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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ___________
Commission File Number: 0-22317
ESHARE TECHNOLOGIES, INC.
(Exact Name of Registrant Specified in Its Charter)
GEORGIA 58-1378534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5051 PEACHTREE CORNERS CIRCLE
NORCROSS, GEORGIA 30092
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(770) 239-4000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
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Common Stock, no par value per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing price for the Common Stock on March
22, 2000 as reported by the Nasdaq Stock Market, was $97,307,434. The shares of
Common Stock held by each officer and director and by each person known to the
company who owns 5% or more of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of March 22, 2000, Registrant had 21,207,142 outstanding shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the 2000 Annual Meeting
of Shareholders, currently expected to be held on or about May 23, 2000, is
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading provider of Electronic Customer Relationship Management (eCRM)
collaboration solutions. Our offering consists of a suite of Customer
Interaction Management (CIM) applications that enable our customers to
effectively manage their customer interactions across multiple communication
channels, including traditional voice, e-mail, interactive Web chat and Voice
over IP. Our customers use our solutions to improve customer relationships,
increase revenues and improve their earnings due to effective utilization of
resources.
We provide a comprehensive, feature-rich web-based, automated customer support
solution for companies that engage in electronic commerce. Our software and
services enable real-time interactive communications and services over the
Internet and include Web-based customer service and support, customer
self-service, instant messaging, live conferencing and events, distance
learning, community chat, threaded discussion forums, a variety of custom
integration tools, web hosting and top quality professional services. Our
Internet solution integrates legacy systems, eSales, eMarketing, eSupport and
other commercial applications and provides a service enabling and provisioning
platform through our award winning products and applications.
Additionally, our suite supports voice/telephony applications designed for
companies that operate blended contact centers. Organizations use our solution
to implement strategies for personalized customer interactions that enhance
customer relationships, increase agent productivity and effectiveness, and
reduce the overall operational costs via patented multi-media contact
management technology.
We serve more than 2,000 customers in over 30 countries, with our headquarters
in Norcross, Georgia and major offices in Commack, New York; Irvine,
California; London; Paris; and Mexico City.
INDUSTRY BACKGROUND
According to International Data Corporation, or IDC, the consolidated
worldwide Web-based Collaborative Service and Support Technologies (CSST)
product market segment of the Electronic Customer Relationship Management (eCRM)
market is projected to grow from $4.3 billion in 1998 to $10.7 billion in 2003,
representing a 20.0% Compound Annual Growth Rate (CAGR). According to IDC, the
top three fastest-growing market sub-segments are two-way multimedia interaction
(89.4% CAGR), Web-based voice interaction (89.0% CAGR) and real-time text
interaction (45.5% CAGR), which are markets eShare is focused on serving. The
rapid increase in electronic commerce and the use of customer services and
support as a revenue enhancement model drive this growth. As more businesses
conduct electronic commerce, there is an increasing need for online live,
customer service and support, e-mail response management and integrated
solutions capabilities that enable companies to communicate with their customers
through multiple communication channels. Additionally, the movement towards CSST
reflects utilization of customer service and support as a means to achieve
revenue enhancement versus as a means to cut costs.
While Web-based CSST solutions have emerged as a rapidly growing
market, it is anticipated that these solutions will be integrated with existing
contact center and legacy customer contact solutions. Like Web-based CSST, the
Computer Telephony Integration (CTI) industry is currently experiencing strong
growth. The CTI outbound and blended call center market segments were
approximately $1.2 billion worldwide in 1998 and are together expected to grow
at a CAGR of 25.2% to $2.4 billion by 2001.
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The Internet explosion is dramatically altering the essence of customer
relationship management. Customer expectations are changing and companies must
recognize and adapt to this shift if they are to be successful. When
communications between businesses and customers were conducted solely by
telephone, the management of customer relationships was a relatively
straightforward matter. With a single primary communications channel, plus the
occasional fax, service agents were generally able to give customers the feeling
that they were receiving personal attention. With the rise of the Internet,
businesses have rushed to offer their customers Web forms and e-mail as
additional communications channels, and wired consumers have begun relying on
these channels as viable means of contact. The Internet as a communications
channel is often disassociated from telephony resources in the typical call
center. As a result, a severe disconnect can occur between types of customer
contact. Having two such disparate systems has serious customer satisfaction
implications.
Customers contacting a business expect a unified front in which all
communications channels supported by the business work in concert. When a
customer picks up the telephone to dial an 800 number, an emerging expectation
is for the agent to have access to previous e-mails, faxes, and other customer
transaction and communication history. Similarly, a customer who prefers to
contact a business via e-mail or the Web expects that communication to be as
effective as a phone call. Meeting these expectations is key to customer
satisfaction, and failure can effectively drive customers away.
Moving forward, quality customer relationship management requires
integrating live, telephony-based customer service with the ability to process
Web-based and e-mail transactions. This dynamic applies equally to traditional
bricks and mortar businesses that have embraced the Web and to the newer breed
of e-commerce players whose customers still require contact via traditional
means. For both, the integration must be as seamless and transparent to the
customer as possible.
The Web-based Customer Relationship Management, or CRM market represents a
tremendous growth opportunity in light of the rapid increase in electronic
commerce. According to Forrester Research, worldwide e-commerce transactions
are projected to grow at a CAGR of 88.0% from $32 billion in 1998 to over $400
billion by 2002. As e-commerce continues to grow, businesses have increasingly
recognized the need to provide online customer support. As Web users continue
to purchase online, they demand live and interactive customer service and
support that can enhance their online shopping experience. Similarly, online
businesses are increasingly using online customer support as a means to retain
traffic, generate repeat purchases, enhance customer satisfaction and build
brand loyalty.
The CRM market will also be impacted by the adoption of Web-based solutions
by the business to business (B2B) market. This market is now estimated by Bank
of America at $50 trillion annually in the U.S. alone and some $250 trillion
globally. In addition, recent research by Legg Mason Equity Research -
Technology Group, a leading market maker for B2B software firms suggests that,
"CRM software vendors participate in a large and growing market; [estimated at]
$1.3 trillion in 1998 and estimated to grow to $13 trillion [by 2003], a CAGR of
46%."
The traditional means of providing customer service and support has been
primarily through telephone call centers. Many early customer service
applications were built on the traditional voice telecommunications platform,
such as customer call centers, and only sought to integrate the Web as a
secondary communications channel. To effectively realize the potential of the
Web, companies must be able to offer a comprehensive solution that can offer
real-time interactive customer service and support that integrates with
traditional call center solutions.
PRODUCTS AND SERVICES
The optimum customer interaction management solution that will maximize
customer satisfaction and company investments consists of a blend of
traditional contact center, e-commerce, and CRM approaches capable of
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providing fully integrated customer care and consistent quality across all
contact channels. In particular, this solution should include:
- Flexible and customizable communication capabilities to enable
businesses and consumers to define when and how to
communicate. Customers should be able to choose any available
communications channel according to preference, and receive
consistently high-quality service regardless of the medium
chosen. For maximum return on investment, the system should
offer self-service wherever practical.
- Skill- and preference-based interaction routing to process
customer requests based on predefined agent skill sets and
customer preferences and needs via automated or human agents.
As communications channels and means of contact multiply,
specialization will become even more pronounced among agents,
and matching agent skill sets to customer situations and
communications media will be critical.
- Round-trip communication capabilities via a combination of
telephone, e-mail, fax, Internet messaging, interactive chat,
self-service Web pages, and wireless messaging. Regardless of
the communications channel used to establish contact, each
agent should have complete access to every customer's
communications and transaction history associated to active or
inactive business processes.
- Implementation of best-of-breed solutions via a
standards-based framework for integration of components from
diverse vendors. The ideal integrated customer care solution
should employ open standards and a flexible architecture to
accommodate investments in legacy solutions and provide for
integration with the newest technologies.
The following sections describe some of the major elements of eShare's
applications and services that help businesses manage the complete customer
lifecycle from acquiring new customers to servicing and retaining existing
customers, to maximizing each customer's value to the business.
Web-based Customer Service
Designed to enhance communication between agents and Web site visitors, Web
based communication is provided by eShare NetAgent(TM), a customer care tool
that also integrates inbound/outbound e-mail traffic and directs questions and
comments to the appropriate personnel. Customer care agents can monitor web
visitor activity, proactively engage visitors in real time discussions and
interactions, respond to customer e-mail, and manage multiple sessions
concurrently.
To allow agents to interact knowledgeably with customers, NetAgent provides
immediate access to complete customer interaction histories, including listings
of previous e-mail exchanges and transcripts of live chat interactions. Agents
can assist in two-way, dynamic form preparation and can add notes from voice
calls and access other records from telephony-based interactions.
Our Internet solutions are highly scaleable, require no additional
software or other downloads for visitor use and integrate seamlessly with most
leading conference, PBX, ACD, customer care and legacy systems. These solutions
currently support Windows NT operating environment.
A critical component of any e-commerce application, eShare NetAgent enables
agents to maximize online revenues, improve service levels, and earn customer
loyalty, all while reducing the costs of managing the total customer service
experience.
E-mail Management
eShare Re:sponse(TM) helps companies to manage the large volume of e-mail that
Web sites typically generate and minimizes the agent time required to handle
it. Re:sponse can determine if the message can be addressed automatically and,
in this case, can send an automated acknowledgement message while the original
message is being processed. As with NetAgent, Re:sponse provides agents with
immediate access to complete customer interaction histories.
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eShare Re:sponse enables agents to answer customer e-mail inquiries
responsively and cost-effectively, allowing companies to retain satisfied,
loyal customers, increase service levels, and generate incremental revenue.
Community Chat
A turnkey solution for adding chat capability, threaded discussion forums,
and online presentations to Web sites is provided by eShare Expressions (TM).
Expressions promotes community collaboration, and dynamic interaction between
users by providing the means for conducting virtual meetings, moderated events,
live training, conferencing, distance learning, and chat sessions.
eShare Expressions helps companies build community, increase customer
loyalty, and facilitates business to business, business to employee, business
to consumer and consumer to consumer collaborations.
Instant Messaging
eShare Connections(TM) provides a company the power to customize and create
its own branded Instant Messenger for its Web site's community of users. As an
organization-centric Instant Messaging application, eShare Connections enables
user communities to interact directly in a chat-like process. Connections allows
users to search for and communicate with one another in real time, bookmark Web
pages, store conversation notes, and provides alerts when specific associates
log on.
With Connections Instant Messaging, businesses and organizations can
achieve greater productivity and time savings, and can build customer loyalty,
thereby increasing its Web site traffic.
Customer Self-service
The initial focus of Internet-based commerce was to be a self-service
mechanism for the consumer to purchase goods and services. This strategy worked
well for the dot.com startups. However, the traditional bricks and mortar
companies wishing to adopt this strategy have been challenged by its customers
accustomed to an assisted service model. eShare NetAgent provides the
capability to transition those customers accustomed to assisted service to
self-service. This is accomplished in part by Web enabling current business
processes and then migrating them to the company Web as self-service pages.
NetAgent is integrated with both Primus and Inference, industry leading
KnowledgeBases which facilitate Web-based customer self service. NetAgent also
includes features such as Auto-Pilot and Frequently Used Pages that enable a
company to push information to on-line customers, using this opportunity to
train them on how to use the site's self-service capabilities.
Inbound/Outbound Voice Contact Management
eShare provides leading voice-based contact management solutions. Customers
worldwide use eShare Contact Management solutions to manage their inbound and
outbound voice-based contacts for proactive customer service, collections,
teleservice, mortgage services, fund raising and in many other areas. These
contact solutions help business manage the complete customer lifecycle from
acquiring new customers, to servicing and retaining existing ones, maximizing
each customers value to the business.
eShare was one of the first companies to introduce inbound/ outbound
contact blending so that both inbound and outbound voice calls could be handled
by the same group of agents. Contact blending provides for higher levels of
agent productivity and increases agent response times for improved customer
service levels. Additionally, contact blending provides companies with the
ability to better manage customer needs in situations where inbound and
outbound calls are part of a multi-sequence transaction. eShare Contact
Management Solutions are highly integrated with other key components of a
typical contact center, including hosts/data bases, PBX/ACDs, digital recording
devices, reader board display devices, etc.
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Our contact center solutions support IBM RISC/6000, NT platforms and AIX &
Windows NT operating systems. Our Mixed Media Server platform supports both CTI
links to leading PBX/ACDs (software only solutions) and telephony links through
industry standard call processing hardware/software to perform call processing
across multiple protocols for multiple countries.
Multi-Channel Administrator and Agent Desktops
As contact channels are added to the telephony or Web-based call center,
these customer interaction channels must be capable of being
administered/managed from a single desktop. Additionally, agent desktops must
be able to switch between the various duty modes, supporting live
collaborations, live chat, e-mail, assisted forms, etc.
Our e360 CIM Suite enables customers who have an eShare Voice Contact
Management application, NetAgent, Re:sponse, or Connections applications to
administer these from a single desktop. The e360 CIM suite allows agents to
easily switch between the various interactive chat/e-mail/messaging duty modes.
PROFESSIONAL SERVICES
eShare provides professional services including comprehensive business
analysis, solutions planning, implementation, training, application integration,
staff augmentation, and project management. We also offer other special customer
services such as custom application development and scripting. These services
enable our customers to develop, maintain and grow their customer contact
centers while increasing contact center productivity and reducing operational
costs.
Installation and integration services consist of configuration and
documentation, along with the physical installation and integration of the
suite. In many instances, the installation of our Internet applications is
completed electronically without the need for on-site work. Introductory
training classes are provided for a fee as part of each initial suite purchase,
and additional advanced classes may be delivered for additional fees.
We also supplement our applications offerings with maintenance services
including help desk support. Customers that receive maintenance services are
entitled to customer and technical support 24 hours a day, seven days a week.
Maintenance customers also receive ongoing system support and baseline software
upgrades.
Our customer service group is composed of a Professional Services group,
which provides services for a fee when contracted for by a customer, and a
Global Support Services group, which manages the help desk, tech-support, spare
parts inventory, purchasing, testing and ongoing relations with customers.
Services personnel are located throughout the United States and in the United
Kingdom, France, Singapore, Mexico, Brazil and Canada. Additional services are
provided by the company's VARs and distribution partners. We contract with
third parties to provide local hardware support.
As of December 31, 1999, we employed 172 people in our Professional
Services and Global Support Services groups.
WEB CUSTOMER SERVICE HOSTING
NetAgent Live (SM), the industry's first hosted Internet customer
interaction solution, enables our customers to eliminate costly hardware and
configuration from their Internet customer service strategy.
Using NetAgent Live, our customers can minimize up-front costs and maximize
the return on their investment. The NetAgent Live service gets eShare NetAgent,
and other software up and running on a dedicated server within 24 hours of
order. With remote access to our applications data and reports, the customer can
configure services 24 hours a day, seven days a week. Unlimited bandwidth and
security gives our customers the availability and protection they require.
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SALES AND MARKETING
We primarily license our products and services to companies that engage in
e-commerce/e-business and Customer Relationship Management (CRM). Our products
are licensed to leading companies in a variety of industries including
financial services, banks, telecommunications and technology, electronic
commerce and Web-communities as well as government/education. We provide
solutions to Portals, Application Service Providers (ASPs), Internet Service
Providers (ISPs), Dot.coms, Web Exchanges, and Interactive Contact Centers.
INTERNET PRODUCTS - The Internet Business has a customer base of over 200
eShare NetAgent/Re:Sponse customers and over 1,500 eShare Expressions
customers.
eShare NetAgent/Re:Sponse and eShare Expressions are licensed through a
direct/indirect telemarketing sales force and over 20 channel partnerships. We
maintain strategic relationships with companies such as Snickleways Interactive
and Linkshare Corporation to make eShare NetAgent/Re:Sponse available to over
200 online merchants, as well as relationships with America Online and StarMedia
to assist in marketing eShare NetAgent/Re:Sponse to their merchant partners.
VOICE CONTACT MANAGEMENT PRODUCTS - Through our extensive market knowledge and
technological strength, we have built a large blue-chip customer base of over
600 contact center sites in over 30 countries.
We license our Voice Contact Management solutions through a direct sales
organization with offices worldwide. Additionally, we maintain a network of
distributors and Value Added Resellers (VARs) to re-license our products. We do
business in the United States, Mexico, Canada, France and the United Kingdom
primarily through direct channels, while products and services are licensed in
other countries through indirect channels. We maintain strategic relationships
with companies such as, Cable & Wireless/Mercury Communications, Manta Systems,
Mitsubishi, Lucent Technologies, and Williams Communications.
THIRD-PARTY DISTRIBUTION - Our VARs and distributors are independent
organizations that perform some or all of the following functions for our
products: sales and marketing, systems implementation and integration, and
ongoing consulting and technical support. We believe that our VARs and
distributors have a significant influence over product choices made by our
customers and that our VAR and distributor relationships are an important
element in our marketing, sales and implementation efforts.
OTHER MARKETING ACTIVITIES - Our marketing activities include product
management, product marketing, direct marketing, public relations, press and
analyst communications, event support and management of our Website. Our
Business Development Group is responsible for creating distribution
relationships, strategic alliances, joint-marketing agreements and
co-development relationships with B2B, B2C and C2B industry providers.
Our customers independently operate domestic and international user groups.
Each group conducts annual as well as regional user group meetings typically
focused on common applications and business opportunities. We participate as
invited in the user group conferences generally by conducting seminars, product
demonstrations and educational sessions.
As of December 31, 1999, eShare employed 146 people world-wide in our Sales
and Marketing groups.
STRATEGY
Our primary objective is to be the leading provider of eCRM Collaboration
Solutions with emphasis on multi-channel Customer Interaction Management (CIM),
enabling businesses to integrate their customer contact strategies with their
front and back office operations. Our strategy to achieve this objective
includes the following key elements:
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Significantly Expand internet solutions penetration: We believe that our suite
of Internet based customer interaction applications is well positioned to
participate in the explosive growth in e-commerce spending, serving business to
consumer (B2C), consumer to business (C2B), and consumer to consumer (C2C)
interactions and transactions. We also believe that our solutions are equally
applicable to supporting interactions and transactions in the huge business to
business (B2B) market. We believe that in this market dynamic, gaining market
share is a key to future growth and viability. We will continue to invest
heavily in people, processes, partnerships and technologies to capture
significant market share.
Leverage Installed Base of Customers: We believe that our global installed
customer base represents significant potential market for future sales of our
products and services. We will continue to use our customer relationships:
- to sell new suites and applications and cross-sell to multiple
divisions, offices and business units of a customer's
organization.
- as a reference to gain new customers for our suite of Customer
Interaction Management (CIM) applications and services.
- to leverage our penetration of targeted vertical markets.
Leverage Technology Leadership and Software Focus: We believe we are a global
technology leader in the field of Customer Interaction Management (CIM)
software, having pioneered many of the industry's fundamental technologies. We
hold a comprehensive U.S. and foreign-based patent portfolio covering numerous
processes and technologies utilized in multi-media contact management systems.
We have based our products on a software architecture, which is distributed,
object-oriented, and standards-based. Our software-focused solution is
compatible with standard Web/Internet, telephony and computing infrastructures,
allowing businesses to leverage all of these technologies. We are leveraging
our technological expertise to develop solutions to incorporate multi-channel
customer contact across the enterprise, including inbound and outbound calling,
the Internet, fax and e-mail.
Continue to Focus on Enhancing and Complementing Customer Relationship
Management Solutions: We provide system design, application configuration,
integration and training and consulting services in conjunction with the
installation of our products. We believe our ability to integrate Customer
Relationship Management (CRM) solutions with our CIM suite and, existing
systems and applications, is an important factor in the purchasing decisions of
customers, and we intend to continue our emphasis on providing these design and
integration services.
Continue to Leverage and Expand Sales and Marketing: We intend to pursue an
increased share of the market for customer interaction management systems by
leveraging our existing customer base and global sales team. We will also add
additional sales and marketing personnel. We intend to aggressively market our
applications through expanded public relations, web site expansion, and
marketing communications activities, through select trade shows, direct
advertising, and industry presentations.
Increase Penetration of International Markets: We currently have relationships
with VARs in Europe, Latin America and the Pacific Rim. We intend to commit
additional resources to these relationships in selected international markets.
We also intend to expand our international operations through hiring additional
personnel and forming additional relationships with VARs and distributors in
Europe, Latin America and the Pacific Rim.
Continue to Develop Domestic Distribution Channels: We have historically relied
on our direct sales channel domestically. We intend to increase support of
distribution channels in North America with additional channel programs and
personnel. We also plan to strengthen existing joint marketing and distribution
relationships.
Transferring Call Center Knowledge and Expertise to Internet Solutions:
Implementation of our CIM strategy is significantly enhanced by our ability to
transfer and combine our data management, suite integration knowledge and
expertise to internet solutions research and development and sales and
marketing activities.
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TECHNOLOGY AND PRODUCT DEVELOPMENT
eShare's CIM architecture uses a standards-based framework to provide open
solution implementations for best-of-breed products. Our open approach also
helps assure that CIM applications/components integrate easily with other
applications and services, when provided by third-parties.
In particular, the eShare CIM architecture offers the following benefits:
- Proven, tested, robust business services and application
components
- Off-the-shelf component development from heterogeneous
technologies
- Reusable common application elements to shorten development
cycles
- Lower application development and implementation costs
- Faster development and deployment across multiple platforms
- Interoperability with legacy systems and new emerging
applications
Our applications are based on an open architecture utilizing industry
standards and provide seamless integration with third-party systems or
customers' existing technology infrastructure. Our commitment to open
architecture leverages customers' investments in other customer interaction
management components by ensuring that these systems are adaptable for future
needs. We will seek to continue to develop products that adhere to existing and
emerging standards. Still, there can be no assurance that eShare will be able
to successfully develop new products to address new customer requirements and
technological changes, or that such products will achieve market acceptance.
We intend to continue investment in research and development to maintain
our position as a leader in Customer Relationship Management collaboration
solutions. In fiscal 1999, 1998, and 1997, the Company's research and
development expenditures were approximately $14.2 million, $11.8 million, and
$8.0 million. All of the Company's expenditures for research and development
costs have been expensed as incurred. As of December 31, 1999, we employed 90
people in our Research and Development groups.
COMPETITION
We compete in the Customer Relationship Management market, which includes
both voice based and Internet based solutions. This market is characterized by
rapid growth and converging technologies. These market dynamics represent both
an opportunity and a competitive threat to eShare.
The Company competes with numerous companies in each product category.
Several of the Company's competitors compete across many of our product lines,
while others offer a more narrow solution. Some of our competitors include, in
alphabetic order, Cisco Systems, eGain Communications, FaceTime, Genesys, Kana
Communications, LivePerson, Lucent Technologies, PeopleSupport, Quintus, and
Siebel Systems.
Several of the company's current and potential competitors have greater
financial, marketing and technical resources than the Company. As a result,
they may be able to respond more quickly to new or emerging technologies and
changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products than we could.
We believe that the primary competitive factors affecting our markets
include the speed of application adaptability based on, flexibility,
scaleability, interoperability, functionality and ease of use, as well as
reputation, quality, performance, price and customer service and support.
