<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------
FORM 8-K
--------------
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: December 20, 1999
(Date of earliest event reported): December 20, 1999
ESHARE TECHNOLOGIES, INC.
(Exact name of Company specified in its charter)
GEORGIA 0-22317 58-1378534
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification No.)
5051 PEACHTREE CORNERS CIRCLE, NORCROSS, GEORGIA 30092
(Address of principal executive offices) (Zip Code)
(770) 239-4000
(Company's telephone number, including area code)
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Page 1 of 3
<PAGE> 2
Item 5. Other Events.
eShare Technologies, Inc. ("eShare") is filing in this report financial
statements of eShare reflecting the historical effect on a pooling of interests
basis of its acquisition of eShare.com, Inc. on September 1, 1999.
Item 7. Financial Statements and Exhibits.
(a) The following financial statements of eShare, together with the
independent auditors' report thereon, are included in this report:
(i) consolidated balance sheets as of December 31, 1998
and 1997;
(ii) consolidated statements of operations for the years
ended December 31, 1998 and 1997 and 1996
(unaudited for 1996);
(iii) consolidated statements of shareholders' equity for
the years ended December 31, 1998 and 1997 and 1996
(unaudited for 1996);
(iv) consolidated statements of comprehensive income for
the years ended December 31, 1998 and 1997 and 1996
(unaudited for 1996).
(v) consolidated statements of cash flows for the years
ended December 31, 1998 and 1997 and 1996
(unaudited for 1996); and
(vi) notes to consolidated financial statements.
(b) Pro Forma Financial Information. None.
(c) Exhibits. The following exhibits are included in this Report.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
99.1 Report of KPMG LLP, independent
auditors of eShare.com, Inc. (formerly
eShare Technologies, Inc.)
</TABLE>
<PAGE> 3
ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY MELITA INTERNATIONAL CORPORATION)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1998
TOGETHER WITH
AUDITORS' REPORT
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To eShare Technologies, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of ESHARE
TECHNOLOGIES, INC. (a Georgia corporation, and formerly Melita International
Corporation) AND SUBSIDIARIES as of December 31, 1997 and 1998 and the related
consolidated statements of operations, shareholders' equity, comprehensive
income, and cash flows for each of the two years in the period ended December
31, 1998. These financial statements are the responsibility of eShare
Technologies, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the financial
statements of eShare.com, Inc. (a Delaware corporation, and formerly eShare
Technologies, Inc.) a company acquired during 1999 in a transaction accounted
for as a pooling of interests, as discussed in Note 2. Such statements are
included in the financial statements of eShare Technologies, Inc. and
subsidiaries and reflect total assets and total revenues of 4% and 1% in 1997,
respectively, and reflect total assets and total revenues of 4% and 4%, in 1998,
respectively, of the related totals. These statements were audited by other
auditors whose report has been furnished to us and our opinion, insofar as it
relates to amounts included for eShare.com, Inc., is based solely upon the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of eShare Technologies, Inc. and subsidiaries as of
December 31, 1997 and 1998 and the results of their operations and their cash
flows for each of the two years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
September 1, 1999
<PAGE> 5
ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY MELITA INTERNATIONAL CORPORATION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1997 1998
- ---------------------------------------------------------- -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,147 $ 8,027
Marketable securities 23,969 22,756
Accounts receivable, net of allowance for doubtful
accounts of $886 and $2,600 at December 31, 1997 and
1998, respectively 16,066 33,788
Inventories 2,461 1,260
Deferred taxes 2,035 3,731
Prepaid expenses and other 258 458
-------- --------
Total current assets 52,936 70,020
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Furniture and fixtures 1,872 2,466
Equipment 8,935 12,650
Leasehold improvements 921 1,198
-------- --------
Total property and equipment 11,728 16,314
Less accumulated depreciation 5,958 8,413
-------- --------
Net property and equipment 5,770 7,901
-------- --------
Other assets 155 563
-------- --------
$58,861 $78,484
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1998
- ---------------------------------------------------------- -------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 5,787 $ 7,265
Accrued liabilities 7,991 12,516
Deferred revenue 4,145 6,574
Customer deposits 1,988 815
Current portion of notes payable 116 194
-------- --------
Total current liabilities 20,027 27,364
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
NOTES PAYABLE, EXCLUDING CURRENT PORTION 185 226
-------- --------
CONVERTIBLE NOTES PAYABLE - 2,500
-------- --------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 20,000,000 shares
authorized; no shares issued and outstanding at
December 31, 1997 and 1998 - -
Common stock, no par value; 100,000,000 shares
authorized; 20,770,395 shares issued and outstanding
at December 31, 1997 and 20,872,738 shares issued and
outstanding at December 31, 1998 69 69
Additional paid-in capital 42,848 44,282
Deferred compensation (8) (303)
Accumulated other comprehensive income 30 96
Retained earnings (4,290) 4,250
-------- --------
Total shareholders' equity 38,649 48,394
-------- --------
$58,861 $78,484
======== ========
</TABLE>
All prior period amounts have been restated to reflect the acquisition
of eShare.com, Inc. in a pooling transaction.
