1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
-------
eshare communications, Inc.
(Exact Name of Registrant as Specified in Its Charter)
GEORGIA 58-1378534
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification
or Organization) Number)
5051 Peachtree Corners Circle
Norcross, Georgia 30092-2500
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (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 August 8, 2001: 21,931,477 shares.
2
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of June 30, 2001 and 3
December 31, 2000
Unaudited Consolidated Statements of Operations for the three months 4
and six months ended June 30, 2001 and 2000
Unaudited Consolidated Statements of Cash Flows for the six months 5
ended June 30, 2001 and 2000
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
2
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
eshare communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
June 30, December 31,
2001 2000
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,983 $ 14,727
Accounts receivable, net of allowance for doubtful accounts of $2,875
at June 30, 2001 and $4,577 at December 31, 2000 20,841 26,587
Inventories 1,515 2,157
Deferred taxes 1,394 1,397
Prepaid expenses and other 2,279 5,236
-------- --------
Total current assets 40,012 50,104
-------- --------
Property and equipment, net of accumulated depreciation 9,675 10,656
Deferred taxes 9,189 7,776
Intangible assets, net 3,611 4,196
Other assets 121 140
-------- --------
Total assets $ 62,608 $ 72,872
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,975 $ 7,809
Accrued liabilities 7,228 8,711
Deferred revenue 9,823 11,463
Other current liabilities 449 499
-------- --------
Total current liabilities 21,475 28,482
-------- --------
Shareholders' equity
Preferred stock, no par value: 20,000,000 shares authorized,
no shares issued and outstanding at June 30, 2001 and
December 31, 2000 -- --
Common stock, no par value: 100,000,000 shares authorized
21,930,551 issued and outstanding at June 30, 2001 and
21,797,312 issued and outstanding at December 31, 2000 69 69
Additional paid-in capital 62,314 62,166
Accumulated other comprehensive loss (1,210) (1,020)
Accumulated deficit (20,040) (16,825)
-------- --------
Total shareholders' equity 41,133 44,390
-------- --------
Total liabilities and shareholders' equity $ 62,608 $ 72,872
======== ========
The accompanying notes are an integral part of these consolidated statements.
3
4
eshare communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
(unaudited)
For the three months ended For the six months ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net revenues:
Product $ 7,989 $ 13,200 $ 18,063 $ 25,867
Service 10,634 8,101 19,659 15,890
-------- -------- -------- --------
Total revenues 18,623 21,301 37,722 41,757
Cost of revenues:
Product 1,340 2,634 3,840 5,487
Service 4,947 4,823 10,707 8,982
-------- -------- -------- --------
Total cost of revenues 6,287 7,457 14,547 14,469
-------- -------- -------- --------
Gross margin 12,336 13,844 23,175 27,288
Operating expenses:
Engineering, research and development 2,339 2,589 4,980 5,264
Selling, general and administrative 11,367 13,323 23,539 25,489
-------- -------- -------- --------
Total operating expenses 13,706 15,912 28,519 30,753
-------- -------- -------- --------
Loss from operations (1,370) (2,068) (5,344) (3,465)
Other (loss) income, net (24) 138 349 250
-------- -------- -------- --------
Loss before income taxes (1,394) (1,930) (4,995) (3,215)
Income tax benefit (502) (695) (1,798) (1,157)
-------- -------- -------- --------
Net loss $ (892) $ (1,235) $ (3,197) $ (2,058)
======== ======== ======== ========
Net loss per share
Basic $ (0.04) $ (0.06) $ (0.15) $ (0.10)
======== ======== ======== ========
Diluted $ (0.04) $ (0.06) $ (0.15) $ (0.10)
======== ======== ======== ========
Weighted average shares outstanding
Basic 21,959 21,756 21,957 21,595
======== ======== ======== ========
Diluted 21,959 21,756 21,957 21,595
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
4
5
eshare communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the six months ended
June 30,
2001 2000
-------- --------
Cash flows from operating activities:
Net loss $ (3,197) $ (2,058)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,806 2,507
