDREW J. FILIPOWSKI has served as a director since April 1999. He is
President, CEO and Chairman of Divine, Inc, an enterprise web solutions company.
Mr. Filipowski was Founder/Chairman/President of
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Platinum Technology, Inc., from its founding in 1987 until its sale to Computer
Associates, Inc. in 1999. Platinum Technology developed and marketed a wide
array of distributed computing systems software products and data warehousing
solutions.
DONALD L. HOUSE has served as a director since June 1997. Mr. House is
currently Chairman of the Board of Directors of Ockam Technologies. He served as
Chairman of the Board of Directors of Clarus Corporation (formerly known as SQL
Financials International, Inc.), from 1993 to 1998. He continues to serve on
that Board, where he is a member of its Audit Committee. He is also on the Board
of Carreker Corporation, where he is Chairman of the Audit Committee. Since
1988, he has been a business advisor, director and investor in a number of
emerging growth high technology companies. From 1968 through 1987, Mr. House
served in a number of positions with Management Science America, Inc.
STEVEN JEFFERY has served as a director since December 2000. He is
Chairman, President and CEO of Clarus Corporation. Mr. Jeffery joined Clarus in
1994 from Hewlett-Packard Company, where he served in a variety of sales,
marketing and management positions in the U.S., Europe and Asia Pacific for 15
years. Before that, he was in sales with IBM. Mr. Jeffery holds a bachelor's
degree in business from Sheffield City University in the U.K.
JACK A. PELLICCI has served as a director since July 2000. He is Vice
President of Oracle Corporation's Global Service Industries Group, having joined
Oracle in 1992 after retiring from the U.S. Army as a Brigadier General,
responsible for the Personnel Information Systems Command. Mr. Pellicci also
served as the Deputy Director and acting Director of Training for the U. S. Army
and was responsible for policy and funding for technology-based training and
education. He is currently the co-chairman of the Armed Forces Communications
and Electronics Association ("AFCEA") International's Technical Committee and
has served on the Board of Directors of the Washington Chapter of AFCEA. He is a
member of the Board of Directors of the Open GIS Consortium, a worldwide
organization leading the initiative for interoperability in the
GIS/Geo-processing community. Mr. Pellicci serves on the Board of Advisors for
the Government Technology Program at the University of Denver. He also serves on
the Board of Directors of Sedona, a public company focusing on
Geospatial/GIS/Spatially Enabled CRM business. Mr. Pellicci holds a BSEE degree
from the U.S. Military Academy at West Point, and a MSEE degree from the Georgia
Institute of Technology.
JAMES TITO has served as a director since September 1999. Mr. Tito served
as our president from October 1999 through December 2000 and as our Chief
Executive Officer from July 2000 through December 2000. Mr. Tito was a
co-founder of eShare.com, Inc., and served as the Chairman and Chief Executive
Officer of eShare.com, Inc. from its inception in October 1996 until its
acquisition by us. Prior to co-founding eShare.com, Inc. Mr. Tito served as the
president of its predecessor, Interactive Marketing Technologies, a database
marketing, consulting and services firm, since 1988. Mr. Tito serves as a
director of Long Island's Software Technology Network.
There are no family relationships between any of our directors or executive
officers.
CERTAIN FORWARD LOOKING STATEMENTS
In this report (including the documents incorporated herein by reference),
we have made certain forward-looking statements that are based on our current
beliefs and the information currently available to us, as well as estimates and
assumptions we have made. Words such as "anticipate," "believe," "estimate,"
"expect," "future," "intend," "plan" and similar expressions, as they relate to
us or our management, identify forward-looking statements. Such statements
reflect our current views with respect to future events and are subject to
certain risks, uncertainties and assumptions relating to our operations and
results of operations, competitive factors and pricing pressures, shifts in
market demand, the performance and needs of the industries we serve, the costs
of product development and other risks and uncertainties, including the risk and
uncertainties identified above under "Risk Factors." Should one or more of these
risks or uncertainties materialize, or should the underlying assumptions prove
incorrect, actual results or outcomes may vary significantly from those
anticipated, believed, estimated, expected, intended or planned. Please see Ex-
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hibit 99.1 "Safe Harbor Compliance Statement for Forward Looking Statements",
the terms of which are incorporated herein, for additional factors to be
considered by shareholders and prospective shareholders.
ITEM 2. PROPERTIES
Our corporate headquarters, which include our principal administrative
offices, are located in approximately 100,000 square feet of modern office space
in Norcross, Georgia. This facility is leased to us through 2005. Subsequent to
entering into this lease, the facility was acquired by a partnership controlled
by our Chairman of the Board, Chief Executive Officer and principal shareholder.
We lease through our English subsidiary eShare Technologies Limited,
approximately 14,000 square feet of modern office space outside London. The
facility is owned by a corporation controlled by our Chairman of the Board,
Chief Executive Officer and principal shareholder.
Our marketing, support, sales and research and development activities are
undertaken in our corporate headquarters and a 36,000 square foot leased
facility in Hauppauge, New York. Through the year 2000, we also leased space for
several sales and support centers located in the United States, Mexico City, and
Paris. In addition, we had leased space in Toronto through October 1999.
ITEM 3. LEGAL PROCEEDINGS
We are from time to time, subject to legal proceedings and claims that have
arisen in the ordinary course of business. We are not currently a party to any
legal proceedings that we believe to be material with respect to our financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters brought to a vote of security holders during the
fourth quarter of fiscal year 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is listed on the Nasdaq National Market, or Nasdaq, under
the symbol "ESHR." The following table sets forth the range of high and low sale
prices for our common stock on Nasdaq during the periods indicated:
HIGH LOW
---- ---
1999:
First Quarter............................................. 25 1/8 11
Second Quarter............................................ 16 7/8 9 3/8
Third Quarter............................................. 13 1/2 7 3/4
Fourth Quarter............................................ 28 7/16 3 7/16
2000:
First Quarter............................................. 26 11 1/4
Second Quarter............................................ 12 1/4 4 5/8
Third Quarter............................................. 7 1 7/8
Fourth Quarter............................................ 3 5/8 3/4
2001:
First Quarter (through March 21, 2001).................... 2 1/8 11/16
On March 21, 2001, the last sale price of the common stock on Nasdaq was
$0.72 per share. As of March 21, 2001, there were 172 holders of record of our
common stock.
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We have never declared or paid any cash dividends on our common stock. We
currently anticipate that we will retain all future earnings for use in our
business and do not anticipate paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report. We have derived the statement of operations data for
the years ended December 31, 2000, 1999, 1998, 1997 and 1996 from our financial
statements. On September 1, 1999, we completed the acquisition of eShare.com,
Inc. (formerly eShare Technologies, Inc.). The acquisition was accounted for as
a pooling of interest; therefore, all prior period amounts have been restated.
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
NET REVENUES:
Product.................................. $ 48,675 $ 63,063 $71,333 $46,481 $32,077
Service.................................. 35,281 31,792 25,748 20,039 15,944
-------- -------- ------- ------- -------
Total revenues................... 83,956 94,855 97,081 66,520 48,021
Cost of revenues:
Product.................................. 10,738 19,398 21,680 15,577 11,494
Service.................................. 20,384 16,765 13,346 9,642 6,994
-------- -------- ------- ------- -------
Total cost of revenues........... 31,122 36,163 35,026 25,219 18,488
-------- -------- ------- ------- -------
Gross margin............................... 52,834 58,692 62,055 41,301 29,533
Operating expenses:
Engineering, research and development.... 10,658 14,213 11,798 8,003 5,158
Selling, general and administrative...... 57,042 46,467 36,208 26,080 17,655
Write off of purchased software.......... 3,186 -- -- 268 --
Amortization of intangible assets........ 1,021 542 -- -- --
Acquisition and restructuring related
charges............................... -- 6,990 -- -- --
Deferred compensation expense............ -- 2,271 -- -- --
-------- -------- ------- ------- -------
Total operating expenses......... 71,907 70,483 48,006 34,351 22,813
-------- -------- ------- ------- -------
(Loss) income from operations.............. (19,073) (11,791) 14,049 6,950 6,720
Other income, net.......................... 414 756 1,067 417 178
-------- -------- ------- ------- -------
(Loss) income before income taxes.......... (18,659) (11,035) 15,116 7,367 6,898
Income tax (benefit) provision:
Tax (benefit) provision.................. (7,542) (1,077) 6,576 3,024 2
Deferred tax adjustment.................. -- -- -- (1,473) --
-------- -------- ------- ------- -------
Net (loss) income.......................... $(11,117) $ (9,958) $ 8,540 $ 5,816 $ 6,896
Preferred stock preference................. -- (5,850) -- -- --
-------- -------- ------- ------- -------
Net (loss) income applicable to common
shareholders............................. $(11,117) $(15,808) $ 8,540 $ 5,816 $ 6,896
======== ======== ======= ======= =======
Income before pro forma income taxes....... $ 7,367 $ 6,896
Pro forma income taxes..................... 4,469 2,827
------- -------
Pro forma net income....................... $ 2,898 $ 4,069
======= =======
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YEAR ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Loss) earnings per share:
Diluted (loss) earnings per share........ $ (0.51) $ (0.76) $ 0.40 $ 0.29 $ 0.39
Pro forma diluted (loss) earnings per
share................................. $ (0.51) $ (0.76) $ 0.40 $ 0.14 $ 0.23
Weighted average shares outstanding:
Diluted.................................. 21,697 20,758 21,575 20,049 17,475
DECEMBER 31,
-----------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities................................. $14,727 $14,873 $30,783 $32,116 $10,973
Working capital.............................. 21,622 38,596 42,656 32,909 9,474
Total assets....................... 72,872 77,323 78,484 58,861 29,167
Long-term debt, net of current portion....... -- 74 2,726 185 --
Total shareholders' equity......... 44,390 53,837 48,394 38,649 12,786
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are a provider of CIM software applications. Our solutions support
voice, e-mail, live interaction/chat and hosting services for approximately
2,500 call center sites, e-businesses, ASPs, ISPs and Portals in approximately
30 countries. Our solutions enable real-time interactive communications and
services, both voice based and over the Internet, and include customer service
and support, customer self-service, instant messaging, live conferencing and
events, distance learning, community chat, threaded discussion forums and a
variety of custom integration tools. Organizations use our applications and
services to implement strategies for customer interaction that increase the
value derived from their customers by enhancing customer acquisition and
retention activities, while reducing costs and improving agent productivity and
effectiveness. We offer ongoing maintenance support of our products. We also
offer fee-based installation, integration, training, hosting and consulting
services.