The accompanying notes are an integral part of these consolidated
balance sheets.
<PAGE> 6
ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY MELITA INTERNATIONAL CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- -------
(Unaudited)
<S> <C> <C> <C>
NET REVENUES:
Product $32,077 $ 46,481 $71,333
Service 15,944 20,039 25,748
------- -------- -------
Total revenues 48,021 66,520 97,081
------- -------- -------
COST OF REVENUES:
Product 11,494 15,577 21,680
Service 6,994 9,642 13,346
------- -------- -------
Total cost of revenues 18,488 25,219 35,026
------- -------- -------
GROSS MARGIN 29,533 41,301 62,055
------- -------- -------
OPERATING EXPENSES:
Engineering, research, and development 5,158 8,003 11,798
Selling, general, and administrative 17,655 26,080 36,208
Write-off of purchased software - 268 -
------- -------- -------
Total operating expenses 22,813 34,351 48,006
------- -------- -------
INCOME FROM OPERATIONS 6,720 6,950 14,049
OTHER INCOME, NET 178 417 1,067
------- -------- -------
INCOME BEFORE INCOME TAXES 6,898 7,367 15,116
INCOME TAX PROVISION (BENEFIT):
Tax provision as C corporation 2 3,024 6,576
Deferred tax adjustment - (1,473) -
------- -------- -------
NET INCOME $ 6,896 $ 5,816 $ 8,540
======= ======== =======
PRO FORMA NET INCOME:
Income before income taxes $ 6,898 $ 7,367 $15,116
Pro forma income taxes 2,827 4,469 6,576
------- -------- -------
$ 4,071 $ 2,898 $ 8,540
======= ======== =======
EARNINGS PER SHARE:
Basic earnings per share $ 0.39 $ 0.30 $ 0.41
======= ======== =======
Diluted earnings per share $ 0.38 $ 0.28 $ 0.38
======= ======== =======
Pro forma basic earnings per share $ 0.23 $ 0.15 $ 0.41
======= ======== =======
Pro forma diluted earnings per share $ 0.23 $ 0.14 $ 0.38
======= ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 17,690 19,434 20,795
======= ======== =======
Diluted 18,011 20,587 22,188
======= ======== =======
</TABLE>
All prior period amounts have been restated to reflect the acquisition
of eShare.com, Inc. in a pooling transaction.
The accompanying notes are an integral part of these consolidated
statements.
<PAGE> 7
ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY MELITA INTERNATIONAL CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER
COMMON STOCK ADDITIONAL COMPREHEN-
----------------- PAID-IN TREASURY SIVE DEFERRED RETAINED
SHARES AMOUNT CAPITAL STOCK INCOME COMPENSATION EARNINGS TOTAL
--------- ------ ---------- -------- --------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 (UNAUDITED) 13,633,428 $49 $ 22 $(64) $ 5 $ - $ 6,575 $ 6,587
Net income before pro forma income taxes - - - - - - 6,896 6,896
Proceeds from the issuance of common stock - - 2,634 64 - - - 2,698
Distributions to shareholders - - - - - - (3,424) (3,424)
Foreign currency translation adjustment - - - - 30 - - 30
---------- --- ------- ----- --- ----- -------- -------
BALANCE, DECEMBER 31, 1996 (UNAUDITED) 13,633,428 49 2,656 - 35 - 10,047 12,787
Net income - - - - - - 5,816 5,816
Issue of warrants - - 157 - - - - 157
Exercise of warrants - - 1 - - - - 1
Deferred compensation - - 12 - - (12) - -
Amortization of deferred compensation - - - - - 4 - 4
Proceeds from the issuance of common stock 4,025,000 - 40,042 - - - - 40,042
Combination transaction 3,111,967 20 (20) - - - - -
Note and cash distribution to shareholders - - - - - - (20,153) (20,153)
Unrealized gain on marketable securities - - - - 15 - - 15
Foreign currency translation adjustment - - 0 - (20) - - (20)
---------- --- ------- ----- --- ----- -------- -------
BALANCE, DECEMBER 31, 1997 20,770,395 69 42,848 - 30 (8) (4,290) 38,649
Net income - - - - - - 8,540 8,540
Exercise of warrants - - 1 - - - - 1
Deferred compensation - - 394 - - (394) - -
Amortization of deferred compensation - - - - - 99 - 99
Proceeds from the issuance of common stock 102,343 - 1,039 - - - - 1,039
Unrealized gain on marketable securities - - - - 89 - - 89
Foreign currency translation adjustment - - - - (23) - - (23)
---------- --- ------- ----- --- ----- ------- -------
BALANCE, DECEMBER 31, 1998 20,872,738 $69 $44,282 $ - $96 $(303) $ 4,250 $48,394
========== === ======= ===== === ===== ======= =======
</TABLE>
All prior period amounts have been restated to reflect the acquisition
of eShare.com, Inc. in a pooling transaction.