Non cash financing charges -- (69)
Non cash compensation expense -- 25
Deferred taxes (1,410) --
Changes in assets and liabilities:
Accounts receivable, net 5,746 (4,430)
Inventories 642 459
Prepaid expenses and other assets 2,957 (3,587)
Accounts payable and accrued expenses (5,317) 4,152
Deferred revenue (1,640) 3,820
Customer deposits (50) 601
Current portion of long term debt -- (139)
Other, net 1 (86)
-------- --------
Total adjustments 3,735 3,253
-------- --------
Net cash provided by operating activities 538 1,195
Cash flows from investing activities:
Purchases of property and equipment (1,208) (1,770)
Sale of marketable securities, net 2,766 4,500
Payment on purchase of business (32) --
-------- --------
Net cash provided by investing activities 1,526 2,730
Cash flows from financing activities:
Net proceeds from issuance (retirements) of common stock 148 1,453
Repayment of debt -- (74)
-------- --------
Net cash provided by financing activities 148 1,379
Effect of foreign currency translation (190) (703)
Net change in cash and cash equivalents 2,022 4,601
Cash and cash equivalents, beginning of period 7,598 3,558
-------- --------
Cash and cash equivalents, end of period 9,620 8,159
Marketable securities 4,363 6,976
-------- --------
Cash, cash equivalents and marketable securities $ 13,983 $ 15,135
======== ========
Supplemental cash flow information:
Income taxes paid $ 68 $ 11
======== ========
The accompanying notes are an integral part of these consolidated statements.
5
6
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 June 30, 2001 and 2000. The interim results for the
three months and six months ended June 30, 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 our 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
("SAB 101"), "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 ranges 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 SAB 101. 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 $9,823 and $11,463 at June
30, 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.
6
7
Inventories consist of the following at:
June 30, 2001 December 31, 2000
------------- -----------------
Raw materials $ 1,215 $ 1,050
Work in process 225 497
Finished goods 310 778
-------- --------
1,750 2,325
Less, reserve (235) (168)
-------- --------
Total inventories $ 1,515 $ 2,157
======== ========
5. Net loss per share
Net loss 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 which they are antidilutive.
The following table presents the components of diluted weighted average shares
outstanding.
For the three months ended June 30, For the six months ended June 30,
2001 2000 2001 2000
------ ------ ------ ------
Weighted average shares outstanding
Basic weighted average shares outstanding 21,959 21,756 21,957 21,595
Weighted average common equivalent shares -- -- -- --
------ ------ ------ ------
Diluted weighted average shares outstanding 21,959 21,756 21,957 21,595
====== ====== ====== ======
7
8
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 For the six months ended
June 30, June 30,
2001 2000 2001 2000
------ -------- -------- --------
Net loss as reported $ (892) $ (1,235) $ (3,197) $ (2,058)
====== ======== ======== ========
Other comprehensive (loss) income:
Foreign currency translation $ (65) $ (333) $ (187) $ (739)
Unrealized (losses) gains on securities, net (6) 18 (3) 36
------ -------- -------- --------
Other comprehensive loss $ (71) $ (315) $ (190) $ (703)
====== ======== ======== ========
7. Business Segment and Geographic Area Information
We are a multinational business operating in two segments, telephony and
Internet. 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 that is consistent with that made available to our
management to assess performance. The results of these business segments are as
follows:
For the three months ended June 30, For the six months ended June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Revenues:
Telephony $ 16,105 $ 15,660 $ 32,209 $ 31,994
Internet 2,518 5,641 5,513 9,763
-------- -------- -------- --------
Total Revenues $ 18,623 $ 21,301 $ 37,722 $ 41,757
======== ======== ======== ========
(Loss) income from operations:
Telephony $ (746) $ 1,068 $ (3,993) $ 503
Internet (624) (3,136) (1,351) (3,968)