Our revenues are derived primarily from product license fees for the use of
our software applications and sales of related computer and telephony hardware
to utilize the software, service fees for ongoing system support, maintenance,
installation, integration, training, and consulting services, and fees for
hosting applications for our customers. We recognize product revenue upon
delivery of the product if there are no significant post-delivery obligations,
if collection is probable and if our fees are fixed and determinable. Revenues
from post-contract maintenance support and revenues from hosting applications
are recognized ratably over the term of the support or hosting period.
Post-contract maintenance support revenues accounted for 25.6% of total revenues
in 2000. Revenues from consulting, installation, integration, and training
services are recognized as the services are performed. In any given period, a
significant portion of our revenues may be derived from large sales to a limited
number of customers. During 2000, no customer accounted for more than 10% of our
total revenues. During 1999, First USA Bank accounted for 11% of our total
revenues. During 1998, CitiGroup accounted for 13.1% of our total revenues.
Revenues from our five largest customers represented 16.6%, 28.2% and 23.2%, of
our total revenues for 2000, 1999 and 1998, respectively.
We currently market our products in the United States, Canada, Mexico,
France, and the United Kingdom through a direct sales force and through select
distributors. We rely on VARs and distributors to sell, install and support our
products in other countries. Revenues from sales to customers outside the United
States accounted for 27.5%, 31.7%, and 23.8% of our total revenues for 2000,
1999 and 1998, respectively. We believe that our continued growth and future
profitability will require further expansion of our international operations. In
order to successfully expand international sales, we continue to establish
additional foreign operations and we plan to hire additional personnel and
recruit additional VARs and distributors. To the extent that we are unable to do
so on a timely basis, our revenue growth, if any, may be slowed, and
profitability may be adversely affected. Our international revenues are
denominated primarily in British
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pounds or Euro. Our expenses incurred in foreign countries are typically
denominated in local currencies. We have recognized pre-tax foreign exchange
(losses) gains of approximately $(43,000), $(49,000) and $16,000 in 2000, 1999
and 1998, respectively. There can be no assurance that future fluctuations in
currency exchange rates will not have a material adverse impact on our future
international operations.
In June 1999 we acquired smallwonder! softworks, Inc., a provider of
multi-media, web enabled call center software solutions. The acquisition was
accounted for as a purchase. Under purchase accounting, the total purchase cost
and fair value of liabilities assumed were allocated to the tangible and
intangible assets of smallwonder softworks based upon their respective fair
values as of the closing. The remainder of the excess of the purchase price over
the tangible assets acquired of approximately $4.7 million was assigned to trade
names, workforce, and goodwill and is being amortized over a period of five
years.
In September 1999 we merged with eShare.com, Inc. (formerly eShare
Technologies, Inc.), a provider of Internet-based software solutions. The merger
was designed to expand our addressable market to include the emerging market of
customer interaction management over the Internet. All historical financial
information and analysis have been restated to reflect the acquisition, which
was accounted for as a pooling of interests. With the merger, we are currently
operating in two segments, telephony and Internet. We believe that these two
segments may collapse into a single segment as we integrate our telephony and
Internet solutions into a single product offering and as the market place
changes from "call center" or telephony centric installations into "contact
centers" using blended forms of customer contact technology. Segment information
is detailed in the notes to the consolidated financial statements. Although not
currently a material segment of business, we are actively pursuing the licensing
of our patent portfolio. We believe that our patents are infringed by a number
of companies. We intend to selectively move forward to enforce our patents
against potential infringers when we can document the infringement and believe
that we can recover a combination of damages for past infringements and enter
into license agreements for future patent use. We believe this segment may
produce material and reportable revenue and income streams in the future.
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RESULTS OF OPERATIONS
The following table sets forth items shown in our statement of operations
as a percentage of total revenues for the periods indicated. The table should be
read in conjunction with our financial statements and notes thereto contained
elsewhere in this report.
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
Net revenues:
Product................................................... 58.0% 66.5% 73.5%
Service................................................... 42.0 33.5 26.5
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
Cost of revenues:
Product................................................... 12.8 20.4 22.3
Service................................................... 24.3 17.7 13.8
----- ----- -----
Total cost of revenues............................ 37.1 38.1 36.1
----- ----- -----
Gross margin................................................ 62.9 61.9 63.9
Operating expenses:
Engineering, research and development..................... 12.7 15.0 12.2
Selling, general and administrative....................... 67.9 49.0 37.3
Write off of purchased software........................... 3.8 -- --
Amortization of intangible assets......................... 1.2 0.6 --
Acquisition and restructuring related charges............. -- 7.3 --
Deferred compensation expense............................. -- 2.4 --
----- ----- -----
Total operating expenses.......................... 85.6 74.3 49.5
----- ----- -----
(Loss) income from operations............................... (22.7) (12.4) 14.4
Other income, net........................................... 0.5 0.8 1.1
----- ----- -----
(Loss) income before income taxes........................... (22.2) (11.6) 15.5
Income tax (benefit) provision:
Tax (benefit) provision................................... (9.0) (1.1) 6.7
----- ----- -----
Net (loss) income........................................... (13.2)% (10.5)% 8.8%
Preferred stock preference.................................. -- (6.2) --
----- ----- -----
Net (loss) income applicable to common shareholders......... (13.2)% (16.7)% 8.8%
===== ===== =====
The following table sets forth, for each component of net revenues, the
cost of such revenues as a percentage of such revenues for the periods
indicated:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
----- ----- -----
Cost of product revenues.................................... 22.1% 30.8% 30.4%
Cost of service revenues.................................... 57.8% 52.7% 51.8%
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues
Product. Product revenues in 2000 were $48.7 million as compared to $63.1
million in 1999, a decrease of $14.4 million, or 22.8%. Revenue from the sale of
telephony product decreased $20.3 million or 36.7% for the comparable periods.
This decrease is principally due to a slowdown in purchases from telephony
customers and ongoing pricing pressures within the telephony based call center
industry. This reduction was partially offset by an increase in Internet product
revenues of $5.9 million, or 79.0%, from $7.6 million in 1999 to $13.5 million
in 2000. This increase resulted from continued market acceptance of our
Internet-based customer
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interaction products and the growing trend of telephony based call centers to
add Internet customer interaction software tools.
Service. Service revenue increased by $3.5 million, or 11.0% to $35.3
million in 2000 as compared to service revenue of $31.8 million in 1999.
Increased maintenance and consulting service revenue associated with the
increase in Internet product sales was the primary source of the new service
revenues.
Cost of Revenues
Product. The cost of product revenues include the cost of material, fees
paid to third parties for outsourced hardware assembly and, in certain
instances, the cost of sublicensing third-party software. The cost of product
revenue for 2000 was $10.7 million, a decrease of $8.7 million, or 44.6%, as
compared to $19.4 million in 1999. This decrease in product cost is principally
the result of software only upgrades for our existing telephony customers and
the lower cost of software only Internet products. Cost of product revenue for
2000 was 22.1% of related product revenues as compared to 30.8% of related
product revenues for 1999. This 8.7% decrease in absolute dollar terms in the
cost of product revenue was due to the decline in telephony hardware product
revenue and a higher percentage of software products in total product revenue as
compared to the prior year.
Service. The cost of service revenues primarily consist of
employee-related costs and outsourcing costs for customer support, consulting
and field service personnel, as well as fees paid to third parties for
installation services and post installation, help desk, and hardware maintenance
services. The Company's cost of service revenues for 2000 increased to $20.4
million or 57.8% of related service revenues as compared to $16.8 million or
52.9% of related service revenues for 1999. This increase in cost of service
revenues is related to the addition of personnel primarily to support Internet
services plus investments to increase our customer support to a global, 24 X 7
coverage.
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 product development.
Also included are outside contractor costs for development projects.
Engineering, research and development expenses decreased by $3.5 million, or
24.7%, to $10.7 million in 2000, as compared to $14.2 million in 1999, while as
a percentage of product revenue they were 22.0% of product revenues in 2000 as
compared to 22.5% of product revenues in 1999. The drop in absolute dollars from
2000 to 1999 was primarily the result of targeting engineering, research and
development to approximately 22% of revenues. We intend to continue to invest in
product development activities as we combine the telephony and Internet products
into a seamless CIM solution for our customers. As a result, we expect 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, other promotional
expenditures, as well as depreciation and bad debt expenses. Our selling,
general and administrative expenses increased by $10.5 million, or 22.6%, to
$57.0 million in 2000, as compared to $46.5 million in 1999. During fiscal 2000,
the Company increased its reserves for bad debts to $4.6 million as compared to
reserves for bad debts of $3.0 million in fiscal 1999 for an increase of $1.6
million. In addition, we recorded bad debt expenses of $9.0 million in fiscal
2000 as compared to $2.0 million in fiscal 1999. The bad debt expense increase
in 2000 was primarily due to the failure of several dot.com companies and the
write-off of problematic foreign product receivables as well as non-collectible
receivables from maintenance contracts and charge backs under Expert Services
contracts. We do not expect this trend to continue.
