<PAGE> 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 September 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________.
Commission file number 0-22317
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ESHARE TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
GEORGIA 58-1378534
(State or other Jurisdiction of Incorporation (I.R.S. Employer Identification
or Organization) Number)
5051 PEACHTREE CORNERS CIRCLE
NORCROSS, GEORGIA 30092-2500
(770) 239-4330
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common stock, no par value,
outstanding as of November 11, 21,322,440 shares.
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PART 1 - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C>
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of September 30, 1999 and December 31, 3
1998.
Unaudited Consolidated Statements of Operations for the three months and nine 4
months ended September 30, 1999 and 1998.
Unaudited Consolidated Statement of Cash Flows for the nine months ended 5
September 30, 1999 and 1998.
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations.
Item 3. Quantitative and Qualitative Disclaimers 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
Item 6. Exhibits 13
Signatures 14
</TABLE>
2
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ESHARE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998(A)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,340 $ 30,783
Accounts receivable, net of allowance for doubtful
accounts of $3,224 at September 30, 1999 and $2,600 at December 31, 1998 34,963 33,788
Inventories 2,165 1,260
Inventories 2,165 1,260
Deferred taxes 3,731 3,731
Prepaid expenses and other 422 458
-------- --------
Total current assets 63,621 70,020
Property and equipment, net of accumulated depreciation 10,443 7,901
Other assets 175 563
Intangible assets, net 4,463 --
-------- --------
Total Assets $ 78,702 $ 78,484
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,140 $ 7,265
Accrued liabilities 12,036 12,516
Deferred revenue 8,426 6,574
Customer deposits 485 815
Current portion of notes payable 162 194
-------- --------
Total current liabilities 26,249 27,364
Notes payable, excluding current portion 105 226
Convertible notes payable -- 2,500
Stockholders' Equity
Common Stock, no par value, 100,000,000 shares authorized
21,322,440 outstanding at September 30, 1999 and 20,872,738 issued and outstanding
at December 31, 1998 69 69
Additional paid-in capital 54,379 44,282
Accumulated other comprehensive income (40) (207)
-------- --------
Retained earnings (2,060) 4,250
-------- --------
Total stockholders' equity 52,348 48,394
-------- --------
Total liabilities and stockholders' equity $ 78,702 $ 78,484
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
(A) Amounts have been restated to reflect the acquisition of eShare.com which
was accounted for using the pooling-of-interest method (See Note 1).
3
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ESHARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except for per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- --------------------------
1999 1998(A) 1999 1998(A)
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<S> <C> <C> <C> <C>
Net revenues:
Product $ 10,981 $ 18,764 $ 50,571 $51,021
Service 8,146 6,680 24,579 18,483
-------- -------- -------- -------
Total revenues 19,127 25,444 75,150 69,504
Cost of revenues:
Product 3,960 5,562 15,512 15,487
Service 4,450 3,511 12,717 9,546
-------- -------- -------- -------
Total cost of revenues 8,410 9,073 28,229 25,033
-------- -------- -------- -------
Gross margin 10,717 16,371 46,921 44,471
Operating expenses:
Research and development 3,922 2,894 10,821 8,418
Selling, general and administrative 11,699 9,343 34,633 25,779
Acquisition related charges 4,500 4,695
Deferred comp expense 2,073 2,271
Amortization of intangible assets 303 303
Restructuring charge 200 200
-------- -------- -------- -------
Total operating expenses 22,697 12,237 52,923 34,197
-------- -------- -------- -------
Income from operations (11,980) 4,134 (6,002) 10,274
Other income (expense), net 173 365 641 889
-------- -------- -------- -------
Income before income taxes (11,807) 4,499 (5,361) 11,163
Income tax provision (2,459) 1,725 949 4,696
-------- -------- -------- -------
Net income after income tax (9,348) 2,774 (6,310) 6,467
Preferred stock preference -- -- (5,850) --
-------- -------- -------- -------
Net income to common shareholders $ (9,348) $ 2,774 $(12,160) $ 6,467
======== ======== ======== =======
Earnings per share
Basic $ (0.44) $ 0.13 $ (0.57) $ 0.31
======== ======== ======== =======
Diluted $ (0.44) $ 0.12 $ (0.57) $ 0.29
======== ======== ======== =======
Weighted average common and common
equivalent shares
Basic 21,306 20,800 21,222 20,781
Diluted 21,306 22,230 21,222 22,298
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
(A) Amounts have been restated to reflect the acquisition of eShare.com which
was accounted for using the pooling-of-interest method (See Note 1).