-------- -------- -------- --------
Total (loss) income from operations $ (1,370) $ (2,068) $ (5,344) $ (3,465)
======== ======== ======== ========
Depreciation & amortization
Telephony $ 1,294 $ 1,182 $ 2,514 $ 2,277
Internet 145 120 292 230
-------- -------- -------- --------
Total depreciation & amortization $ 1,439 $ 1,302 $ 2,806 $ 2,507
======== ======== ======== ========
8
9
The following represents our total revenues and long-lived assets based on
geographic location for the three and six months ended June 30, 2001 and 2000:
For the three months ended June 30, For the six months ended June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Total revenues:
United States $ 12,645 $ 15,675 $ 27,659 $ 32,253
Europe 3,286 3,884 6,314 6,524
Mexico/Latin America 1,529 988 2,186 1,615
Other 1,163 754 1,563 1,365
-------- -------- -------- --------
$ 18,623 $ 21,301 $ 37,722 $ 41,757
======== ======== ======== ========
2001 2000
-------- --------
Long-lived assets at June 30:
United States $ 9,296 $ 10,296
Europe 362 394
Mexico/Latin America 17 18
-------- --------
$ 9,675 $ 10,708
======== ========
8. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board approved Statement of
Financial Accounting Standard No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interest method of accounting for business combinations
initiated after June 30, 2001. SFAS No. 142 requires companies to cease
amortizing goodwill that existed at June 30, 2001. This amortization of existing
goodwill will cease on December 31, 2001. Any goodwill resulting from
acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142
also establishes a new method of testing goodwill for impairment on an annual
basis or on an interim basis if an event occurs or circumstances change that
would reduce the fair value of a reporting unit below its carrying value. The
adoption of SFAS No. 142 will result in our discontinuation of amortization of
our goodwill; however, we will be required to test our goodwill for impairment
under the new standard beginning in the first quarter of 2002, which could have
an adverse effect on our future results of operations if an impairment occurs.
9. Subsequent Event
On July 8, 2001, we entered into an agreement to merge with and into a
wholly-owned subsidiary of divine, Inc. ("divine"), a provider of web-based
technology, professional services and managed application capabilities.
Following the proposed merger, we will be a wholly-owned subsidiary of divine.
Additional information about the merger is contained in Item 5 of Part II of
this Quarterly Report on Form 10-Q.
9
10
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,
Internet service providers and portals in approximately 40 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 through our
expert services organization.
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 attached to this Quarterly Report on
Form 10-Q.
Results of Operations
Revenues
Product. Product revenues for the quarter ended June 30, 2001 were
$7,989 as compared to $13,200 for the same period ended June 30, 2000, a
decrease of $5,211, or 39.5%. Revenue from the sale of telephony product
decreased to $6,576 for the quarter ended June 30, 2001 from $8,651 in the
quarter ended June 30, 2000, a decrease of $2,075 or 24.0%. Sales of internet
product decreased to $1,413 for the quarter ended June 30, 2001 from $4,549 in
the quarter ended June 30, 2000, a decrease of $3,136 or 68.9%. For the six
months ended June 30, 2001, product revenues decreased $7,804 or 30.2% to
$18,063 as compared to product revenue of $25,867 for the six-month period ended
June 30, 2000. Revenue from telephony product decreased $3,198, or 17.9%, to
$14,684 in the six-month period ended June 30, 2001 as compared to telephony
product revenue of $17,882 for the six-month period ended June 30, 2000. This
decrease is principally due to the current downturn in capital spending as the
United States economy slowed during the period and ongoing competitive pricing
pressures within the call center industry. Internet product revenues decreased
$4,606, or 57.7%, from $7,985 for the six months ended June 30, 2000 to $3,379
for the six months ended June 30, 2001. This decrease resulted primarily from a
downturn in the e-commerce market place.
