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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________.
Commission file number 0-22317
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ESHARE COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 58-1378534
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
5051 Peachtree Corners Circle
Norcross, Georgia 30092-2500
(770) 239-4000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common stock, no par value,
outstanding as of May 7, 2001: 21,979,910 shares.
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PART I - FINANCIAL INFORMATION
Page
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Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000 3
Unaudited Consolidated Statements of Operations for the three
months ended March 31, 2001 and 2000 4
Unaudited Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Signatures 14
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
eshare communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(unaudited)
March 31, December 31,
2001 2000
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ASSETS
Current assets:
Cash and cash equivalents $ 9,878 $ 14,727
Accounts receivable, net of allowance for doubtful
accounts of $2,621 at March 31, 2001 and $4,577 at December 31, 2000 24,598 26,587
Inventories 1,913 2,157
Deferred taxes 1,394 1,397
Prepaid expenses and other 6,146 5,236
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Total current assets 43,929 50,104
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Property and equipment, net of accumulated depreciation 10,194 10,656
Deferred taxes 9,072 7,776
Intangible assets, net 3,921 4,196
Other assets 132 140
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Total assets $ 67,248 $ 72,872
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,997 $ 7,809
Accrued liabilities 7,249 8,711
Deferred revenue 11,328 11,463
Other current liabilities 520 499
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Total current liabilities 25,094 28,482
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Stockholders' Equity
Common Stock, no par value, 100,000,000 shares authorized
21,979,910 issued and outstanding at March 31, 2001 and
21,797,312 issued and outstanding at December 31, 2000 69 69
Additional paid-in capital 62,355 62,166
Accumulated other comprehensive loss (1,139) (1,020)
Accumulated deficit (19,131) (16,825)
---------- ----------
Total stockholders' equity 42,154 44,390
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Total liabilities and stockholders' equity $ 67,248 $ 72,872
========== ==========
The accompanying notes are an integral part of these consolidated statements.
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eshare communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per share amounts)
(unaudited)
For the three months ended
March 31,
2001 2000
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Net revenues:
Product $ 10,074 $ 12,667
Service 9,025 7,789
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Total revenues 19,099 20,456
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Cost of revenues:
Product 2,500 2,852
Service 5,760 4,160
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Total cost of revenues 8,260 7,012
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Gross margin 10,839 13,444
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Operating expenses:
Engineering, research and development 2,641 2,675
Selling, general and administrative 12,172 12,166
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Total operating expenses 14,813 14,841
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Loss from operations (3,974) (1,397)
Other income, net 373 113
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Loss before income taxes (3,601) (1,284)
Income tax benefit (1,296) (462)
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Net loss $ (2,305) $ (822)
========= =========
Net loss per share
Basic $ (0.10) $ (0.04)
========= =========
Diluted $ (0.10) $ (0.04)
========= =========
Weighted average common and common
Equivalent shares
Basic 21,975 21,435
Diluted 21,975 21,435
The accompanying notes are an integral part of these consolidated statements.
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eshare communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the three months ended
March 31,
2001 2000
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Cash used by operating activities:
Net loss $ (2,305) $ (822)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 1,367 1,205
Deferred taxes (1,293) --
Changes in assets and liabilities:
Accounts receivable, net 1,989 (6,124)
Inventories 244 43
Prepaid expenses and other assets (910) (40)
Accounts payable and accrued expenses (3,274) 3,195
Deferred revenue (135) 2,090
Customer deposits 20 629
Current portion of long term debt -- 33
Other, net 7 29
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Total adjustments (1,985) 1,002
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Net cash provided by (used in) operating activities (4,290) 180
Cash flows from investing activities:
Purchases of property and equipment (597) (779)
Proceeds from sale of marketable securities 1,444 4,420
Payment on purchase of business (32) --
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Net cash provided by investing activities 815 3,641
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Cash flows from financing activities:
Net proceeds from issuance of common stock 189 1,403
Deferred offering costs -- (35)
Repayment of debt -- (15)
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Net cash provided by financing activities 189 1,353
Effect of foreign currency translation (119) (388)
Net change in cash and cash equivalents (3,405) 4,786
Cash and cash equivalents, beginning of period 7,598 3,558
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Cash and cash equivalents, end of period 4,193 8,344
Marketable securities 5,685 6,895
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Cash, cash equivalents and marketable securities $ 9,878 $ 15,239
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Supplemental Disclosures of Cash Flow Information:
Income taxes paid $ 34 $ 11
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The accompanying notes are an integral part of these consolidated statements.