4
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ESHARE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1999 1998(A)
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $(12,160) $ 6,467
Adjustments to reconcile net income to net cash provided
by(used in) operating activities:
Preferred stock preference 5,850 --
Depreciation and amortization 2,599 1,579
Deferred taxes -- (1,787)
Amortization and write-off of trademarks -- (4)
Non-cash financing expense 124 --
Non-cash compensation expense 2,271 --
Deferred offering costs 335 --
Deferred interest expense 1 --
Amortization and write-off of purchased software costs 5 --
Changes in assets and liabilities net of business acquired:
Accounts receivable, net (969) (8,137)
Inventories (793) 295
Prepaid expenses and other assets 36 (400)
Accounts payable and accrued expenses (1,531) 4,283
Deferred revenue 778 1,462
Customer deposits (330) (1,530)
Other, net (129) (94)
-------- --------
Total adjustments 8,247 (4,333)
-------- --------
Net cash (used in) provided by operating activities (3,913) 2,134
Cash flows from investing activities:
Purchase of business, net of cash (5,131) --
Purchases of property and equipment (4,539) (3,253)
Purchased software -- (135)
Sale of marketable securities 5,594 2,536
-------- --------
Net cash (used in) investing activities (4,076) (852)
Cash flows from financing activities:
Net proceeds from issuance of common stock 1,739 260
Exercise of common stock options 110 2
Proceeds from issuance of debt 5,945 2,835
Repayment of debt (2,653) --
Distributions to stockholders -- --
-------- --------
Net cash provided by financing activities 5,141 3,097
Net change in cash and cash equivalents (2,848) 4,379
Cash and cash equivalents, beginning of period 8,027 8,147
-------- --------
Cash and cash equivalents, end of period 5,179 12,526
Marketable securities 17,161 21,479
-------- --------
Cash, cash equivalents and marketable securities $ 22,340 $ 34,005
======== ========
Supplemental Disclosures of Cash Flow Information:
Income taxes paid $ 2,673 $ 2,990
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
(A) Amounts have been restated to reflect the acquisition of eShare.com which
was accounted for using the pooling-of-interest method (See Note 1).
5
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ESHARE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar share amounts in thousands)
(unaudited)
1. Basis of Presentation
The unaudited consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles applicable
to interim financial statements. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of the Company's management,
these consolidated financial statements contain all adjustments (which comprise
only normal and recurring accruals) necessary to present fairly the financial
position as of September 30, 1999 and 1998. The interim results for the three
months and nine months ended September 30, 1999 are not necessarily indicative
of the results to be expected for the full year. These statements should be
read in conjunction with the Company's combined financial statements for the
fiscal year ended December 31, 1998, as filed in its annual report on form
10-K.
On September 1, 1999, the Company acquired eShare Technologies, Inc., a Delaware
corporation ("eShare.com") for 6,050 shares of its common stock. The
acquisition was accounted for using the pooling-of-interest method of accounting
and accordingly, all prior period financial statements have been restated to
reflect that the acquisition had been completed as of the start of each period.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
3. Revenue Recognition
The Company generates product revenues primarily from the sale of integrated
systems, which are comprised of both hardware and software and software
licenses. The Company's service revenues are generated from maintenance
contracts which include support, parts and labor, and software update rights.
Service revenues also include fee-based installation, training, and consulting
services.
The Company recognizes product revenues when a contract has been executed, the
product has been shipped and the Company has no significant obligations yet to
be satisfied. The Company's sales contracts provide for certain payment terms
normally based upon signing the contract, customer receipt of the product, and
commencement of operation of the customer's system.
Revenues from maintenance contracts are recognized ratably over the term of the
contractual support period which may range up to four years. If maintenance is
included in the original integrated product contract, such amounts are
unbundled from the license fee based on the value established by independent
sale of such maintenance to customers. Consulting revenues are primarily
related to implementation services performed under separate service
arrangements related to installation. Revenues from consulting, installation,
and training services are recognized as the services are performed.
4. Acquisitions
a. eShare.com
On September 1, 1999, the Company acquired eShare.com for 6,050 shares of
common stock. The acquisition was accounted for using the pooling-of-interest
method of accounting and accordingly, all prior period financial statements have
been restated to reflect that the acquisition had been completed as of the start
of each period.
b. smallwonder! softworks, Inc.