The accompanying notes are an integral part of these consolidated
statements.
<PAGE> 8
ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY MELITA INTERNATIONAL CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ ------
(Unaudited)
<S> <C> <C> <C>
NET INCOME $6,896 $5,816 $8,540
------ ------ ------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustment 30 (20) (23)
Unrealized gain on marketable securities - 15 89
------ ------ ------
Other comprehensive income 30 (5) 66
------ ------ ------
COMPREHENSIVE INCOME $6,926 $5,811 $8,606
====== ====== ======
</TABLE>
All prior period amounts have been restated to reflect the acquisition
of eShare.com, Inc. in a pooling transaction.
The accompanying notes are an integral part of these consolidated
statements.
<PAGE> 9
ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY MELITA INTERNATIONAL CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income or pro forma net income $ 6,896 $ 5,816 $ 8,540
Adjustments to reconcile net income or pro forma
net income to net cash provided by operating
activities:
Deferred taxes - (2,035) (1,695)
Depreciation and amortization 1,289 1,816 2,463
Noncash financing expense - 125 -
Noncash compensation expense - 4 99
Deferred interest expense - 11 98
Loss on sale of property and equipment 6 - -
Changes in assets and liabilities:
Accounts receivable (2,684) (4,164) (17,723)
Inventories 585 (19) 1,201
Prepaid expenses and other assets 163 (79) (201)
Accounts payable and accrued liabilities 578 6,943 5,904
Deferred revenue 472 1,080 2,429
Customer deposits 1,417 (1,861) (1,173)
Other, net 63 (126) (103)
-------- -------- --------
Total adjustments 1,889 1,695 (8,701)
-------- -------- --------
Net cash provided by (used in) operating
activities 8,785 7,511 (161)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property equipment (1,691) (4,273) (4,585)
Purchased software (343) (22) -
Purchases (sale) of marketable securities - (23,954) 1,302
-------- -------- --------
Net cash used in investing activities (2,034) (28,249) (3,283)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible notes $ - $ 1,000 $ 2,500
Deferred offering costs - - (335)
Repayment of capital lease obligations (48) (19) -
Net proceeds from issuance of common stock 2,698 39,046 1,039
Acquisition of treasury stock (64) - -
Exercise of warrants - - 1
Proceeds from issuance of debt 245 1,162 673
Repayment of debt (408) (860) (554)
Repayment of notes payable to stockholder - (2,625) -
Repayment of notes payable to stockholder
representing distributions (375) (12,900) -
Distributions to stockholder (3,424) (7,253) -
-------- -------- --------
Net cash (used in) provided by financing
activities (1,376) 17,551 3,324
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,375 (3,187) (120)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,959 11,334 8,147
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 11,334 $ 8,147 $ 8,027
======== ======== ========
MARKETABLE SECURITIES $ - $ 23,969 $ 22,756
======== ======== ========
CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES $ 11,334 $ 32,116 $ 30,783
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest during the year $ 283 $ 400 $ 34
======== ======== ========
Income taxes paid $ - $ 3,199 $ 6,395
======== ======== ========
Purchase of software with common stock $ 188 $ - $ -
======== ======== ========
Conversion of notes payable to common stock $ - $ 1,000 $ -
======== ======== ========
</TABLE>
All prior period amounts have been restated to reflect the acquisition
of eShare.com, Inc. in a pooling transaction.
The accompanying notes are an integral part of these consolidated
statements.
<PAGE> 10
ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES
(FORMERLY MELITA INTERNATIONAL CORPORATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997, AND 1998
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
eShare Technologies, Inc. (the "Company") is a leading provider of
unified Web and telephony customer communications solutions for
customer contact centers, e-Commerce and on-line communities. Prior to
October 4, 1999, the Company was named Melita International
Corporation.
All 1996 disclosures in the accompanying financial statements and
related footnotes have not been audited.