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REGULATORY ENVIRONMENT
Certain uses of outbound call management systems are regulated by federal,
state and foreign law. The Federal Telephone Consumer Protection Act, or TCPA,
prohibits the use of automatic dialing equipment to call emergency telephone
lines, health care and similar facility patient telephone lines, and telephone
lines where the called party is charged for incoming calls, such as those used
by pager and cellular phone services. The TCPA prohibits use of such equipment
to engage two or more lines of a multi-line business simultaneously, and
restricts the use of artificial or prerecorded voice messages in calls to
residential lines. Among other things, the TCPA required the Federal
Communications Commission, or FCC, to create regulations protecting residential
telephone subscribers from unwanted telephone solicitations. In addition, the
Telemarketing and Consumer Fraud and Abuse Prevention Act authorized the
Federal Trade Commission, or FTC, to prohibit a variety of deceptive and/or
abusive telemarketing practices, including, among other things, repetitive or
harassing calls and requests by telemarketers for payments before certain types
of services are provided. The rules adopted by the FCC and FTC prohibit calls
to persons who have indicated that they do not wish to be contacted, and the
FCC specifically requires telemarketers to maintain a company-specific
"do-not-call list" that contains the names and numbers of residential
subscribers who do not want to receive calls. The rules also require that
telemarketers may call consumers only after 8:00 a.m. and before 9:00 p.m.,
local time. The FCC rules do not restrict calls made to parties that have an
"established business relationship" with the caller or calls placed by
tax-exempt nonprofit organizations. The Telemarketing Fraud Prevention Act, or
TFPA, adopted in June 1998, imposes severe criminal penalties, including
forfeiture of property, for fraud committed through telemarketing calls.
Certain states have enacted similar laws limiting access to telephone
subscribers who object to receiving solicitations. The Fair Debt Collection
Practices Act, or FDCPA, limits communication by certain debt collectors with
consumers only after 8:00 a.m. and before 9:00 p.m., local time, and not at the
consumer's place of business. Many of our customers are exempt from the FDCPA.
In addition, certain states have enacted laws regarding debt collection
practices, which in some cases may impose restrictions on telephonic collection
activities in addition to those of the FDCPA. Although compliance with these
laws may limit the potential use of our products in some respects, we believe
our systems can be programmed to operate automatically in full compliance with
these laws through the use of appropriate calling lists and calling campaign
time parameters.
THE APPLICATION OF SALES AND OTHER TAXES TO ONLINE COMMERCE COULD ADVERSELY
AFFECT DEMAND FOR OUR PRODUCTS AND SERVICES.
The application of sales and other taxes by state and local governments to
online commerce is uncertain and may take years to resolve. In particular, the
federal government and a number of states are currently reviewing the
appropriate tax treatment of online commerce, and new federal laws or state tax
regulations may subject online commerce to additional state sales and income
taxes. Any adverse impact on the growth of online commerce may reduce the sales
of our software and adversely affect our revenues and earnings.
PROPRIETARY RIGHTS
We rely on a combination of patent, copyright, trade secret and trademark
laws, confidentiality procedures and contractual provisions to protect our
proprietary rights in our products and technology. We hold numerous U.S. and
foreign patents covering various processes and technologies utilized in
telephony based call management systems. These patents cover our proprietary
implementations of applications such as inbound/outbound call blending, call
progress analysis, screen pops of the called person's account information,
Cancel Dial and Single System Image View. We also have a number of pending
patent applications on customer interaction management innovations for which
patents have not yet issued. In many cases, we have also received or applied
for patents in other countries covering the innovations covered by existing
U.S. patents or patent applications. We have an extensive portfolio of
seventeen US patents and twenty-four foreign patents worldwide, and another
sixty-four patents pending in over 20 countries.
EMPLOYEES
As of December 31, 1999, we had 478 full-time employees, (172 in
professional services and global support services, 146 in sales and marketing,
90 in research and development and 70 in administration), of whom 419 were
based in the United States and 59 were based in other countries. With the
exception of eight employees of our Mexico City subsidiary, none of our
employees are covered by a collective bargaining agreement. We consider our
employee relations to be good.
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<PAGE> 12
We believe our future success will depend in large part on our ability to
recruit and retain qualified employees, especially experienced software
engineering personnel. The competition for such personnel is intense, and we
cannot assure that we will be successful in retaining or recruiting key
personnel.
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their ages as of January 31, 2000
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Aleksander Szlam............................ 48 Chairman of the Board and Chief Executive
Officer
James Tito.................................. 43 Vice Chairman of the Board and President
George W. Landgrebe......................... 58 Chief Operating Officer, Chief Financial
Officer and Chief Administrative Officer
William K. Dumont........................... 50 Executive Vice President
Andrew J. Filipowski (1).................... 48 Director
Donald L. House(1).......................... 58 Director
</TABLE>
- ----------
(1) Member of the Audit Committee and the Compensation Committee.
ALEKSANDER SZLAM founded eShare in 1979 and has served as our Chairman of
the Board and Chief Executive Officer since its inception. Prior to founding
the Company, Mr. Szlam worked as a design engineer and scientist at Lockheed
Corporation, NCR and Solid State Systems.
JAMES TITO has served as our president since October 1999. Mr Tito was a
co-founder of eShare.com (formerly eShare Technologies, Inc.), and served as
the Chairman and Chief Executive Officer of eShare.com from its inception in
October 1996 until its acquisition by eShare. Prior to co-founding eShare.com,
Mr. Tito served as the president of its predecessor, Interactive Marketing
Technologies (IMT), a database marketing, consulting and services firm, since
1988. Mr. Tito serves as a director of LISTNet, Long Island's Software
Technology Network.
GEORGE W. LANDGREBE has served as our Chief Operating Officer since
December 1999, and as our Chief Financial Officer since February 2000. Mr.
Landgrebe was a Director of eShare.com from its inception until its merger with
us. Prior to joining eShare, Mr. Langrebe was managing partner in Performance
Leadership, LLC, a human resources consulting group. Mr. Landgrebe has also
held executive positions with AutEx Systems, an online, real time interactive
equity block trading firm, Thomson Financial Information (American Banker/Bond
Buyer), Robbins Research International & Infinite Possibilities LLC, WorkLife
Solutions, and Xerox Corporation.
WILLIAM K. DUMONT has served as Executive Vice President, Business
Development, since January 2000. Mr. Dumont was Chief Operating Officer of
eShare from January 1999 until December 1999. He was Senior Vice President,
Worldwide Sales from August 1998 until December 1999. Mr. Dumont also served as
Vice President, Sales from December 1996 until August 1998. Prior to joining
eShare, Mr. Dumont served as Regional Manager for Octel Communications
Corporation from 1994 to 1996, and from 1990 to 1994 he served as Regional Vice
President of VMX, Inc., both of which are voice-processing companies.
DONALD L. HOUSE has served as a Director since June 1997. Mr. House has
served as Chairman of the Board of Directors of Clarus Corporation (formerly
known as SQL Financials International, Inc.), a client/server software company,
since January 1993. From September 1991 until December 1992, Mr. House served
as President of Prentice Hall Professional Software, Inc., a subsidiary of
Simon and Schuster, Inc. Since 1988, he has been a
A-12
<PAGE> 13
business advisor, director and investor in a number of emerging growth high
technology companies. From 1968 through 1987, Mr. House served in a number of
positions with Management Science America, Inc., a provider of application
software.
ANDREW J. FILIPOWSKI has served as a Director since April 1999. He is
President, CEO and Chairman of divine interVentures, Inc, a technology
investment group. Mr. Filipowski was Founder/Chairman/President of Platinum
Technology, Inc., from its founding in 1987 until its sale to Computer
Associates, Inc. in 1999. Platinum Technology developed and marketed a wide
array of distributed computing systems software products and data warehousing
solutions
There are no family relationships between any of our directors or executive
officers.
CERTAIN FORWARD LOOKING STATEMENTS
In this report (including the documents incorporated herein by reference),
we have made certain forward-looking statements that are based on our current
beliefs and the information currently available to us, as well as estimates and
assumptions we have made. Words such as "anticipate," "believe," "estimate,"
"expect," "future," "intend," "plan" and similar expressions, as they relate to
us or our management, identify forward-looking statements. Such statements
reflect our current views with respect to future events and are subject to
certain risks, uncertainties and assumptions relating to our operations and
results of operations, competitive factors and pricing pressures, shifts in
market demand, the performance and needs of the industries we serve, the costs
of product development and other risks and uncertainties, including the risk
and uncertainties identified above under "Risk Factors." Should one or more of
these risks or uncertainties materialize, or should the underlying assumptions
prove incorrect, actual results or outcomes may vary significantly from those
anticipated, believed, estimated, expected, intended or planned. Please see
Exhibit 99.1 "Safe Harbor Compliance Statement for Forward Looking Statements",
the terms of which are incorporated herein, for additional factors to be
considered by shareholders and prospective shareholders.
ITEM 2. PROPERTIES
Our corporate headquarters, which include our principal administrative
offices are located in approximately 100,000 square feet of modern office space
in Norcross, Georgia. This facility is leased to us through 2005. Subsequent to
entering into this lease, the facility was acquired by a partnership controlled
by our Chairman of the Board, Chief Executive Officer and principal
shareholder. We lease through our English subsidiary eShare Technologies
Limited, approximately 14,000 square feet of modern office space outside
London. The facility is owned by a corporation controlled by our Chairman of
the Board, Chief Executive Officer and principal shareholder.
Our marketing, support, sales and research and development activities are
undertaken in our corporate headquarters and a 10,000 square foot leased
facility in Commack, N.Y. We also lease space for several sales and support
centers located in the United States and in London, Mexico City, Paris and
Toronto. We believe we will require significant additional office space within
the next 12 months and that suitable space will be available to accommodate
expansion of our operations on commercially reasonable terms. We anticipate
leasing approximately 30,000 additional square feet of general office space at
market rates near our current office in Commack, NY.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time, subject to legal proceedings and claims
which have arisen in the ordinary course of business. We are not currently a
party to any legal proceedings which we believe to be material with respect to
the financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters brought to a vote of security holders during the
fourth quarter of FY 1999.
A-13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is listed on the Nasdaq National Market, or Nasdaq, under
the symbol "ESHR." The following table sets forth the range of high and low
sale prices for our common stock on Nasdaq during the periods indicated
commencing June 4, 1997, the date of our initial public offering.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1997:
Second Quarter (from June 4, 1997)........................ $ 13 $ 10
Third Quarter............................................. 12 7/8 7 5/8
Fourth Quarter............................................ 12 7/8 7 3/4
1998:
First Quarter............................................. 19 1/8 8 1/2
Second Quarter............................................ 19 1/8 11 3/4
Third Quarter............................................. 17 3/8 8
Fourth Quarter............................................ 21 1/4 7 1/4
1999:
First Quarter............................................. 25 1/8 11
Second Quarter............................................ 16 7/8 9 3/8
Third Quarter............................................. 13 1/2 7 3/4
Fourth Quarter............................................ 28 7/16 3 7/16
2000
First Quarter (through March 17, 2000)................... 25 3/4 13
</TABLE>
On March 22, 2000, the last sale price of the common stock on Nasdaq was
$13.625 per share. As of March 22, 2000, there were 130 holders of record of our
common stock.
We have never declared or paid any cash dividends on our common stock. We
currently anticipate that we will retain all future earnings for use in our
business and do not anticipate paying cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data in
conjunction with our consolidated financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report. We have derived the statement of operations data for
the years ended December 31, 1995, 1996, 1997, 1998 and 1999 from our financial
statements. On September 1, 1999, we completed the acquisition of eShare.com,
Inc. The acquisition was accounted for as a pooling of interest; therefore, all
prior period amounts have been restated.
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<PAGE> 15
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net revenues:
Product .................................... $24,620 $32,077 $ 46,481 $71,333 $ 63,063
Service .................................... 10,662 15,944 20,039 25,748 31,792
------- ------- -------- ------- --------
Total revenues ...................... 35,282 48,021 66,520 97,081 94,855
Cost of revenues:
Product .................................... 8,730 11,494 15,577 21,680 19,398
Service .................................... 5,282 6,994 9,642 13,346 16,765
------- ------- -------- ------- --------
Total cost of revenues .............. 14,012 18,488 25,219 35,026 36,163
------- ------- -------- ------- --------
Gross margin ................................. 21,270 29,533 41,301 62,055 58,692
Operating expenses:
Engineering, research and development ...... 4,050 5,158 8,003 11,798 14,213
Selling, general and administrative ........ 12,559 17,655 26,080 36,208 46,467
Write off of purchased software ............ -- -- 268 -- --
Amortization of intangible assets .......... -- -- -- -- 542
Acquisition and restructuring related
charges ................................. -- -- -- -- 6,990
Deferred compensation expense .............. -- -- -- -- 2,271
------- ------- -------- ------- --------
Total operating expenses ............ 16,609 22,813 34,351 48,006 70,483
------- ------- -------- ------- --------
Income (loss) from operations ................ 4,661 6,720 6,950 14,049 (11,791)
Other income, net ............................ 88 178 417 1,067 756
------- ------- -------- ------- --------
Income (loss) before income taxes ............ 4,749 6,898 7,367 15,116 (11,035)
Income tax provision (benefit):
Tax provision (benefit) .................... -- 2 3,024 6,576 (1,077)
Deferred tax adjustment .................... -- -- (1,473) -- --
------- ------- -------- ------- --------
Net income (loss) ............................ $ 4,749 $ 6,896 $ 5,816 $ 8,540 $ (9,958)
Preferred stock preference ................... -- -- -- -- (5,850)
------- ------- -------- ------- --------
Net income (loss) applicable to common
shareholders ................................. $ 4,749 $ 6,896 $ 5,816 $ 8,540 $(15,808)
======= ======= ======== ======= ========
Income before pro forma income taxes ......... $ 4,749 $ 6,896 $ 7,367
Pro forma income taxes ....................... 1,794 2,827 4,469
------- -------- -------
Pro forma net income ......................... $ 2,955 $ 4,069 $ 2,898
======= ======== ========
Earnings (loss) per share:
Diluted earnings (loss) per share .......... $ 0.38 $ 0.39 $ 0.29 $ 0.40 $ (0.76)
Pro forma diluted earnings (loss) per share. $ 0.24 $ 0.23 $ 0.14 $ 0.40 $ (0.76)
Weighted average shares outstanding:
Diluted .................................... 12,338 17,475 20,049 21,575 20,758
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and marketable securities.............. $ 5,959 $10,973 $32,116 $30,783 $14,872
Working capital .............................................. 6,904 9,474 32,909 42,656 38,596
Total assets ................................................. 20,928 29,167 58,861 78,484 70,551
Long-term debt, net of current portion ....................... 2,644 -- 185 2,726 74
Total shareholders' equity ................................... 6,657 12,786 38,649 48,394 53,837
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are a leading provider of Customer Relationship Management solutions
focusing on Customer Interaction Management. Our solutions support voice,
e-mail, live interaction/chat and hosting services for more than 2,000 major
e-businesses, Application Service Providers (ASP's), Internet Service Providers
(ISP's) and Portals in more than 30 countries. Our solutions enable real-time
interactive communications and services, both voice based and over the
Internet, and include customer service and support, customer self-service,
instant messaging, live conferencing and events, distance learning, community
chat, threaded discussion forums and a variety of custom integration tools.
Organizations use our applications and services to implement strategies for
customer interaction that increase the value derived from their customers by
enhancing customer acquisition and retention activities, while reducing costs
and improving agent productivity and effectiveness. We offer ongoing
maintenance support of our products. We also offer fee-based installation,
integration, training and consulting services.
Our revenues are derived primarily from three sources: (i) product license
fees for the use of our software applications and sales of related computer and
telephony hardware to utilize the software, (ii) service fees for ongoing
system support, maintenance, installation, integration, training and consulting
services, and (iii) fees for hosting applications for our customers. We
recognize product revenue upon shipment of the product if there are no
significant post-delivery obligations, if collection is probable and if the
agreement requires payment within one
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<PAGE> 16
year. Revenues from post-contract maintenance support and revenues from hosting
applications are recognized ratably over the term of the support or hosting
period. Post-contract maintenance support revenues accounted for 21.7% of total
revenues in 1999. Revenues from consulting, installation, integration, and
training services are recognized as the services are performed. In any given
period, a significant portion of our revenues may be derived from large sales to
a limited number of customers. During 1999, no customer accounted for more than
10% of our total revenues. During 1998, CitiGroup accounted for 13.1% of our
total revenues. During 1997, BancOne Services Corp. (now First USA) accounted
for 11.8% of our total revenues. Revenues from our five largest customers
represented 27.9%, 23.2%, and 28.2% of our total revenues for 1997, 1998 and
1999, respectively.
We currently market our products in the United States, Canada, Mexico,
France, and the United Kingdom through a direct sales force and through select
distributors. We rely on Value Added Resellers (VARs) and distributors to sell,
install and support our products in other countries. Revenues from sales to
customers outside the United States accounted for 18.4%, 23.8%, and 31.7% of
our total revenues for 1997, 1998 and 1999, respectively. We believe that our
continued growth and future profitability will require further expansion of our
international operations. To successfully expand international sales, we may
establish additional foreign operations and we will hire additional personnel
and recruit additional VARs and distributors. To the extent that we are unable
to do so on a timely basis, our revenue growth, if any, may be slowed, and
profitability may be adversely affected. Our international revenues are
denominated primarily in U.S. dollars or British pounds. Our expenses incurred
in foreign countries are typically denominated in local currencies. We have
recognized pre-tax foreign exchange gains (losses) of approximately ($20,000),
$(23,000), and $24,000 in 1997, 1998 and 1999, respectively. There can be no
assurance that future fluctuations in currency exchange rates will not have a
material adverse impact on our future international operations.
In June 1999 we acquired smallwonder softworks, a provider of multi-media,
web enabled contact center software solutions. The acquisition was accounted
for as a purchase. Under purchase accounting, the total purchase cost and fair
value of liabilities assumed were allocated to the tangible and intangible
assets of smallwonder softworks based upon their respective fair values as of
the closing. The remainder of the excess of the purchase price over the
tangible assets acquired of approximately $4.7 million was assigned to trade
names, workforce, and goodwill and is being amortized over a period of five
years.
In September 1999 we merged with eShare Technologies, Inc., a provider of
internet-based software solutions. The merger was designed to expand our
addressable market to include the emerging market of customer interaction
management over the Internet, which is being driven by the explosive growth in
e-commerce. All historical financial information and analysis have been
restated to reflect the acquisition, which was accounted for as a pooling of
interests. With the merger, we are currently operating in two segments, call
center and Internet. Segment information is detailed in the notes to the
consolidated financial statements.
We anticipate the integration and consolidation of smallwonder softworks
and eShare Technologies will require substantial management, financial, and
other resources. The acquisitions involve a number of significant risks
including potential difficulties in assimilating the technologies, services,
and products, or in achieving the expected synergies and cost reductions, as
well as other unanticipated risks and uncertainties. As a result, there can be
no assurance as to the extent to which the anticipated benefit with respect to
the acquisitions will be realized, or the timing of any such realization.
RESULTS OF OPERATIONS
The following table sets forth items shown in our statement of operations
as a percentage of total revenues for the periods indicated. The table should
be read in conjunction with our financial statements and notes thereto
contained elsewhere in this report.
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<PAGE> 17
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues:
Product .................................. 69.9% 73.5% 66.5%
Service .................................. 30.1 26.5 33.5
----- ----- -----
Total revenues ................... 100.0 100.0 100.0
Cost of revenues:
Product .................................. 23.4 22.3 20.4
Service .................................. 14.5 13.8 17.7
----- ----- -----
Total cost of revenues ........... 37.9 36.1 38.1
----- ----- -----
Gross margin ............................... 62.1 63.9 61.9
Operating expenses:
Engineering, research and development .... 12.0 12.2 15.0
Selling, general and administrative ...... 39.2 37.3 49.0
Write off of purchased software .......... 0.4 -- --
Amortization of intangible assets ........ -- -- 0.6
Acquisition and restructuring related
charges ................................ -- -- 7.3
Deferred compensation expense............. -- -- 2.4
----- ----- -----
Total operating expenses ......... 51.6 49.5 74.3
----- ----- -----
Income (loss) from operations .............. 10.5 14.4 (12.4)
Other income, net .......................... 0.6 1.1 0.8
----- ----- -----
Income (loss) before income taxes .......... 11.1 15.5 (11.6)
Income tax provision (benefit):
Tax provision (benefit) .................. 4.5 6.7 (1.1)
Deferred tax adjustment .................. (2.2) -- --
----- ----- -----
Net income (loss) .......................... 8.8% 8.8% 10.5%
Preferred stock preference ................. -- -- (6.2)
----- ----- -----
Net income (loss) applicable to common
shareholders ............................. 8.8% 8.8% (16.7)%
====== ====== ======
Income before pro forma income taxes ....... 11.1%
Pro forma income taxes ..................... 6.7
Pro forma net income ....................... 4.4%
</TABLE>
The following table sets forth, for each component of net revenues, the
cost of such revenues as a percentage of such revenues for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cost of product revenues............ 33.5% 30.4% 30.8%
Cost of service revenues............ 48.1% 51.8% 52.7%
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
Product. Our product revenues declined by 11.6% from $71.3 million in 1998
to $63.1 million in 1999. The decrease in product revenues was due to reduced
demand for our call center products, primarily in the United States, and to a
reduction in hardware content in our products. Total call center product
revenue dropped 18.3% from $67.9 million in 1998 to $55.5 million in 1999. The
reduced demand related to Y2K slowdowns in purchasing as well as increased
pricing pressures within the call center industry. Internet product revenue
increased 123.1% from $3.4 million in 1998 to $7.6 million in 1999 due to
increased demand for Internet customer interaction solutions. In addition, our
Internet product suite was expanded with the introduction of NetAgent 2.0 in
the fourth quarter of 1998, Expressions 4.0 in the first quarter of 1999,
Connections and Re:sponse in the third quarter of 1999, and NetAgent 3.0 in the
fourth quarter of 1999.
Service. We increased our service revenues by 23.5% from $25.7 million in
1998 to $31.8 million in 1999. Service revenues increased primarily due to an
increase in the number of post-contract maintenance support agreements and
growing demand for post-implementation consulting services.
Cost of Revenues
Product. The cost of product revenues includes the cost of material, the
cost of sublicensing third-party software, personnel-related costs for internal
product assembly and fees paid to third parties for outsourced product
assembly. Cost of product revenues decreased from $21.7 million, or 30.4% of
related product revenues, in 1998, to $19.4
A-17
<PAGE> 18
million, or 30.8% of related product revenues, in 1999. Cost of product revenues
for the contact center segment decreased from $21.3 million, or 31.4% of related
product revenues in 1998, to $19.0 million, or 34.3% of related product
revenues, in 1999. The decrease in absolute dollars in the cost of product
revenues was due to the decline in the volume of shipments of our contact center
products. The increase as a percentage of product revenues was primarily due to
the impact of personnel and other fixed costs on a reduced base of contact
center product revenues. Cost of product revenues for the Internet segment
increased from $344,000, or 10.2% of related product revenues in 1998, to
$392,000, or 5.2% of related product revenues, in 1999. The increase in absolute
dollars in cost of product revenues was related to the increase in volume of
shipments of our Internet products. The decrease as a percentage of product
revenues was primarily due to the impact of an increased base of Internet
product revenues in relation to personnel and other fixed costs.
Service. The cost of service revenues primarily consists 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 increased
from $13.3 million, or 51.8% of related service revenues, in 1998, to $16.8
million, or 52.7% of related service revenues, in 1999. The increase in
absolute dollars in the cost of service revenues was primarily due to the
increase in service personnel to support the larger installed customer base,
and the expansion of our post-implementation consulting practice. The increase
as a percentage of service revenues was primarily due to the creation of a
NetAgent support staff and infrastructure to support the expected growth in
NetAgent customers.