Write-off of Purchased Software
In accordance with SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of", the Company recorded an impairment loss of
$3.2 million in 2000 due to a write-down of
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purchased third party software. Based on the Company's evaluation of the future
market potential and recoverability of this software product, the Company wrote
off the estimated unrecoverable portion of its investment. This write-down is a
onetime event, as the Company has not recorded any other such third party
software investments.
Other Income (Expense), Net
Other income (expense), net decreased by $0.3 million, or 45.2%, to $0.4
million in 2000, as compared to $0.7 million in 1999. These decreases resulted
from reduced interest income earned on lower average balances invested in
marketable securities over the comparable periods and a loss on disposal of
assets of approximately $0.4 million in 2000.
Income Tax (Benefit)
We recorded a tax benefit of $7.5 million in 2000 as compared to a tax
benefit of $1.1 million in 1999. Our effective tax rate was (40.4)% in 2000
primarily due to management's estimate of utilization of the majority of the
current net operating loss carryforwards. Our effective tax rate was (9.7)% for
1999 primarily due to the effect of not recording the majority of the benefit on
the losses incurred by eShare.com, Inc. due to the uncertainty of realizing
those losses.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
Product. Our product revenues declined by 11.6% from $71.3 million in 1998
to $63.1 million in 1999. The decrease in product revenues was due to reduced
demand for our call center products, primarily in the United States, and to a
reduction in hardware content in our products. Total call center product revenue
dropped 18.3% from $67.9 million in 1998 to $55.5 million in 1999. The reduced
demand related to Y2K slowdown concerns in purchasing as well as increased
pricing pressures within the call center industry. Internet product revenue
increased 123.1% from $3.4 million in 1998 to $7.6 million in 1999 due to
increased demand for Internet customer interaction solutions. In addition, our
Internet product suite was expanded with the introduction of NetAgent 2.0 in the
fourth quarter of 1998, Expressions 4.0 in the first quarter of 1999,
Connections and Re:sponse in the third quarter of 1999, and NetAgent 3.0 in the
fourth quarter of 1999.
Service. We increased our service revenues by 23.5% from $25.7 million in
1998 to $31.8 million in 1999. Service revenues increased primarily due to an
increase in the number of post-contract maintenance support agreements and
growing demand for post-implementation consulting services.
Cost of Revenues
Product. Cost of product revenues decreased from $21.7 million, or 30.4%
of related product revenues, in 1998, to $19.4 million, or 30.8% of related
product revenues, in 1999. Cost of product revenues for the call center segment
decreased from $21.3 million, or 31.4% of related product revenues in 1998, to
$19.0 million, or 34.3% of related product revenues, in 1999. The decrease in
absolute dollars in the cost of product revenues was due to the decline in the
volume of shipments of our call center products. The increase as a percentage of
product revenues was primarily due to the impact of personnel and other fixed
costs as compared to a reduced base of call center product revenues. Cost of
product revenues for the Internet segment increased from $344,000, or 10.2% of
related product revenues in 1998, to $392,000, or 5.2% of related product
revenues, in 1999. The increase in absolute dollars in cost of product revenues
was related to the increase in volume of shipments of our Internet products. The
decrease as a percentage of product revenues was primarily due to the impact of
an increased base of Internet product revenues in relation to personnel and
other fixed costs.
Service. Cost of service revenues increased from $13.3 million, or 51.8%
of related service revenues, in 1998, to $16.8 million, or 52.7% of related
service revenues, in 1999. The increase in absolute dollars in the cost of
service revenues was primarily due to the increase in service personnel to
support the larger installed customer base, and the expansion of our
post-implementation consulting practice. The increase as a
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percentage of service revenues was primarily due to the creation of a NetAgent
support staff and infrastructure to support the expected growth in NetAgent
customers.
Operating Expenses
Engineering, research and development. Engineering, research and
development costs increased from $11.8 million, or 12.2% of total revenues, in
1998, to $14.2 million, or 15.0% of total revenues, in 1999. The increase in
absolute dollars resulted primarily from the addition of developers and outside
contractors to support Internet product development efforts. The increase as a
percentage of total revenues was primarily a factor of the reduced call center
product revenues.
Selling, general and administrative. Selling, general and administrative
costs increased from $36.2 million, or 37.3% of total revenues, in 1998, to
$46.5 million, or 49.0% of total revenues, in 1999. This increase in absolute
dollars was primarily related to the expansion of our sales and marketing
resources, and increased levels of marketing activities. The increase as a
percentage of total revenues was primarily a result of the reduction in total
revenues, and the duplicate costs of supporting two business segments as a
result of the pooling of interest accounting treatment following the acquisition
of eShare.com, Inc., which began its principal selling operations in fiscal
1999.
Acquisition and Merger-Related Expenses
In connection with the fiscal 1999 acquisition of smallwonder! softworks,
Inc., and the merger with eShare.com, Inc., we incurred direct merger and
restructuring related expenses of approximately $7.0 million, comprised
primarily of investment bankers, attorneys, accountants and other professional
fees. In addition, we incurred $2.3 million (non-cash) of indirect deferred
compensation expenses related to the conversion of the eShare.com, Inc. stock
option plan. We also incurred $0.5 million in amortization of intangible assets
related to the purchase of smallwonder! softworks, Inc.
Other Income, Net
Other income, net decreased from $1.1 million in 1998 to $0.7 million in
1999. The decrease was primarily due to interest income earned on our
investments in marketable securities, which decreased due to lower cash levels
caused by negative cash flows from operating activities in the second half of
the year.
Income Tax Provision (Benefit)
We recorded an income tax provision of $6.6 million in 1998 and an income
tax benefit of approximately $1.1 million in 1999. Our effective tax rate was
43.3% in 1998 primarily due to the effect of permanent differences between book
and tax and due to the effect of not recording the benefit on the losses
incurred by eShare.com, Inc. due to the uncertainty of realizing those losses.
Our effective tax rate was (9.7)% for 1999 primarily due to the effect of
recording some of the benefit on the losses incurred by the Company.
Preferred Stock Preference
Included in results of operations for the year ended December 31, 1999, is
a non-recurring, non-cash charge of $5.8 million which represents the difference
between the estimated fair value of common stock of eShare.com, Inc. at February
19, 1999 and the purchase price of certain Series C Preferred Stock issued on
that date. As part of the acquisition of eShare.com, Inc. the Series C Preferred
Stock was converted to common stock.
18
20
SELECTED QUARTERLY RESULTS
The following table shows unaudited statement of operations data for each
of the periods indicated. This data has been derived from unaudited interim
financial statements prepared on the same basis as the audited financial
statements.
NET INCOME
(LOSS)
NET APPLICABLE TO DILUTED
TOTAL GROSS INCOME COMMON EARNINGS
REVENUES MARGIN (LOSS) SHAREHOLDERS PER SHARE
-------- ------- ------- ------------- ---------
1999:
First Quarter............................... $29,106 $18,896 $ 2,474 $(3,376) $(0.16)
======= ======= ======= =======
Second Quarter.............................. $26,896 $17,308 $ 564 $ 564 $ 0.03
======= ======= ======= =======
Third Quarter............................... $19,127 $10,717 $(9,348) $(9,348) $(0.45)
======= ======= ======= =======
Fourth Quarter.............................. $19,706 $11,771 $(3,648) $(3,648) $(0.17)
======= ======= ======= =======
2000:
First Quarter............................... $20,456 $13,444 $ (822) $ (822) $(0.04)
======= ======= ======= =======
Second Quarter.............................. $21,301 $13,844 $(1,235) $(1,235) $(0.06)
======= ======= ======= =======
Third Quarter............................... $22,294 $14,666 $(1,122) $(1,122) $(0.05)
======= ======= ======= =======
Fourth Quarter.............................. $19,905 $10,880 $(7,938) $(7,938) $(0.36)
======= ======= ======= =======
FINANCIAL CONDITION
Total assets as of December 31, 2000, were $72.9 million, a decrease of
$4.4 million from December 31, 1999. The decrease was primarily due to the
reduction in Accounts receivable of $6.3 million and Prepaid expenses and other
of $2.1 million, offset by an increase in Deferred taxes of $4.3 million.
Accounts receivable decreased $6.3 million due to increased collections and the
increase in bad debt reserves and write-off of certain receivables. Prepaid
expenses and other decreased by $2.1 million primarily caused by a lower tax
refund in 2000. Deferred taxes increased $4.3 million primarily due to the
recognition of increased net operating loss carryforwards.