COMPLETION OF INITIAL PUBLIC OFFERING
On June 4, 1997, the Company completed an initial public offering (the
"Offering") of 4,025,000 shares of common stock at $10 per share
resulting in net proceeds of $36,046,000.
BASIS OF COMBINATION
Prior to June 4, 1997, the financial statements are presented on a
combined basis and include the accounts of the Company, Melita Europe
Limited ("eShare Europe"), and Inventions, Inc. ("Inventions") since
all were under common control. All significant intercompany accounts
and transactions have been eliminated in combination.
Concurrent with the Offering, the shareholders of eShare Europe and
Inventions contributed their respective shares in exchange for
3,143,395 shares of the Company. The combination was treated similar to
a pooling of interests and no step-up basis was recorded as the
entities involved were under common control.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements since June 4, 1997 include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to cash or cash equivalents.
<PAGE> 11
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MARKETABLE SECURITIES
The Company's marketable securities are categorized as
available-for-sale securities, as defined by the Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Unrealized holding gains
and losses are reflected as a net amount in a separate component of
shareholders' equity until realized. For the purpose of computing
realized gains and losses, cost is identified on a specific
identification basis.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market. Cost includes raw materials, labor, and overhead.
Market is defined as replacement cost for work in progress and raw
materials and net realizable value for finished goods. Inventories
consist of the following at December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Raw materials $1,251 $ 143
Work in progress 457 37
Finished goods 753 1,080
------ ------
$2,461 $1,260
====== ======
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. The straight-line method
of depreciation was adopted for property placed in service after
September 30, 1997. Prior to September 30, 1997, an accelerated method
was used. The difference between the accelerated method and the
straight-line method was immaterial. The estimated useful lives are as
follows:
<TABLE>
<S> <C>
Furniture and fixtures Five to seven years
Equipment Three to seven years
Leasehold improvements Remaining life of lease
</TABLE>
INCOME TAXES
Prior to June 4, 1997, the Company and Inventions were organized as S
corporations under the Internal Revenue Code and, therefore, were not
subject to federal income taxes. The income or loss of the Company and
Inventions was included in the shareholders' individual federal and
state tax returns, and as such, no provision for income taxes was
recorded in the accompanying combined statements of operations. The
Company historically made distributions to cover the shareholders'
anticipated tax liability.
In connection with the Offering, the Company converted its U.S. taxable
status from an S corporation to a C corporation, and accordingly,
became subject to federal and state
<PAGE> 12
-3-
income taxes. Upon the conversion, the Company recognized a one-time
benefit by recording deferred tax assets of $1,473,000.
The accompanying financial statements prior to June 4, 1997 reflect a
provision for income taxes on a pro forma basis as if the Company were
liable for federal and state income taxes as a taxable corporate entity
throughout the years presented. The pro forma income tax provision has
been computed by applying the Company's anticipated statutory tax rate
to pretax income, adjusted for permanent tax differences and valuation
allowances (Note 4).
FOREIGN CURRENCY TRANSLATION
The financial statements of eShare Europe are translated into U.S.
dollars in accordance with SFAS No. 52, "Foreign Currency Translation."
Net assets of eShare Europe are translated at the current rates of
exchange at December 31. Income and expense items are translated at the
average exchange rate for the year. The resulting translation
adjustments are recorded in shareholders' equity. The Company has
recognized foreign exchange gains (losses) of approximately $30,000,
$(20,000), and $(23,000) in 1996, 1997, and 1998, respectively.
REVENUE RECOGNITION
The Company generates product revenues from both hardware and software.
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 revenue in accordance with the American
Institute of Certified Public Accountants Statement of Position ("SOP")
97-2, "Software Revenue Recognition," as amended by SOP 98-9.
The Company recognizes product revenues when a contract has been
executed, the product has been shipped, the Company has no significant
obligations yet to be satisfied, the fee is fixed and determinable, and
collection of the resulting receivable is deemed to be probable.
Software delivered on a trial basis is not recorded as revenue until a
permanent key is delivered to the customer. Certain of the Company's
sales contracts provide for certain payment terms normally based upon
signing the contract, customer receipt of the product, and commencement
of operation of the customer's system.
Revenues from maintenance contracts are deferred and recognized ratably
over the term of the contractual support period. If maintenance is
included in the original contract, such amounts are unbundled from the
license fee based on the value established by the independent sale of
such maintenance to customers. Consulting revenues are primarily
related to implementation services performed under separate service
arrangements related to the installation of the Company's hardware and
software products. Revenues from consulting, installation, and training
services are recognized as the services are performed.