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eshare communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands)
(unaudited)
1. Basis of Presentation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with accounting principles generally accepted in the
United States applicable to interim financial statements. Accordingly, they do
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of our
management, these consolidated financial statements contain all adjustments
(which comprise only normal and recurring accruals) necessary to present fairly
the financial position as of March 31, 2001 and 2000. The interim results for
the three months ended March 31, 2001 are not necessarily indicative of the
results to be expected for the full year. These statements should be read in
conjunction with our consolidated financial statements for the fiscal year ended
December 31, 2000, as filed in its Annual Report on Form 10-K for the Year Ended
December 31, 2000.
We have reclassified the presentation of certain prior period information to
conform to the current presentation format.
2. Principles of Consolidation
The accompanying financial statements include our accounts and our wholly-owned
subsidiaries. All significant inter-company balances and transactions have been
eliminated in consolidation.
3. Revenue Recognition
We generate product revenues primarily from the sale of integrated systems,
which are comprised of both hardware and software and software licenses. Our
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.
We recognize 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."
We recognize 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
deferred and recognized ratably over the term of the contractual support period,
which may range from one to four years. Consulting revenues are primarily
related to extended services performed 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 of the contract. 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. Certain of our 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.
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 revenues were $11,328 and $11,463 at
March 31, 2001 and December 31, 2000, respectively.
4. Inventories
Inventories are stated at the average cost 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:
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March 31, 2001 December 31, 2000
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Raw materials $ 1,171 $ 1,050
Work in process 213 497
Finished goods 701 778
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2,085 2,325
Less, reserve (172) (168)
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Total inventories $ 1,913 $ 2,157
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5. Net (loss) income per share
Net (loss) income per share is computed using the weighted-average number of
common stock and diluted common stock equivalent ("CSE") shares from stock
options (using the treasury stock method) outstanding during each period. CSEs
are not included in periods where they are antidilutive.
The following table presents the components of diluted weighted average shares
outstanding.
For the three months ended March 31,
2001 2000
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Weighted average shares outstanding:
Basic weighted average shares outstanding 21,975 21,435
Weighted average common equivalent shares -- --
------ ------
Diluted weighted average shares outstanding 21,975 21,435
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6. Other Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. The changes in the components of other comprehensive
loss are reported as follows:
For the three months ended March 31,
2001 2000
--------- -------
Net loss as reported $ (2,305) $ (822)
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Other comprehensive (loss) income:
Foreign currency translation adjustment $ (122) $ (406)
Unrealized gain (loss) on marketable securities 3 18
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Other comprehensive income (loss) $ (119) $ (388)
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7. Business Segment and Geographic Area Information
We are a multinational business operating in two segments. We have adopted
Statement of Financial Accounting Standards No. 131, "Disclosure about Segments
of an Enterprise and Related Information" (SFAS 131). The adoption of SFAS 131
requires the presentation of descriptive information about reportable segments
which is consistent with that made available to our management to assess
performance. The reportable business segments are telephony and internet. The
results of these business segments are as follows:
For the three months ended March 31,
2001 2000
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Revenues:
Telephony $ 16,104 $ 16,334
Internet 2,995 4,122
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Total revenues $ 19,099 $ 20,456
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Loss from operations:
Telephony $ (3,247) $ (564)
Internet (727) (833)
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Total loss from operations $ (3,974) $ (1,397)
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Depreciation & amortization
Telephony $ 1,220 $ 1,095
Internet 147 110
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Total depreciation & amortization $ 1,367 $ 1,205
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The following represents our total revenues and long-lived assets based on
geographic location for the three months ended March 31, 2001 and 2000:
For the three months ended March 31,
2001 2000
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Total revenues:
United States $ 15,014 $ 16,578
Europe 3,028 2,640
Mexico/Latin America 657 626
Other 400 612
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$ 19,099 $ 20,456
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Long-lived assets at March 31:
United States $ 9,865 $ 10,363
Europe 311 382
Mexico/Latin America 18 25
Other -- 1
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$ 10,194 $ 10,771
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollar and share amounts in thousands)
Overview
eshare communications, Inc. ("eshare", "we", "us" or "our") is a leading
provider of customer interaction management software applications. Our solutions
support voice, e-mail, live interaction/chat and hosting services for
approximately 2,500 call centers, e-businesses, Application Service Providers
(ASPs), Internet Service Providers (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.