Current liabilities as of December 31, 2000 were $28.5 million, an increase
of $5.1 million from December 31, 1999. The increase was primarily due to an
increase in Deferred revenue of $3.2 million and an increase in accounts payable
and accrued liabilities of $1.5 million. The increase in deferred revenue was
derived principally from increased billings and cash collections of maintenance
contracts that are generally one year in length. The timing for payment of and
the accrual of liabilities varies from period to period according to the terms
of the underlying obligations and is primarily responsible for the increase.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through internally
generated cash flow and the proceeds of our 1997 initial public offering. Our
operating activities generated cash of $4.6 million in 2000, used cash of $11.8
million in 1999, and used cash of $0.2 million in 1998. In 2000, our source of
cash was primarily due to the decrease in accounts receivable of $6.3 million
and increases in deferred revenue of $3.2 million and accounts payable and
accrued liabilities of $1.5 million, offset by net losses. In 1999 our use of
cash was caused by net operating losses and a decrease in accounts payable and
accrued liabilities. In 1998, our use of cash resulted from net income, an
increase in accounts payable and accrued liabilities and deferred revenue,
primarily offset by an increase in accounts receivable, and a decrease in other
current liabilities.
Our investing activities used cash of $1.2 million in 2000, generated cash
of $0.7 million in 1999, and used cash of $3.3 million in 1998. The use of cash
in 2000 was primarily for the purchase of capital equipment offset by a
reduction in investments in marketable securities. The generation of cash in
1999 was primarily from a
19
21
reduction in investments in marketable securities offset by purchases of capital
equipment and software to support our growth and the purchase of smallwonder!
softworks, Inc. The use of cash in 1998 was primarily for the purchase of
capital equipment and software to support our growth and was partially offset by
a reduction in investments in marketable securities
Our financing activities generated $1.7 million in 2000, $6.6 million in
1999, and $3.3 million in 1998. The cash generated in 2000 was primarily from
redemption of options to purchase common stock. Our cash in 1999 was primarily
from the sale of common stock and preferred stock by eShare.com, Inc. Our cash
in 1998 was primarily a result of the issuance of convertible notes and the sale
of common stock.
As of December 31, 2000, we had working capital of $21.6 million. Cash,
cash equivalents and marketable securities were $14.7 million. In order to
enhance our liquidity, we are exploring the establishment of a line of credit
with a commercial lender. There can be no assurance we will complete such a
transaction. We believe that existing cash, cash equivalents and marketable
securities and potential cash flow from operations will be sufficient to meet
our cash requirements for at least the next twelve months.
NEW ACCOUNTING PRONOUNCEMENT
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The effective date of SFAS No. 133 was
delayed through the issuance of SFAS No. 137 and 138 to fiscal year 2001. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments including derivative instruments embedded in other contracts. SFAS
No. 133 requires that an entity recognize all derivatives as either assets or
liabilities measured based on their fair values. The Company adopted SFAS No.
133 on January 1, 2001 and does not hold any significant derivative financial
instruments; therefore, the adoption of this statement did not have a
significant impact on the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a number of market risks in the ordinary course of
business, such as foreign currency exchange risks resulting from our
international operations. These risks arise in the normal course of business
rather than from trading. During fiscal 2000, the Company did not actively
participate in any foreign currency hedging strategies. Our international
revenues are denominated primarily in British pounds or Euro. Our expenses
incurred in foreign countries are typically denominated in local currencies. The
magnitude and direction of any adjustment in the future depends on the
relationship of the U.S. dollar to other currencies. In 2000, the unrecognized
translation adjustment was primarily due to the decrease in the British pound
and Euro compared to 1999. There can be no assurance that future fluctuations in
currency exchange rates will not have a material adverse impact on our future
international operations.
In addition, some of our traded assets are exposed to market risks such as
interest rate fluctuations. Primarily, this risk comes from securities owned by
us through Melita Finance Corporation, our wholly-owned investment subsidiary.
At December 31, 2000, the Company was invested primarily in commercial paper and
municipal bonds with short-term maturities.
The following table provides information about securities owned by us
through Melita Finance Corporation that are sensitive to market risks:
SECURITIES SENSITIVE TO MARKET RISK BY MATURITY
AS OF DECEMBER 31, 2000
(IN THOUSANDS)
2001 2002 TOTAL
------ ----- -----
Fixed Rate ($US)............................................ $6,777 $ 352 7,129
Average Interest Rate..................................... 4.75% 4.59% 4.72%
20
22
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2000 AND 1999
TOGETHER WITH AUDITORS' REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................... 22
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... 23
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2000............... 24
Consolidated Statements of Shareholders' Equity for each of
the three years in the period ended December 31, 2000..... 25
Consolidated Statements of Comprehensive (Loss) Income for
each of the three years in the period ended December 31,
2000...................................................... 26
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2000............... 27
Notes to Consolidated Financial Statements.................. 28
21
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To eshare communications, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of eshare
communications, Inc. (a Georgia corporation) and subsidiaries as of December 31,
2000 and 1999 and the related consolidated statements of operations,
shareholders' equity, comprehensive (loss) income, and cash flows for each of
the three years in the period ended December 31, 2000. These financial
statements are the responsibility of eshare communications, Inc.'s management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements as of and for the year
ended December 31, 1998 of eShare.com, Inc. (a Delaware corporation, and
formerly eShare Technologies, Inc.), a company acquired during 1999 in a
transaction accounted for as a pooling of interests, as discussed in Note 2.
Such statements are included in the consolidated financial statements of eshare
communications, Inc. and subsidiaries and reflect total assets and total
revenues of 4% and 4% in 1998, respectively, of the related consolidated totals.
These statements were audited by other auditors whose report has been furnished
to us and our opinion, insofar as it relates to amounts included for eShare.com,
Inc., is based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the 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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of eshare communications, Inc. and subsidiaries
as of December 31, 2000 and 1999 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Atlanta, Georgia
February 14, 2001
22
24
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,598 $ 3,558
Marketable securities..................................... 7,129 11,315
Accounts receivable, net of allowance for doubtful
accounts of $4,577 and $3,817 at December 31, 2000 and
1999, respectively..................................... 26,587 32,863
Inventories, net.......................................... 2,157 1,967
Deferred taxes............................................ 1,397 4,921
Prepaid expenses and other................................ 5,236 7,384
-------- --------
Total current assets.............................. 50,104 62,008
-------- --------
Property and equipment, at cost:
Furniture and fixtures.................................... 3,322 3,122
Equipment................................................. 17,972 17,436
Leasehold improvements.................................... 1,630 1,390
-------- --------
Total property and equipment...................... 22,924 21,948
Less accumulated depreciation............................. (12,268) (10,985)
-------- --------
Property and equipment, net....................... 10,656 10,963
-------- --------
Deferred taxes.............................................. 7,776 --
Intangible assets, net...................................... 4,196 4,254
Other assets................................................ 140 98
-------- --------
Total assets...................................... $ 72,872 $ 77,323
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,809 $ 3,343
Accrued liabilities....................................... 8,711 11,651
Deferred revenue.......................................... 11,463 8,265
Other current liabilities................................. 499 12
Current portion of notes payable.......................... -- 141
-------- --------
Total current liabilities......................... 28,482 23,412
-------- --------
Commitments and contingencies (Note 7)
Notes payable, excluding current portion.................... -- 74
Shareholders' Equity
Preferred stock, no par value: 20,000,000 shares authorized,
no shares issued and outstanding at December 31, 2000 and
1999...................................................... -- --
Common Stock, no par value: 100,000,000 shares authorized,
21,797,312 and 21,386,714 issued and outstanding at
December 31, 2000 and 1999, respectively............... 69 69
Additional paid-in capital................................ 62,166 59,504
Accumulated other comprehensive loss...................... (1,020) (28)
Accumulated deficit....................................... (16,825) (5,708)
-------- --------
Total shareholders' equity........................ 44,390 53,837
-------- --------
Total liabilities and shareholders' equity........ $ 72,872 $ 77,323
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
23
25
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues:
Product................................................... $ 48,675 $ 63,063 $71,333
Service................................................... 35,281 31,792 25,748
-------- -------- -------
Total revenues.................................... 83,956 94,855 97,081
-------- -------- -------
Cost of revenues:
Product................................................... 10,738 19,398 21,680
Service................................................... 20,384 16,765 13,346
-------- -------- -------
Total cost of revenues............................ 31,122 36,163 35,026
-------- -------- -------
Gross margin................................................ 52,834 58,692 62,055
-------- -------- -------
Operating expenses:
Engineering, research and development..................... 10,658 14,213 11,798
Selling, general and administrative....................... 57,042 46,467 36,208
Write-off of purchased software........................... 3,186 -- --
Amortization of intangible assets......................... 1,021 542 --
Acquisition and restructuring related charges............. -- 6,990 --
Deferred compensation expense............................. -- 2,271 --
-------- -------- -------
Total operating expenses.......................... 71,907 70,483 48,006
-------- -------- -------
(Loss) income from operations............................... (19,073) (11,791) 14,049
Other income, net........................................... 414 756 1,067
-------- -------- -------
(Loss) income before income taxes........................... (18,659) (11,035) 15,116
Income tax (benefit) provision.............................. (7,542) (1,077) 6,576
-------- -------- -------
Net (loss) income........................................... (11,117) (9,958) 8,540
Preferred stock preference.................................. -- (5,850) --
-------- -------- -------
Net (loss) income applicable to common shareholders......... $(11,117) $(15,808) $ 8,540
======== ======== =======
(Loss) earnings per share:
Basic..................................................... $ (0.51) $ (0.76) $ 0.42
======== ======== =======
Diluted................................................... $ (0.51) $ (0.76) $ 0.40
======== ======== =======
Weighted average shares outstanding:
Basic..................................................... 21,697 20,758 20,259
======== ======== =======
Diluted................................................... 21,697 20,758 21,575
======== ======== =======
The accompanying notes are an integral part of these consolidated statements.