Operating Expenses
Engineering, research and development. Engineering, research and
development expenses primarily consist of employee-related costs for
engineering personnel involved with Internet and voice/CTI software
development. Also included are outside contractor costs for development
projects and expendable equipment purchases. Engineering, research and
development costs increased from $11.8 million, or 12.2% of total revenues, in
1998, to $14.2 million, or 15.0% of total revenues, in 1999. The increase in
absolute dollars resulted primarily from the addition of developers and outside
contractors to support our new Internet product development efforts. The
increase as a percentage of total revenues was primarily a factor of the
reduced contact center product revenues. We expect to transfer a significant
number of contact center developers to our Internet product development efforts
in the near future, in order to expand our multi-channel CIM offerings.
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 from $36.2
million, or 37.3% of total revenues, in 1998, to $46.5 million, or 49.0% of
total revenues, in 1999. This increase in absolute dollars was primarily
related to the expansion of our sales and marketing resources, and increased
levels of marketing activities. The increase as a percentage of total revenues
was primarily a result of the reduction in total revenues, and the duplicate
costs of supporting two businesses. We will consolidate general and
administrative costs as we more fully integrate the businesses.
Acquisition and Merger-Related Expenses
In connection with the acquisition of smallwonder softworks and the merger with
eShare Technologies, Inc., the Company incurred direct merger and restructuring
related expenses of approximately $7.0 million, comprised primarily of
investment bankers, attorneys, accountants and other professional fees. In
addition, the Company incurred $2.3 million (non-cash) of indirect deferred
compensation expenses related to the conversion of the eShare stock option
plan. The Company also incurred $542,000 in amortization of intangible assets
related to the purchase of smallwonder softworks.
Other Income, Net
Other income, net decreased from $1.1 million in 1998 to $756,000 in 1999.
The decrease was primarily due to interest income earned on our investments in
marketable securities, which decreased due to lower cash levels caused by
negative cash flows from operating activities in the second half of the year.
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<PAGE> 19
Income Tax Provision (Benefit)
We recorded an income tax provision of $6.6 million in 1998 and an income
tax benefit of approximately $1.1 million in 1999. Our effective tax rate was
43.3% in 1998 primarily due to the effect of permanent differences between book
and tax and due to the effect of not recording the benefit on the losses
incurred by eShare due to the uncertainty of realizing those losses. Our
effective tax rate was (9.7)% for 1999 primarily due to the effect of not
recording the majority of the benefit on the losses incurred by eShare due to
the uncertainty of realizing those losses.
Preferred Stock Preference
Included in results of operations for the year ended December 31, 1999, is
a non-recurring, non-cash charge of $5.8 million which represents the
difference between the estimated fair value of common stock of eShare 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.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Product. We increased our product revenues by 53.5% from $46.5 million in
1997 to $71.3 million in 1998. The increase in product revenues was due to
continued strong demand for our products, increased marketing and sales
efforts, increased international sales through the direct channel and increased
sales through distribution channels. Over this period, we expanded our Internet
solutions with the introduction of Expressions 3.0 in the fourth quarter of
1997, NetAgent 1.0 in the second quarter of 1998. We expanded our contact
center solutions with the introduction of PhoneFrame Explorer in the fourth
quarter of 1997.
Service. We increased our service revenues by 28.5% from $20.0 million in
1997 to $25.7 million in 1998. Service revenues increased primarily due to an
increase in the number of maintenance and support agreements and, to a lesser
degree, from revenues generated by installation of new systems, upgrades to
existing systems and consulting services. We introduced consulting services in
the fourth quarter of 1997.
Cost of Revenues
Product. The cost of product revenues includes the cost of material, the
cost of sublicensing third-party software, personnel-related costs for internal
product assembly and fees paid to third parties for outsourced product
assembly. Cost of product revenues increased from $15.6 million, or 33.5% of
related product revenues, in 1997, to $21.7 million, or 30.4% of related
product revenues in 1998. The increase in absolute dollars in the cost of
product revenues was due to the increase in the volume of shipments of our
products. The decrease, as a percentage of product revenues, was primarily due
to product design improvements, reduced material purchase costs, and lower
hardware content of the systems.
Service. The cost of service revenues primarily consists 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 increased
from $9.6 million, or 48.1% of related service revenues, in 1997, to $13.3
million, or 51.8% of related services revenues, in 1998. The increase in
absolute dollars in the cost of service revenues was primarily due to the
increase in service personnel to support the larger installed customer base and
higher volume of installations. The increase as a percentage of service
revenues, was primarily due to increased infrastructure spending for
international operations and to support expansion of domestic indirect
distribution channels.
A-19
<PAGE> 20
Operating Expenses
Engineering, research and development. Engineering, research and
development expenses primarily consist of employee-related costs for
engineering personnel involved with software, voice processing and CTI
technology development. Also included are outside contractor costs for
development projects and expendable equipment purchases. Engineering, research
and development costs increased from $8.0 million, or 12.0% of total revenues,
in 1997, to $11.8 million, or 12.2% of total revenues, in 1998. The increase in
absolute dollars resulted primarily from the addition of developers and outside
contractors to support our new product development efforts, which were focused
on continued enhancements to PhoneFrame Explorer and ongoing development of
future products, including Enterprise Explorer. We intend to continue to invest
heavily in product development activities. As a result, we expect that
engineering, research and development costs will increase in absolute dollars
and may increase as a percentage of revenues 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 from $26.1
million, or 39.2% of total revenues, in 1997, to $36.2 million, or 37.3% of
total revenues, in 1998. This increase in absolute dollars was primarily
related to the expansion of our sales and marketing resources, increased
commission expenses due to higher sales, and increased levels of marketing
activities. The decrease as a percentage of total revenues was primarily a
result of leveraging the infrastructure and improvements to operating
efficiencies.
Other Income, Net
Other income, net increased from $417,000 in 1997 to $1.1 million in 1998.
The increase was primarily due to interest income earned on our investments in
marketable securities and the elimination of interest expense attributable to
the receipt of proceeds from our initial public offering in June 1997.
Income Tax Provision (Benefit)
In connection with the initial public offering on June 4, 1997, we
converted our U.S. taxable status from an S corporation to a C corporation and,
accordingly, we are subject to federal and state income taxes. As a result, we
recorded a one time tax benefit of $1.5 million in 1997 for the change in our
tax status. We recorded an income tax provision of $6.6 million in 1998. Our
effective tax rate was 43.3% in 1998 primarily due to the effect of permanent
differences between book and tax and due to the effect of not recording the
benefit on the losses incurred by eShare due to the uncertainty of realizing
those losses.
FINANCIAL CONDITION
Total assets as of December 31, 1999, were $70.6 million, a decrease of
$7.9 million from December 31, 1998. The decrease was primarily due to the
reduction in cash and cash equivalents and marketable securities due to net
operating losses experienced during the year, and a reduction in accounts
receivable, offset by an increase in property and equipment. Cash, cash
equivalents and marketable securities decreased by $15.9 million. Accounts
receivable decreased $925,000. Net property and equipment increased by $3.1
million primarily due to the purchase and implementation of enterprise resource
planning software and equipment and purchases of software and equipment used
for development purposes.
Current liabilities as of December 31, 1999 were $16.6 million, a decrease
of $10.7 million from December 31, 1998. The decrease was primarily due to a
decrease in accounts payable and accrued liabilities, offset by an increase in
deferred revenue.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through internally
generated cash flow and funds generated
A-20
<PAGE> 21
from our initial public offering. Our operating activities generated cash of
$7.5 million in 1997, used cash of $161,000 in 1998, and used cash of $12.3
million in 1999. In 1999, our use of cash was caused by net operating losses and
a decrease in accounts payable and accrued liabilities. In 1998, our use of cash
resulted from net income, an increase in accounts payable and accrued
liabilities and deferred revenue, primarily offset by an increase in accounts
receivable, and a decrease in customer deposits. In 1997, our cash was generated
by net income, an increase in accounts payable and accrued liabilities,
partially offset by an increase in accounts receivable and a decrease in
customer deposits.
Our investing activities used cash of $28.2 million in 1997, $3.3 million
in 1998, and generated cash of $1.0 million in 1999. Our use of cash in 1997
was primarily for the purchase of capital equipment and software to support our
growth and for investments in marketable securities. The use of cash in 1998
was primarily for the purchase of capital equipment and software to support our
growth and was partially offset by a reduction in investments in marketable
securities. The generation of cash in 1999 was primarily from a reduction in
investments in marketable securities partially offset by purchases of capital
equipment and software to support our growth and the purchase of smallwonder
softworks.
Our financing activities generated $17.6 million in 1997, $3.3 million in
1998, and $6.6 million in 1999. The cash generated in 1997 was primarily from
the proceeds of our initial public offering, offset by payments to a
stockholder. Our cash in 1998 was primarily a result of the issuance of
convertible notes and the sale of common stock. Our cash in 1999 was primarily
from the sale of common stock and preferred stock.
As of December 31, 1999, we had working capital of $38.6 million. Cash,
cash equivalents and marketable securities were $14.9 million. We estimate that
we will incur capital expenditures of approximately $2.0 million in 2000,
related to anticipated increased capital needs of technology and facility
upgrades, and support of increased staffing. We believe that existing cash,
cash equivalents and marketable securities and potential cash flow from
operations will be sufficient to meet our cash requirements for at least the
next twelve months.
YEAR 2000 READINESS
A-21
<PAGE> 22
The Risks of Our Year 2000 Issues
We do not currently believe that the effects of any Year 2000 non-compliance
in our installed base of software will adversely affect our business, financial
condition and results of operations. However, no assurance can be given that we
will not be exposed to potential claims resulting from system problems
associated with the century change which have not manifested themselves.
We developed contingency plans for business functions that are susceptible
to a substantive risk of disruption resulting from a Year 2000 related event,
including installation of backup power generation capability at our corporate
headquarters. We did not experience any material failures in business functions
as a result of Year 2000.
NEW ACCOUNTING PRONOUNCEMENT
In 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 will be effective for our fiscal year ending December 31, 2001. We do not
believe that the adoption of this pronouncement will have a material impact on
our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a number of market risks in the ordinary course of
business, such as foreign currency exchange risk resulting from our
international operations. These risks arise in the normal course of business
rather than from trading. In addition, some of our traded assets are exposed to
market risks such as interest rate fluctuations. Primarily securities owned by
us through Melita Finance Corporation, our wholly-owned investment subsidiary,
are sensitive to all of these risks and has concluded that none of our
exposures in these areas is material to fair values, cash flows or earnings.
The following table provides information about securities owned by us
through Melita Finance Corporation that are sensitive to markets risks:
<TABLE>
<CAPTION>
Securities Sensitive to Market Risk by Maturity
As of December 31, 1999
(In thousands)
2000 2001 Total
------ ------ -------
<S> <C> <C> <C>
Fixed Rate ($US) $5,970 $5,306 $11,276
Average Interest Rate 4.13% 3.87% 4.00%
</TABLE>
A-22
<PAGE> 23
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1999
TOGETHER WITH
AUDITORS' REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................................. 24
Consolidated Balance Sheets as of December 31, 1998 and 1999.............................. 25
Consolidated Statements of Operations for the three years in the period ended
December 31, 1999......................................................................... 26
Consolidated Statements of Shareholders' Equity for the three years in the period ended 27
December 31, 1999.........................................................................
Consolidated Statements of Comprehensive Income for the three years in the period ended
December 31, 1999......................................................................... 28
Consolidated Statements of Cash Flows for the three years in the period ended
December 31, 1999......................................................................... 29
Notes to Consolidated Financial Statements................................................ 30
</TABLE>
A-23
<PAGE> 24
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, 1998 and 1999 and the related
consolidated statements of operations, shareholders' equity, comprehensive
income (loss), and cash flows for each of the three years in the period ended
December 31, 1999. 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 as of and for the years ended December 31, 1997 and 1998 of
eShare.com, Inc. (a Delaware corporation, and formerly eShare Technologies,
Inc.) a company acquired during 1999 in a transaction accounted for as a pooling
of interests, as discussed in Note 2. Such statements are included in the
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. Such statements also reflect total net loss of $(4,713,000) in
1997 and $(3,145,000) in 1998. These statements were audited by other auditors
whose report has been furnished to us and our opinion, insofar as it relates to
amounts included for eShare.com, Inc., is based solely upon the report of the
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of eShare Technologies, Inc. and subsidiaries
as of December 31, 1998 and 1999 and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Atlanta, Georgia
February 15, 2000
A-24
<PAGE> 25
ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1998 1999
---------------------------------------------------------- -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,027 $ 3,558
Marketable securities 22,756 11,315
Accounts receivable, net of allowance for doubtful
accounts of $2,600 and $3,014 at December 31, 1998 and
1999, respectively 33,788 32,863
Inventories, net 1,260 1,967
Deferred taxes 3,731 4,921
Prepaid expenses and other 458 612
-------- --------
Total current assets 70,020 55,236
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Furniture and fixtures 2,466 3,122
Equipment 12,650 17,436
Leasehold improvements 1,198 1,390
-------- --------
Total property and equipment 16,314 21,948
Less accumulated depreciation 8,413 10,985
-------- --------
Net property and equipment 7,901 10,963
-------- --------
Intangible assets, net - 4,254
Other assets 563 98
-------- --------
$78,484 $70,551
======== ========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1999
---------------------------------------------------------- -------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 7,265 $ 3,343
Accrued liabilities 12,516 4,879
Deferred revenue 6,574 8,265
Customer deposits 815 12
Current portion of notes payable 194 141
-------- --------
Total current liabilities 27,364 16,640
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
Notes payable, excluding current portion 226 74
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, 1998 and 1999 - -
Common stock, no par value; 100,000,000 shares
authorized; 20,337,183 shares issued and
outstanding at December 31, 1998 and 21,386,714
shares issued and outstanding at December 31, 1999 69 69
Additional paid-in capital 44,282 61,439
Deferred compensation (303) (1,935)
Accumulated other comprehensive income 96 (28)
Retained earnings(deficit) 4,250 (5,708)
-------- --------
Total shareholders' equity 48,394 53,837
-------- --------
$78,484 $70,551
======== ========
</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.
A-25
<PAGE> 26
ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
NET REVENUES:
Product ................................................ $ 46,481 $71,333 $ 63,063
Service ................................................ 20,039 25,748 31,792
-------- ------- --------
Total revenues ................................ 66,520 97,081 94,855
-------- ------- --------
COST OF REVENUES:
Product ................................................ 15,577 21,680 19,398
Service ................................................ 9,642 13,346 16,765
-------- ------- --------
Total cost of revenues ........................ 25,219 35,026 36,163
-------- ------- --------
GROSS MARGIN .............................................. 41,301 62,055 58,692
-------- ------- --------
OPERATING EXPENSES:
Engineering, research, and development ................. 8,003 11,798 14,213
Selling, general, and administrative ................... 26,080 36,208 46,467
Write-off of purchased software ........................ 268 -- --
Amortization of intangible assets ...................... -- -- 542
Acquisition and restructuring related charges .......... -- -- 6,990
Deferred compensation expense .......................... -- -- 2,271
-------- ------- --------
Total operating expenses ...................... 34,351 48,006 70,483
-------- ------- --------
INCOME FROM OPERATIONS .................................... 6,950 14,049 (11,791)
OTHER INCOME, NET ......................................... 417 1,067 756
-------- ------- --------
INCOME BEFORE INCOME TAXES ................................ 7,367 15,116 (11,035)
INCOME TAX PROVISION (BENEFIT):
Tax provision (benefit) as C corporation ............... 3,024 6,576 (1,077)
Deferred tax adjustment ................................ (1,473) -- --
-------- ------- --------
NET INCOME (LOSS) ......................................... 5,816 8,540 (9,958)
Preferred stock preference ................................ -- -- (5,850)
-------- ------- --------
NET INCOME (LOSS) APPLICABLE TO
COMMON SHAREHOLDERS ...................................... $ 5,816 $ 8,540 $(15,808)
======== ======= ========
PRO FORMA NET INCOME:
Income before income taxes ............................. $ 7,367
Pro forma income taxes ................................. 4,469
--------
$ 2,898
=======
EARNINGS PER SHARE:
Basic earnings (loss) per share ........................ $ 0.31 $ 0.42 $ (0.76)
======== ======= ========
Diluted earnings (loss) per share ...................... $ 0.29 $ 0.40 $ (0.76)
======== ======= ========
Pro forma basic earnings per share ..................... $ 0.15
========
Pro forma diluted earnings per share ................... $ 0.14
========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic .................................................. 18,898 20,259 20,758
======== ======= ========
Diluted ................................................ 20,049 21,575 20,758
======== ======= ========
</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.
A-26
<PAGE> 27
ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK OTHER
--------------- ADDITIONAL COMPREHEN- RETAINED
PAID-IN SIVE DEFERRED EARNINGS
SHARES AMOUNT CAPITAL INCOME COMPENSATION (DEFICIT) TOTAL
--------- ------ ---------- --------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 13,097,873 $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 20,234,840 $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 20,337,183 $69 $ 44,282 $ 96 $ (303) $ 4,250 $ 48,394
Net loss -- -- -- -- -- (9,958) (9,958)
Proceeds from issuance of
common stock 1,049,531 -- 6,292 -- -- -- 6,292
Non-cash stock issuance costs -- -- 119 -- -- -- 119
Tax benefit from exercise
of options -- -- 3,598 -- -- -- 3,598
Conversion of convertible notes -- -- 3,000 -- -- -- 3,000
Issuance of warrants -- -- 244 -- -- -- 244
Deferred compensation with
granting of options -- -- 3,904 -- (1,830) -- 2,074
Amortization of deferred
compensation -- -- -- -- 198 -- 198
Unrealized loss on marketable
securities -- -- -- (148) -- -- (148)
Foreign currency
translation adjustment -- -- -- 24 -- -- 24
---------- --- -------- ----- ------- -------- --------
BALANCE, DECEMBER 31, 1999 21,386,714 $69 $ 61,439 $ (28) $(1,935) $ (5,708) $ 53,837
========== === ======== ===== ======= ======== ========
</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.
A-27
<PAGE> 28
ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- ------
<S> <C> <C> <C>
NET INCOME (LOSS) $ 5,816 $ 8,540 $ (9,958)
------- ------- --------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustment (20) (23) 24
Unrealized gain(loss) on marketable securities 15 89 (148)
------- ------- --------
Other comprehensive income (loss) (5) 66 (124)
------- ------- --------
COMPREHENSIVE INCOME (LOSS) $ 5,811 $ 8,606 $(10,082)
======= ======= ========
</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.
A-28
<PAGE> 29
ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,816 $ 8,540 $ (9,958)
Adjustments to reconcile net income (loss)
to net
Cash provided by operating activities:
Deferred taxes (2,035) (1,695) (1,190)
Depreciation and amortization 1,816 2,463 3,120
Noncash financing & compensation expense 140 197 --
Noncash compensation expense -- -- 2,271
Changes in assets and liabilities, net of effects
of acquisition:
Accounts receivable, net (4,164) (17,723) 1,322
Inventories (19) 1,201 (595)
Prepaid expenses and other assets (79) (201) (154)
Accounts payable and accrued liabilities 6,943 5,904 (7,961)
Deferred revenue 1,080 2,429 1,691
Customer deposits (1,861) (1,173) (803)
Other, net (126) (103) 471
-------- -------- --------
Total adjustments 1,695 (8,701) (1,828)
-------- -------- --------
Net cash provided by (used in)
operating activities 7,511 (161) (11,786)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property equipment (4,273) (4,585) (6,106)
Purchased software (22) -- --
Purchases (sale) of marketable securities (23,954) 1,302 11,441
Acquisition, net of cash acquired -- -- (4,605)
-------- -------- --------
Net cash provided by (used in) investing
activities (28,249) (3,283) 730
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible notes 1,000 2,500 500
Deferred offering costs -- (335) --
Repayment of capital lease obligations (19) -- --
Net proceeds from issuance of common stock 39,046 1,039 6,292
Exercise of warrants -- 1 --
Proceeds from issuance of debt 1,162 673 --
Repayment of debt (860) (554) (205)
Repayment of notes payable to stockholder (2,625) -- --
Repayment of notes payable to stockholder
representing distributions (12,900) -- --
Distributions to stockholder (7,253) -- --
-------- -------- --------
Net cash (used in) provided by
financing activities 17,551 3,324 6,587
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,187) (120) (4,469)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,334 8,147 8,027
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,147 $ 8,027 $ 3,558
======== ======== ========
MARKETABLE SECURITIES $ 23,969 $ 22,756 $ 11,315
======== ======== ========
CASH, CASH EQUIVALENTS, AND MARKETABLE
SECURITIES $ 32,116 $ 30,783 $ 14,873
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest during the year $ 400 $ 34 $ 44
======== ======== ========
Income taxes paid $ 3,199 $ 6,395 $ 4,042
======== ======== ========
Conversion of convertible notes to
common stock $ 1,000 $ -- $ 3,000
======== ======== ========
</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.
A-29
<PAGE> 30
ESHARE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, AND 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
eShare Technologies, Inc. (the "Company") is a leading provider of
Electronic Customer Relationship Management (eCRM) collaboration
solutions supporting voice, e-mail, live interaction/chat and hosting
services for over 2,000 major eBusinesses, Application Service
Providers (ASPs), Internet Service Providers (ISPs) and Portals. Prior
to October 4, 1999, the Company was named Melita International
Corporation.
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. All prior period amounts have been restated to reflect
the acquisition of eShare.com, Inc. in a pooling of interests
transaction.
REVENUE RECOGNITION
The Company generates product revenues from sales of 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.
A-30
<PAGE> 31
Deferred revenues primarily relate to products that have not yet been
delivered and maintenance services which have been paid by the
customers prior to the performance of those services. Deferred revenue
amounted to $6,574,000 and $8,265,000 at December 31, 1998 and 1999,
respectively.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Research and development expenditures are charged to expense as
incurred. Software development costs are charged to research and
development expense until technological feasibility is established,
after which remaining software production costs are capitalized in
accordance with Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for Costs of Computer Software to Be Sold, Leased,
or Otherwise Marketed." The Company has defined technological
feasibility of its products as the point in time at which the Company
has a working model of the related product, which is when the product
has achieved "beta" status. Historically, the development costs
incurred during the period between the achievement of beta status by a
product and the point at which the product is available for general
release to customers have not been material. Accordingly, the Company
has concluded that the amount of development costs capitalizable under
the provisions of SFAS No. 86 was not material to the financial
statements for the years ended December 31, 1997, 1998, and 1999.
Therefore, the Company charged all software development costs to
expense as incurred for the years ended December 31, 1997, 1998, and
1999.
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash or cash
equivalents.
MARKETABLE SECURITIES
The Company's marketable securities are categorized as
available-for-sale securities, as defined by the SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Unrealized holding gains and losses are reflected as a net amount in a
separate component of shareholders' equity until realized. For the
purpose of computing realized gains and losses, cost is identified on a
specific identification basis.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of accounts receivable, accounts payable, and other
financial instruments approximate their fair values at December 31,
1997, 1998, and 1999 principally because of the short-term maturities
of these instruments.
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:
Furniture and fixtures Five to seven years
Equipment Three to seven years
Leasehold improvements Remaining life of lease
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the
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<PAGE> 32
carrying amount of asset may not be recoverable. The Company uses the
undiscounted future cash flow to determine if an impairment loss is to
be recognized.
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.
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 $(20,000),
and $(23,000) and 24,000 in 1997, 1998, and 1999, respectively.
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 consolidated 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 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 10).