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including but not limited to statements related to plans for future business
development activities, anticipated costs of revenues, product mix and service
revenues, research and development, and selling, general and administrative
activities, and liquidity and capital needs and resources. Such forward-looking
statements are subject to risks, uncertainties and other factors, which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Investors are cautioned that any
forward looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward looking statements. A discussion of certain
risk factors that may cause actual results to differ from these forward-looking
statements can be found in Exhibit 99.1 in our Annual Report on Form 10-K for
the period ended December 31, 2000, on file with the Securities and Exchange
Commission.
Results of Operations
Revenues
Product. Product revenues for the quarter ended March 31, 2001 were
$10,074 as compared to $12,667 for the same period ended March 31, 2000, a
decrease of $2,593, or 20.5%. Revenue from the sale of telephony product
decreased to $8,108 for the quarter ended March 31, 2001 from $9,231 in the
quarter ended March 31, 2000, a decrease of $1,123 or 12.2%, principally due to
the current down turn in capital spending as the United States economy slowed
during the quarter and ongoing competitive pricing pressures within the call
center industry. Sales of internet product decreased to $1,966 for the quarter
ended March 31, 2001 from $3,436 in the quarter ended March 31, 2000, a decrease
of $1,470 or 42.8%. This decrease resulted primarily from a downturn in the
e-commerce market place.
Service. Service revenues increased by $1,236, or 15.9% to $9,025 for
the quarter ended March 31, 2001, as compared to service revenues of $7,789 for
the quarter ended March 31, 2000. Increased maintenance and consulting service
revenue 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 the cost of
sublicensing third-party software. The cost of product revenues for the quarter
ended March 31, 2001 was $2,500, a decrease of $352, or 12.3%, as compared to
$2,852 for the quarter ended March 31, 2000. This decrease in product cost is
principally the result of software only upgrades for our existing telephony
customers and the decline in absolute dollar sales of product. Cost of product
revenue for the quarter ended March 31, 2001 was 24.8% of related product
revenues as compared to 22.5% of related product revenues for the comparable
period ended March 31, 2000. The slight increase in absolute dollar terms in the
cost of product revenue of 2.3% was due to the different mix of products sold.
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. Our cost of service revenues for the quarter ended March 31, 2001
increased to $5,760, or 63.8% of
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related service revenues as compared to $4,160 or 53.4% of related service
revenues for the quarter ended March 31, 2000. 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 hours
a day, 7 days a week 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 $34, or 1.3%, to
$2,641 in the quarter ended March 31, 2001, as compared to $2,675 in the quarter
ended March 31, 2000. Engineering, research and development costs increased as a
percentage of product revenue to 26.2% of product revenues for the three-month
period ended March 31, 2001 as compared to 21.1% of product revenues for the
quarter ended March 31, 2000. We intend to continue to invest heavily in product
development activities as we combine the telephony and Internet products into a
seamless customer interaction management solution for our customers. As a
result, we expect that engineering, research and development costs may increase
in the future as a percentage of product sales.