Service. Service revenues increased by $2,533, or 31.3% to $10,634 for
the quarter ended June 30, 2001, as compared to service revenues of $8,101 for
the quarter ended June 30, 2000. Service revenues increased by $3,769, or 23.7%
to $19,659 for the six months ended June 30, 2001 from $15,890 in the comparable
prior year period. 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 June 30, 2001 was $1,261, a decrease of $1,373, or 52.1%, as compared to
$2,634 for the quarter ended June 30, 2000. The cost of product revenue for the
six-month period ended June 30, 2001 was $3,840, a decrease of $1,647, or 30.0%,
as compared to a product cost of $5,487 for the six-month
10
11
period ended June 30, 2000. This decrease in product cost is principally the
result of the mix of products sold, which included a higher percentage of
software only upgrades for our existing telephony customers and also was the
result of the decline in absolute dollar sales of product. The cost of product
revenue as a percentage of related product revenues was relatively unchanged for
the comparable six-month periods.
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 June 30, 2001
increased to $4,947, or 46.5% of related service revenues, as compared to $4,823
or 59.5% of related service revenues for the quarter ended June 30, 2000. Cost
of service revenues increased to $10,707 or 54.5% of related service revenues
for the six months ended June 30, 2001 from $8,982 or 56.5% of related service
revenues for the six-month period ended June 30, 2000. This increase in cost of
service revenues is related to the addition of costs to support Internet product
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 $250, or 9.7%, to
$2,339 in the quarter ended June 30, 2001, as compared to $2,589 in the quarter
ended June 30, 2000. Engineering, research and development expenses decreased by
$284, or 5.4%, to $4,980 in the six-month period ended June 30, 2001, as
compared to $5,264 for the six-month period ended June 30, 2000. Engineering,
research and development costs increased as a percentage of product revenue to
27.5% of product revenues for the six-month period ended June 30, 2001, as
compared to 20.3% of product revenues for the six-month period ended June 30,
2000. We 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, engineering, research and
development costs have increased 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 decreased by $1,877, or 14.1%, to $11,446 in
the quarter ended June 30, 2001, as compared to $13,323 in the quarter ended
June 30, 2000. Selling, general and administrative costs decreased by $1,950 or
7.7%, to $23,539 for the six-month period ended June 30, 2001 from $25,489 for
the six months ended June 30, 2000. We intend to continue cost cutting efforts
and expense control.
Other Income (Expense), Net. Other income (expense), net decreased by
$162, or 117.4%, to a loss of $24 in the quarter ended June 30, 2001, as
compared to income of $138 in the quarter ended June 30, 2000. Other income
(expense), net increased to $349 for the six-month period ended June 30, 2001
from $250 for the six-month period ended June 30, 2000. This increase resulted
from not having to make interest payments on debt for the period ended June 30,
2001 as we did in the comparable period.
Income Tax Provision (Benefit). For the quarter ended June 30, 2001, we
recorded a tax benefit of $502 as compared to a tax benefit of $695 for the
quarter ended June 30, 2000. For the six months ended June 30, 2001, we recorded
a tax benefit of $1,798, as compared to a tax benefit $1,157 for the six months
ended June 30, 2000, as a result of having a larger operating loss for the
six-month period ended June 30, 2001.
Financial Condition
Total assets at June 30, 2001, were $62,608, a decrease of $10,264 over
total assets of $72,872 at December 31, 2000. This decrease was primarily due to
a decrease in accounts receivable as well as a decrease in prepaid expenses and
other.
Current liabilities were $21,475 at June 30, 2001, down from $28,482 at
December 31, 2000. This decrease was primarily due to payments of accounts
payable and accrued liabilities.