24
26
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE RETAINED
------------------- PAID-IN DEFERRED INCOME EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION (LOSS) (DEFICIT) TOTAL
---------- ------ ---------- ------------ ------------- --------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
Balance, December 31, 1997........ 20,234,840 $69 $42,848 $ (8) $ 30 $ (4,290) $ 38,649
Net income...................... -- -- -- -- -- 8,540 8,540
Exercise of warrants............ -- -- 1 -- -- -- 1
Deferred compensation........... -- -- 394 (394) -- -- --
Amortization of deferred
compensation.................. -- -- -- 99 -- -- 99
Proceeds from the issuance of
common stock.................. 102,343 -- 1,039 -- -- -- 1,039
Unrealized gain on marketable
securities.................... -- -- -- -- 89 -- 89
Foreign currency translation
adjustment.................... -- -- -- -- (23) -- (23)
---------- --- ------- ------- ------- -------- --------
Balance, December 31, 1998........ 20,337,183 69 44,282 (303) 96 4,250 48,394
Net loss........................ -- -- -- -- -- (9,958) (9,958)
Proceeds from the issuance of
common stock.................. 1,049,531 -- 6,292 -- -- -- 6,292
Non-cash stock issuance costs... -- -- 119 -- -- -- 119
Tax benefit from exercise of
options....................... -- -- 3,598 -- -- -- 3,598
Conversion of convertible
notes......................... -- -- 3,000 -- -- -- 3,000
Issuance of warrants............ -- -- 244 -- -- -- 244
Deferred compensation with
granting of options........... -- -- 1,969 (1,830) -- -- 139
Amortization of deferred
compensation.................. -- -- -- 2,133 -- -- 2,133
Unrealized loss on marketable
securities.................... -- -- -- -- (148) -- (148)
Foreign currency translation
adjustment.................... -- -- -- -- 24 -- 24
---------- --- ------- ------- ------- -------- --------
Balance, December 31, 1999........ 21,386,714 69 59,504 -- (28) (5,708) 53,837
Net loss........................ -- -- -- -- -- (11,117) (11,117)
Proceeds from the issuance of
common stock.................. 410,598 -- 1,888 -- -- -- 1,888
Non-cash stock issuance costs... -- -- 127 -- -- -- 127
Tax benefit from exercise of
options....................... -- -- 647 -- -- -- 647
Unrealized gain on marketable
securities.................... -- -- -- -- 47 -- 47
Foreign currency translation
adjustment.................... -- -- -- -- (1,039) -- (1,039)
---------- --- ------- ------- ------- -------- --------
Balance, December 31, 2000........ 21,797,312 $69 $62,166 $ -- $(1,020) $(16,825) $ 44,390
========== === ======= ======= ======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
25
27
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
-------- -------- ------
(IN THOUSANDS)
Net (loss) income........................................... $(11,117) $ (9,958) $8,540
-------- -------- ------
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment................... (1,039) 24 (23)
Unrealized gain (loss) on marketable securities........... 47 (148) 89
-------- -------- ------
Other comprehensive (loss) income...................... (992) (124) 66
-------- -------- ------
Comprehensive (loss) income................................. $(12,109) $(10,082) $8,606
======== ======== ======
The accompanying notes are an integral part of these consolidated statements.
26
28
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
-------- ------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net (loss) income......................................... $(11,117) $(9,958) $ 8,540
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Deferred taxes......................................... (3,605) (1,190) (1,695)
Depreciation and amortization.......................... 5,246 3,120 2,463
Write-off of purchased software........................ 3,186 -- --
Non cash financing and compensation expense............ 127 -- 197
Non cash compensation expense.......................... -- 2,271 --
Loss on disposal of property and equipment............. 473 -- --
Changes in assets and liabilities, net of effects of
acquisition:
Accounts receivable, net............................. 6,276 1,322 (17,723)
Inventories.......................................... (190) (595) 1,201
Prepaid expenses and other assets.................... (1,038) (154) (201)
Accounts payable and accrued liabilities............. 1,526 (7,961) 5,904
Deferred revenue..................................... 3,198 1,691 2,429
Other current liabilities............................ 487 (803) (1,173)
Other, net........................................... (42) 471 (103)
-------- ------- --------
Total adjustments................................. 15,644 (1,828) (8,701)
-------- ------- --------
Net cash provided by (used in) operating
activities...................................... 4,527 (11,786) (161)
-------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (4,354) (6,106) (4,585)
Sale of marketable securities, net........................ 4,186 11,441 1,302
Acquisition, net of cash acquired......................... (1,000) (4,605) --
-------- ------- --------
Net cash (used in) provided by investing
activities...................................... (1,168) 730 (3,283)
Cash flows from financing activities:
Issuance of convertible notes............................. -- 500 2,500
Deferred offering costs................................... -- -- (335)
Net proceeds from issuance of common stock................ 1,888 6,292 1,039
Exercise of warrants...................................... -- -- 1
Proceeds from issuance of debt............................ -- -- 673
Repayment of debt......................................... (215) (205) (554)
-------- ------- --------
Net cash provided by financing activities......... 1,673 6,587 3,324
-------- ------- --------
Effect of foreign currency translation............ (992) -- --
Net change in cash and cash equivalents..................... 4,040 (4,469) (120)
Cash and cash equivalents, beginning of year................ 3,558 8,027 8,147
-------- ------- --------
Cash and cash equivalents, end of year...................... $ 7,598 $ 3,558 $ 8,027
======== ======= ========
Marketable securities....................................... $ 7,129 $11,315 $ 22,756
======== ======= ========
Cash, cash equivalents and marketable securities............ $ 14,727 $14,873 $ 30,783
======== ======= ========
Supplemental cash flow information:
Cash paid for interest during the year.................... $ 11 $ 44 $ 34
======== ======= ========
Income taxes paid......................................... $ 12 $ 4,042 $ 6,395
======== ======= ========
Conversion of convertible notes to common stock........... $ -- $ 3,000 $ --
======== ======= ========
The accompanying notes are an integral part of these consolidated statements.
27
29
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
eshare communications, Inc. (the "Company") is a leading provider of
Customer Interaction Management software applications. The Company's solutions
support voice, e-mail, live interaction/chat and hosting services for
approximately 2,500 call center sites, e-businesses, ASPs, ISPs and Portals in
approximately 30 countries. The Company's solutions enable real-time interactive
communications and services, both voice based and over the Internet, and include
customer service and support, customer self-service, instant messaging, live
conferencing and events, distance learning, community chat, threaded discussion
forums and a variety of custom integration tools. Organizations use the
Company's applications and services to implement strategies for customer
interaction that increase the value derived from their customers by enhancing
customer acquisition and retention activities, while reducing costs and
improving agent productivity and effectiveness. The Company offers ongoing
maintenance support of the Company's products. The Company also offers fee-
based installation, integration, training, hosting and consulting services.
The Company, formerly eShare Technologies, Inc. was renamed eshare
communications, Inc. on June 8, 2000. Prior to October 4, 1999, the Company was
named Melita International Corporation.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances have
been eliminated in consolidation. All prior period amounts have been restated to
reflect the acquisition of eShare.com, Inc. in a pooling of interests
transaction.
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 that include support, parts, labor, and software update rights as well
as fee-based installation, training, hosting, consulting services and the
licensing of patents.
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended by SOP 98-9, Staff Accounting
Bulletin No. 101 ("SAB101"), "Revenue Recognition" and Emerging Issues Task
Force Issue 00-03, "Application of AICPA SOP 97-2 to Arrangements That Include
the Right to Use Software Stored on Another Entity's Hardware."
The Company recognizes product revenues when persuasive evidence of an
agreement exists, the product has been delivered, the license fee is fixed and
determinable and collection of the fee is probable. Revenues from maintenance
contracts are recognized ratably over the term of the contractual support
period, which ranges from one to four years. Consulting revenues are primarily
related to extended services sold under separate service arrangements during the
installation period. Revenues from consulting, hosting, installation, and
training services are recognized as the services are performed or over the
hosting period, if applicable. In contracts where product and services are
bundled together, revenue is allocated to each element with 100% of any discount
going to product. Certain of 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 deferred and recognized ratably
over the term of the contractual support period. If maintenance is included in
the original contract, such amounts are unbundled from the license fee based on
the value established by the independent sale of such maintenance to customers.
Consulting revenues are primarily related to implementation services performed
under separate service
28
30
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
arrangements related to the installation of the Company's hardware and software
products. Revenues from consulting, installation, and training services are
recognized as the services are performed. Revenues from hosting arrangements are
recognized over the hosting period. Revenues from patent settlements are
recognized as other income when received. Revenues from patent licenses are
recognized per the contract terms and in accordance with SAB101.
Deferred revenues primarily relate to products that have not yet been
delivered and maintenance services, which have been paid by the customers prior
to the performance of those services. Deferred revenue amounted to $11.5 million
and $8.3 million at December 31, 2000 and 1999, respectively.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research and development expenditures are charged to expense as incurred.
Software development costs are charged to research and development expense until
technological feasibility is established, after which remaining software
production costs are capitalized in accordance with SFAS No. 86, "Accounting for
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed". The
Company has defined technological feasibility of its products as the point in
time at which the Company has a working model of the related product, which is
when the product has achieved "beta" status. Historically, the development costs
incurred during the period between the achievement of beta status by a product
and the point at which the product is available for general release to customers
have not been material. Accordingly, the Company has concluded that the amount
of development costs capitalizable under the provisions of SFAS No. 86 was not
material to the financial statements for the years ended December 31, 2000, 1999
and 1998. Therefore, the Company charged all software development costs to
expense as incurred for the years ended December 31, 2000, 1999 and 1998.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash or cash equivalents.