6
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On June 15,1999, the Company acquired smallwonder!softworks, Inc.
("smallwonder") for $4,100 in cash and a prospective earnout of up to
additional $3,000, based on achievement of certain defined criteria. The
acquisition was accounted for using the purchase method of accounting. The
excess of the cost over the fair value of net assets acquired of $4,744 is
being amortized over 5 years.
5. Non-recurring charges
a. Acquisition related charges
For the three months ended September 30, 1999, the Company incurred charges of
$4,500 principally related to professional services and other costs
associated with the acquisitions of eShare.com and smallwonder
(see note 4 above).
b. Deferred compensation expense
For the three months ended September 30, 1999, the Company incurred a non-cash
charge of $2,073 associated with the conversion of the eShare.com Employee
Stock Option Plan.
c. Restructuring charge
For the three months ended September 30, 1999, the Company incurred a charge of
$200 associated with a reduction-in-force of approximately 40 employees
principally related to its telephony-based business.
6. Preferred Stock Preference
Included in results of operations for the nine months ended September 30,1999,
is a non-recurring, non-cash charge of $5,850 which represents the difference
between the estimated fair value of common stock of eShare.com at February 19,
1999 and the purchase price of certain Series C Preferred Stock issued
on that date. As part of the acquisition, the Series C Preferred Stock was
converted to common stock.
7. Inventories
Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market and consist of the following at:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Raw Materials $ 284 $ 143
Work in process 3 37
Finished goods 1,878 1,080
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Total inventories $ 2,165 $1,260
======= ======
</TABLE>
7
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8. Earnings Per Share
Earnings per share are computed using the weighted-average number of common
stock and diluted common stock equivalents ("CSE") shares from stock options
(using the treasury stock method) outstanding during each period. CSE's are not
included in periods where they are antidilutive.
The following table presents the components of diluted weighted average shares
outstanding.
<TABLE>
<CAPTION>
For the nine months For the three months For the nine months
ended ended ended
September 30, September 30, September 30,
1999 1999 1998
------------------- -------------------- -------------------
<S> <C> <C> <C>
Weighted average shares outstanding
Basic weighted average shares outstanding 21,222 21,306 20,781
Weighted average common equivalent shares -- -- 1,517
------ ------ ------
Diluted weighted average shares outstanding 21,222 21,306 22,298
====== ====== ======
</TABLE>
9. Other Comprehensive Income
In June, 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes standards for the disclosure of all components of
comprehensive income. Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company adopted SFAS No. 130 in 1998.
The changes in the components of other comprehensive income are reported as
follows (in thousands):
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1999 1998 1999 1998
------- ------- -------- ------
<S> <C> <C> <C> <C>
Net income as reported $(9,348) $ 2,774 $(12,160) $6,467
======= ======= ======== ======
Other comprehensive income:
Foreign currency translation $ (13) $ (3) $ (39) $ 17
Unrealized gains on securities, net 112 19 160 61
------- ------- -------- ------
Other comprehensive income $ 99 $ 16 $ 121 $ 78
======= ======= ======== ======
</TABLE>
10. Subsequent Event
On November 2, 1999, the Company completed a reduction in force of approximately
95 employees, principally related to its telephony business. In addition,
approximately 45 employees with Internet skills were transferred to support the
Company's Internet Solutions Business Unit. The Company will take a charge in
its results of operations for the three months ended December 31, 1999 for the
reduction in force and certain transfer activities.
8
<PAGE> 9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollar and share amounts in thousands)
Overview
eShare Technologies, Inc., f/k/a Melita International Corporation (the
"Company") along with its recently acquired wholly-owned subsidiaries; eShare
Technologies, Inc.("eshare.com") and smallwonder! softworks, Inc. ("small
wonder") is a leading provider of unified web and telephony customer
communications solutions for customer contact centers, e-commerce and online
communities.
On September 1, 1999, the Company acquired eShare.com for 6,050 shares of
common stock. The acquisition was accounted for using the pooling-of-interest
method of accounting and accordingly, all prior period financial information
has been restated to reflect that the acquisition had been completed as of the
start of each period presented.
On June 15, 1999, the Company acquired smallwonder, for $4,100 in cash and a
prospective earnout of an additional $3,000, based on achievement of certain
defined criteria. The acquisition was accounted for utilizing the purchase
method of accounting and accordingly, results have been included from the date
of the acquisition. The excess of the cost over the fair value of net assets
acquired of $4,744 is being amortized over 5 years.