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
<PAGE> 13
-4-
those services. Deferred revenue amounted to $4,145,000 and $6,574,000
at December 31, 1997 and 1998, respectively.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research and development expenditures are charged to expense as
incurred. Software development costs are charged to research and
development expense until technological feasibility is established,
after which remaining software production costs are capitalized in
accordance with SFAS No. 86, "Accounting for Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed." The Company has defined
technological feasibility of its products as the point in which time
the Company has a working model of the related product, which is when
the product has achieved "beta" status. Historically, the development
costs incurred during the period between the achievement of beta status
by a product and the point at which the product is available for
general release to customers have not been material. Accordingly, the
Company has concluded that the amount of development costs
capitalizable under the provisions of SFAS No. 86 was not material to
the financial statements for the years ended December 31, 1996, 1997,
and 1998. Therefore, the Company charged all software development costs
to expense as incurred for the years ended December 31, 1996, 1997, and
1998.
During 1997, based on the Company's evaluation of the future market
potential and recoverability of one of its purchased software products,
which was made available to customers in 1996, the Company wrote off
the unamortized costs of $268,000.
WARRANTY COSTS
The Company generally warranties its products for 90 days and provides
for estimated warranty costs upon shipment of such products. Warranty
costs have not been and are not anticipated to be significant.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to accounts receivable are
limited due to the wide variety of customers and markets for which the
Company's services are provided as well as their dispersion across many
different geographic areas. As a result, as of December 31, 1997 and
1998, the Company did not consider itself to have any significant
concentrations of credit risk. During 1997, only BankOne Services
Corporation (now First USA Bank), at 11.8%, accounted for greater than
10% of total revenues. During 1998, only CitiGroup, at 13.1%, accounted
for greater than 10% of total revenues. In 1996, 1997, and 1998, the
Company's five largest customers accounted for approximately 24.5%,
27.9%, and 23.2%, respectively, of total revenues. These sales were
predominantly to customers in the financial services industry. Although
the particular customers may change from period to period, the Company
expects that large sales to a limited number of customers will continue
to account for a significant percentage of its revenues in any
particular period for the foreseeable future.
<PAGE> 14
-5-
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
BASIC AND DILUTED NET EARNINGS PER SHARE
Basic earnings per share and pro forma basic earnings per share are
computed using net income or pro forma net income divided by the sum of
(i) the weighted average number of shares of common stock outstanding
("Weighted Shares") for the period presented including the number of
shares issued in the combination of the Company, eShare Europe, and
Inventions discussed in Note 1 and (ii) for periods prior to the
Offering, the number of shares pursuant to Staff Accounting Bulletin
1B.3 that at the assumed public offering price would yield proceeds in
the amount necessary to pay the distribution to the majority
stockholder as a result of the Offering that are not covered by the
earnings for the year ("Distribution Shares").
The only difference between basic and diluted net earnings per share is
the result of the treasury stock method effect of common equivalent
shares ("CESs"). Diluted earnings per share and pro forma diluted
earnings per share are computed using net income or pro forma net
income divided by the sum of (i) Weighted Shares, (ii) the Distribution
Shares, and (iii) the treasury stock method effect of CESs outstanding
of 321,000, 1,153,000, and 1,393,000 for the years ended December 31,
1996, 1997, and 1998, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of accounts receivable, accounts payable, and other
financial instruments approximate their fair values at December 31,
1996, 1997, and 1998 principally because of the short-term maturities
of these instruments.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of the asset may not be recoverable. The Company uses the undiscounted
future cash flow to determine if an impairment loss is to be
recognized.
<PAGE> 15
-6-
ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997 and 1998 include the following
(in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Accrued salaries and wages $3,279 $ 4,935
Other current liabilities 4,386 7,179
Accrued rent 315 292
------ --------
$7,980 $12,406
====== =======
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 is effective for the year ending December 31, 2000. The
adoption of this statement is not expected to have a significant impact
on the Company's financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
2. ACQUISITION
On September 1, 1999, the Company completed the acquisition of
eShare.com, Inc., a leading provider of real-time customer service
and interactive communications solutions for e-Commerce and on-line
communities. The shareholders of eShare.com, Inc. received 6,050,000
shares of the Company's common stock. The new combined company was
renamed eShare Technologies, Inc. on October 4, 1999. The acquisition
was accounted for as a pooling of interests, therefore, all prior
period amounts have been restated. A reconciliation between revenue
and net income as previously reported and as restated follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
----------------------------------
1996 1997 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Revenue:
As previously reported $47,540 $65,790 $93,410
eShare 481 730 3,671
------- ------- -------
As restated $48,021 $66,520 $97,081
======= ======= =======
Net Income (loss):
As previously reported $ 7,609 $10,529 $11,685
eShare (713) (4,713) (3,145)
------- ------- -------
As restated $ 6,896 $ 5,816 $ 8,540
======= ======= =======
</TABLE>
<PAGE> 16
-7-
3. NOTES PAYABLE
NOTES PAYABLE TO SHAREHOLDERS
In 1997, the Company issued to the shareholder notes payable in the
amount of $12,900,000 representing undistributed earnings through
December 31, 1996. Additionally, the Company accumulated earnings of
$7,253,000 through the closing date of the Offering. With the proceeds
from the Offering, the Company paid an original note of $2,625,000, the
$12,900,000 notes payable, and the $7,253,000 of additional accumulated
earnings through the closing date of the Offering.