MARKETABLE SECURITIES
The Company's marketable securities are categorized as available-for-sale
securities, as defined by the SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Unrealized holding gains and losses are
reflected as a net amount in a separate component of shareholders' equity until
realized. For the purpose of computing realized gains and losses, cost is
identified on a specific identification basis. Realized gains and losses were
not material to the financial statements for the years ended December 31, 2000,
1999 and 1998.
The following table provides information about securities owned by us
through our Melita Finance Corporation subsidiary that are sensitive to market
risks by maturity as of December 31, 2000 (in thousands):
2001 2002 TOTAL
------ ---- -----
Fixed Rate ($US).................................. $6,777 $352 7,129
Average Interest Rate............................. 4.75% 4.59% 4.72%
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of accounts receivable, accounts payable, and other
financial instruments approximate their fair values at December 31, 2000 and
1999 principally because of the short-term maturities of these instruments.
29
31
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method. The estimated useful lives are as follows:
Furniture and fixtures............. Five to seven years
Equipment.......................... Three to seven years
Leasehold improvements............. Remaining life of lease
The Company's cost and related accumulated depreciation applicable to
assets retired or sold are removed from the accounts and the gain or loss on
disposition is recognized in income. During 2000, the Company recorded a loss of
approximately $0.4 million on the disposal of obsolete computer equipment.
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was $4.2 million, $2.6 million, and $2.5 million, respectively.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company uses the undiscounted future cash flow to determine
if an impairment loss is to be recognized.
In accordance with SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets to Be Disposed Of", the Company recorded an impairment loss of
$3.2 million in 2000 due to a write-down of purchased software. Based on the
Company's evaluation of the future market potential and recoverability of this
software product, which was made available to customers in 2000, the Company
wrote off the unamortized costs.
WARRANTY COSTS
The Company generally warranties its call center products for 90 days and
its Internet products for 30 days and provides for estimated warranty costs upon
shipment of such products. Warranty costs have not been and are not anticipated
to be significant.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's European subsidiaries are
translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." Net assets of these subsidiaries are translated at the current
rates of exchange at December 31. Income and expense items are translated at the
average exchange rate for the year. The resulting translation adjustments are
recorded in shareholders' equity. Gains and losses on foreign currency
transactions are included in Other Income, net in the Consolidated Statements of
Operations. The Company has recognized pre-tax foreign exchange (losses) gains
of approximately $(43,000), $(49,000) and $16,000 in 2000, 1999 and 1998,
respectively.
INCOME TAXES
The Company uses the liability method of accounting for income taxes, as
set forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred tax assets or liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to be settled or realized. A valuation allowance is
established for deferred tax assets when it is more likely than not that the
benefits of such assets will not be realized.
30
32
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
BASIC AND DILUTED NET EARNINGS PER SHARE
Basic earnings per share are computed using net income divided by the
weighted average number of shares of common stock outstanding ("Weighted
Shares") for the period presented.
The only difference between basic and diluted net earnings per share is the
result of the treasury stock method effect of common equivalent shares ("CESs").
Diluted earnings per share are computed using net income divided by the sum of
(i) Weighted Shares and (ii) the treasury stock method effect of CESs
outstanding of 1,316,000 for the year ended December 31, 1998. The CESs for 2000
and 1999 were anti-dilutive and not considered in the calculation of loss per
share.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The effective
date of SFAS No. 133 was delayed through the issuance of SFAS No. 137 and 138 to
fiscal year 2001. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments including derivative instruments embedded in other
contracts. SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities measured based on their fair values. The Company
adopted SFAS No. 133 on January 1, 2001 and does not hold any significant
derivative financial instruments; therefore, the adoption of this statement did
not have a significant impact on the Company's financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation.
PREFERRED STOCK PREFERENCE
Included in the results of operations for the year ended December 31, 1999
is a nonrecurring, non-cash charge of $5.8 million, which represents the
difference between the estimated fair value of common stock of eShare.com, Inc.
at February 19, 1999 and the purchase price of certain Series C preferred stock
issued on that date. As part of the acquisition discussed below, the Series C
preferred stock was converted to common stock.
2. ACQUISITIONS
On September 1, 1999, the Company completed the acquisition of eShare.com,
Inc., a leading provider of real-time customer service and interactive
communication solutions for online communities. The shareholders of eShare.com,
Inc. received 6,050,000 shares of the Company's common stock. The new combined
company was renamed eShare Technologies, Inc. on October 4, 1999. The
acquisition was accounted for as a pooling of
31
33
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
interests, therefore, all prior period amounts have been restated. A
reconciliation between revenue and net income as previously reported in fiscal
1998 and as restated follows:
FOR THE YEAR ENDED
DECEMBER 31,
1998
------------------
(IN THOUSANDS)
Revenue:
As previously reported.................................... $93,410
eShare.com, Inc. ......................................... 3,671
-------
As restated............................................... $97,081
=======
Net Income (loss):
As previously reported.................................... $11,685
eShare.com, Inc. ......................................... (3,145)
-------
As restated............................................... $ 8,540
=======
On June 15, 1999, the Company purchased smallwonder! softworks, Inc.
of Leesburg, Virginia for $4.6 million in net cash and a prospective
earnout of up to an additional $3.0 million, based on achievement of
certain defined criteria. During 2000, $1.0 million of the earnout was
paid. During 1999, none of the earnout was paid. The operations of
smallwonders! softworks, Inc. are included in the accompanying statements
from June 15, 1999. The acquisition was accounted for using the purchase
method of accounting.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cost includes raw materials, labor, and overhead. Market is defined as
replacement cost for work in progress and raw materials and net realizable value
for finished goods. Inventories consist of the following at December 31, 2000
and 1999 (in thousands):
2000 1999
------ -------
Raw materials............................................... $1,050 $ 1,288
Work in progress............................................ 497 920
Finished goods.............................................. 778 835
------ -------
2,325 3,043
Less, reserve............................................... (168) (1,076)
------ -------
$2,157 $ 1,967
====== =======
4. INTANGIBLE ASSETS
The Company allocated the intangible assets of approximately $4.7 million
from the acquisition of smallwonder! softworks, Inc. to tradenames, workforce
and goodwill. The intangible assets are being amortized over a five-year period.
Total amortization expense for the years ended December 31, 2000 and 1999 was
approximately $1.0 million and $0.5 million, respectively. Accumulated
amortization as of December 31, 2000 and 1999 was $1.5 million and $0.5 million,
respectively.
32
34
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 2000 and 1999 include the following (in
thousands):
2000 1999
------ -------
Accrued salaries and wages.................................. $5,091 $ 3,771
Other current liabilities................................... 3,263 7,556
Accrued rent................................................ 357 324
------ -------
$8,711 $11,651
====== =======
6. NOTES PAYABLE
The Company had outstanding notes payable of approximately $0.2 million as
of December 31, 1999. These notes were payable over 36 months and required the
Company to maintain certain financial covenants. In February of 1999, the
Company issued 10% convertible notes for an aggregate amount of $0.5 million.
These notes were converted to equity in February of 1999.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At December 31, 2000, the future minimum operating lease payments
(including leases with related parties) under noncancellable operating leases
were as follows (in thousands):
2001........................................................ $ 1,903
2002........................................................ 1,851
2003........................................................ 1,808
2004........................................................ 1,830
Thereafter.................................................. 6,706
-------
Total future minimum lease payments............... $14,098
=======
The Company's leases are primarily for equipment and facilities. Total
rental expense for operating leases was $2.0 million, $1.4 million and $1.0
million in 2000, 1999, and 1998, respectively.
The Company has entered into lease agreements with a related party to lease
land and buildings. One agreement provides for annual rentals of approximately
$0.5 million to $0.6 million per year over a ten-year term, which began in 1995.
The other agreement provides for annual rentals of approximately $0.5 million
per year over a fifteen-year term. Total rent expense, under both agreements,
paid to the related party was $1.1 million, $0.6 million and $0.6 million in
2000, 1999, and 1998, respectively.
LEGAL MATTERS
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 subject to legal proceedings and claims, which have arisen,
in the ordinary course of business. In the opinion of management, the amount of
potential liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
33
35
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK OPTION PLANS
During 1992, the Company approved a stock option plan (the "1992 Plan") for
key employees for which 640,000 shares of common stock were authorized for use
in the Plan. During 1995, the number of authorized shares was increased to
1,000,000 shares of common stock. Options are granted at the fair market value
and are exercisable based on the specific terms of the grant up to ten years
from the grant date. Options granted primarily vest ratably over a four-or
five-year employment period.
On February 6, 1997, the Company approved the 1997 Stock Option Plan (the
"1997 Plan") for which 1,350,000 shares of common stock were authorized for
issuance, less any options issued under the 1992 Plan. In October of 1997, the
Company increased the number of shares available under the 1997 Plan to
1,850,000. On May 11, 1998, the shareholders approved an amendment to the 1997
Plan whereby the number of shares of common stock available for issuance under
the 1997 Plan will automatically be adjusted on the first day of each fiscal
year, beginning with 1998, by a number of shares such that the total number of
shares reserved for issuance under the 1997 Plan equals the sum of (i) the
aggregate number of shares previously issued under the 1997 Plan and the 1992
Plan, (ii) the aggregate number of shares subject to then outstanding or
authorized options granted under the 1997 Plan and the 1992 Plan, and (iii) 5%
of the number of shares of common stock outstanding on the last day of the
preceding fiscal year. Options are granted at the fair market value and are
exercisable based on the specific terms of the grant up to ten years from the
grant date. The options vest primarily over a four-year period subject to
acceleration upon the achievement of certain performance measures.