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 1,151,000 and 1,316,000 for the years ended December 31, 1997 and
1998 respectively. The CESs for 1999 were antidilutive and not
considered in the calculation of loss per share.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
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<PAGE> 33
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, 2001. 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 years' financial
statements to conform to the current year presentation.
PREFERRED STOCK PREFERENCE
Included in the results of operations for the year ended December 31,
1999 is a nonrecurring, non cash charge of $5.8 million which
represents the difference between the estimated fair value of common
stock of eShare.com, Inc. at February 19, 1999 and the purchase price
of certain Series C preferred stock issued on that date. As part of the
acquisition discussed below, the Series C preferred stock was converted
to common stock.
2. ACQUISITIONS
On September 1, 1999, the Company completed the acquisition of
eShare.com, Inc., a leading provider of real-time customer service and
interactive communication solutions for e-commerce and online
communities. The shareholders of eShare.com, Inc. received 6,050,000
shares of the Company's common stock. The new combined company was
renamed eShare Technologies, Inc. on October 4, 1999. The acquisition
was accounted for as a pooling of interests, therefore, all prior
period amounts have been restated. A reconciliation between revenue and
net income as previously reported and as restated follows:
<TABLE>
FOR THE YEAR ENDED
DECEMBER 31
1997 1998
---- ----
(In Thousands)
<S> <C> <C>
Revenue:
As previously reported $ 65,790 $ 93,410
eShare 730 3,671
-------- --------
As restated $ 66,520 $ 97,081
======== ========
Net Income (loss):
As previously reported $ 10,529 $ 11,685
eShare (4,713) (3,145)
-------- --------
As restated $ 5,816 $ 8,540
======== ========
</TABLE>
On June 15, 1999, the Company purchased smallwonder! softworks, Inc. of
Leesburg, Virginia for $4.6 million in cash and a prospective earnout
of up to an additional $3 million, based on achievement of certain
defined criteria. During 1999, the Company did not pay out anything
related to the earnout. The operations of smallwonders! softworks, Inc.
are included in the accompany statements from June 15, 1999.
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<PAGE> 34
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market. Cost includes raw materials, labor, and overhead.
Market is defined as replacement cost for work in progress and raw
materials and net realizable value for finished goods. Inventories
consist of the following at December 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Raw materials $ 143 $ 212
Work in progress 37 920
Finished goods 1,080 835
------ ------
$1,260 $1,967
====== ======
</TABLE>
4. INTANGIBLE ASSETS
The Company allocated the intangible assets of approximately $4.7
million from the acquisition of smallwonder! softworks, Inc. to
tradenames, workforce and goodwill. The intangible assets are being
amortized over a five year period. Total amortization expense for the
year ended December 31, 1999 was $542,000.
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1998 and 1999 include the following
(in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Accrued salaries and wages $ 4,935 $3,771
Other current liabilities 7,289 784
Accrued rent 292 324
------- ------
$12,516 $4,879
======= ======
</TABLE>
6. NOTES PAYABLE
NOTES PAYABLE TO SHAREHOLDERS
In 1997, the Company issued to a shareholder notes payable in the
amount of $12,900,000 representing undistributed earnings through
December 31, 1996. The note was paid to the shareholder in June 1997
with proceeds from the Company's initial public offering.
Interest paid to the shareholder was $335,000 year ended December 31,
1997. No interest was paid in 1998 or 1999.
NOTES PAYABLE TO BANK
The Company had outstanding notes payable of approximately $420,000 and
$215,000 as of December 31, 1998 and 1999, respectively. These notes
are payable over 36 months and require the Company to maintain certain
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<PAGE> 35
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. In February of 1999, the Company issued
10% convertible notes for an aggregate amount of $500,000. These notes
were converted to equity in February of 1999.
7. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
At December 31, 1999, the future minimum operating lease payments
(including leases with related parties) under noncancellable operating
leases were as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 1,794
2001 1,540
2002 1,347
2003 1,178
Thereafter 7,137
-------
Total future minimum lease payments $12,996
=======
</TABLE>
The Company's leases are primarily for equipment and facilities. Total
rental expense for operating leases was $859,000, $1,029,000, and
$1,385,000 in 1997, 1998, and 1999, 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 $554,000, $555,000 and $566,000 in 1997,
1998, and 1999, respectively.
In August 1999, the Company entered into a lease agreement with a
related party to lease land and buildings commencing December 1999 for
a new facility in the United Kingdom. The agreement provides for annual
rentals of approximately $565,000 per year over a fifteen-year term.
The Company expects to offset a portion of this cost by subletting two
of the four floors under lease.
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.
8. STOCK OPTION PLANS
During 1992, the Company approved a stock option plan (the "1992 Plan")
for key employees for which 640,000 shares of common stock were
authorized for use in the Plan. During 1995, the number of authorized
shares was increased to 1,000,000 shares of common stock. Options are
granted at the fair market value and are exercisable based on the
specific terms of the grant up to ten years from the grant date.
Options granted primarily vest ratably over a four- or five-year
employment period.
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<PAGE> 36
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.
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 989 $0.43-$ 4.07
Granted 736 $0.43-$10.00
Exercised --
Forfeited/repurchased (120) $2.91-$10.00
------
Outstanding at December 31, 1997 1,605 $0.43-$10.00
Granted 1,287 $0.02-$14.50
Exercised (103)
Forfeited/repurchased (534) $0.43-$14.50
------
Outstanding at December 31, 1998 2,255 $0.02-$14.50
Granted 2,328 $0.43-$20.88
Exercised (1,093)
Forfeited/repurchased (564) $2.81-$20.88
------
Outstanding at December 31, 1999 2,926 $0.02-$20.88
======
</TABLE>
At December 31, 1999, options to purchase 135,623 shares were available
for future grant and options were exercisable to purchase 913,000
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 1999 PRICE 1999 PRICE
-------- ------------ -------- ------------ ---------
<S> <C> <C> <C> <C>
$0.02-$3.00 515 $0.91 494 $ 0.82
$4.00-$4.00 1,060 4.00 15 4.00
$4.07-$10.00 593 8.02 282 7.44
$10.06-$20.00 485 11.28 122 12.26
$20.88-$20.88 273 20.88 0 0
2,926 7.05 913 4.45
</TABLE>
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<PAGE> 37
During, 1995, the Financial Accounting Standards Board issued SFAS No.
123, which defines a fair value-based method of accounting for an
employee stock option plan or similar equity instrument. However, it
also allows an entity to continue to measure compensation cost for
those plans using the method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting in APB
No. 25 must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value-based method of accounting
defined in the statement had been applied.
The Company has elected to account for its stock-based compensation
plan under APB No. 25; however, the Company has computed for pro forma
disclosure purposes the value of all options granted during 1996 and
1997 using the Black-Scholes option pricing model as prescribed by SFAS
No. 123 using the following weighted assumptions used for grants in
1996, 1997, and 1998:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.7%-6.5% 4.0%-5.5% 4.3%-5.4%
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, 1997, 1998, and 1999 were computed as approximately $4,506,000,
$8,592,000 and $13,978,000, 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, 1997, 1998, and
1999 would have decreased in the following amounts (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Pro
Forma Actual
------- -------------------
1997 1998 1999
---- ------ -------
<S> <C> <C> <C>
Net income (loss) or pro forma net income (loss):
As reported in the financial statements $ 2,898 $8,540 $(15,808)
Pro forma in accordance with SFAS No. 123 2,531 6,578 (24,306)
Basic earnings (loss) per share:
As reported in the financial statements $ 0.15 $ 0.42 $ (0.76)
Pro forma in accordance with SFAS No. 123 0.13 0.32 (1.17)
Diluted earnings (loss) per share:
As reported in the financial statements $ 0.14 $ 0.40 $ (0.76)
Pro forma in accordance with SFAS No. 123 0.12 0.30 (1.17)
</TABLE>
9. BENEFIT PLAN
The Company has a defined contribution profit-sharing plan (the
"Plan")for substantially all employees meeting the eligibility
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<PAGE> 38
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
$429,000, $391,000, and $434,000 for the years ended December 31, 1997,
1998, and 1999, respectively.
10. 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 1997, 1998 and 1999. The components of the total deferred tax assets
as of December 31, 1998, and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets and liabilities
Deferred revenue $ 1,866 $ 1,930
Net operating loss carryforwards 3,000 4,923
Accrued liabilities 643 527
Allowance for doubtful accounts 840 1,020
Foreign tax credits -- 561
Depreciation (4) 40
Inventory 394 366
------- -------
Total deferred tax assets 6,739 9,367
------- -------
Valuation allowance (3,008) (4,446)
------- -------
Total net deferred tax assets $ 3,731 $ 4,921
======= =======
</TABLE>
The following summarizes the components of the income tax provision for
the years ended December 31, 1997, 1998, and 1999 (in thousands):
<TABLE>
<CAPTION>
Pro Forma ------ACTUAL-------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current domestic taxes:
Federal $2,803 $ 6,304 $(1,136)
State 329 552 (327)
Foreign taxes 109 1,143 1,576
Deferred taxes 1,228 (1,423) (1,190)
------ ------- -------
Tax provision $4,469 $ 6,576 $(1,077)
====== ======= =======
</TABLE>
A reconciliation from the federal statutory rate to the tax provision
(benefit) for the years ended December 31, 1997, 1998, and 1999 is as
follows:
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<PAGE> 39
<TABLE>
<CAPTION>
Pro Forma ------ACTUAL----
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 35.0% (35.0)%
State income taxes, net of federal tax benefit 4.0 2.4 (3.0)
Foreign operations (1.2) (0.8) 30.6
Valuation allowance 0.2 (0.6) --
Other 23.7 7.3 (2.3)
---- ---- ----
Effective tax rate 60.7% 43.3% (9.7)%
==== ==== ====
</TABLE>
As of December 31, 1999, the Company has net operating loss
carryforwards of approximately $12,800,000 which expire through 2019.
At December 31, 1999, the Company has established a valuation allowance
against its net deferred tax assets since a significant portion of
these tax loss carryforwards may be subject to substantial annual
limitations under the change in stock ownership imposed by Internal
Revenue Code Section 382.
11. CONCENTRATION 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, 1998 and
1999, the Company did not consider itself to have any significant
concentrations of credit risk. During 1998, only CitiGroup, at 13.1%,
accounted for greater than 10% of total revenues. During 1999, only
First USA Bank, at 11.0%, accounted for greater than 10% of total
revenues. In 1997, 1998, and 1999, the Company's five largest customers
accounted for approximately 27.9%, 23.2% and 28.2%, respectively, of
total revenues. These sales were predominantly to customers in the
financial services industry. Although the particular customers may
change from period to period, the Company expects that large sales to a
limited number of customers will continue to account for a significant
percentage of its revenues in any particular period for the foreseeable
future.
12. SEGMENT INFORMATION
The Company is a multinational business operating in two segments. The
Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related
Information" (SFAS 131). The adoption of SFAS 131 requires the
presentation of descriptive information about reportable segments which
is consistent with that made available to the management of the Company
to assess performance. The reportable business segments are telephony
and internet. The results of these segments are as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Telephony $ 65,790 $ 93,410 $ 85,887
Internet 730 3,671 8,968
-------- -------- --------
Total Revenues $ 66,520 $ 97,081 $ 94,855
Income (Loss) from operations:
Telephony $ 11,417 $ 17,065 $ (5,361)
Internet (4,467) (3,016) (6,430)
-------- -------- --------
Total income (loss) from operations: $ 6,950 $ 14,049 $(11,791)
Depreciation & amortization:
Telephony $ 1,279 $ 2,212 $ 2,775
Internet 537 251 345
-------- -------- --------
Total depreciation & amortization: $ 1,816 $ 2,463 $ 3,120
Deferred compensation expense:
Telephony $ -- $ -- $ --
Internet -- -- 2,271
-------- -------- --------
Total deferred compensation expense: $ -- $ -- $ 2,271
</TABLE>
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<PAGE> 40
The following represents total revenues and long-lived assets of the
Company based on geographic location representing over 10% of the
combined totals for the years ended December 31, 1997, 1998, and 1999:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
United States:
Total revenues $54,424 $73,960 $64,784
Long-lived assets 5,549 7,608 10,494
Europe:
Total revenues 7,347 9,939 14,350
Long-lived assets 131 234 435
Latin America:
Total revenues 2,346 7,381 10,580
Long-lived assets 90 58 33
Other:
Total revenues 2,403 5,801 5,141
Long-lived assets 0 1 1
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors of the Company required under
this item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 1999 fiscal year ended December
31, 1999 under the heading "Election of Directors". Certain information
regarding directors and executive officers of the Company is included in Part I,
Item 1 of this report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning the directors of the Company required under
this item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 1999 fiscal year ended December
31, 1999 under the heading "Compensation and Other Information Concerning
Directors and Officers."
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<PAGE> 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the directors of the Company required under
this item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 1999 fiscal year ended December
31, 1999 under the heading "Security Ownership of Certain Beneficial Owners and
Management."
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
The information concerning the directors of the Company required under
this item is incorporated herein by reference to the Company's definitive proxy
statement pursuant to Regulation 14A, to be filed with the Commission not later
than 120 days after the close of the Company's 1999 fiscal year ended December
31, 1999 under the heading "Certain Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
See the index to Consolidated Financial Statements on page 20
for a list of the financial statements and supplementary data filed
herewith.
2. Financial Statement Schedule
(i) The following Financial Statement Schedule of eShare
Technologies, Inc. for the Years Ended December 31, 1999, 1998 and 1997
is filed as a part of this Report on Form 10-K and should be read in
conjunction with the Financial Statements, and related notes thereto,
of eShare Technologies, Inc.
ESHARE TECHNOLOGIES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
YEAR EXPENSES DEDUCTIONS YEAR
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997:
Allowance for doubtful accounts .... $ 494,000 $1,152,000 $ 760,000 $ 886,000
Allowance for inventory obsolescence $ 485,000 $ 986,000 $ 596,000 $ 875,000
1998:
Allowance for doubtful accounts .... $ 886,000 $1,837,000 $ 123,000 $2,600,000
Allowance for inventory obsolescence $ 875,000 $ 922,000 $ 840,000 $ 957,000
1999:
Allowance for doubtful accounts .... $2,600,000 $1,902,000 $1,488,000 $3,014,000
Allowance for inventory obsolescence $ 957,000 $ 712,000 $ 593,000 $1,076,000
</TABLE>
(ii) Report of Independent Public Accountants on Financial
Statement Schedule.
A-41
<PAGE> 42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To eShare Technologies, Inc.:
We have audited in accordance with auditing standards generally
accepted in the United States, the financial statements of eShare Technologies,
Inc. and subsidiaries included in this Form 10-K and have issued our report
thereon dated February 15, 2000. Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole. The foregoing
schedule is the responsibility of the company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 15, 2000
A-42
<PAGE> 43
(b) Reports on Form 8-K Filed during the Fourth Quarter of 1999.
(i) Reports on Form 8-K with respect to historical effect
on financial statements of a pooling of interests basis of the
acquisition by eShare of eShare.com on September 1, 1999, as filed
December 20, 1999.
(c) Exhibits. The following exhibits are filed as part of, or are
incorporated by reference into, this report on Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
3.1 -- Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.3 to Amendment No. 1
to the Company's Registration Statement on Form S-1 (File
No. 333-22855) filed March 28, 1997).
3.2 -- Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.4 to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (File No. 333-22855)
filed March 28, 1997).
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Amended and
Restated Articles of Incorporation and Amended and Restated Bylaws of
the Company defining rights of the holders of Common
Stock of the Company.
4.2 -- Specimen Stock Certificate (incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-1
(File No. 333-22855) filed March 6, 1997).
10.1 -- Lease Agreement between the Company and 5051 Peachtree Corners
Circle, L.L.C. (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-1 (File No. 333-22855) filed
on March 6, 1997).
10.2 -- Lease Agreement between eShare Technologies Limited (formerly
Melita Europe Limited )and Melita House Inc. dated August 15, 1999.
10.3 -- 1992 Stock Option Plan effective June 4, 1992, as amended March 1,
1997 (incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-1 (File No. 333-22855) filed on March
6, 1997).
10.3 -- 1997 Stock Option Plan effective February 6, 1997, as amended October
21, 1997 (incorporated by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K (File No. 0-22317) filed on March 31, 1998).
10.4 -- Employee Stock Purchase Plan adopted March 1, 1997 (incorporated
by reference to Exhibit 10.4 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (File No. 333-22855) filed March 28,
1997).
10.5 -- 401(k) Profit Sharing Plan as amended effective January 1, 1993
(incorporated by reference to Exhibit 10.5 filed to the Company's
Registration Statement on Form S-1 (File 333-22855)
filed March 6, 1997).
10.6 -- Employment Agreement between the Company and Aleksander
Szlam dated March 5, 1997 (incorporated by reference to Exhibit
10.6 to Amendment No. 1 to the Company's Registration Statement
on Form S-1 (File 333-22855) filed March 28, 1997).
10.7 -- Form of Tax Indemnification Agreement between the Company and
certain shareholders of the Company (incorporated by reference to
Exhibit 10.8 to the Company's Registration Statement on Form S-1
(File 333-22855) filed March 6, 1997).
</TABLE>
A-43
<PAGE> 44
<TABLE>
<S> <C> <C>
10.8 -- Form of Tax Indemnification Agreement between Inventions, Inc.
and certain shareholders of Inventions, Inc. (incorporated by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (File 333-22855) filed March 6, 1997).
10.9 -- Employment Agreement of George Landgrebe dated December 16, 1999,
as amended.
21.1 -- List of Subsidiaries of the Company.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Report of Independent Auditors.
23.3 -- Consent of KPMG LLP.
27.1 -- Financial Data Schedule (SEC use only).
99.1 -- Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forward-Looking Statements
</TABLE>
A-44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 12 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ESHARE TECHNOLOGIES, INC.