Interest paid to the shareholder was $271,000, $335,000, and $0 for the
years ended December 31, 1996, 1997, and 1998, respectively.
NOTES PAYABLE TO BANK
The Company had outstanding notes payable of approximately $300,000 and
$420,000 as of December 31, 1997 and 1998, respectively. These notes
are payable over 36 months and require the Company to maintain certain
financial covenants. In August and September of 1998, the Company
issued three 10% convertible notes due February 1, 1999 for an
aggregate amount of $2,500,000. These notes were converted to equity in
February of 1999 and are therefore classified as long term in the
accompanying balance sheets.
4. INCOME TAXES
In connection with the Offering, the Company converted from an S
corporation to a C corporation and, accordingly, became subject to
federal and state income taxes. eShare.com, Inc. incurred pretax losses
in 1996, 1997 and 1998. The components of the total deferred tax assets
as of December 31, 1997, and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets and liabilities:
Deferred revenue $ 1,207 $ 1,866
Net operating loss carryforwards 1,734 3,000
Accrued liabilities 231 643
Allowance for doubtful accounts 267 840
Depreciation (93) (4)
Inventory 405 394
------- -------
Total deferred tax assets 3,751 6,739
------- -------
Valuation allowance (1,716) (3,008)
------- -------
Total net deferred tax assets $ 2,035 $ 3,731
======= =======
</TABLE>
<PAGE> 17
-8-
The following summarizes the components of the income tax provision for
the years ended December 31, 1996, 1997, and 1998 (in thousands):
<TABLE>
<CAPTION>
Pro Forma
------------------- ACTUAL
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Current domestic taxes:
Federal $1,706 $2,803 $ 6,304
State 283 329 552
Foreign taxes (75) 109 1,143
Deferred taxes 913 1,228 (1,426)
------ ------ -------
Tax provision $2,827 $4,469 $ 6,573
====== ====== =======
</TABLE>
A reconciliation from the federal statutory rate to the tax provision for
the years ended December 31, 1996, 1997, and 1998 is as follows:
<TABLE>
<CAPTION>
Pro Forma
------------------- ACTUAL
1996 1997 1998
------ ----- -------
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 35.0%
State income taxes, net of federal tax benefit 4.0 4.0 2.4
Foreign operations (1.3) (1.2) (0.8)
Valuation allowance 0.5 0.2 (0.6)
Other 3.8 23.7 7.3
------ ----- -------
Effective tax rate 41.0% 60.7% 43.3%
====== ===== =======
</TABLE>
As of December 31, 1998, the Company has net operating loss
carryforwards of approximately $8,000,000 which expire through 2013. At
December 31, 1998, the Company has established a valuation allowance
against its net deferred tax assets due to the Company's history of
pretax losses and since a significant portion of these tax loss
carryforwards may be subject to substantial annual limitations under
the change in stock ownership imposed by Internal Revenue Code Section
382.
5. BENEFIT PLAN
The Company has a defined contribution profit-sharing plan (the "Plan")
for substantially all employees meeting the eligibility requirements as
defined in the plan agreement. The Plan provides for annual
contributions by the Company at the discretion of the board of
directors. The Plan also contains a 401(k) feature which allows
participants to contribute up to 15% of their eligible compensation, as
defined, and provides for discretionary employer matching
contributions. Total contributions by the Company to the Plan were
$119,000, $429,000, and $391,000 for the years ended December 31, 1996,
1997, and 1998, respectively.
<PAGE> 18
-9-
6. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At December 31, 1998, the future minimum operating lease payments
(including leases with related parties) under noncancellable operating
leases were as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 979
2000 897
2001 847
2002 682
Thereafter 1,768
------
Total future minimum lease payments $5,173
======
</TABLE>
The Company's leases are primarily for equipment and facilities. Total
rental expense for operating leases was $768,000, $859,000, and
$1,029,000 in 1996, 1997, and 1998, respectively.