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including but not limited to statements related to plans for future business
development activities, anticipated costs of revenues, product mix and service
revenues, research and development and selling, general and administrative
activities, and liquidity and capital needs and resources. Such forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Investors are cautioned that any
forward looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward looking statements.
Results of Operations
Revenues
Product. For the three months ended September 30, 1999, product revenues
decreased $7,783 or 41.5% to $10,981 from $18,764 in the comparable prior year
period. Revenues from the Company's telephony-based products decreased $8,783,
or 49.8%, to $8,856 principally due to reduced system sales. This reduction was
partially offset by an increase in internet product revenues of $1,000, almost
doubling to $2,125 resulting from sales of products introduced this year.
For the nine months ended September 30, 1999, product revenues remained
relatively stable at $50,571 versus $51,021 in the comparable prior year
period. Revenues from the Company's telephony-based products decreased by
$2,912, or 6.0%, again principally due to reduced systems sales. This reduction
was substantially offset by higher internet product revenues which rose to
$5,012 from $2,550 in the comparable prior year period.
Service. Service revenues increased by $1,466, or 21.9% to $8,146 for the
three months ended September 30, 1999 from $6,680 in the comparable prior year
period. For the nine months ended September 30, 1999, service revenues increased
by $6,096, or 33.0%, to $24,579 from $18,483 in the prior year. These increases
are a result of an increase in the number of software maintenance and support
agreements and, to a lesser extent, an increase in revenue generated by training
and consulting services.
Cost of Revenues
Product The cost of product revenues include the cost of material,
personnel-related cost for product assembly, fees paid to third parties for
outsourced product assembly and, in certain instances, the cost of sublicensing
third-party software. Cost of product revenues (expressed as a percentage of
product revenues) for the three months ended September 30, 1999 increased to
36.1% from 29.6% in the comparable prior year period. This increase is the
result of the impact of certain fixed expenses and the lower revenues discussed
above. This increase was partially offset by a higher mix of internet products
in total revenues from the prior year. Cost of revenues for these products is
less than 20.0% for each period.
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Service The cost of service revenues primarily consist of employee-related
costs for customer support, consulting and field service personnel and fees
paid to third parties for installation services and post installation hardware
maintenance services. Cost of service revenues (expressed as a percentage of
service revenues) has remained relatively stable for the periods presented
representing 54.6% and 51.7% for the three and nine month periods ended
September 30, 1999 and 52.6% and 51.6% for the comparable prior year periods,
respectively.
Operating Expenses
Engineering, research and development Engineering, research and development
expenses primarily consist of employee-related costs for engineering personnel
involved with software development. Also included are outside contractor costs
for development projects. Engineering, research and development costs increased
to $3,922 and $10,821 for the three and nine months ended September 30, 1999
from $2,894 and $8,418 in the comparable prior year periods, respectively. The
increase resulted primarily from the addition of developers and outside
contractors to support development efforts. These efforts were focused on
continued enhancements to existing products and ongoing development of future
products. The Company intends to continue to invest heavily in product
development activities, especially for our internet and mixed media
communications solutions. As a result, the Company expects that engineering,
research and development costs will increase in the future.
Selling, general and administrative Selling, general and administrative
expenses consist primarily of employee-related costs for sales, marketing,
administrative, finance and human resources personnel. Also included are
marketing expenditures for trade shows, advertising and other promotional
expenditures. Selling, general and administrative costs increased to $11,699
and $34,633 for the three and nine month periods ended September 30, 1999 from
$9,343 and $25,779 in the comparable prior year periods, respectively. These
increases are primarily related to the expansion of our sales and marketing
resources and increased levels of marketing activities. The Company intends to
continue expanding our sales, marketing and sales support operations
principally related to our internet products. As a result, the Company expects
selling, general and administrative costs will increase in the future.
Acquisition related charges For the three months ended September 30,1999,
the Company incurred charges of $4,500 principally related to professional
services and other related costs associated with the acquisitions of eShare
Technologies, Inc. and smallwonder! softworks, Inc.
Deferred compensation expense For the three months ended September 30,
1999, the Company incurred a non-cash charge of $2,073 associated with the
conversion of the eShare Technologies, Inc. Employee Stock Option Plan.
Restructuring charges For the three months ended September 30, 1999, the
Company incurred a charge of $200 associated with a reduction-in-force of
approximately 40 employees principally related to its telephony-based business.