Liquidity and Capital Resources
At June 30, 2001, we had $13,983 in cash, cash equivalents and marketable
securities, compared to $14,727 as of December 31, 2000. Cash decreased due to
payments of accounts payable and accrued expenses. Net cash provided by
investing activities included the
11
12
sale of $2,766 of marketable securities, offset by the purchase of property and
equipment of $1,208. Net cash provided by financing activities of $148 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 $18,537 at
June 30, 2001, as compared to $21,622 at December 31, 2000, a reduction of
14.2%. We believe that existing cash and cash equivalents will be adequate to
meet our cash requirements for at least the next twelve months.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board approved SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of
accounting for business combinations initiated after June 30, 2001. SFAS No. 142
requires companies to cease amortizing goodwill that existed at June 30, 2001.
This amortization of existing goodwill will cease on December 31, 2001. Any
goodwill resulting from acquisitions completed after June 30, 2001 will not be
amortized. SFAS No. 142 also establishes a new method of testing goodwill for
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The adoption of SFAS No. 142 will result in our
discontinuation of amortization of our goodwill; however, we will be required to
test our goodwill for impairment under the new standard beginning in the first
quarter of 2002, which could have an adverse effect on our future results of
operations if an impairment occurs.
Subsequent Event
On July 8, 2001, we entered into an agreement to merge with and into a
wholly-owned subsidiary of divine, Inc. ("divine"), a provider of web-based
technology, professional services and managed application capabilities.
Following the proposed merger, we will be a wholly-owned subsidiary of divine.
Additional information about the merger is contained in Item 5 of Part II of
this Quarterly Report on Form 10-Q.
12
13
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange
During the three and six months ended June 30, 2001 total revenues from our
international operations were approximately 32.1% and 26.7%, 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 second quarter of 2001 was not material. During these periods, we did
not actively participate in any foreign currency hedging strategies. There can
be no assurance that future fluctuations in currency exchange rates will not
have a material adverse impact on our future international relations.
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 June 30, 2001 was approximately 3.93% based on
short-term investments. The fair value of securities held at June 30, 2001 was
$4.4 million.
13
14
PART II. OTHER INFORMATION
Item 1. 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 are material with
respect to our financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Our Annual Meeting of Shareholders was held on May 22, 2001 at which
time certain matters were submitted to our shareholders for a vote.
Below is a brief description of each such matter as well as the outcome
of each vote.
The shareholders elected the following persons to serve a one-year term
as members of the Company's Board of Directors:
<Table>
<Caption>
Shares Shares
For Withheld
---------- --------
Nominees:
Aleksander Szlam 19,154,367 178,001
Andrew J. Filipowski 19,156,180 176,188
Donald L. House 19,175,403 156,965
Stephen Jeffery 19,177,697 154,671
Jack Pellicci 19,177,257 155,111
James Tito 19,155,437 176,931
</Table>
The shareholders ratified the appointment of Arthur Andersen LLP as the
Company's independent auditors for the fiscal year ended December 31,
2001.
<Table>
<Caption>
Shares Shares Shares
For Against Abstaining
---------- ------- ----------
19,280,748 22,365 29,255
</Table>
Item 5. Other Information.
Subsequent Events:
On July 8, 2001, we signed a definitive Agreement and Plan of Merger
(the "Merger Agreement") with divine, inc., a Delaware corporation
("divine") and DES Acquisition Company, a Delaware corporation and
wholly-owned subsidiary of divine ("MergerSub"). According to the
Merger Agreement, divine will acquire us effective as soon as
practicable after the closing date, which has not yet been set, through
our merger with and into MergerSub, with MergerSub surviving and
remaining a wholly-owned subsidiary of divine. The proposed transaction
remains subject to the approval of our shareholders and to the extent
required, the stockholders of divine. The date of our shareholders'
meeting and the divine stockholders' meeting, if required, has not yet
been determined. In anticipation of the shareholders' meeting and
stockholders' meeting (if required), our Board of Directors and the
Board of Directors of divine intend to solicit proxies by filing a
combined proxy statement/registration statement on Form S-4 with the
Securities and Exchange Commission. The proposed merger is intended to
qualify as a tax-free reorganization and will be accounted for under
the purchase method of accounting.