By: /s/ ALEKSANDER SZLAM
-------------------------
Aleksander Szlam
Chairman of the Board and
Chief Executive Officer
March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ALEKSANDER SZLAM Chairman of the Board and March 30, 2000
- -------------------------------------------- Chief Executive Officer
Aleksander Szlam (Principal Executive
Officer)
/s/ JAMES TITO Vice Chairman of the Board and March 30, 2000
- -------------------------------------------- President
James Tito
/s/ GEORGE W. LANDGREBE Chief Operating Officer, Vice March 30, 2000
- -------------------------------------------- President, Administration and
George w. Landgrebe Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ ANDREW J. FILIPOWSKI Director March 30, 2000
- --------------------------------------------
Andrew J. Filipowski
/s/ DONALD L. HOUSE Director March 30, 2000
- --------------------------------------------
Donald L. House
</TABLE>
A-45
<PAGE> 1
EXHIBIT 10.2
-----------------------------------------------
(1) MELITA HOUSE INC
(2) MELITA EUROPE LIMITED
LEASE
- of -
MELITA HOUSE 124 BRIDGE ROAD
CHERTSEY SURREY
<PAGE> 2
PARTICULARS
- -------------------------------------------------------------------------------
1. DATE OF THIS DEED 1999
- -------------------------------------------------------------------------------
2. LEASE OR UNDERLEASE LEASE
- -------------------------------------------------------------------------------
3. LANDLORD MELITA HOUSE INCORPORATED
whose registered office is at
5051 Peachtree Corners Circle Norcross
Georgia 30092 USA and whose address
for service within the United Kingdom
is c/o Radcliffes 5 Great College
Street London SW1P 3SJ
- -------------------------------------------------------------------------------
4. TENANT MELITA EUROPE LIMITED whose
registered office is at
253 Burlington Road
New Malden Surrey KT3 4NE
- -------------------------------------------------------------------------------
5. DEMISED PREMISES ALL THAT land and buildings known
as Melita House 124 Bridge Road
Chertsey Surrey
- -------------------------------------------------------------------------------
6. DATE OF COMMENCEMENT
OF TERM 15th August 1999
- -------------------------------------------------------------------------------
7. LENGTH OF TERM 15 YEARS
- -------------------------------------------------------------------------------
8. EXPIRY OF TERM 14th August 2014
- -------------------------------------------------------------------------------
9. RENT(S) Three hundred and fifty thousand pounds
((pound)350,000) per annum
exclusive subject to review
- -------------------------------------------------------------------------------
10. RENT COMMENCEMENT
DATE 1st December 1999
- -------------------------------------------------------------------------------
11. INSURANCE RENT
COMMENCEMENT DATE 15th August 1999
- -------------------------------------------------------------------------------
<PAGE> 3
- -------------------------------------------------------------------------------
12. RENT REVIEW DATE(S) Every fifth anniversary of the Date
of Commencement of the Term and the
date set out in Paragraph 9 of these
Particulars
- -------------------------------------------------------------------------------
13. SPECIFIED USER Office use within Class B1 of the Town
and Country Planning (Use Classes)
Order 1987 (as enacted at the date
hereof)
- -------------------------------------------------------------------------------
14. INITIAL EXTERNAL 3 years from date of this Lease
DECORATION YEAR
- -------------------------------------------------------------------------------
15. INITIAL INTERNAL 3 years from date of this Lease
DECORATION YEAR
- -------------------------------------------------------------------------------
<PAGE> 4
INDEX
CLAUSE SUBJECT
Particulars Tenancy details
1 Definitions
2 Inclusion of Particulars
3 Demise and Rents
4 Tenant's Covenants
4.1 Rents
4.2 Outgoings
4.3 General Repairs
4.4 Internal Decoration
4.5 External Decoration
4.6 Upkeep
4.7 Entry
4.8 Remedy lack of repair etc
4.9 Not to erect any other building
4.10 Alterations
4.11 General User
4.12 User
4.13 Display of Notices
4.14 Masts and Wires
4.15 Obstruction of Common Areas
4.16 Vitiation of Insurance etc
4.17 Statutory Requirements
4.18 Notices
4.19 Alienation
4.20 New Guarantor
4.21 To remedy breaches of underlessees
4.22 To give notice
4.23 Payment of Fees
4.24 Town and Country Planning Acts
4.25 Fire Fighting Equipment etc
4.26 Boards
4.27 Not to accumulate rubbish
4.28 Not to obstruct windows
<PAGE> 5
4.29 Emergency warning systems
4.30 Rating Surveyor
4.31 Defective Premises Act
4.32 Repayment of Costs
4.33 To indemnify Landlord
4.34 To observe covenants
4.35 Yielding up
4.36 VAT
4.37 Payment of Costs
4.38 Interest on unpaid and other moneys
4.39 Construction (Design & Management)
Regulations 1994
5 Landlord's Covenants
5.1 Quiet Enjoyment
5.2 Insurance
6 Provisos
6.1 Re-entry
6.2 Remedies
6.3 Service of Notices
6.4 Planning Restrictions
6.5 Tenant's Acknowledgement
6.6 Exclusion of Compensation
6.7 Disputes
6.8 Cesser of Rent
6.9 Waiver
6.10 No liability in damages
6.11 Exclusion of Rights not Granted
6.12 Tenant's possessions
6.13 Statutory Compensation
6.14 Enforcement of Landlord's Covenants
6.15 Determination by Tenant
7 Covenants by Surety
FIRST SCHEDULE Provisions for Rent Review
SECOND SCHEDULE Matters to which the demise is subject
THIRD SCHEDULE Authorised Guarantee Agreement
<PAGE> 6
THIS LEASE is made on the date stated in the Particulars
BETWEEN
(1) the Landlord specified in the Particulars (hereinafter called "the
Landlord")
(2) the Tenant specified in the Particulars (hereinafter called "the
Tenant") and
(3) the Surety (if any) specified in the Particulars (hereinafter called
"the Surety")
NOW THIS DEED WITNESSETH as follows:-
1 DEFINITIONS
1.1 In this Deed the following expressions shall have where the context so
admits the following meanings respectively:-
"the Act" The Landlord and Tenant (Covenants)
Act 1995
"the Contractual Term" The term described in Paragraphs 7, 8
and 9 of the Particulars
"the Demised Premises" The land and premises described in the
Particulars the freehold of which is
registered at HM Land Registry with
Title Absolute under Title No SY331943
and each and every part of the interior
and exterior thereof together with the
appurtenances thereto and any building
now or hereafter erected thereon or on
any part thereof including (a) fire
fighting or prevention equipment within
the Demised Premises window furniture
door furniture carpeting heating
ventilating gas water and electrical
installations boilers walls fences
drains cables conduits accessways
forecourts parking areas landscaped
areas and service areas and (b) all
additions alterations and improvements
thereto and all Landlord's fixtures and
fittings and plant machinery and
equipment now or hereafter in or about
or exclusively serving the same
"the Insured Risks" Fire storm flood earthquake tempest
(including lightning) explosion impact
and (in peacetime) aircraft and other
<PAGE> 7
aerial devices and articles dropped
therefrom burst water pipes and tanks
riot and civil commotion malicious
damage public liability and any
liability and costs arising in respect
of any notice claim or demand made by
any person by reason of the provisions
of the Defective Premises Act 1972 and
such other risks or liability
(including acts of terrorism) against
which the Landlord may from time to
time in its absolute discretion deem
it necessary to insure
"loss of rent" The loss of rents payable in respect
of the Demised Premises for such period
(being not less than three years) as
may reasonably be required by the
Landlord from time to time having
regard to the likely period required
for reinstatement of the Demised
Premises in the event of total
destruction in an amount which would
take into account potential increases
of rent in accordance with the Rent
Review provisions contained in this
lease
"the Particulars" The details and descriptions appearing
in the pages which precede this page
and comprising part of this Deed
"the Planning Acts" The Town and Country Planning Act 1990
the Local Government Planning and Land
Act 1980 the Planning (Hazardous
Substances) Act 1990 the Planning
(Listed Buildings and Conservation
Areas) Act 1990 the Planning
(Consequential Provisions) Act 1990 the
Planning and Compensation Act 1991 and
any statute for the time being in force
of a similar nature or any laws or
` regulations intended to control or
regulate the construction demolition
alteration or change of use of land or
buildings
"the Prescribed Rate" Four per centum per annum above the
base rate of Lloyds TSB Bank Plc from
time to time (or if the same shall
become incapable of determination such
rate of interest as the Landlord may
reasonably specify in
<PAGE> 8
substitution therefor) compounded with
rests on the usual quarter days such
rate to apply as well after as before
any judgment
"Requisite Notice" A notice in writing to the Tenant
forty-eight hours before any entry is
made on the Demised Premises or any
part thereof PROVIDED THAT in case of
an emergency no notice shall be
required
"the Surveyor" Any chartered surveyor appointed by the
Landlord (including an employee of the
Landlord or of a company being a member
of the same group of companies as the
Landlord within the meaning of Section
42 of the Landlord and Tenant Act)
"the Term" The term described in Paragraphs 7, 8
and 9 of the Particulars including the
period of any holding over or any
extension or continuance thereof
whether by statute or at common law
"the Termination Date" The date of expiration or sooner
determination of the Term
(howsoever occurring)
"VAT" Value Added Tax and any imposition or
levy of a like nature together with
any interest or penalty payable in
respect of such VAT chargeable under
the Value Added Tax Act 1984 or under
the Sixth Council Directive of the
Council of the European Communities
(77/388/EC) or any identical or
substantially similar tax which may
replace such Value Added Tax and in
relation to VAT "supplies" includes
anything on which VAT is chargeable
INTERPRETATION
1.2 In this Lease
1.2.1 Where the context so admits words importing the neuter gender
only shall include the masculine or feminine gender (as the
case may be) and words importing the masculine gender only
shall include the feminine gender and
<PAGE> 9
words importing the singular number only include the plural
number and vice versa and where there are two or more
individuals included in the expressions "the Tenant" or "the
Surety" covenants herein expressed to be made by them shall
be deemed to be made by such persons jointly and severally
1.2.2 The expression "the Landlord" shall include the person for
the time being entitled to the reversion immediately
expectant on the determination of the Term "the Tenant" shall
include the Tenant's successors in title and the expressions
"the Tenant" and "the Surety" shall include if they are
individuals their respective personal representatives
1.2.3 Each covenant by the Tenant not to do any act or thing shall
be deemed to include a covenant not to permit or suffer that
act or thing to be done and to use all reasonable endeavours
to prevent that act or thing being done by another person
1.2.4 Where the Landlord has the right or obligation to serve a
notice demand or certificate or to enter the Demised Premises
for any purpose such right or obligation may be exercised by
the Surveyor or agent authorised to act on the Landlord's
behalf and (in the case of entry) if appropriate with workmen
materials and equipment
1.2.5 Any reference to a statute or any enactment shall (except
where the context does not allow) include any statutory
extension or modification or re-enactment or amendment of
such statute or enactment and any instruments regulations
permissions directions or orders made issued or given
thereunder or deriving validity therefrom
1.2.6 The expression "any enactment" includes any and every Act of
Parliament already or hereafter to be passed and also any and
every notice direction order regulation bye-law rule
condition code of practice circular and guidance notes
already or hereafter to be made under or in pursuance of or
deriving effect from any such Act or prescribed or required
by any public local or other authority or issued by any
competent authority exercising powers under statute or Royal
Charter
1.2.7 References to any right exercisable by the Landlord shall
where the context so admits include the exercise of such
right by any superior lessor and all persons
authorised by the Landlord or any superior lessor
<PAGE> 10
HEADINGS
1.3 The paragraph headings shall not affect the interpretation hereof
2 INCLUSION OF PARTICULARS
In this Lease the details and descriptions appearing in the Particulars shall
be included in this Lease and form part of this Lease
3 DEMISE AND RENTS
The Landlord HEREBY DEMISES to the Tenant ALL THOSE the Demised Premises TO
HOLD the Demised Premises unto the Tenant for the Term SUBJECT to all rights
easements quasi-easements privileges restrictions covenants liabilities and
stipulations of whatever nature appertaining to or affecting the Demised
Premises and FURTHER SUBJECT to the matters referred to in the Second Schedule
hereto YIELDING AND PAYING therefor yearly and proportionately for any fraction
of a year
3.1 FIRST in respect of the period commencing on the Rent Commencement
Date until the first Rent Review Date the Rent and during the
remainder of the Term such other rent as may become payable under the
provisions of the First Schedule hereto such sums to be paid by equal
payments in advance on the usual quarter days in every year without
any deduction the first such payment to be made on the Rent
Commencement Date for the period from the Rent Commencement Date to
the quarter day following
3.2 SECONDLY by way of further rent a yearly sum equal to the premium or
premiums for insuring and keeping insured the Demised Premises
excluding plate glass therein against:-
3.2.1 loss or damage by the Insured Risks in such sum (including
the cost of shoring demolition site clearance and similar
expenses and Architects' Surveyors' and other professional
fees and incidental expenses) as shall in the opinion of the
Landlord represent the reinstatement value thereof with due
allowance for inflation
3.2.2 public liability of the Landlord arising out of or in
connection with any accident explosion collapse breakdown or
other incident involving or relating to the Demised Premises
or any part thereof and
<PAGE> 11
3.2.3 loss of rent
Such further rent to be payable on demand and the first payment to be
in respect of the period commencing on the Insurance Rent Commencement
Date up to the date of renewal of the premium concerned
3.3 THIRDLY by way of further rent all sums due to the Landlord under the
provisions of this Lease including all VAT payable hereunder (if any)
4 TENANT'S COVENANTS
The Tenant HEREBY COVENANTS with the Landlord:-
4.1 RENTS
To pay the yearly rents hereinbefore reserved at the times and in the
manner at and in which the same are respectively hereinbefore reserved
and made payable together with VAT (if any) thereon and without any
deduction (and all rights of set off whether equitable or otherwise
are hereby excluded)
4.2 OUTGOINGS
4.2.1 To pay bear and discharge and perform all existing and future
rates taxes duties charges assessments impositions and
outgoings and obligations whatsoever (whether parliamentary
parochial local national or any other description and whether
or not of a capital revenue or non-recurring nature and even
though of a wholly novel character) which now are or may at
any time hereafter during the Term be charged rated levied
assessed or imposed upon the Demised Premises or upon the
owner or occupier in respect thereof and to pay bear and
discharge the proportion properly attributable to the Demised
Premises of any such outgoings as may be charged levied
assessed or imposed upon any premises of which the Demised
Premises form part (such proportion to be determined by the
Surveyor whose decisions shall be conclusive) except any tax
payable in respect of any dealing by the Landlord with its
reversionary interest
4.2.2 If the Landlord shall suffer any loss of rating relief which
would have been applicable to the Demised Premises after the
Termination Date by reason of
<PAGE> 12
such relief being allowed to the Tenant or any other person
in respect of any period prior to the Termination Date to
indemnify the Landlord against such loss
4.2.3 To pay for all gas water and electricity consumed and all
telephone telex and similar services used on the Demised
Premises during the Term (including all charges for hire of
meters in respect thereof) and to observe and perform at the
Tenant's expense all present and future regulations and
requirements of the gas and electricity and water and
telecommunication supply authorities concerning the
installation and use of services in the Demised Premises
4.3 GENERAL REPAIRS
4.3.1 To put and from time to time and at all times during the Term
to keep the whole of the Demised Premises in good and
substantial repair and condition (damage by any of the
Insured Risks excepted unless payment of the insurance moneys
shall be withheld in whole or in part by reason solely or in
part of any act or default of the Tenant its servants agents
or licensees) and if at any time during the Term whether by
reason of age or state of dilapidation or by reason of any
original or inherent defect (whether latent or apparent) or
any requirement of any competent authority it shall become
necessary or expedient for the purposes of putting or keeping
any building from time to time comprising the Demised
Premises or any part thereof in good and substantial repair
and condition to reinstate renew and rebuild such building or
any part thereof then the Tenant shall at its own cost and
with all practical speed and under the direction and to the
reasonable satisfaction of the Surveyor and in accordance
with plans and specifications to be previously approved by
the Landlord in writing carry out such reinstatement renewal
and rebuilding
4.3.2 To repair renew and replace from time to time with others of
modern and up to date design all Landlord's fixtures and
fittings plant machinery or equipment in and upon the Demised
Premises which may become obsolete or unusable or beyond
repair at any time during the Term or at the Termination Date
4.3.3 To procure that the lifts boilers central heating air
conditioning apparatus and fire fighting equipment from time
to time in and about the Demised Premises
<PAGE> 13
are properly and regularly serviced maintained and tested in
accordance with current statutory requirements by qualified
persons approved by the Landlord (such approval not to be
unreasonably withheld)
4.4 INTERNAL DECORATION
Without prejudice to the generality of the foregoing covenants during
the Initial Internal Decoration Year and thereafter at least once in
every five years of the Term calculated from the Initial Internal
Decoration Year and also in the last three months thereof whether
determined by effluxion of time or otherwise to paint french polish or
otherwise treat as the case may be all internal surfaces usually or
requiring to be so treated of the Demised Premises having first
prepared such surfaces by stripping off stopping and priming as may be
necessary and to wash down all washable surfaces and to grain marble
or varnish any parts so treated all decorations being carried out with
high quality materials and where painting is involved two coats being
applied in addition to the priming coat such decoration in the last
three months of the Term to be executed in such colours patterns and
materials as the Landlord may require
4.5 EXTERNAL DECORATION
Without prejudice to the generality of the foregoing covenants during
the Initial External Decoration Year and thereafter at least once in
every five years of the Term calculated from the Initial External
Decoration Year and also in the last three months thereof whether
determined by effluxion of time or otherwise to paint french polish or
otherwise treat as the case may be all external surfaces usually or
requiring to be so treated of the Demised Premises having first
prepared such surfaces by stripping off stopping and priming as may be
necessary and to wash down all washable surfaces and to grain marble
or varnish any parts so treated all decorations being carried out with
high quality external materials and where painting is involved two
coats being applied in addition to the priming coat and in the case of
specialist finishes by washing and treating in accordance with the
manufacturers' recommendations such decoration in the last three
months of the Term to be executed in such colours patterns and
materials as the Landlord may require
4.6 UPKEEP
4.6.1 To cleanse and maintain and to keep cleansed and maintained
and free from obstruction all gutters sewers drains and water
and waste-pipes and ducts belonging to the Demised Premises
<PAGE> 14
4.6.2 As often as the Landlord may reasonably consider necessary to
clean and treat in an appropriate manner to the reasonable
satisfaction of the Surveyor all materials surfaces and
finishes of the interior and the exterior of the Demised
Premises which ought normally to be so cleaned and treated in
accordance with the manufacturers' recommendations and in
particular (but without prejudice to the generality of the
foregoing) all wood plastic metal stonework cladding and
concrete and to wash all surfaces requiring to be washed
4.6.3 At all times during the Term to keep the Demised Premises
(including such part (if any) as shall not be built upon) in
a clean and tidy condition throughout and clear of all
rubbish and refuse and not to use such part of the Demised
Premises as remain open or unbuilt upon for storage or
stacking and to keep the gardens and grounds and all trees
shrubs and hedging (if any) therein in good order and
condition and tended fed cultivated and pruned or trimmed to
a good standard and to replace all losses (if necessary by
replanting) and to cultivate the gardens and keep the soil in
good heart fertile and free from weeds and to keep the drives
and paths in good order and condition and free from weeds and
to keep the lawns properly mown trimmed rolled and fed and
not to remove or except in the proper course of cultivation
and management cut or lop any trees shrubs bushes or hedging
4.6.4 To keep all windows and skylights and all the glass in the
entrance doors of the Demised Premises properly glazed and as
to such of the same as are glazed with plate glass to keep
the same glazed with glass of the same type and pattern and
to clean the inside and outside of all the glass in the
entrance doors at least once every week and in the remainder
of the Demised Premises at least once every month
4.6.5 To maintain in good and tenantable repair the concrete
paviors and the tarmacadam in the parking areas at the
Demised Premises and to professionally clean or (if such
cleaning is not successful) replace any concrete paviors
which become oil stained
4.6.6 Whenever necessary to repaint the marking lines in the
parking areas at the Demised Premises
<PAGE> 15
4.7 ENTRY
To permit the Landlord and its agents and the Surveyor with or without
workmen and others and appliances at all reasonable times during the
Term upon Requisite Notice to enter upon the Demised Premises and to
remain there for such period as shall be necessary:
4.7.1 To take schedules or inventories of the fixtures and fittings
plant and machinery belonging to the Landlord or to be
yielded up at the Termination Date
4.7.2 To enter and execute any repairs decorations or other works
upon or to any adjoining or neighbouring premises or to carry
out any repairs decorations or other works which the Landlord
must or may carry out under the provisions of this Lease upon
or to the Demised Premises or to cleanse or empty or renew
the sewers drains and gutters belonging to the same or to
construct any building or erection on any land adjoining or
neighbouring the Demised Premises all damage occasioned
thereby to the Demised Premises being made good as soon as
reasonably possible and causing as little interference as
possible to the Tenant's business
4.7.3 To exercise any rights excepted and reserved to the Landlord
and for any other purpose connected with the interest of the
Landlord in the Demised Premises or its disposal charge or
demise
4.7.4 To view the state and condition of the Demised Premises
4.8 REMEDY LACK OF REPAIR ETC
4.8.1 Forthwith to commence to repair and make good all defects
wants of reparation and breaches of covenants for which the
Tenant is liable hereunder of which notice shall be given by
the Landlord in writing to the Tenant and thereafter
diligently to proceed to repair and to make good the same
according to such notice and the covenants in that behalf
herein contained to the reasonable satisfaction of the
Surveyor
4.8.2 If the Tenant shall fail within 14 days of such notice or
such shorter period as shall be appropriate in case of
emergency to commence and then to continue diligently and
expeditiously to comply with such notice in all respects or
if the
<PAGE> 16
Tenant shall at any time make default in the performance of
any of the covenants herein contained for or relating to the
repair decoration or maintenance of the Demised Premises it
shall be lawful (but without prejudice to the right of
re-entry and forfeiture hereinafter contained) for the
Landlord its agents servants and workmen to enter upon the
Demised Premises and to carry out or cause to be carried out
all or any of the works referred to in such notice and the
cost of so doing and all expenses incurred in relation
thereto shall be paid by the Tenant to the Landlord on demand
4.9 NOT TO ERECT ANY OTHER BUILDING
Not to erect any new building or new structure of any kind at any time
upon the Demised Premises or any part thereof
4.10 ALTERATIONS
4.10.1 Not at any time during the Term:-
4.10.1.1 to commit any waste
4.10.1.2 to erect or build any additional or substituted
erection or building whatsoever
4.10.1.3 to alter or change the construction height elevation
or external architectural appearance of the Demised
Premises or any part thereof
4.10.1.4 to alter or cut in any way any of the principal or
loadbearing walls or floors of the Demised Premises
4.10.1.5 to make any structural alterations of or to the
Demised Premises
4.10.2 (Without prejudice to the absolute prohibitions contained in
Clauses 4.9 and 4.10.1) not to make any internal
non-structural alteration to the Demised Premises without the
prior written consent of the Landlord which shall not be
unreasonably withheld or delayed subject to the Tenant:-
4.10.2.1 obtaining and complying with all necessary consents
of any competent authority
<PAGE> 17
4.10.2.2 paying all charges of any competent authority in
respect of those consents
4.10.2.3 making an application to the Landlord describing the
proposed alteration on drawings and where
appropriate a specification in duplicate
4.10.2.4 at the Termination Date (if and to the extent
required by the Landlord) reinstating the Demised
Premises to the same condition as they were in at
the grant of this lease
4.10.2.5 entering into such other covenants as the Landlord
may require as to the execution insurance and
reinstatement of the works
4.10.2.6 complying with all conditions regulations bye-laws
and other matters prescribed by any competent
authority either generally or specifically in
respect thereof
4.10.2.7 carrying out such works at the Tenant's own expense
in a good and workmanlike manner strictly in
accordance with all conditions regulations and other
matters prescribed by the insurers to the reasonable
satisfaction of the Landlord
4.10.2.8 not causing any nuisance or annoyance to any other
tenant of the Landlord or to the owners or occupiers
of any neighbouring premises
4.10.3 (Without prejudice to the absolute prohibitions contained in
Clauses 4.9 and 4.10.1) the Tenant may install alter and
remove demountable non-structural partitions in the Demised
Premises without the prior written consent of the Landlord on
the following conditions:-
4.10.3.1 the provisions of Clauses 4.10.2.1 to 4.10.2.2,
4.10.2.4 and 4.10.2.6 to 4.10.2.8 (inclusive) are
complied with
4.10.3.2 the Tenant shall give the Landlord not less than 28
days' prior written notice of the intended
installation or removal of such partitions and a
plan showing the changes
4.10.3.3 the Tenant shall not remove any demountable
partitions erected by the Landlord without the
Landlord's prior written consent
<PAGE> 18
4.10.4 Before commencing any permitted alterations to produce to the
Landlord all such notices permissions consents licences and
other documents relating thereto together with copies for
retention by the Landlord
4.10.5 To allow the Landlord at all reasonable times to enter upon
the Demised Premises both for the purposes of seeing that no
unauthorised erections additions or alterations have been
made and for the purposes of seeing that authorised
alterations are carried out in accordance with any consent
given hereunder and any permission granted by the competent