In October 1996, eShare.com, Inc. approved, as amended, a stock option and
restricted stock purchase plan (the "1996 Plan") for which 2,300,000 shares of
common stock were originally authorized for issuance. Upon the acquisition of
eShare.com, Inc. the 1996 Plan options were converted into options for the
common stock of eshare communications, Inc. as adjusted by the acquisition
conversion ratio. The activity of the 1996 Plan, as audited, has been added to
the option activity listed below. No additional options will be granted under
the 1996 Plan.
In 1999 and 1998, eShare.com, Inc. granted options from the 1996 Plan at
exercise prices below the fair market value on the date of grant. The excess of
the fair value of the common stock over the exercise price was approximately
$1.8 million and $0.4 million, respectively, which was recorded as deferred
compensation and was amortized over the vesting period. These options vested
immediately upon the change in control of the Company on September 1, 1999. In
connection with the merger with eShare.com, Inc., the Company incurred $2.3
million (non-cash) of indirect deferred compensation expenses related to the
conversion of the eShare.com, Inc. stock option plan.
Activity for the 1992 Plan, 1996 Plan and 1997 Plan is as follows (number
of shares in thousands):
OPTIONS OPTION PRICES
------- --------------
Outstanding at December 31, 1997............................ 1,605 $0.43 - $10.00
Granted................................................... 1,287 $0.43 - $14.50
Exercised................................................. (103)
Forfeited/repurchased..................................... (534) $0.43 - $14.50
------ --------------
Outstanding at December 31, 1998............................ 2,255 $0.43 - $14.50
Granted................................................... 2,076 $0.43 - $20.88
Exercised................................................. (1,093)
Forfeited/repurchased..................................... (564) $2.81 - $20.88
------ --------------
Outstanding at December 31, 1999............................ 2,674 $0.43 - $20.88
Granted................................................... 1,577 $2.13 - $17.06
Exercised................................................. (266)
Forfeited/repurchased..................................... (982) $2.13 - $20.88
------ --------------
Outstanding at December 31, 2000............................ 3,003 $0.43 - $20.88
====== ==============
34
36
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2000, options to purchase 1,133,841 shares were available
for future grant and options were exercisable to purchase 975,771 shares, as
discussed in the following table (number of shares in thousands):
NUMBER OF SHARES WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, EXERCISE DECEMBER 31, EXERCISE
PRICES 2000 PRICE 2000 PRICE
- --------------- ---------------- -------- -------------- --------
$ 0.43 - $ 2.13 57 $0.72 48 $0.45
$ 2.25 - $ 2.25 448 2.25 11 2.25
$ 2.75 - $ 3.00 89 2.82 89 2.82
$ 4.00 - $ 4.00 658 4.00 205 4.00
$ 4.07 - $ 5.50 116 5.01 70 4.74
$ 5.88 - $ 5.88 589 5.88 195 5.88
$ 6.00 - $ 9.06 403 7.71 102 8.96
$ 9.38 - $10.75 320 10.27 155 10.20
$10.81 - $20.00 120 14.12 50 13.86
$20.88 - $20.88 203 20.88 51 20.88
----- ----- --- -----
3,003 $6.76 976 $7.01
===== ===== === =====
During, 1995, the Financial Accounting Standards Board issued SFAS No. 123,
which defines a fair value-based method of accounting for an employee stock
option plan or similar equity instrument. However, it also allows an entity to
continue to measure compensation cost for those plans using the method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to remain with the
accounting in APB No. 25 must make pro forma disclosures of net income and, if
presented, earnings per share, as if the fair value-based method of accounting
defined in the statement had been applied.
The Company has elected to account for its stock-based compensation plan
under APB No. 25; however, the Company has computed for pro forma disclosure
purposes the value of all options granted during 1996 and 1997 using the
Black-Scholes option pricing model as prescribed by SFAS No. 123 using the
following weighted assumptions used for grants in 2000, 1999, and 1998:
2000 1999 1998
----------- ----------- -----------
Risk-free interest rate................... 4.8% - 6.9% 4.3% - 5.4% 4.0% - 5.5%
Expected dividend yield................... -- -- --
Expected lives............................ Five years Five years Five years
Expected volatility....................... 146% 65% 65%
35
37
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The total value of the options granted during the years ended December 31,
2000, 1999, and 1998 were computed as approximately $7.4 million, $14.0 million
and $8.6 million, respectively, which would be amortized over the vesting period
of the options. If the Company had accounted for these plans in accordance with
SFAS No. 123, the Company's reported net (loss) income and (loss) earnings per
share for the years ended December 31, 2000, 1999, and 1998 would have
(increased) decreased to the following amounts (in thousands, except per share
amounts):
2000 1999 1998
-------- -------- ------
Net (loss) income:
As reported in the financial statements.................... $(11,117) $(15,808) $8,540
Pro forma in accordance with SFAS No. 123.................. (14,835) (24,306) 6,578
Basic (loss) earnings per share:
As reported in the financial statements.................... $ (0.51) $ (0.76) $ 0.42
Pro forma in accordance with SFAS No. 123.................. (0.68) (1.17) 0.32
Diluted (loss) earnings per share:
As reported in the financial statements.................... $ (0.51) $ (0.76) $ 0.40
Pro forma in accordance with SFAS No. 123.................. (0.68) (1.17) 0.30
Under the Company's 1997 Employee Stock Purchase Plan (ESPP), the Company
is authorized to sell up to 250,000 shares of Common Stock (subject to
adjustments for changes in the Company's capitalization) to full-time employees.
Per the terms of the ESPP, employees may elect to have up to 10% of their annual
compensation withheld to purchase the Company's Common Stock at 85% of the fair
market value. Fair market value is the price of the Common Stock on the
preceding trading day of purchase.
9. BENEFIT PLAN
The Company has a defined contribution profit-sharing plan (the "Plan") for
substantially all employees meeting the eligibility requirements as defined in
the plan agreement. The Plan provides for annual contributions by the Company at
the discretion of the board of directors. The Plan also contains a 401(k)
feature which allows participants to contribute up to 15% of their eligible
compensation, as defined, and provides for discretionary employer matching
contributions. Total contributions by the Company to the Plan were approximately
$0.5 million, $0.4 million, and $0.4 million for the years ended December 31,
2000, 1999, and 1998, respectively.
36
38
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
The tax effects of temporary differences that give rise to the total net
deferred tax assets as of December 31, 2000 and 1999 were as follows (in
thousands):
2000 1999
------ ------
Net operating loss carryforwards............................ $9,047 $4,923
Deferred revenue............................................ 2,791 1,930
Accrued liabilities......................................... 782 527
Allowance for doubtful accounts............................. 1,555 1,020
Depreciation and amortization............................... 983 40
Foreign tax credits......................................... 273 561
Inventory................................................... 128 366
State tax credits........................................... 170 --
------ ------
Total deferred tax assets......................... 15,729 9,367
Valuation allowance......................................... (6,556) (4,446)
------ ------
Total net deferred tax assets..................... $9,173 $4,921
====== ======
The following summarizes the components of the income tax provision for the
years ended December 31, 2000, 1999, and 1998 (in thousands):
2000 1999 1998
------- ------- ------
Current domestic taxes:
Federal.............................................. $(4,085) $(1,136) $6,304
State................................................ 743 (327) 552
Foreign taxes.......................................... 52 1,576 1,143
Deferred taxes......................................... (4,252) (1,190) (1,423)
------- ------- ------
Tax provision..................................... $(7,542) $(1,077) $6,576
======= ======= ======
A reconciliation from the federal statutory rate to the tax (benefit)
provision for the years ended December 31, 2000, 1999, and 1998 is as follows:
2000 1999 1998
----- ----- ----
Statutory federal tax rate.................................. (35.0)% (35.0)% 35.0%
State income taxes, net of federal tax benefit.............. (6.2) (3.0) 2.4
Foreign operations.......................................... 1.6 30.6 (0.8)
Valuation allowance......................................... 2.0 -- (0.6)
Other....................................................... (2.8) (2.3) 7.3
----- ----- ----
Effective tax rate........................................ (40.4)% (9.7)% 43.3%
===== ===== ====
As of December 31, 2000 and 1999, the Company has net operating loss
carryforwards of approximately $23.3 million and $12.8 million, respectively,
which expire through 2020. At December 31, 2000 and 1999, the Company has
established a partial valuation allowance against its net deferred tax assets
since a significant portion of these tax loss carryforwards may be subject to
substantial annual limitations under the change in stock ownership imposed by
Internal Revenue Code Section 382.
11. CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to accounts receivable are
limited due to the wide variety of customers and markets for which the Company's
services are provided as well as their dispersion across many
37
39
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
different geographic areas. As a result, as of December 31, 2000 and 1999, the
Company did not consider itself to have any significant concentrations of credit
risk. During 2000, no customers accounted for greater than 10% of total
revenues. During 1999, only First USA Bank, at 11.0%, accounted for greater than
10% of total revenues. In 2000, 1999, and 1998, the Company's five largest
customers accounted for approximately 16.6%, 28.2% and 23.2%, respectively, of
total revenues. These sales were predominantly to customers in the financial
services industry. Although the particular customers may change from period to
period, the Company expects that large sales to a limited number of customers
will continue to account for a significant percentage of its revenues in any
particular period for the foreseeable future.