Upon consummation of the merger, and except as provided below, each of
the approximately 21.9 million outstanding shares of our common stock
currently outstanding will be converted into the right to receive 1.30
shares of divine class A common stock (the "Exchange Ratio"). If the
average per share closing price of divine class A common stock for the
ten trading days ending two trading days prior to the consummation of
the merger (the "Average Market Value") is $2.82 or greater, the
Exchange Ratio will be adjusted to an amount equal to $3.653 divided by
the Average Market Value. If the Average Market Value is $2.39 or less,
the Exchange Ratio will be adjusted to an amount equal to $3.12 divided
by the greater of the Average Market Value or $1.00.
14
15
If, pursuant to the above-described adjustments, more than
approximately 28.5 million shares of divine class A common stock are to
be issued to our shareholders in the merger, divine can elect to pay
cash in lieu of such excess shares in an amount per share equal to the
Average Market Value of divine class A common stock. However, divine
has represented that it will not elect to pay cash in excess of 50% of
the total consideration paid to all our shareholders.
In addition, each outstanding option to purchase shares of our common
stock that has an exercise price that, when multiplied by the Exchange
Ratio, is less than or equal to the closing price of divine class A
common stock on the day prior to the consummation of the merger will
become exercisable at the adjusted exercise price for a number of
shares of divine class A common stock equal to the number of shares of
our common stock subject to the option multiplied by the Exchange
Ratio. All our other stock options will be cancelled. As of July 8,
2001, there were outstanding options to purchase a total of
approximately 3.7 million shares of our common stock, with exercise
prices ranging from $0.43 to $20.88 per share, with a weighted average
exercise price of $4.80 per share. divine has also agreed to reserve a
number of options to purchase its class A common stock equal to 13% of
the number of shares of divine class A common stock issued to our
shareholders in the merger for future grants to our employees who
become employees of divine after the merger is consummated.
Each share of divine common stock issued pursuant to the Merger
Agreement will be registered pursuant to a Form S-4 Registration
Statement filed with the Securities and Exchange Commission.
The Merger Agreement may be terminated under certain circumstances,
including by eshare if at any time after the effective date of the
Form S-4 Registration Statement, but prior to the date of our
shareholders' meeting, the average per share closing price of divine's
class A common stock for the previous ten trading days is less than
$1.00. Under certain circumstances, termination of the Merger
Agreement will require divine or eshare, as applicable, to pay the
other party a $2,000,000 termination fee.
The Merger Agreement contains representations, conditions,
indemnifications, provisions, covenants and other provisions typical
for similar transactions. The consummation of the Merger and the
transactions contemplated by the Merger Agreement are subject to
certain conditions, including approval by the our shareholders and the
declaration of effectiveness by the Securities and Exchange Commission
of the registration statement to be filed pursuant to the Securities
Act of 1933, as amended, covering the shares of divine common stock
being issued pursuant to the Merger.
15
16
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The following exhibits are filed with this Report:
Exhibit 10.1 Agreement and Plan of Merger, dated as of
July 8, 2001, among divine, inc., DES Acquisition Company and
eshare communications, Inc.
Exhibit 10.2 Voting Agreement, dated as of July 8, 2001,
between divine, inc. and Szlam Partners, L.P.
Exhibit 10.3 Stockholder Agreement, dated as of July 8,
2001, among divine, inc., Szlam Partners, L.P. and Aleksander
Szlam.
Exhibit 99.1 Safe-Harbor Compliance Statement
(b) Reports on Form 8-K
None.
16
17
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.
August 14, 2001 By /s/ Aleksander Szlam
----------------------------------------------
Aleksander Szlam
Chairman of the Board and
Chief Executive Officer
August 14, 2001 By /s/ Glen Shipley
----------------------------------------------
Glen Shipley
Chief Financial and Administrative Officer
17