authority
4.10.6 Not to make any alterations or additions to the electrical
gas water sanitary or ventilation installations of the
Demised Premises without the prior written consent of the
Landlord (such consent not to be unreasonably withheld) and
to procure that all such alterations or additions are carried
out by suitably qualified and skilled persons in accordance
with regulations and standards of the relevant supply
authority and not to interfere with or otherwise cause access
to any pipes wires cables optic fibres drains sewers
watercourses conduits or other conducting media which now are
or may hereafter be in or through the Demised Premises to be
or become more difficult than the case now is
4.10.7 To carry out and complete the work involved in any fitting
out of the Demised Premises and all alterations to the
Demised Premises in accordance with the terms of all consents
with materials of suitable good quality in a proper and
workmanlike manner and to the reasonable satisfaction of the
Landlord
4.10.8 On completion of the installation of anything which shall
become part of the Demised Premises forthwith to give to the
Landlord written notice of the same stating the full cost of
reinstatement thereof
4.10.9 If the Tenant or any other occupier of the Demised Premises
shall carry out any building work alterations excavation
change of use or any other development on or to the Demised
Premises to indemnify the Landlord against all liability
whether immediate or consequential for any tax levy
imposition or change of whatsoever nature for which the
Landlord may be or
<PAGE> 19
become liable as a result of the same and also against any
further liability to tax flowing from this indemnity or any
payment pursuant to it and to repay to the Landlord on demand
the amount thereof
4.10.10 At the Tenant's own expense to remove on demand any
alterations or additions made in contravention of this clause
or in respect of which the permission of the Landlord or any
competent authority is withdrawn or lapses and to comply with
every order or such authority requiring the removal or
demolition of or other work in connection with such
alterations or additions and in all such cases to make good
all damage caused by such removal demolition or other work
and to restore all parts of the Demised Premises affected
thereby to a good and substantial condition and properly
decorated to the satisfaction of the Landlord
4.11 GENERAL USER
4.11.1 Not to do or permit or suffer to be done or remain upon the
Demised Premises or any part thereof anything which may be or
become a nuisance annoyance disturbance inconvenience injury
or damage to the Landlord or its tenants or the owners or
occupiers of any property in the neighbourhood or which may
produce noise audible outside the Demised Premises
4.11.2 Not to use or permit or suffer the Demised Premises or any
part thereof to be used for any noxious noisy or offensive
trade or business nor for any illegal or immoral act or
purpose and no sale by auction shall take place thereon
4.11.3 Not to allow rubbish of any description to accumulate upon
the Demised Premises nor to discharge or permit or suffer to
be discharged into any pipe or drain serving the Demised
Premises or any other property any oil grease or other
deleterious matter or any substance which might stop up or
obstruct or be or become a source of danger or injury to the
drainage system of the Demised Premises or any such other
property or any parts thereof
4.11.4 Not to suspend or to permit or suffer to be suspended any
excessive weight from the main structure of the Demised
Premises
4.11.5 Not to overload or permit or suffer to be overloaded the
floors roofs or structures of the Demised Premises or permit
or suffer the same to be used in any manner which will cause
the same to be subject to any strains beyond that which they
are designed to bear
<PAGE> 20
4.11.6 Not to permit or suffer to be done or to be present upon the
Demised Premises any activity process thing or source which
will or might reasonably be expected to produce directly or
indirectly moisture or humidity in excess of that which is
reasonably and usually found in a building used for the
purposes for which the Demised Premises are to be used
hereunder or corrosive fumes or vapours or heat in excess of
Twenty-five degrees centigrade
4.11.7 Not to have or keep upon the Demised Premises or any part
thereof any substance of an explosive or of an especially
inflammable or dangerous nature or such as might increase the
risk of fire or explosion or which might attack or in any way
injure by percolation corrosion or otherwise the Demised
Premises or the keeping or using whereof may contravene any
statute or local regulation or bye-law and not to house or
operate or permit to be housed or operated in or upon the
Demised Premises or any part thereof any engine or machinery
of any kind other than such as does not cause any vibration
or noise or is unlikely to become a nuisance annoyance or
disturbance to any tenants or occupiers of any adjoining or
neighbouring premises
4.12 USER
4.12.1 At all times during the Term to use the Demised Premises for
the Specified User or for such other use within Class B.1 of
the Town and Country Planning (Use Classes) Order 1987 (as
enacted at the date hereof) to which the Landlord shall
consent (such consent not to be unreasonably withheld)
4.12.2 Not to permit or suffer the Demised Premises to remain vacant
4.12.3 Not to leave the Demised Premises continuously unoccupied
without providing security and caretaking arrangements
approved by the Landlord such approval not to be unreasonably
withheld
4.13 DISPLAY OF NOTICES
Not to attach or display or affix any figure letter pole flag
signboard advertisement inscription bill placard or sign whatsoever in
on or to the Demised Premises or the
<PAGE> 21
windows thereof so as to be seen from the exterior without the
previous written consent of the Landlord which shall not be
unreasonably withheld in respect of a sign on the fascia stating the
Tenant's name and business or profession (such sign if the Landlord so
requires to be removed and any damage caused thereby made good by the
Tenant at the end or sooner determination of the Term)
4.14 MASTS AND WIRES
Not to erect or affix any satellite dishes poles masts or wires on the
exterior of the Demised Premises (whether in connection with
communications or television apparatus or otherwise)
4.15 OBSTRUCTION OF COMMON AREAS
Not to damage or obstruct any road forecourt or other area leading to
or giving access to the Demised Premises or over which the Tenant is
hereby granted rights of access or use nor to use the same in such
manner as to cause in the opinion of the Landlord any nuisance damage
or annoyance
4.16 VITIATION OF INSURANCE ETC
4.16.1 Not to do or omit anything whereby any policy or policies of
insurance for the time being in force in respect of or
including or covering the Demised Premises or any adjoining
or neighbouring premises of the Landlord against any risk may
become void or voidable or whereby the rate of premium
thereon may be increased
4.16.2 At all times to comply with all the requirements and
recommendation of any insurers of the Demised Premises
4.16.3.1 Not to effect or permit or suffer to be effected by
any other person any insurance against any of the
Insured Risks in respect of or relating to the
Demised Premises
4.16.3.2 To pay to the Landlord any insurance monies received
by the Tenant in respect of any claim under any
insurance policy effected in breach of Clause
4.16.3.1
4.16.4 Forthwith upon the happening of any event or thing against
which insurance has been effected by the Landlord or under
the provisions hereinafter contained to give notice thereof
to the Landlord
<PAGE> 22
4.16.5 In the event of the Demised Premises or any part thereof
being destroyed or damaged by any of the Insured Risks and
the insurance money under any insurance against the same
effected thereon by the Landlord being wholly or partially
irrecoverable by reason solely or in part of any act neglect
or default of the Tenant its servants agents or licensees
then and in every such case the Tenant will forthwith pay to
the Landlord the whole of such irrecoverable insurance money
4.16.6 To pay to the Landlord the amount of any excess which is
irrecoverable on the occasion of any claim made under any
insurance effected by the Landlord under the terms of this
Lease
4.17 STATUTORY REQUIREMENTS
4.17.1 At all times during the Term at the Tenant's own expense to
observe and comply in all respects with the provisions and
requirements of any and every enactment and to execute all
works and provide and maintain all arrangements so far as
they relate to or affect the Demised Premises or the landlord
or the tenant thereof or any additions or improvements
thereto or the user thereof for any purposes or the
employment therein of any person or persons or any fixtures
machinery plant or chattels for the time being affixed
thereto or being thereupon or used for the purposes thereof
whether such compliance or such works or such arrangements
are required to be carried out by the owner or any occupier
or any other person
4.17.2 Not at any time to do or omit to do on or about the Demised
Premises any act or thing by reason of which the Landlord may
under any enactment incur or have imposed upon it or become
liable to pay any fine levy penalty damages compensation
costs charges or expenses
4.17.3 To obtain all licences permissions and consents and to
execute and do all works and things and to bear and pay all
expenses required or imposed by any enactment in respect of
any works carried out on the Demised Premises or of any user
thereof or of the employment of any persons therein
<PAGE> 23
4.18 NOTICES
Immediately on receipt of any permission notice order or proposal for
a notice or order relevant to the Demised Premises or to the use or
condition thereof made given or issued to the Tenant or the occupier
of the Demised Premises by any competent authority to give a copy
thereof to the Landlord and without delay to take all reasonable or
necessary steps to comply therewith and also at the request of the
Landlord to make or join with the Landlord in making such objections
and representations against or in respect of any such notice order or
proposal as the Landlord shall deem expedient
4.19 ALIENATION
4.19.1 Not to assign or charge or hold on trust for any other person
or corporation any part or parts (as distinct from the whole)
of the Demised Premises
4.19.2 Not to charge underlet part with or share the possession or
occupation of part of the Demised Premises other than by way
of an underletting of a "Permitted Part" being an
underletting which comprises the entirety of one or more
floors of the Demised Premises (excluding from any such
underletting such parts of a floor as may be used in common
with other parts of the Demised Premises) so that there are
no more than four underlettings in respect of the whole of
the Demised Premises subsisting at any one time and each
underlease complies with the following provisions of this
Clause 4.19
4.19.3 Not to part with or share possession of or hold on trust for
any other person or corporation the whole of the Demised
Premises or permit any company or person to occupy the same
save by way of an assignment of this Lease or an underlease
of the whole of the Demised Premises or an underlease of a
Permitted Part which in each case complies with the following
provisions of this Clause 4.19
4.19.4 Not to assign the Demised Premises
4.19.4.1 without procuring if so required by the Landlord on
any assignment of the Demised Premises that the
assignee enters into a covenant with the Landlord to
pay the rents reserved by and perform and observe
the covenants on the part of the Tenant
<PAGE> 24
contained in this Lease until the next assignment of
this Lease which is not an excluded assignment as
defined in Section 11 of the Landlord and Tenant
(Covenants) Act 1995 (referred to as "the Act" in
this Sub-clause 4.19) and further if the Landlord
shall in its absolute discretion so require without
obtaining a guarantor or guarantors reasonably
acceptable to the Landlord who shall covenant with
the Landlord in the terms set out in Clause 7 of
this Lease
4.19.4.2 without entering into an authorised guarantee
agreement for the purposes of the Act in the form
set out in the Third Schedule hereto and further if
the Landlord shall reasonably so require without
procuring that any guarantor for the Tenant under
this Lease covenants with the Landlord in such terms
as the Landlord shall reasonably require for the
purpose of guaranteeing the performance by the
Tenant of its obligations under the authorised
guarantee agreement
4.19.4.3 without procuring that the proposed assignee if
reasonably required by the Landlord has deposited
with the Landlord such sum as the Landlord
reasonably requires as security for the performance
by the assignee of its obligations under this Lease
4.19.5 Not to underlet the whole of the Demised Premises or a
Permitted Part nor to permit the creation of any derivative
underlease on payment of a fine or a premium (whether given
or taken) nor at a rent less than the open market rent as
defined in the First Schedule at the time of such underlease
of the Demised Premises or the Permitted Part
4.19.6 Not to underlet the whole of the Demised Premises or a
Permitted Part unless the underlease shall contain:
4.19.6.1 covenants by the underlessee (which the Tenant
hereby undertakes to enforce) as to prohibit the
underlessee from doing or suffering any act or thing
upon or in relation to the Demised Premises by the
underlessee which will contravene any of the
Tenant's obligations in this Lease
<PAGE> 25
4.19.6.2 provision for review of the rent reserved by the
underlease (which the Tenant hereby undertakes to
operate and enforce) corresponding both as to terms
and dates with the provisions set out in the First
Schedule hereto for revision of the rent hereby
reserved
4.19.6.3 a condition for re-entry on breach of any covenant
on the part of the underlessee
4.19.6.4 provisions reserving the same rights of entry for
the Landlord against the underlessee as the Landlord
has against the Tenant in this Lease
4.19.6.5 in the case of an underletting for a term of less
than or equal to five years an agreement authorised
by a Court Order excluding the effect of Sections
24-28 of the Landlord and Tenant Act 1954
4.19.6.6 covenants conditions and provisions as are necessary
to ensure that the underlease is consistent with the
terms of this Lease
4.19.6.7 a determination date not less than six months prior
to the Termination Date of this Lease
4.19.7 In relation to any underletting:
4.19.7.1 not to grant any underlease except in a form to be
first approved in writing by the Landlord such
approval not to be unreasonably withheld in the case
of an underlease the terms of which comply with
Clause 4.19.6 and which are consistent with the
terms of this Lease
4.19.7.2 not to waive or vary any provisions of any such
underlease after it has been granted
4.19.7.3 not at any time during the Term to be a party or
privy to an agreement or arrangement for commutation
in whole or in part of the rent reserved by any
underlease in consideration of the payment of a lump
sum or any other consideration
<PAGE> 26
4.19.7.4 not upon a review of the rent reserved by any
underlease of the Demised Premises to agree the
amount of any such reviewed rent without the prior
written consent of the Landlord (such consent not to
be unreasonably withheld)
4.19.8 Not to underlet the Demised Premises without obtaining from
the underlessee a covenant by deed with the Landlord that the
underlessee will throughout the term granted by the
underlease or if applicable until an assignment of the
underlease which is not an excluded assignment as defined in
Section 11 of the Act:
4.19.8.1 not to do anything whereby the Tenant shall be in
breach of the terms of this Lease
4.19.8.2 not assign part nor sublet or part with the
possession or occupation of the whole or part of the
premises demised by the underlease
4.19.8.3 not assign the whole or part with possession or
occupation of the whole of the premises demised by
the underlease except in a manner and on terms
permitted by this Clause 4.19 nor without first
obtaining the written consent of the Landlord under
this Lease which consent shall subject to compliance
with such requirements not be unreasonably withheld
4.19.9 Upon making an application for any licence to assign or
underlet the Tenant shall disclose to the Landlord such
information as the Landlord may reasonably require and shall
pay the Landlord's reasonable legal expenses and surveyors'
and management fees and expenses (including disbursements and
stamp duty) on all Licences and the duplicate copies thereof
resulting from such application including reasonable charges
expenses fees and disbursements actually incurred in cases
where consent is properly refused or the application is
withdrawn
4.19.10 Not to assign or underlet the whole nor to underlet a
Permitted Part of the Demised Premises otherwise than in
accordance with nor without in each and every case first
complying with the foregoing provisions of this Clause 4.19
and subject thereto not without obtaining the prior written
consent of the Landlord which consent shall not be
unreasonably withheld
<PAGE> 27
4.19.11 The Tenant may without obtaining any consent or approval of
the Landlord share occupation of the Demised Premises or any
part thereof with any company which is part of the same group
of companies as defined in Section 42 of the Landlord and
Tenant Act 1954 (as amended) Provided that :
4.19.11.1 any such arrangement shall be terminated by the
Tenant upon the said company ceasing to be a member
of the same group as aforesaid
4.19.11.2 no such arrangement shall result in any
relationship of landlord and tenant between the
Tenant and the said company 4.19.11.3 any rent or
other payment received by the Landlord from the said
company shall be deemed to have been paid by the
said company as agent for the Tenant 4.19.11.4 the
Tenant shall give notification in writing of any
such arrangement to the Landlord within seven days
of the said company going into occupation
4.20 NEW GUARANTOR
Within 14 days of the death during the Term of any person who has
guaranteed to the Landlord the payment to the Landlord of the said
rents and the observance and performance of the covenants on the part
of the Tenant herein contained or of such person entering into or
suffering any of the arrangements or circumstances described in Clause
6.1.4. or (if such guarantor is a company) entering into or suffering
any of the arrangements or circumstances described in Clause 6.1.3
hereof then to give notice thereof to the Landlord and if so required
by the Landlord at the expense of the Tenant within 28 days to procure
some other person acceptable to the Landlord to execute a guarantee in
respect of the payment of the rents and the observance and performance
of the covenants in the form set out in Clause 7 of this Lease
4.21 TO REMEDY BREACHES OF UNDERLESSEES
In the event of any breach non-performance or non-observance of any of
the covenants conditions agreements and provisions contained or
referred to in these presents by any underlessee or other person
holding the Demised Premises as underlessee of the Tenant forthwith
upon discovering the same to take and institute at its own expense all
necessary steps and proceedings to remedy such breach non-performance
or non-observance
<PAGE> 28
4.22 TO GIVE NOTICE
Within one month after the execution of any assignment charge transfer
or underlease or any transmission by reason of a death or otherwise
affecting the Demised Premises or any part thereof or any derivatory
interest therein or the ascertainment (whether by agreement or
determination) of any reviewed amount of the rent payable under any
underlease created in accordance with the terms of this Lease to
produce to and leave with the Landlord or the solicitors for the time
being of the Landlord a certified copy of the deed instrument or other
document evidencing or effecting such dealing or transmission or
reviewed rent and on each occasion to pay to the Landlord or such
solicitors a registration fee equivalent to decimal point nought five
per cent of the annual rent at that time payable hereunder plus VAT
4.23 PAYMENT OF FEES
To pay to the Landlord all costs charges and expenses (including
Solicitors' Counsels' and Surveyors' and other professional costs and
fees and bailiffs' charges) including any VAT thereon incurred by the
Landlord notwithstanding that the same may have been incurred or
expended after the Termination Date:-
4.23.1 In or in contemplation of any proceedings relating to the
Demised Premises under Section 146 or 147 of the Law of
Property Act 1925 or the preparation and service of notice
thereunder (whether or not any right of re-entry or
forfeiture has been waived by the Landlord or a notice served
under the said Section l46 is complied with by the Tenant or
the Tenant has been relieved under the provisions of the said
Act and notwithstanding forfeiture is avoided otherwise than
by relief granted by the Court)
4.23.2 In the preparation and service of a schedule of want of
repair or of dilapidations at any time during or after the
Term and any negotiations ancillary or subsequent thereto
4.23.3 In connection with the recovery of arrears of rent due from
the Tenant
4.23.4 In respect of any application for consent required by this
Lease whether or not such consent be granted or the
application be withdrawn
<PAGE> 29
4.23.5 In connection with or procuring the remedying of any breach
of covenant on the part of the Tenant
4.23.6 In connection with the valuing or obtaining of valuations of
the Demised Premises for insurance purposes
4.24 TOWN AND COUNTRY PLANNING ACTS
In relation to the Planning Acts
4.24.1 At all times during the Term to comply in all respects with
the provisions and requirements of the Planning Acts and all
licences consents permissions and conditions (if any) already
or hereafter to be granted or imposed thereunder or under any
enactment repealed thereby so far as the same respectively
relate to or affect the Demised Premises or any part thereof
or any operations works acts or things already or hereafter
to be carried out executed done or omitted thereon or the
user thereof for any purpose
4.24.2 During the Term so often as occasion shall require at the
expense in all respects of the Tenant to obtain from the
Local Authority the Local Planning Authority and/or the
Secretary of State for the Environment (or other appropriate
Minister) all such licences consents and permissions (if any)
as may be required for the carrying out by the Tenant of any
operations on the Demised Premises or the institution or
continuance by the Tenant thereon of any use thereof which
may constitute development within the meaning of the Planning
Acts but so that the Tenant shall not make any application
for planning permission without the prior written consent of
the Landlord (which consent shall not be unreasonably
withheld in respect of any matter for which the Landlord's
consent is not to be unreasonably withheld under this Lease
but which shall not be deemed to be unreasonably withheld if
giving such consent would impose any financial liability on
the Landlord)
4.24.3 To pay and satisfy any charge that may hereafter be imposed
under the Planning Acts in respect of the carrying out or
maintenance by the Tenant of any such operation or the
institution or continuance by the Tenant of any such use as
aforesaid
<PAGE> 30
4.24.4 Notwithstanding any consent which may be granted by the
Landlord under this Lease not to carry out or make any
alteration or addition to the Demised Premises or any change
of use thereof (being an alteration or addition or change of
use which is prohibited by or for which the consent of the
Landlord is required to be obtained under this Lease and for
which a planning permission needs to be obtained) before a
planning permission and building regulation consent therefor
has been produced to the Landlord and acknowledged by it as
satisfactory to it but so that the Landlord may refuse so to
express satisfaction with any such planning permission or
building regulation consent on the grounds that the period
thereof or anything contained therein or omitted therefrom in
the reasonable opinion of the Landlord or the Surveyor would
be or be likely to be prejudicial to the Landlord's interest
in the Demised Premises whether during the Term or following
the Termination Date
4.24.5 Unless the Landlord shall otherwise in writing direct to
carry out before the Termination Date any works stipulated to
be carried out to the Demised Premises as a condition of any
planning permission or building regulation consent which may
have been granted during the Term whether or not the date by
which the planning permission or building regulation consent
required such works to be carried out falls within the Term
4.24.6 If and when called upon so to do to produce to the Landlord
and the Surveyor and as it may direct all such plans
documents and other evidence as the Landlord may reasonably
require to satisfy itself that the provisions of this
covenant have been complied with in all respects
4.24.7 In any case where the permission for any works upon or change
of use of the Demised Premises granted by the Local Planning
or other Authority to the Tenant is granted subject to
conditions the Landlord shall be entitled as a condition of
giving consent to the carrying out of the works or making the
change of use to require the Tenant to provide security for
the compliance with the conditions imposed as aforesaid and
the works shall not be commenced or the change of use put
into effect until such security shall have been provided to
the satisfaction of the Landlord
4.24.8 As soon as practicable to give to the Landlord notice of any
order direction proposal or notice under the Planning Acts or
relating to any of the matters
<PAGE> 31
referred to in this Sub-clause hereof which is served upon or
received by or comes to the notice of the Tenant in
connection with or relating to the Demised Premises and will
produce to the Landlord if so required any such order
direction proposal or notice as aforesaid as is in the
possession of the Tenant and will not regarding such order
direction proposal or notice as aforesaid take any action not
approved by the Landlord
4.25 FIRE FIGHTING EQUIPMENT ETC
4.25.1 To keep the Demised Premises sufficiently supplied and
equipped with such fire fighting and extinguishing appliances
as shall from time to time be required by law or by any
competent authority or by the Landlord's insurers or as shall
be reasonably required by the Landlord and such appliances
shall be open to inspection and shall be maintained to the
reasonable satisfaction of the Landlord
4.25.2 Not to obstruct or permit or suffer to be obstructed the
access to or means of working such appliances or the means of
escape from the Demised Premises in the case of fire or other
emergency
4.25.3 To take expeditiously all requisite steps to obtain any
necessary fire certificate for the Demised Premises
4.26 BOARDS
4.26.1 During the six months immediately preceding the determination
of the Term to permit the Landlord or its agents to affix
upon any part of the Demised Premises a notice as to the
proposed re-letting or other disposal thereof
4.26.2 At any time during the term to permit the Landlord or its
agent to affix upon any part of the Demised Premises a notice
as to the disposal of the freehold of the Demised Premises
(subject to the same making it clear that the business of the
occupier is not thereby affected)
4.26.3 To permit intending tenants or purchasers at reasonable times
of the day to view the Demised Premises
<PAGE> 32
4.27 NOT TO ACCUMULATE RUBBISH
Not to allow trade empties or rubbish of any description to accumulate
on or outside the Demised Premises but to place all refuse or rubbish
in proper receptacles therefor and not hang or place or to allow to be
hung or placed any articles or other goods of any description outside
the Demised Premises or the entrance door thereof whether on the
forecourt or otherwise or from the windows of the Demised Premises nor
expose outside or from the windows of the Demised Premises any clothes
articles or other goods of any description
4.28 NOT TO OBSTRUCT WINDOWS
Not to stop up or obstruct any windows or light belonging to the
Demised Premises or to any other building belonging to the Landlord
nor permit any new window light opening doorway path drain or other
encroachment or easement to be made into against or upon the Demised
Premises and to give notice to the Landlord of any such which shall be
made or attempted and come to the Tenant's notice and at the request
and cost of the Landlord to adopt such means and take such steps as
may be reasonably required by the Landlord to prevent the same
4.29 EMERGENCY WARNING SYSTEMS
To keep any emergency systems within the Demised Premises free from
obstruction and ensure that any such system is visible at all times