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 for the quarter ended March 31, 2001, were
unchanged compared to the quarter ended March 31, 2000. We intend to continue
cost cutting efforts and expense control.
Other Income (Expense), Net. Other income (expense), net increased by
$260, or 230.1%, to $373 in the quarter ended March 31, 2001, as compared to
$113 in the quarter ended March 31, 2000.
Income Tax Provision (Benefit). For the quarter ended March 31, 2001,
we recorded a tax benefit of $1,296 as compared to a tax benefit of $462 for the
quarter ended March 31, 2000 as the result of having a larger operating loss for
the quarter ended March 31, 2001.
Financial Condition
Total assets at March 31, 2001, were $67,248, a decrease of $5,624 over
total assets of $72,872 at December 31, 2000. This decrease was primarily due to
decreased cash and cash equivalents as well as a decrease in accounts
receivable.
Current liabilities were $25,094 at March 31, 2001, down from $28,482
at December 31, 2000. This decrease was primarily due to a decrease in accounts
payable and accrued liabilities.
Liquidity and Capital Resources
At March 31, 2001, we had $9,878 in cash, cash equivalents and marketable
securities, compared to $14,727 as of December 31, 2000. Cash decreased due to
the decrease in accounts payable and accrued expenses. Net cash provided by
investing activities included the sale of $1,444 of marketable securities,
offset by the purchase of property and equipment of $597. Net cash provided by
financing activities of $189 was primarily due to the proceeds of the issuance
of common stock through our option program and employee stock purchase plan.
Our working capital was $18,835 at March 31, 2001 as compared to $21,622 at
December 31, 2000. We believe that existing cash and cash equivalents will
be adequate to meet our cash requirements for at least the next twelve months.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange
During the quarter ended March 31, 2001 and March 31, 2000 total revenues from
our international operations were approximately 21.0% and 19.0%, respectively,
of our total revenues for all operations.
Our international business is subject to risks typical of an international
business, including, but not limited to: differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, our future
results could be materially adversely impacted by changes in these or other
factors. The effect of foreign exchange rate fluctuations on our operations
during the first quarter of 2001 was not material.
Interest Rates
We invest our cash in a variety of financial instruments, including taxable and
tax-advantaged variable rate and fixed rate obligations of corporations,
municipalities, and local, state and national governmental entities and
agencies. These investments are denominated in U.S. dollars. Cash balances in
foreign currencies are operating balances.
Interest income on our investments is carried in "Other income (expense), net"
on the Consolidated Statements of Operations. We account for our investment
instruments in accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). All of the cash equivalents and short-term investments are treated as
available-for-sale under SFAS 115.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted due to a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall.
Due in part to these factors, our future investment income may fall short of
expectations due to changes in interest rates, or we may suffer losses in
principal if forced to sell securities which have seen a decline in market value
due to changes in interest rates. The weighted-average interest rate on
investment securities at March 31, 2001 was approximately 5.07% based on
predominately tax-free instruments. The fair value of securities held at March
31, 2001 was $5.7 million.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Many of our installations involve products that are critical
to the operations of its clients' businesses. Any failure in one of our
products could result in a claim for substantial damages against us,
regardless of our responsibility for such failure. Although we attempt
to limit contractually our liability for damages arising from product
failures or negligent acts or omissions, there can be no assurance the
limitations of liability set forth in our contracts will be enforceable
in all instances. We are not currently party to any material legal
proceedings.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
eshare communications, Inc.
May 14, 2001 By: /s/ ALEKSANDER SZLAM
-------------------------------------
Aleksander Szlam
Chairman of the Board and
Chief Executive Officer
May 14, 2001 By: /s/ GLEN SHIPLEY
-------------------------------------
Glen Shipley
Chief Financial and Administrative
Officer
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