In August 1994, the Company entered into a lease agreement with an
unrelated party to lease land and buildings commencing April 1994. The
agreement provides for annual rentals of approximately $542,000 to
$636,000 per year over a ten-year term. In November 1995, the Company's
majority shareholder purchased the land and buildings and now rents
them to the Company under the terms of the original lease. Rent expense
paid to the shareholder was $543,000, $554,000, and $555,000 in 1996,
1997, and 1998, respectively.
LEGAL MATTERS
Many of the Company's installations involve products that are critical
to the operations of its clients' businesses. Any failure in a Company
product could result in a claim for substantial damages against the
Company, regardless of the Company's responsibility for such failure.
Although the Company attempts to limit contractually its liability for
damages arising from product failures or negligent acts or omissions,
there can be no assurance the limitations of liability set forth in its
contracts will be enforceable in all instances.
The Company is subject to legal proceedings and claims which have
arisen in the ordinary course of business. In the opinion of
management, the amount of potential liability with respect to these
actions will not materially affect the financial position or results of
operations of the Company.
7. STOCK OPTION PLANS
During 1992, the Company approved a stock option plan (the "1992 Plan")
for key employees for which 640,000 shares of common stock were
authorized for use in the Plan. During 1995, the number of authorized
shares was increased to 1,000,000 shares of common stock. Options are
granted at the fair market value and are exercisable based on
<PAGE> 19
-10-
the specific terms of the grant up to ten years from the grant date.
Options granted primarily vest ratably over a four- or five-year
employment period. The Company reserved the right to purchase vested
options at the then-estimated fair market value prior to the date of an
IPO. During 1996, the Company purchased 30,250 vested but unexercisable
options held by terminated employees for $39,774. No options were
purchased during 1997 or 1998. Cash paid to repurchase options is
expensed as incurred.
On February 6, 1997, the Company approved the 1997 Stock Option Plan
(the "1997 Plan") for which 1,350,000 shares of common stock were
authorized for issuance, less any options issued under the 1992 Plan.
In October of 1997, the Company increased the number of shares
available under the 1997 Plan to 1,850,000. On May 11, 1998, the
shareholders approved an amendment to the 1997 Plan whereby the number
of shares of common stock available for issuance under the 1997 Plan
will automatically be adjusted on the first day of each fiscal year,
beginning with 1998, by a number of shares such that the total number
of shares reserved for issuance under the 1997 Plan equals the sum of
(i) the aggregate number of shares previously issued under the 1997
Plan and the 1992 Plan, (ii) the aggregate number of shares subject to
then outstanding options granted under the 1997 Plan and the 1992 Plan,
and (iii) 5% of the number of shares of common stock outstanding on the
last day of the preceding fiscal year. Options are granted at the fair
market value and are exercisable based on the specific terms of the
grant up to ten years from the grant date. The options vest primarily
over a four-year period subject to acceleration upon the achievement of
certain performance measures.
In 1997 and 1998, eShare.com, Inc. granted options at exercise prices
below the fair market value on the date of grant. The excess of the
fair value of the common stock over the exercise price was
approximately $12,000 and $394,000, respectively, which was recorded as
deferred compensation and was amortized over the vesting period.
These options vested immediately upon the change in control of the
Company on September 1, 1999.
<PAGE> 20
-11-
Activity for the 1992 Plan and 1997 Plan is as follows (number of
shares in thousands):
<TABLE>
<CAPTION>
OPTION
OPTIONS PRICE
------- -----------
<S> <C> <C>
Outstanding at December 31, 1996 861 $2.75-$3.00
Granted 185 $0.43-$4.07
Exercised --
Forfeited/repurchased (57) $2.75-$4.07
------
Outstanding at December 31, 1997 989 $0.43-$4.07
Granted 736 $0.43-$10.00
Exercised --
Forfeited/repurchased (120) $2.91-$10.00
------
Outstanding at December 31, 1998 1,605 $0.43-$10.00
Granted 1,287 $0.43-$10.00
Exercised (103)
Forfeited/repurchased (534) $0.43-$14.50
------
Outstanding at December 31, 1999 2,255 $0.43-$14.50
======
</TABLE>
At December 31, 1998, options to purchase 1,303,000 shares were
available for future grant and options were exercisable to purchase
969,000 shares, as discussed in the following table (number of shares
in thousands):
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, EXERCISE DECEMBER 31, EXERCISE
PRICES 1998 PRICE 1998 PRICE
-------- ------------ -------- ------------ ---------
<S> <C> <C> <C> <C>
$4.07-$7.94 215 $5.30 99 $ 4.71
$0.43-$0.63 486 0.50 270 0.56
$8.38-$10.00 553 9.11 64 9.30
$2.75-$3.00 621 2.89 529 2.88
$10.25-$14.50 380 11.31 7 10.25
2,255 5.50 969 2.90
</TABLE>
During, 1995, the Financial Accounting Standards Board issued SFAS No.