during trading hours to at least one senior employee of the Tenant and
to ensure that all employees of the Tenant have detailed knowledge of
the emergency procedure to operate in the event the emergency warning
system is used which procedure will be contained in the regulations
therefor issued from time to time by the Landlord
4.30 RATING SURVEYOR
To advise the rating surveyors nominated by the Landlord from time to
time of any negotiations with the local authority in connection with
the rateable value of the Demised Premises and to consult with the
said rating surveyors before agreeing or settling any rateable value
4.31 DEFECTIVE PREMISES ACT
Forthwith upon becoming aware of the same to give notice in writing to
the Landlord of any defect in the state of the Demised Premises which
would or might give rise to an obligation on the Landlord to do or
refrain from doing any act or thing in order to comply with the duty
of care imposed on the Landlord pursuant to the Defective
<PAGE> 33
Premises Act 1972 and at all times to display and maintain all notices
(including the wording thereof) which the Landlord may from time to
time display or require to be displayed at the Demised Premises in
relation to such liability
4.32 REPAYMENT OF COSTS
To pay to the Landlord on demand a due proportion (to be conclusively
determined by the Surveyor save in the case of manifest error) of the
cost (including any compensation for damage or disturbance and any
surveyor's fees) incurred by the Landlord from time to time in respect
of any of the following namely repairing cleansing or lighting (as
shall in the opinion of the Landlord be appropriate) any roadways
passageways paths staircases yards or other areas party walls fences
or other structures or any other easements or services used or to be
used in common by the occupier of the Demised Premises and the
occupiers of any adjacent premises
4.33 TO INDEMNIFY LANDLORD
To indemnify the Landlord in respect of all actions proceedings
expenses costs claims and demands whatsoever arising in any way
directly or indirectly out of:-
4.33.1 Any use or occupation of the Demised Premises or the state
and condition of the Demised Premises or the execution of any
alterations or additions to the Demised Premises
4.33.2 Any interference or alleged interference or obstruction of
any right or alleged right of light air drainage or other
right or alleged right now existing for the benefit of any
adjoining or neighbouring property
4.33.3 Any injury to or death of any person or damage to any
property moveable or immovable
4.33.4 The use or existence of any party fences or other boundary
structures or any other easements or services used or to be
used in common by the occupier of the Demised Premises and
the occupiers of any adjacent premises
4.33.5 The user of the Demised Premises
4.33.6 Any relevant defect in or affecting the Demised Premises
within the meaning of the Defective Premises Act 1972
<PAGE> 34
4.33.7 Any failure to perform or observe any of the covenants
conditions provisions agreements or declarations herein
contained and on the part of the Tenant to be observed and
performed
4.33.8 Any act neglect or default of the Tenant or any other
occupier for the time being of the Demised Premises
4.34 TO OBSERVE COVENANTS
To observe and perform the agreements covenants and stipulations
contained or referred to in the documents referred to in the Second
Schedule hereto and to keep the Landlord indemnified against all
actions proceedings costs claims and demands in any way relating
thereto
4.35 YIELDING UP
4.35.1 Immediately prior to the Termination Date at the cost of the
Tenant:-
4.35.1.1 to remove every moulding sign writing or painting of
the name or business of the Tenant or other
occupiers from the Demised Premises and to remove
all tenant's and trade fixtures and fittings
furniture and effects from the Demised Premises
4.35.1.2 (unless released from compliance by written notice
given by the Landlord) to remove and make good all
alterations or additions made to the Demised
Premises at any time during the Term and well and
substantially to reinstate the Demised Premises to
the condition in which the same were prior to the
making of such alterations or additions in such
manner as the Landlord shall direct and to its
reasonable satisfaction
4.35.1.3 to make good to the reasonable satisfaction of the
Landlord all damage caused by any such removal or
reinstatement
4.35.2 At the Termination Date quietly to yield up to the Landlord
the Demised Premises in such good and substantial repair and
condition as shall be in accordance with the covenants on the
part of the Tenant herein contained including for the
avoidance of doubt the covenant contained in Clause 4.35.1
above together with all Landlord's fixtures fittings
improvements and
<PAGE> 35
additions which now are or may at any time hereafter be in or
about the Demised Premises (but excepting the Tenant's
fixtures and fittings) Provided that if at the Termination
Date the Demised Premises shall not be in such good and
substantial repair and condition then whether the works
necessary to put the Demised Premises into such repair and
condition are carried out by the Tenant or at the entire cost
of the Tenant by the Landlord there shall in addition be paid
to the Landlord by the Tenant by way of liquidated damages a
sum equivalent to the loss of rent suffered by the Landlord
in respect of the period that it would take the Landlord to
carry out all such necessary works such sum to be paid within
seven days of the Landlord informing the Tenant that all such
works have been so completed
4.36 VAT
4.36.1 To pay all VAT at the rate for the time being in force
payable upon any sums due from the Tenant pursuant to the
terms of these presents or as the case may be to repay to the
Landlord all such VAT borne by the Landlord in respect of
such sums
4.36.2 All sums reserved under the terms of this Lease or otherwise
payable to the Landlord under the terms of this Lease
(whether by way of rent interest service charge fee indemnity
reimbursement or otherwise howsoever) are exclusive of VAT so
that the amount of each sum so reserved or payable shall be
increased by the amount of any VAT applicable in respect
thereof and if any other VAT shall be chargeable on supplies
by the Landlord to the Tenant (including any supplies other
than for consideration in money paid to the Landlord) or
shall be chargeable on any other supplies made or
consideration given under the terms of this Lease then the
Tenant shall also pay to the Landlord the amount of VAT so
chargeable
4.36.3 Where for the purposes of this Lease it is necessary to
calculate or estimate the cost or value of any building
structure work item act service or any other matter of
whatsoever nature there shall be calculated or estimated such
cost or value together with any VAT which will or may be
chargeable or payable in respect of such cost or value
4.36.4 For the avoidance of doubt the provisions of this clause
shall apply whether or not the Landlord or any other person
has exercised or has failed to exercise any election or other
discretion for VAT to be chargeable
<PAGE> 36
4.37 PAYMENT OF COSTS
To pay to the Landlord the costs and expenses of and incidental to the
preparation and execution in duplicate of a suitable memorandum of
rent review to be attached to the Lease and Counterpart upon each
occasion when the rent is reviewed under the provisions of the Third
Schedule hereto
4.38 INTEREST ON UNPAID AND OTHER MONEYS
If any rents or other amounts payable by the Tenant under this Lease
shall not be paid to the Landlord within 14 days of the due date the
Tenant shall pay to the Landlord with any such sums (but without
prejudice to any other rights or remedies of the Landlord) interest
thereon at the Prescribed Rate calculated on a day-to-day basis from
the date on which the same became due and payable down to the date of
payment by the Tenant
4.39 CONSTRUCTION (DESIGN & MANAGEMENT) REGULATIONS 1994
4.39.1 For the purposes of this Clause 4.39 reference to "the CDM
Regulations" shall mean the Construction (Design &
Management) Regulations 1994 or any regulations from time to
time amending supplementing or replacing the same and the
expression "relevant project" shall mean any works of
construction to which the CDM Regulations apply
4.39.2 In respect of the Demised Premises the Tenant shall at all
times observe and comply with (or procure the observance of
and compliance with) the CDM Regulations and shall indemnify
and keep indemnified the Landlord against any loss or
liability incurred by the Landlord as a result of the failure
by the Tenant to observe or comply with the CDM Regulations
and in particular shall maintain in a complete and up-to-date
form any Health & Safety file for the Demised Premises
(whether existing at the date of this Lease or created
subsequently) and upon reasonable request from the Landlord
and at reasonable intervals to make available to the Landlord
a full copy of the Health & Safety file for the Demised
Premises and at the end (or sooner determination) of the Term
to hand over the said file in a complete and up to date form
<PAGE> 37
4.39.3 Before commencing any relevant project the Tenant shall
produce to the Landlord satisfactory evidence of:-
4.39.3.1 The appointment of a planning supervisor for the
relevant project
4.39.3.2 Notification of the project to the Health & Safety
Executive
4.39.3.3 The preparation of a Health and Safety plan
(providing to the Landlord a copy thereof)
4.39.4 To comply with such requirements as the Landlord may
reasonably impose in connection with any application for
consent to works of alteration for the purpose of ensuring
compliance with the CDM Regulations and for keeping the
Landlord fully informed of the contents of the Health &
Safety file for the Demised Premises and any relevant project
5 LANDLORD'S COVENANTS
The Landlord HEREBY COVENANTS with the Tenant as follows:-
5.1 QUIET ENJOYMENT
That the Tenant paying the rents hereinbefore reserved on the days and
in the manner hereinbefore appointed for payment thereof and observing
and performing the covenants and conditions hereinbefore contained on
the Tenant's part to be observed and performed shall and may peaceably
and quietly hold and enjoy the Demised Premises during the Term
without any lawful interruption by the Landlord or any person
rightfully claiming through under or in trust for it
5.2 INSURANCE
5.2.1 At all times to pay to the Landlord's insurers the premiums
for keeping the Demised Premises (including all fixtures
therein but not tenant's trade fixtures) insured against loss
or damage by the Insured Risks (so long as the same are
insurable on normal terms on the London insurance market)
subject to such limitations or exclusions or excesses as the
insurers may impose in some insurance office of repute or
with underwriters and through such agency as the Landlord
shall from time to time decide in such sums as shall in the
Landlord's opinion represent the full reinstatement value
thereof including Architects and Surveyors and other
professional fees and incidental expenses and against loss of
rent
<PAGE> 38
5.2.2 Within 14 days of demand and not more frequently than once a
year to produce or procure the production to the Tenant of
evidence of such insurance and of the payment of the last
premium therefor
5.2.3 As often as the Demised Premises or any part thereof shall be
destroyed or damaged by any of the Insured Risks so as to
render the Demised Premises unfit for use and occupation then
unless payment of the insurance moneys shall be withheld in
whole or in part by reason solely or in part of any act or
default of the Tenant its agents servants or licensees and
subject to the Landlord being able to obtain any necessary
planning consents and all other necessary licences approvals
and consents as soon as possible to lay out the net proceeds
of such insurance (other than sums receivable in respect of
loss of rent) in rebuilding repairing and reinstating the
Demised Premises (but not in any case so as to provide
accommodation identical in design and layout if it would not
be reasonably practicable to do so) Provided that in so doing
the Landlord may use materials of a different quality type or
specification as the Landlord reasonably deems desirable or
necessary
5.2.4 If either:
5.2.4.1 the Landlord having used all reasonable endeavours
to do so is unable to obtain all necessary planning
consents and other licences approvals and consents
necessary for such rebuilding repairing or
reinstatement or
5.2.4.2 such rebuilding repairing or reinstatement is
frustrated for any other reason
the Landlord shall be under no obligation to rebuild repair
or reinstate the Demised Premises and shall be entitled to
retain for its own benefit all insurance monies received or
receivable
6 PROVISOS
PROVIDED ALWAYS AND IT IS HEREBY AGREED AND DECLARED as follows:-
<PAGE> 39
6.1 RE-ENTRY
Notwithstanding and without prejudice to any other remedies and powers
herein contained or otherwise available to the Landlord in any of the
following events the Landlord or any person or persons duly authorised
by the Landlord may at any time re-enter the Demised Premises or any
part thereof in the name of the whole and repossess and enjoy the same
as if this Lease had not been made and thereupon this demise shall
absolutely cease and determine but without prejudice to any right of
action or remedy of the Landlord in respect of any antecedent breach
of any of the covenants by the Tenant herein contained:-
6.1.1 if the rents hereby reserved or any part thereof shall remain
unpaid for 21 days after becoming payable (whether formally
demanded or not)
6.1.2 if any covenant or obligation on the part of the Tenant
herein contained shall not be performed or observed
6.1.3 if the Tenant or any Surety being a company:-
6.1.3.1 makes a scheme of arrangement or a voluntary
arrangement or compounds or enters into a
composition or arrangement with its creditors
6.1.3.2 has a petition presented for the appointment of an
administrator or an administrator is appointed
6.1.3.3 has a receiver or manager or administrative receiver
appointed over all or any part of its assets
6.1.3.4 has a resolution passed for its voluntary winding-up
(save for the purpose of amalgamation or
reconstruction with the prior consent of the
Landlord) or enters into voluntary liquidation
6.1.3.5 has a petition presented for its winding-up or a
winding-up order is made
6.1.3.6 is removed for any reason from the Register of
Companies
6.1.4 if the Tenant or any Surety being an individual (or if
individuals any one of them):-
<PAGE> 40
6.1.4.1 enters into a deed of arrangement with his creditors
6.1.4.2 makes or has an application made for an interim
order in connection with a proposal to creditors for
a voluntary arrangement
6.1.4.3 makes any assignment for the benefit of or enters
into any arrangement voluntary or otherwise with his
creditors either by composition or otherwise
6.1.4.4 has a petition presented for his bankruptcy or is
made bankrupt
6.1.5 if any distress or process of execution shall be levied at
the Demised Premises
6.2 REMEDIES
If the Tenant shall make default in making payment to the Landlord of
rent or any moneys payable by the Tenant to the Landlord pursuant to
any of the Tenant's covenants hereinbefore contained on the due date
the amount owing may be recovered by the Landlord by action or
distress as if the same formed part of the rent payable hereunder or
as liquidated damages and such moneys shall bear interest as
hereinbefore provided
6.3 SERVICE OF NOTICES
6.3.1 Any demand or notice requiring to be made given to or served
on the Tenant or the Surety hereunder shall be duly and
validly made given or served if sent by the Landlord or its
Agents through the first class post by pre-paid letter
addressed to the Tenant or the Surety respectively (and if
there shall be more than one of them then any of them) at its
registered office or its last known address or at the Demised
Premises
6.3.2 Any notices required to be given to the Landlord shall be
well and sufficiently given if sent through the first class
post by pre-paid letter addressed to the Landlord at its
registered office or (if the Landlord is an individual) the
Landlord's last known address
6.3.3 Any demand or notice sent by post as aforesaid shall be
conclusively treated as having been made given or served
forty-eight hours after posting
<PAGE> 41
6.4 PLANNING RESTRICTIONS
Nothing herein shall render the Landlord or the Tenant liable in
respect of any of the covenants conditions or provisions hereinbefore
contained if and so far only as the performance and observance of such
covenants conditions and provisions or any one or more of them shall
hereafter become impossible or illegal under or by virtue of the
provisions of the Planning Acts but subject as aforesaid the Term and
the rents payable to the Landlord in respect thereof shall not
determine by reason only of any change modification or restriction of
use of the Demised Premises or obligations or requirements hereafter
to be made or imposed under or by virtue of the Planning Acts
6.5 TENANT'S ACKNOWLEDGEMENT
Nothing in this Lease contained shall imply or warrant that the
Demised Premises may in accordance with the Planning Acts be used for
the purpose herein authorised and the Tenant hereby acknowledges and
admits that the Landlord has not given or made at any time any
representation or warranty that any such use is or will be or will
remain a permitted use under the Planning Acts
6.6 EXCLUSION OF COMPENSATION
Notwithstanding anything herein contained or consequent hereto and in
derogation thereof the Landlord and all persons authorised by it shall
have power without obtaining any consent from or making any
compensation to the Tenant to deal as it or they may think fit with
any of the lands buildings or parts of buildings and hereditaments
adjacent adjoining or near to the Demised Premises or any part thereof
and to erect or suffer to be erected thereon or on any part thereof
any building whatsoever and to make any alterations or additions and
carry out any demolition or rebuilding whatsoever which it or they may
think fit or desire to do to such lands or buildings or any part or
parts thereof and without prejudice to the generality of the foregoing
whether such buildings alterations or additions shall or shall not
affect or diminish the light or air which may now or at any time
during the Term be enjoyed by the Tenant or the tenants or occupiers
of the Demised Premises
6.7 DISPUTES
Any dispute arising between the Tenant and any owner or occupier of
adjacent or nearby premises (other than the Landlord) as to any right
or privilege or any party or
<PAGE> 42
other wall or otherwise shall be determined on behalf of the Tenant by
the Surveyor whose decision shall bind the Tenant and whose fees shall
be payable as he may direct
6.8 CESSER OF RENT
In case the Demised Premises or any part thereof shall at any time
during the Term be destroyed or damaged by any of the Insured Risks so
as to render the Demised Premises unfit for occupation and use and
payment of the insurance monies shall not have been refused in whole
or in part by reason solely or in part of some act or default of the
Tenant its servants agents or licensees the rent hereby reserved or a
fair proportion thereof according to the nature and extent of the
damage sustained shall be suspended from the date of the damage or
destruction until the Demised Premises shall be again rendered fit for
occupation and use or until the expiration of the period of loss of
rent insured by the Landlord from the date whichever shall be the
earlier and any dispute regarding the said cesser of rent shall be
referred to the award of a single Arbitrator to be appointed in
default of agreement upon the application of either party by the
President for the time being of the Royal Institution of Chartered
Surveyors in accordance with the provisions of the Arbitration Acts
1996 or any statutory modification thereof for the time being in force
Provided always that under no circumstances shall the amount of rent
which ceases to be payable hereunder exceed the amount received by the
Landlord in respect of loss of rent under the policy referred to in
Clause 5.2 hereunder
6.9 WAIVER
The demand for and/or the acceptance of rent by the Landlord or its
agents shall not constitute and shall not be construed to mean a
waiver of any of the covenants on the part of the Tenant herein
contained or of the Landlord's rights of forfeiture or re-entry in
respect thereof but any such breach shall be deemed to be a continuing
breach of covenant and neither the Tenant nor any person deriving
title under or through the Tenant shall be entitled to set up any such
demand or acceptance as a defence in any action or proceedings by the
Landlord
6.10 NO LIABILITY IN DAMAGES
The Landlord shall not in any circumstances incur any liability in
respect of damage to person or property or otherwise howsoever by
reason of any act neglect default or misfeasance of the Landlord its
servants employees agents or independent contractors
<PAGE> 43
or by reason of any accidental damage which may at any time be done to
the Demised Premises or to any of the goods persons or property of the
Tenant or any other person caused by any act or default of any other
tenant of the Landlord of any adjoining or neighbouring premises or of
any servant employee or contractor as aforesaid in breach or neglect
of his or her duty
6.11 EXCLUSION OF RIGHTS NOT GRANTED
Nothing herein contained shall operate expressly or impliedly to
confer upon or grant to the Tenant any easement right or privilege
other than those expressly hereby granted
6.12 TENANT'S POSSESSIONS
6.12.1 If after the Tenant has vacated the Demised Premises at the
determination of the Term any property of the Tenant shall
remain in or on the Demised Premises and the Tenant shall
fail to remove the same within seven days after being given
notice to do so by the Landlord then the Landlord shall be
entitled as agent of the Tenant to sell such property and
shall hold the proceeds of such sale (after deducting the
costs and expenses of removal storage and sale reasonably and
properly incurred in connection therewith and after deduction
of any arrears of rent or other sums payable to the Landlord
hereunder) to the order of the Tenant
6.12.2 The Tenant will indemnify the Landlord against any liability
incurred by it to any third party whose property (having been
in or on the Demised Premises as aforesaid) shall have been
sold by the Landlord in the mistaken belief (which shall be
presumed unless the contrary be proved) that such property
belonged to the Tenant and was liable to be dealt with under
Clause 6.12.1 hereof
6.13 STATUTORY COMPENSATION
Except where any statutory provision prohibits the Tenant's right to
compensation being reduced or excluded by agreement the Tenant shall
not be entitled to claim from the Landlord on quitting the Demised
Premises or any part thereof any compensation under the Landlord and
Tenant Act 1954
<PAGE> 44
6.14 ENFORCEMENT OF LANDLORD'S COVENANTS
The covenants conditions and obligations on the part of the Landlord
which are contained or implied in this Lease shall be binding on the
owner of the reversion expectant on the termination of the Term but
shall not be enforceable against any person who has owned such
reversion after it shall have parted with all interest therein
6.15 DETERMINATION BY TENANT
If following the agreement or determination of "the new rent" (as
defined in paragraph 3 of the First Schedule to this Lease) payable on
and after the Second Rent Review Date the Tenant shall desire to
determine this Lease and if the Tenant shall give to the Landlord
within 14 days of such agreement or notification of such determination
of "the new rent" six months notice in writing operating as a notice
to quit within Section 24 of the Landlord and Tenant Act 1954 and if
the Tenant shall pay all the rents and perform and observe all the
Tenant's covenants hereinbefore reserved and contained in all material
respects up to such determination then on the expiration of the six
months' notice the term hereby granted shall cease but without
prejudice to the rights and remedies of the Landlord for any arrears
of rent or any breach of the Tenant's covenants or the conditions
herein contained
7 COVENANTS BY SURETY
7.1 The provisions of this Clause shall apply where:-
7.1.1 a surety is a party to this Lease
7.1.2 in accordance with the requirements of Clause 4.19 a surety
is a party to a Licence to Assign this Lease or to grant an
Underlease out of it
7.2 The Surety as primary obligor and not as guarantor covenants with the
Landlord:-
7.2.1 during the Term or if applicable until completion of an
assignment of this Lease which is not an excluded assignment
as defined in Section 11 of the Act the Tenant shall pay the
rent when due and perform the covenants and other terms of
this Lease
7.2.2 in case of default by the Tenant to pay on demand the rents
and so far as required by the Landlord to observe and perform
the covenants and other terms of this Lease
<PAGE> 45
7.2.3 where the Tenant has assigned the Lease and has entered into
an authorised guarantee agreement with the Landlord under
Section 16 of the Act the Tenant shall pay all sums due and
comply with its obligations arising under the authorised
guarantee agreement
and the Surety indemnifies the Landlord against all losses damages
costs and expenses suffered or incurred by the Landlord as result of
any default by the Tenant
7.3 The liability of the Surety under this Clause 7 shall not be effected
in any way by:-
7.3.1 any neglect of forbearance of the Landlord in enforcing
payment of any rent or the observance or performance of the
covenants and provisions of the Lease
7.3.2 any time or indulgence given to the Tenant by the Landlord
7.3.3 any time or indulgence given to or the release of any person
who is a guarantor or who is otherwise liable for the
performance of the Tenant's obligations under this Lease
7.3.4 any refusal by the Landlord to accept rent from the Tenant
following a breach of covenant by the Tenant
7.3.5 any agreement with the Tenant or any licence or consent
granted to the Tenant or any variation in terms of the Lease
7.3.6 any assignment of the Lease except to the extent the Tenant
is released by statute
7.3.7 the death of the Tenant (if an individual) or the dissolution
of the Tenant (if a company)
7.3.8 a surrender of part of the Demised Premises except that the
Surety shall have no liability in relation to the surrendered
part in respect of any period following the date of surrender
7.3.9 the Tenant or any other person who is a guarantor ceasing to
exist or any legal limitation or incapacity relating to them
7.3.10 any other matter or thing whereby but for this provision the
Surety would have been released
<PAGE> 46
7.4 The Surety undertakes to the Landlord not (without the prior consent
of the Landlord) to make a claim on the Tenant under any right of
subrogation or indemnity or to take any security from the Tenant and
where any such security is taken from the Tenant and enforced by the
Surety to hold the proceeds of such enforcement on trust for the
Landlord
7.5 If this Lease shall be disclaimed or shall be forfeited by the
Landlord the Surety will if the Landlord shall by notice in writing
within six months after such disclaimer or forfeiture so require take
from the Landlord a lease of the Demised Premises for a term equal to
the residue of the Term at the time of such disclaimer or forfeiture
at the same rent as was payable immediately prior to such disclaimer
subject to the same covenants and conditions (including as to rent
review) as in this Lease but without requiring any other person to act
as Surety such new lease to take effect from the date of disclaimer or
forfeiture and to be granted at the cost of the Surety who shall
execute and deliver to the Landlord a counterpart of it
7.6 If this Lease is disclaimed or forfeited or otherwise ceases to have
effect and for any reason the Landlord does not require the Surety to
accept a new lease pursuant to Clause 7.5 the surety shall pay to the
Landlord on demand an amount equal to the difference between any money
received by the Landlord for the use or occupation of the Demised
Premises and the rents (if higher) which would have been payable had
this Lease not been disclaimed or forfeited for the period commencing
with the date of disclaimer or forfeiture and ending on the date
twelve months after the date of disclaimer or forfeiture and the
Landlord's certificate of the amount or amounts due under this
sub-clause shall in the absence of manifest error be final and binding
on the Surety
7.7 The Surety's covenants under this Clause 7 shall be for the benefit of
the person in whom the reversion immediately expectant on this Lease
is vested without the need for any express assignment
7.8 References in this Clause 7 to the Tenant shall include references to
the Tenant's assigns under excluded assignments as defined in Section
11 of the Act but shall not include any other assigns.