Other Income (Expense), Net Other income (expense), net decreased to $173
and $641 for the three and nine month periods ended September 30, 1999 and from
$365 and $889 for the comparable prior year periods, respectively. These
decreases resulted from reduced interest income earned on lower average
investments in marketable securities.
FINANCIAL CONDITION
Total assets as of September 30, 1999, were $78,702, relatively stable with
total assets of $78,484 at December 31, 1998. Reduced cash was substantially
offset by increases in property, plant and equipment and intangible assets.
Intangible assets increased by $4,463 primarily due to the acquisition of
smallwonder! softworks, Inc. (see Overview Section above).
Current liabilities were $26,249 at September 30, 1999 remained relatively
stable from $27,364 at December 31, 1998.
10
<PAGE> 11
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had $22,340 in cash, cash equivalents and
marketable securities, compared to $30,783 as of December 31, 1998. The decrease
in cash is primarily due to the cash purchase of smallwonder! softworks, Inc.
and the increases in property, plant and equipment. The Company's working
capital was $37,372 for the period ending September 30, 1999 as compared to
$42,656 for period ending December 31, 1998. The Company anticipates that
existing cash and cash equivalents will be adequate to meet its cash
requirements for the next twelve months.
IMPACT OF THE YEAR 2000 ISSUE
YEAR 2000 READINESS
Introduction
Many currently installed computer systems and software products are coded
to accept only two digit entries in date code fields. Beginning in the year
2000, many of these systems may not operate properly unless they are modified
to accept four digit entries or otherwise distinguish twenty-first century
dates from twentieth century dates. As a result, over the remainder of the
year, computer systems and/or software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements.
The Company's State of Readiness
Our management has chartered a Year 2000 Committee and charged it with the
task of evaluating our Year 2000 readiness and recommending action that the
Company should take to minimize disruption from the Year 2000 issue. The Year
2000 Committee has developed a comprehensive checklist, or Year 2000 Plan, to
address our Year 2000 readiness with respect to both IT and non-IT systems. The
Year 2000 Plan covers all major and minor IT and non-IT systems potentially
impacted by the Year 2000. Beginning in the second quarter of 1998, the Company
initiated a quarterly review of the status of resolution of any items in the
Year 2000 Plan.
The latest versions of the products are designed to be Year 2000 compliant.
As the Company continues to evaluate system components, including elements of
the system furnished by third parties, the Company will keep the customers
advised of any system changes which need to be made and will make available
such modifications to these customers. The Company has determined the extent to
which our earlier software products as implemented in our installed customer
base are Year 2000 compliant, as well as the impact of any non-compliance on us
and our customers, and have developed a program for addressing this with these
customers.
To operate the business, the Company relies upon relationships with third
parties over which the Company can assert little control. The Year 2000
Committee has determined which third party components require upgrade and is
working to distribute those changes to customers who require it. The Year 2000
Committee is also assessing the risks associated with non-IT systems on which
our operations rely that may contain microcontrollers or embedded systems
technologies that are not Year 2000 compliant.
The Costs to Address Our Year 2000 Issues
The Company estimates that the cost to address our Year 2000 issues will not
have a material impact on operations.
The Risks of Our Year 2000 Issues
The Company does not currently believe that the effects of any Year 2000
non-compliance in our installed base of software will materially adversely
affect our business, financial condition and results of operations. However, no
assurance can be given that the Company will not be exposed to potential claims
resulting from system problems associated with the century change. There can
also be no assurance that our software products that are designed to be Year
2000 compliant contain all necessary date code changes. In addition, Year 2000
non-compliance in our internal IT systems and certain non-IT systems on which
our operations rely or non-compliance by our business partners could adversely
affect our business, financial condition and results of operations.
The Company believes that the purchasing patterns of customers and
potential customers may be affected by Year 2000 issues in a variety of ways.
Many companies are expending significant resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase software products such as those
offered by the Company.
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<PAGE> 12
Potential customers may also choose to defer purchasing Year 2000 compliant
products until they believe it is absolutely necessary, thus potentially
resulting in stalled market sales within the industry. Conversely, Year 2000
issues may cause other companies to accelerate purchases, thereby causing an
increase in short-term demand and a consequent decrease in long-term demand for
software products. Additionally, Year 2000 issues could cause a significant
number of companies, including our current customers, to reevaluate their
current software needs and as a result switch to other systems or suppliers.
Any of the foregoing could adversely affect our business, financial condition
and results of operations.