123, which defines a fair value-based method of accounting for an
employee stock option plan or similar equity instrument. However, it
also allows an entity to continue to measure compensation cost for
those plans using the method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting in APB
No. 25 must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value-based method of accounting
defined in the statement had been applied.
The Company has elected to account for its stock-based compensation
plan under APB No. 25; however, the Company has computed for pro forma
disclosure purposes the value
<PAGE> 21
-12-
of all options granted during 1996 and 1997 using the Black-Scholes
option pricing model as prescribed by SFAS No. 123 using the following
weighted assumptions used for grants in 1996, 1997, and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.4%-6.5% 5.7%-6.5% 4.0%-5.5%
Expected dividend yield -- -- --
Expected lives Five years Five years Five years
Expected volatility 65% 65% 65%
</TABLE>
The total value of the options granted during the years ended December
31, 1996, 1997, and 1998 were computed as approximately $350,000,
$4,506,000, and $8,592,000, respectively, which would be amortized over
the vesting period of the options. If the Company had accounted for
these plans in accordance with SFAS No. 123, the Company's reported
earnings and pro forma earnings and net income per share and pro forma
net income per share for the years ended December 31, 1996, 1997, and
1998 would have decreased in the following amounts (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Pro Forma
-------------------- ACTUAL
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income or pro forma net income:
As reported in the financial statements $4,071 $ 2,898 $ 8,540
Pro forma in accordance with SFAS No. 123 3,872 2,531 6,578
Basic earnings per share:
As reported in the financial statements $ 0.39 $ 0.30 $ 0.41
Pro forma in accordance with SFAS No. 123 0.22 0.13 0.32
Diluted earnings per share:
As reported in the financial statements $ 0.38 $ 0.28 $ 0.38
Pro forma in accordance with SFAS No. 123 0.21 0.12 0.30
</TABLE>
8. GEOGRAPHIC INFORMATION
The Company is a multinational corporation operating in a single
segment as defined by SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The following represents total
revenues, net income, and total assets of the following geographic
segments representing over 10% of the combined totals for the years
ended December 31, 1996, 1997, and 1998 (in thousands):
<PAGE> 22
-13-
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
United States:
Total revenues $38,049 $54,424 $73,960
Net income 5,504 3,969 6,424
Total assets 25,897 54,078 69,988
Europe:
Total revenues 4,292 7,347 9,939
Net income 452 1,680 1,733
Total assets 3,270 4,594 6,830
Other:
Total revenues 5,680 4,749 13,182
Net income 940 167 383
Total assets -- 189 1,666
</TABLE>
9. STOCK RECAPITALIZATION
On February 7, 1997, the Company and Inventions recapitalized their
authorized, issued, and outstanding common stock by declaring a stock
dividend of 99 shares of nonvoting common stock with respect to each
outstanding share of voting common stock. In connection with the stock
dividend, the Company amended its articles of incorporation to increase
its authorized capital stock to 2,000,000,000 shares, consisting of
20,000,000 shares of voting common stock and 1,980,000,000 shares of
nonvoting common stock, and Inventions amended its articles of
incorporation to increase its authorized capital stock to 10,000
shares, consisting of 100 shares of voting common stock and 9,900
shares of nonvoting common stock. Concurrently, on the effective date
of the Offering, the Company effected a 100 to 1 reverse stock split to
return the number of authorized shares to 20,000,000 shares and issued
and outstanding shares to 8,000,000 shares. Accordingly, the financial
statements reflect the capitalization of the Company as if the stock
dividend and the reverse stock split occurred at the beginning of each
period presented.
Additionally, following the completion of the Offering, the
Company's authorized capital stock consists of 100,000,000 shares of
common stock, no par value per share, and 20,000,000 shares of
preferred stock, no par value per share.
10. SUBSEQUENT EVENT
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, Inc. 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.
<PAGE> 23
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.
By: /s/ Gregory Riedel
--------------------------------------------------------
Gregory Riedel
Vice President - Administration, Chief Financial Officer
and Treasurer
(Principal Financial Officer and Principal Accounting
Officer)
Date: December 20, 1999
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
eShare.com, Inc.:
We have audited the accompanying balance sheet of eShare.com, Inc.
(formerly, eShare Technologies, Inc.) as of December 31, 1997 and 1998, and
the related statements of operations, redeemable preferred stock and
stockholders' deficit and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of eShare.com, Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
KPMG LLP
Melville, New York
April 16, 1999, except for Note 12,
which is as of June 15, 1999