12. SEGMENT INFORMATION
In the fourth quarter of 1999, the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for the way public companies report information about
operating segments in annual financial statements and 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 Company is a multinational business operating in two segments,
telephony and Internet. The Company's management primarily evaluates these
segments on income from operations. The telephony business segment includes the
sale of hardware and software for telephone call centers in all geographic
areas, including inbound/outbound voice contact management. The Internet
business segment includes the sale of software such as NetAgent and Expressions
in all geographic areas. The results of these segments are as follows (in
thousands):
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
--------- --------- --------
Revenues:
Telephony.............................................. $ 66,160 $ 85,887 $93,410
Internet............................................... 17,796 8,968 3,671
-------- -------- -------
Total Revenues.................................... $ 83,956 $ 94,855 $97,081
======== ======== =======
(Loss) income from operations:
Telephony................................................. $ (7,952) $ (5,361) $17,065
Internet.................................................. (11,121) (6,430) (3,016)
-------- -------- -------
Total (loss) income from operations:.............. $(19,073) $(11,791) $14,049
======== ======== =======
Depreciation & amortization:
Telephony................................................. $ 4,748 $ 2,775 $ 2,212
Internet.................................................. 498 345 251
-------- -------- -------
Total depreciation & amortization:................ $ 5,246 $ 3,120 $ 2,463
======== ======== =======
Deferred compensation expense:
Telephony................................................. $ -- $ -- $ --
Internet.................................................. -- 2,271 --
-------- -------- -------
Total deferred compensation expense:.............. $ -- $ 2,271 $ --
======== ======== =======
38
40
ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 years ended December 31, 2000, 1999, and 1998 (in thousands):
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
United States:
Total revenues............................................ $60,813 $64,784 $73,960
Long-lived assets......................................... 10,323 10,494 7,608
Europe:
Total revenues............................................ 13,687 14,350 9,939
Long-lived assets......................................... 312 435 234
Latin America:
Total revenues............................................ 3,850 10,580 7,381
Long-lived assets......................................... 21 33 58
Other:
Total revenues............................................ 5,606 5,141 5,801
Long-lived assets......................................... -- 1 1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
39
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors of the Company required under this
item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 2000 fiscal year ended December
31, 2000 under the heading "Election of Directors". Certain information
regarding directors and executive officers of the Company is included in Part I,
Item 1 of this report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning the directors of the Company required under this
item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 2000 fiscal year ended December
31, 2000 under the heading "Compensation and Other Information Concerning
Directors and Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the directors of the Company required under this
item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 2000 fiscal year ended December
31, 2000 under the heading "Security Ownership of Certain Beneficial Owners and
Management."
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information concerning the directors of the Company required under this
item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 2000 fiscal year ended December
31, 2000 under the heading "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
See the index to Consolidated Financial Statements on page 21 for a
list of the financial statements and supplementary data filed herewith.
2. Financial Statement Schedule
(i) The following Financial Statement Schedule of eshare
communications, Inc. for the Years Ended December 31, 2000, 1999 and
1998 is filed as a part of this Report on Form 10-K and should be read
in conjunction with the Financial Statements, and related notes thereto,
of eshare communications, Inc.
40
42
ESHARE COMMUNICATIONS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
YEAR EXPENSES DEDUCTIONS YEAR
------------ ---------- ---------- ----------
2000:
Allowance for doubtful accounts................. $3,817,000 $9,048,000 $8,288,500 $4,576,500
Allowance for inventory obsolescence............ $1,076,000 $ (681,800) $ 226,100 $ 168,100
1999:
Allowance for doubtful accounts................. $2,600,000 $2,020,000 $ 803,000 $3,817,000
Allowance for inventory obsolescence............ $ 957,000 $ 712,000 $ 593,000 $1,076,000
1998:
Allowance for doubtful accounts................. $ 886,000 $1,837,000 $ 123,000 $2,600,000
Allowance for inventory obsolescence............ $ 875,000 $ 922,000 $ 840,000 $ 957,000
(ii) Report of Independent Public Accountants on Financial Statement
Schedule.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To eshare communications, Inc. and subsidiaries:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of eshare
communications, Inc. and subsidiaries included in this Form 10-K and have issued
our report thereon dated February 14, 2001. We did not audit the financial
statements as of and for the year ended December 31, 1998 of eShare.com, Inc. (a
Delaware corporation, and formerly eShare Technologies, Inc.), a company
acquired during 1999 in a transaction accounted for as a pooling of interests,
as discussed in Note 2. Such statements are included in the consolidated
financial statements of eshare communications, Inc. and subsidiaries and reflect
total assets and total revenues of 4% and 4% in 1998, respectively, of the
related consolidated totals. These statements were audited by other auditors
whose report has been furnished to us and our opinion, insofar as it relates to
amounts included for eShare.com, Inc., is based solely upon the report of the
other auditors. Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The foregoing schedule is the
responsibility of the company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion based on our audit and the report of other auditors, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 14, 2001
42
44
(b) Reports on Form 8-K Filed during the Fourth Quarter of 2000: None.
(c) Exhibits. The following exhibits are filed as part of, or are
incorporated by reference into, this report on Form 10-K:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- Amended and Restated Articles of Incorporation of the
Company (incorporated by reference to Exhibit 3.3 to
Amendment No. 1 to the Company's Registration Statement on
Form S-1 (File No. 333-22855) filed March 28, 1997).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.4 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 333-22855)
filed March 28, 1997).
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated
Bylaws of the Company defining rights of the holders of
Common Stock of the Company.
4.2 -- Specimen Stock Certificate (incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on Form
S-1 (File No. 333-22855) filed March 6, 1997).
10.1 -- Lease Agreement between the Company and 5051 Peachtree
Corners Circle, L.L.C. (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-1
(File No. 333-22855) filed on March 6, 1997).
10.2 -- Lease Agreement between eShare Technologies Limited
(formerly Melita Europe Limited) and Melita House Inc. dated
August 15, 1999 (incorporated by reference to Exhibit 10.2
to the Company's Annual Report on form 10-K (File No.
000-22317) filed on March 30, 2000).
10.3 -- Lease Agreement between eshare communications, Inc.
(formerly eShare Technologies, Inc.) and Heartland
Associates dated March 31, 2000.
10.4 -- 1992 Stock Option Plan effective June 4, 1992, as amended
March 1, 1997 (incorporated by reference to Exhibit 10.2 to
the Company's Registration Statement on Form S-1 (File No.
333-22855) filed on March 6, 1997).
10.5 -- 1997 Stock Option Plan effective February 6, 1997, as
amended October 21, 1997 (incorporated by reference to
Exhibit 10.3 to the Company's Annual Report on Form 10-K
(File No. 0-22317) filed on March 31, 1998).
10.6 -- Employee Stock Purchase Plan adopted March 1, 1997
(incorporated by reference to Exhibit 10.4 to Amendment No.
1 to the Company's Registration Statement on Form S-1 (File
No. 333-22855) filed March 28, 1997).
10.7 -- 401(k) Profit Sharing Plan as amended effective January 1,
1993 (incorporated by reference to Exhibit 10.5 filed to the
Company's Registration Statement on Form S-1 (File
333-22855) filed March 6, 1997).
10.8 -- Employment Agreement between the Company and Aleksander
Szlam dated March 5, 1997 (incorporated by reference to
Exhibit 10.6 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File 333-22855) filed
March 28, 1997).
10.9 -- Employment Agreement between the Company and William Dumont
dated March 22, 2001.
10.10 -- Form of Tax Indemnification Agreement between the Company
and certain shareholders of the Company (incorporated by
reference to Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (File 333-22855) filed March 6, 1997).
10.11 -- Form S-1 (File 333-22855) filed March 6, 1997). Form of Tax
Indemnification Agreement between Inventions, Inc. and
certain shareholders of Inventions, Inc. (incorporated by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (File 333-22855) filed March 6, 1997).
21.1 -- List of Subsidiaries of the Company.
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45
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Report of Independent Auditors.
23.3 -- Consent of KPMG LLP.
99.1 -- Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forward-Looking Statements
44
46
SIGNATURES
Pursuant to the requirements of Section 12 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.
eshare communications, Inc.
By: /s/ ALEKSANDER SZLAM
------------------------------------
Aleksander Szlam
Chairman of the Board and
Chief Executive Officer
March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALEKSANDER SZLAM Chairman of the Board and Chief April 2, 2001
- -------------------------------------------------------- Executive Officer
Aleksander Szlam
/s/ GEORGE W. LANDGREBE Chief Operating Officer April 2, 2001
- --------------------------------------------------------
George W. Landgrebe
/s/ GLEN SHIPLEY Chief Financial and April 2, 2001
- -------------------------------------------------------- Administrative Officer
Glen Shipley
/s/ ANDREW J. FILIPOWSKI Director April 2, 2001
- --------------------------------------------------------
Andrew J. Filipowski
/s/ DONALD L. HOUSE Director April 2, 2001
- --------------------------------------------------------
Donald L. House
/s/ STEPHEN JEFFERY Director April 2, 2001
- --------------------------------------------------------
Stephen Jeffery
/s/ JACK PELLICCI Director April 2, 2001
- --------------------------------------------------------
Jack Pellicci
/s/ JAMES TITO Director April 2, 2001
- --------------------------------------------------------
James Tito
45