Our Contingency Plans
The Company is preparing contingency plans for business functions that are
susceptible to a substantive risk of disruption resulting from a Year 2000
related event. However, the Company has not yet identified any business
function that is materially at risk of Year 2000 related disruption, and thus
has not yet developed detailed contingency plans specific to Year 2000 events
for any business function. The Company is prepared for the possibility,
however, that certain business functions may be hereafter identified as at
risk. The Company will develop contingency plans for such business functions as
and if such determinations are made.
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<PAGE> 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLAIMERS ABOUT MARKET RISK.
FOREIGN EXCHANGE
During the three months ended September 30, 1999, total revenues for
the Company's international operations were approximately 22% of the Company's
total revenues for all operations.
The Company's international business is subject to risks typical of an
international business, including, but not limited to: differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility.
Accordingly, the Company's future results could be materially adversely
impacted by changes in these or other factors. The effect of foreign exchange
rate fluctuations on the Company during the second quarter of 1999 was not
material.
INTEREST RATES
The Company invests its cash in a variety of financial instruments,
including taxable and tax-advantaged variable rate and fixed rate obligations
of corporations, municipalities, and local, state and national governmental
entities and agencies. These investments are denominated in U.S. dollars. Cash
balances in foreign currencies overseas are operating balances.
Interest income on the Company's investments is carried in "Other
income (expense), net" on the Consolidated Financial Statements. The Company
accounts for its investment instruments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). All of the cash equivalents and
short-term investments are treated as available-for-sale under SFAS 115.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, the Company's future
investment income may fall short of expectations due to changes in interest
rates, or the Company may suffer losses in principal if forced to sell
securities which have seen a decline in market value due to changes in interest
rates. The weighted-average interest rate on investment securities at September
30, 1999 was approximately 3.9% based on predominately tax free instruments.
The fair value of securities held at September 30, 1999 was $17.2 million.
13
<PAGE> 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a party to litigation instituted by a competitor of the
Company, EIS International, Inc. ("EIS"), relating to the recent
acquisition by the Company of eShare.com. The Company has filed
counterclaims against EIS. The Company believes that the action filed
by EIS is without merit and the Company intends to vigorously defend
against the action.
Additionally, 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.
Item 2. Changes in Securities.
In connection with the Agreement and Plan of Merger, as amended,
between the Company, MICA Corporation I and eShare.com, the Company issued
6,050,000 shares of its common stock to the shareholders.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held a special meeting of Shareholders (the
"Special Meeting") on August 14, 1999. There were present at the
Special Meeting, in person or by proxy, holders of 12,943,842 shares,
or 82.7%, of the Common Stock entitled to vote.
(b) The Special Meeting was held to consider and vote upon a
proposal to approve the Agreement and Plan of Merger, dated as of June
14, 1999 (the Merger Agreement), by and among the Company, MICA
Corporation I, a wholly-owned subsidiary of the Company, and
eShare.com. Pursuant to the Merger Agreement, MICA was
merged with and into eShare.com, and eShare.com become a wholly-owned
subsidiary of the Company.
Item 5. Other Information.
None
Item 6. Exhibits.
(a) Exhibit 27 Financial Data Schedule (for SEC use only).
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ESHARE TECHNOLOGIES, INC.
Date: November 19, 1999 By: /s/ Aleksander Szlam
------------------------------------
Aleksander Szlam
Chairman and Chief Executive Officer
Date: November 19, 1999 By: /s/ Gregory Riedel
------------------------------------
Gregory Riedel
Vice President, Administration and
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ESHARE TECHNOLOGIES FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 22,340
<SECURITIES> 0
<RECEIVABLES> 38,187
<ALLOWANCES> (3,224)
<INVENTORY> 2,165
<CURRENT-ASSETS> 63,621
<PP&E> 21,152
<DEPRECIATION> (10,709)
<TOTAL-ASSETS> 78,702
<CURRENT-LIABILITIES> 26,249
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 52,279
<TOTAL-LIABILITY-AND-EQUITY> 78,702
<SALES> 75,150
<TOTAL-REVENUES> 75,150
<CGS> 28,229
<TOTAL-COSTS> 28,229
<OTHER-EXPENSES> 22,697
<LOSS-PROVISION> (1,472)
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> (5,361)
<INCOME-TAX> 949
<INCOME-CONTINUING> (6,310)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,850)
<CHANGES> 0
<NET-INCOME> (12,160)
<EPS-BASIC> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