IN WITNESS whereof this Deed has been duly executed by the parties the day and
year first before written
<PAGE> 47
THE FIRST SCHEDULE ABOVE REFERRED TO
(PROVISIONS FOR RENT REVIEW)
1 In this Schedule the following expression shall have the following
meanings:-
1.1 "the Rent Review Dates" shall mean the date or dates specified in the
Particulars
1.2 "the open market rent" shall mean the yearly rent which would
reasonably be expected to become payable in respect of the Demised
Premises in the open market upon a letting of the Demised Premises
1.2.1 by a willing landlord to a willing tenant 1.2.2 without
taking a fine or premium
1.2.3 after the tenant has received the benefit of any other
concession or inducement whatsoever that it might then be the
practice for a landlord to allow or give to a tenant in the
open market
1.2.4 either as a whole or by separate lettings whichever shall
produce the higher rent
1.2.5 with vacant possession
1.2.6 for a term equal to the residue of the Term or 10 years
whichever shall be the longer commencing in either event on
the Relevant Rent Review Date (as hereinafter defined) and
with the rent review dates occurring on every fifth
anniversary of the commencement of the term of the
hypothetical lease
1.2.7 upon the terms and conditions (save as to the rent first
hereinbefore reserved but including like provisions for the
review of rent) as are herein contained and
1.2.8 making the assumptions referred to in Paragraph 1.3 and
disregarding the matters referred to in Paragraph 1.4 of this
Schedule
1.3 The assumptions (if not facts) to be made for the purposes of
Paragraph 1.2 of this Schedule are as follows:-
<PAGE> 48
1.3.1 that all the Landlord's and the Tenant's covenants shall have
been fully complied with
1.3.2 that the Demised Premises are fit and available for immediate
occupation and use and may be lawfully used for any of the
users referred to in Paragraph 1.3.3
1.3.3 that this Lease permitted the Demised Premises to be used for
whichever of the following as would command the higher rental
value at the Relevant Rent Review Date namely:
1.3.3.1 the user hereby permitted and
1.3.3.2 any user within Use Classes B1 of the Town and
Country Planning (Use Classes) Order 1987 (as
enacted at the date hereof)
1.3.4 that if the Demised Premises have been destroyed or damaged
they have been fully restored and
1.4 The matters to be disregarded for the purposes of Paragraph 1.2 of
this Schedule are as follows:-
1.4.1 any effect on rent of the fact that the Tenant or an
undertenant may have been in occupation of the Demised
Premises
1.4.2 any goodwill attached to the Demised Premises by reason of
any trade or business carried on therein by the Tenant or any
undertenant
1.4.3 any effect on rent of any improvement carried out on or after
the date of this Lease by the Tenant or any undertenant at
its own expense within 21 years of the Relevant Rent Review
Date with the Landlord's written consent otherwise than in
pursuance of an obligation to the Landlord or its
predecessors in title and only to the extent that the
Landlord or its predecessors in title have made no
contribution either by direct payment or by rent abatement
1.4.4 any diminishing effect on rent of any alterations or internal
partitioning of or other works to the Demised Premises
carried out by the Tenant or any undertenant during the Term
or during any period of occupation prior to the date of this
Lease
<PAGE> 49
1.4.5 any diminishing effect on rent of any statutory restriction
or regulation of the amount of rent obtainable for the
Demised Premises or any part thereof
1.4.6 any effect on rent of the matters set out or referred to in
the Fourth Schedule to this Lease
1.4.7 all trade fixtures and fittings affixed to the Demised
Premises either by the Tenant or any undertenant and
1.4.8 the fact that any VAT is payable in respect of the rents
hereby reserved and the amount of any such VAT
2 On and after each one of the Rent Review Dates the rent first
hereinbefore reserved shall be whichever is the higher of:-
2.1 the yearly rent operative immediately before that one of the Rent
Review Dates (herein referred to as "the Relevant Rent Review Date")
and
2.2 the open market rent of the Demised Premises on the Relevant Rent
Review Date
3 If the Landlord and the Tenant shall be able to agree on the amount of
rent reserved pursuant to Paragraph 2 (hereinafter called "the new rent") such
agreement shall be recorded in a memorandum to be endorsed on or attached to
this Lease and signed by both parties (but that memorandum shall be regarded as
evidential only and its absence shall not affect the liability of the Tenant to
pay the new rent)
4.1 If three months before the Relevant Rent Review Date the Landlord and
the Tenant shall not have agreed on the new rent to commence on the
Relevant Rent Review Date the Landlord may at any time thereafter (but
before the Rent Review Date next following the Relevant Rent Review
Date) require an independent surveyor (hereinafter called "the
Independent Surveyor") to determine the open market rent
4.2 If six months after the Relevant Rent Review Date the Landlord and the
Tenant shall not have agreed on the new rent and the Landlord shall
not have required the Independent Surveyor to determine the open
market rent under Paragraph 4.1 of this Schedule then the Tenant may
at any time thereafter require the Independent Surveyor to determine
the open market rent
<PAGE> 50
5 The Independent Surveyor (who shall be a Chartered Surveyor qualified
for at least ten years having substantial recent experience in valuing property
in the same area and of a like kind and character to the Demised Premises) may
be agreed upon by the Landlord and the Tenant and in default of such agreement
shall be appointed by the President for the time being of the Royal Institution
of Chartered Surveyors on the application of the Landlord or the Tenant If the
said President shall for any reason not be available or be unable to make such
appointment at the time of the application therefor then the appointment may be
made by the Vice-President or next senior officer of the said Institution then
available and able to make such appointment or if no such officer of the said
Institution shall be so available and able by such officer of such professional
body of surveyors as the Landlord shall designate (and any reference hereafter
to the said President shall be deemed to include a reference to such
Vice-President or other officer)
6.1 Notice in writing of his appointment shall be given by the Independent
Surveyor to the Landlord and the Tenant and he shall invite each to
submit within a specified period (which shall not exceed four weeks) a
valuation accompanied if desired by a statement of reasons
6.2 The Independent Surveyor shall act as an arbitrator unless the
Landlord shall in its absolute discretion require him to act as an
expert
6.3 The Independent Surveyor shall give notice in writing of his decision
to the Landlord and the Tenant within two months of his appointment or
within such extended period as the Landlord may determine
6.4 If the Independent Surveyor comes to the conclusion that the open
market rent of the Demised Premises on the Relevant Rent Review Date
is or was less than the yearly rent operative immediately before the
Relevant Rent Review Date (hereinafter called "the current rent") the
new rent shall be the current rent and the decision of the Independent
Surveyor shall so state
6.5 If the Independent Surveyor acts as an arbitrator the arbitration
shall be conducted in accordance with the Arbitration Acts 1996
6.6 If the Independent Surveyor acts as an expert
6.6.1 his fees and expenses including the cost of his nomination
shall follow his determination but the Landlord and the
Tenant shall otherwise bear their own costs and
6.6.2 the Independent Surveyor shall afford the Landlord and the
Tenant an opportunity to make representations to him
<PAGE> 51
6.7 If either the Landlord or the Tenant shall fail to pay costs or fees
and expenses awarded against it by the Independent Surveyor under the
provisions hereof within 21 days of the same being demanded by the
Independent Surveyor then the other party shall be entitled to pay the
same and the amount so paid shall be repaid on demand by the party
chargeable
7 If the Independent Surveyor shall fail to determine the open market
rent and give notice thereof within the time and in the manner hereinbefore
provided or if he shall relinquish his appointment or die or if it shall become
apparent that for any reason he will be unable to complete his duties hereunder
the Landlord may apply to the said President for a substitute to be appointed
in his place which procedure may be repeated as many times as necessary
8 In the event that by the Relevant Rent Review Date the Landlord and
the Tenant shall not have reached agreement as provided for in paragraph 3 and
the Independent Surveyor shall not have given the notice provided for in
paragraph 6.3 of this Schedule then the Tenant shall continue to pay rent at
the rate of the current rent on each day appointed by this Lease for payment of
rent until such agreement shall be reached or the said notice shall be given to
him whichever shall first occur Within 14 days after such agreement shall have
been reached or the said notice shall have been given to him (as the case may
be) the Tenant shall pay to the Landlord as arrears of rent an amount equal to
the difference between the new rent and the rent actually paid for the period
commencing on the Relevant Rent Review Date together with interest thereon in
this context only calculated at the rate of Two per cent below the Prescribed
Rate for the period commencing on the Relevant Rent Review Date to the date of
payment if such payment is made within such period of 14 days and if payment is
not made within such period of 14 days calculated at the Prescribed Rate for
the period commencing on the Relevant Review Date to the date of payment of the
said amount
9 If on any one of the Rent Review Dates there shall be in force any
enactment which shall relate to the control of rents and which shall restrict
interfere with or affect the Landlord's right to revise the rent first
hereinbefore reserved in accordance with the terms hereof or to receive the new
rent then the Landlord shall be entitled following each removal or modification
of such enactment to serve notice (hereinafter called "an interim notice") upon
the Tenant and from and after the date of service of such interim notice until
the next Rent Review Date or the service of the next interim notice (whichever
shall first occur) the rent
<PAGE> 52
first hereinbefore reserved shall be increased to whichever is higher of the
open market rent at the date of service of the interim notice or the rent
payable immediately prior thereto and the provisions of this Schedule shall
apply accordingly with the substitution of the said date of service for the
Relevant Rent Review Date
10 Time shall not be of the essence in respect of any period of time
referred to in this Schedule
THE SECOND SCHEDULE ABOVE REFERRED TO
(MATTERS TO WHICH THE DEMISE IS SUBJECT)
1 The Property and Charges Register of Title Number SY331943 as
disclosed by Office Copies dated 28th April 1999
2 Agreement under Section 106 of the Town and Country Planning Act 1990
dated the 28th April 1995 and made between Runnymede Borough Council of the one
part and Richard Cook Limited of the other part
3 Agreement under Section 115 of the Highways Act 1980 dated the 18th
January 1996 and made between Runnymede Borough Council of the one part and
Richard Cook Limited of the other part
4 Agreement under Section 142 of the Highways Act 1980 dated the 18th
January 1996 and made between Runnymede Borough Council of the one part and
Richard Cook Limited of the other part
THE THIRD SCHEDULE
(Authorised Guarantee Agreement)
1 The Tenant as primary obligor and not as guarantor covenants with the
Landlord:-
1.1 During the Term or if applicable until completion of an assignment of
the Lease which is not an excluded assignment as defined in Section 11
of the Act the Tenant shall pay the rent when due and perform the
covenants and other terms of the Lease
1.2 In case of default by the Assignee to pay on demand the Rents and so
far as required by the Landlord to observe and perform the covenants
and other terms of the Lease
And the Tenant indemnifies the Landlord against all losses damages costs and
expenses suffered or incurred by the Landlord as a result of any default by the
Assignee
<PAGE> 53
1.3 The liability of the Tenant under this Schedule shall not be effected
in any way by:-
1.3.1 any neglect or forbearance of the Landlord in enforcing
payment of any rent or the observance or performance of the
covenants and provisions of the Lease
1.3.2 any time or indulgence given to the Assignee by the Landlord
1.3.3 any time or indulgence given to or the release of any person
who is a guarantor or who is otherwise liable for the
performance of the tenant's obligations under the Lease
1.3.4 any refusal by the Landlord to accept rent from the Assignee
or his successors following a breach of covenant by the
Assignee
1.3.5 any licence or consent granted to the Assignee pursuant to
the terms of the Lease
1.3.6 any assignment of the Lease except to the extent the Assignee
is released by statute
1.3.7 the death of the Assignee (if an individual) or the
dissolution of the Assignee (if a company)
1.3.8 a surrender of part of the Demised Premises except that the
Tenant shall have no liability in relation to the surrendered
part in respect of any period following the date of surrender
1.3.9 the Assignee or any other person who is a guarantor ceasing
to exist or any legal limitation or incapacity relating to
them
1.3.10 any other matter or thing whereby but for this provision the
Tenant would have been released
1.4 The Tenant undertakes to the Landlord not (without the prior consent
of the Landlord) to make a claim on the Assignee under any right of
subrogation or indemnity or to take any security from the Assignee and
where any such security is taken from the Assignee and enforced by the
Surety to hold the proceeds of such enforcement on trust for the
Landlord
<PAGE> 54
1.5 If the Lease shall be disclaimed the Tenant will if the Landlord shall
by notice in writing six months after such disclaimer so require take
from the Landlord a lease of the Demised Premises for a term equal to
the residue of the term at the time of such disclaimer at the same
rent as was payable immediately prior to such disclaimer subject to
the same covenants and conditions (including as to rent review) as in
this Lease but without requiring any other person to act as surety
such new lease to take effect from the date of disclaimer and to be
granted at the cost of the Tenant who shall execute and deliver to the
Landlord and counterpart of it
SIGNED as a DEED by MELITA HOUSE
INCORPORATED acting by its [attorney]
in the presence of:-
Attorney
Witness Signature
Witness Name
Witness Address
EXECUTED as a DEED of MELITA EUROPE
LIMITED acting by (director)
and (director/secretary)
Director
Secretary
<PAGE> 1
EXHIBIT 10.9
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") is made as of the
15th day of December 1999 between George Landgrebe, an individual resident of
the State of Connecticut ("Executive"), and eShare Technologies, Inc., a Georgia
corporation with its principal place of business located in Norcross, Georgia
(the "Company").
WHEREAS, the Company desires to employ Executive as the Chief Operating
Officer of the Company, and Executive desires to accept said employment from the
Company; and
WHEREAS, the Company and Executive have agreed upon the terms and
conditions of Executive's employment with the Company and the parties desire to
express the terms and conditions in this employment agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged and accepted, the parties hereby
agree as follows:
1. EMPLOYMENT OF EXECUTIVE. The Company hereby employs Executive, and Executive
hereby accepts such employment from the Company, under the terms of this
Agreement, beginning on December 15, 1999 and continuing until terminated as
provided herein.
2. DUTIES. Executive shall be employed on a full-time basis, as the Chief
Operating Officer of the Company. Executive's responsibilities as Chief
Operating Officer of the Company shall be to take such action to involve himself
in the general overall and day to day management and operations of the Company
in a manner as the Chief Executive Officer or Board of Directors of the Company
(the "Board of Directors") from time to time deems appropriate under the
circumstances.
3. BASE SALARY. Executive's base salary for the period December 15, 1999 through
December 31, 1999 is $5,250. Commencing on the January 1, 2000 and thereafter
while Executive is employed by the Company, the Executive's base salary shall be
$21,000 per month (the "Base Salary"). Base Salary earned for the period
December 15, 1999 through December 31, 1999, will be paid directly to Executive
by the Company (less lawful withholding). Beginning with Base Salary earned
after January 1, 2000, the Base Salary shall be paid to Executive by the Company
(less lawful withholding) as earned in arrears in accordance with the Company's
regular payroll practice as in effect from time to time as follows:
$15,000 per month to Executive
$ 6,000 per month to Performance Leadership LLC
4. BONUS. Executive shall be eligible to receive, in addition to the Base
Salary, a performance bonus that may be awarded and paid as determined by the
Board of Directors.
5. BENEFITS AND OTHER COMPENSATION. Commencing on the Effective Date of this
Agreement and during the Term of this Agreement, the Company shall provide the
benefits described below.
(a) Management Stock Incentive Program. The Executive shall be eligible
to participate in the Company's stock option, stock purchase, or other stock
incentive plan generally available to senior managers of the Company and shall
be eligible for the grant of stock options, restricted stock and other awards
thereunder. Upon execution of this Agreement and approval of the Board of
Directors and subject to the terms of the Company's 1997 Stock Option Plan (the
"Stock Option Plan") and the terms of this Agreement, the Company shall grant to
Executive, 50,000 stock options (the "Employment Options"). The Employment
Options shall have four year straight line vesting. The Executive shall be
eligible to participate in the Change in Control agreement offered to other
members of the executive team.
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(b) Paid Time Off. Executive shall have the right to paid time off in
accordance with the policy of the Company.
(c) Insurance and Other Benefits. The Company shall make available to
Executive the opportunity to subscribe to insurance coverage (at Executive's
expense, covering 100% of the insurance premium) for Executive in accordance
with the terms of the Company's insurance plan, if any, as it exists from time
to time and shall provide Executive with coverage under all other employee
benefits plans, programs and policies which the Company maintains from time to
time for the benefit of its executive employees.
(d) Expenses. Executive shall be reimbursed monthly by the Company for
the ordinary and necessary business expenses incurred by him in the performance
of his duties for the Company; provided that Executive shall first document said
business expenses in the manner generally required by the Company under its
standard employee business expense reimbursement policies and procedures.
Company will provide the use of a local apartment near the Company headquarters
and reimburse Executive the actual cost of four coach class round trip tickets
per month between Executive's residence in Connecticut and Atlanta, Georgia, the
cost of which is not to exceed $1,500 per month. Executive will use all
reasonable efforts to purchase airline tickets in a manner so as to minimize the
cost, consistent with reasonable planning and good business practice.
Executive will be responsible for his living and other expenses while in the
metropolitan Atlanta area.
6. TERM; TERMINATION.
(a) This Agreement and the Executive's employment hereunder may be
terminated as follows:
(i) immediately, without any notice by or to either party
hereto, upon the death of the Executive;
(ii) immediately, by the Company for the Disability of the
Executive upon delivery by the Company to the Executive of a Notice of
Termination;
(iii) immediately by the Company for Cause which cause has not
been cured within ninety (90) days (except in such instance where the
Cause cannot reasonably be cured) upon delivery by the Company to the
Executive of a Notice of Termination;
(iv) upon ninety (90) days prior written notice by the Company
other than for Cause upon delivery by the Company to the Executive of a
Notice of Termination; or
(v) upon ninety (90) days prior written notice by the
Executive upon delivery by the Executive to the Company of a Notice of
Termination.
(b) If the Executive's employment with the Company shall be terminated
during the Term:
(i) by reason of the Executive's death, the Company shall pay
to the Executive's estate or legal representative within thirty (30)
days after the Termination Date, a lump sum cash payment equal to the
Executive's Accrued Compensation, and any outstanding Employment
Options granted to the Executive under the Stock Option Plan, to the
extent (and only to that extent) that such Employment Options would
have been exercisable by Executive on the Termination Date, shall be
exercisable by the Executive's legal representative. Such options must
be exercised by Executive's legal representative, if at all, within
thirty (30) days after the Termination Date, provided, however, that no
option shall be exercisable after its expiration;
(ii) by the Company for Disability, the Company shall pay to
the Executive or Executive's legal representative within thirty (30)
days after the Termination Date, a lump sum cash
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payment equal to the Executive's Accrued Compensation, and any
outstanding Employment Options granted to the Executive under
the Stock Option Plan, to the extent (and only to the extent)
that such Employment Options would have been exercisable by
Executive on the Termination Date, shall be exercisable by the
Executive or Executive's legal representative. Such options
must be exercised by Executive or his legal representative, if
at all, within thirty (30) days after the Termination Date,
provided, however, that no option shall be exercisable after
its expiration;
(iii) by the Company for Cause, the Company shall pay
to the Executive within thirty (30) days after the Termination
Date a lump sum cash payment equal to the Executive's Accrued
Compensation. All unvested Employment Options, or any other
options or similar rights whatsoever, shall be immediately
forfeited by Executive upon termination by the Company for
Cause;
(iv) by the Company other than for Cause, the Company
shall pay to the Executive within thirty (30) days after the
Termination Date a lump sum cash payment equal to the
Executive's Accrued Compensation plus one month's Base Salary
(not to exceed six months) for each two months worked. All
unvested Employment Options, or any other options or similar
rights whatsoever, shall be forfeited by Executive upon
termination by the Company other than for Cause.
Notwithstanding the foregoing, all such vested Employment
Options shall be exercisable for a period of thirty (30) days
following the Termination Date, after which they shall lapse
and be void if not exercised; provided, however, that no
option shall be exercisable after its expiration.
(v) in the event the Executive resigns from his
employment with the Company pursuant to Section 6(b)(v)
hereof, then the Company shall pay to the Executive within
thirty (30) days after the Termination date a lump sum cash
payment equal to the Executive's Accrued Compensation and all
unvested Employment Options, or any other options or similar
rights whatsoever, shall be forfeited by Executive upon his
resignation. Notwithstanding the foregoing, all such vested
Employment Options shall be exercisable for a period of thirty
(30) days following the Termination Date, after which they
shall lapse and be void if not exercised; provided, however,
that no options shall be exercisable after its expiration
date.
(d) The pay and benefits provided for in this Section 6 shall be in
lieu of any other severance pay to which the Executive may be entitled under any
Company severance plan, program, practice or arrangement. The Executive's
entitlement to any other compensation or benefits shall be determined in
accordance with the Company's employee benefit plans and other applicable
programs, policies and practices then in effect.
(e) The benefits paid or provided herein shall be the only benefits
paid to the Executive or his estate.
7. EXECUTIVE WORKS. Executive agrees that Executive will promptly disclose to
the Company all Executive Works (defined below). Executive hereby irrevocably
assigns to the Company all right, title and interest in and to any and all
Executive Works, created by Executive at any time prior to the Effective Date
and Executive will execute, without requiring the Company to provide any further
consideration therefor, such confirmatory assignments, instruments and documents
as the Company deems necessary or desirable in order to effect such assignment.
Executive further agrees that all Executive Works created by him during the
course of his employment by the Company are the sole property of the Company and
hereby assigns such Executive Works to the Company, and Executive will execute,
without requiring the Company to provide any further consideration therefor,
such confirmatory assignments, instruments and documents as the Company deems
necessary or desirable in order to effect such assignment. The term "Executive
Works" as used in this Agreement means any and all works of authorship,
inventions, discoveries, improvements, designs, techniques, and work product,
whether or not patentable, and in whatever form, which are created, made,
developed or reduced to practice or caused to be created, made, developed or
reduced to practice by Executive during the course of the Executive's employment
by the Company, whether created within or without the Company's facilities and
before, during or after normal business hours, including all worldwide
copyrights, trade secrets, patent rights, and all confidential, proprietary and
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property rights therein, and that relate in any way to the current or future
business of the Company or that result from any work performed by Executive for
the Company.
8. PRODUCTS, NOTES, RECORDS AND SOFTWARE. All memoranda, notes, records and
other documents and computer software made or compiled by Executive during the
course of Executive's employment by the Company or made available to him during
the course of his employment by the Company, including, without limitation, all
customer data, billing information, service data, and other technical material,
confidential information and trade secrets of the Company and its affiliates,
shall be the Company's property and Executive shall deliver all such material
(and all copies thereof) to the Company within three (3) days after any
termination of his employment with the Company.
9. NONDISCLOSURE. Executive acknowledges and agrees that during his employment
by the Company, he has had, or will have, access to trade secrets and other
confidential or proprietary information peculiar to the Company, the disclosure
or use of which would injure the Company. Therefore, Executive agrees that he
will not use, reveal, or divulge any such trade secrets if such use, revelation,
or divulgence would violate the Georgia Trade Secrets Act of 1990. In addition,
Executive agrees that during his employment by the Company and two (2) years
thereafter, he will not, directly or indirectly, use, reveal, or divulge any
such confidential information or proprietary information. However, Executive
shall not be required to keep confidential any trade secrets or confidential or
proprietary information of the Company, which is or becomes publicly available,
is independently developed by Executive outside of the scope of his employment
relationship with the Company, or is rightfully obtained from third parties.
10. NONCOMPETITION. During the course of his employment by the Company for a
period of two (2) years thereafter, Executive agrees that he shall not, within
the continental United States of America, engage in or render the services he
performs or performed for the Company to any entity (other than the Company)
engaged in a business which is directly competitive with the business of the
Company (the "Business").
11. NONSOLITATION.
(a) Customers. During his employment by the Company, Executive shall
not, directly or indirectly without the Company's prior written consent, contact
any customer of the Company, with whom executive, in the ordinary course of his
employment by the Company, had a material contact ("Customer") for business
purposes unrelated to furthering the Business of the Company. For a period of
two (2) years following any termination of employment of Executive, Executive
shall not, directly or indirectly, (i) contact, solicit, divert or take away,
any Customer for purposes of, or with respect to, selling a product or service
which competes with the Business of the Company, or (ii) take any affirmative
action in regard to establishing or continuing a relationship with a Customer
for purposes of making, or which directly or indirectly results in, a sale of a
product or service which competes with the Business of the Company.
(b) Employees. During the employment of the Executive and for a period
of two (2) years following any termination of employment of Executive, Executive
shall not, directly or indirectly, recruit or hire, or attempt to recruit or
hire, any other employees of the Company who were employed by the Company during
the two (2) year period prior to any termination of Executive's employment with
Company (or shorter period if Executive had not then been employed by Company
for two (2) years or who becomes an employee of the Company during the two (2)
year period following any termination of Executive's employment with the
Company.
12. REMEDY FOR BREACH. Executive agrees that remedies at law available to the
Company for any actual or threatened breach by Executive of any of the covenants
contained in Sections 7 through 11 of this Agreement would be inadequate and
that the Company shall be entitled to specific performance by Executive of the
covenants in such paragraphs or injunctive relief against activities in
violation of such paragraphs, or both, by temporary or permanent injunction or
other appropriate judicial remedy, writ or order, in addition to any damages and
legal expenses (including attorney's fees) which the Company may be legally
entitled to recover. Executive acknowledges and agrees that the covenants
contained in Sections 7 through 11 of this Agreement shall be construed as
agreements independent of any other provisions of this or any other contract
between the parties hereto, and that the existence of any claim or cause of
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action by Executive against the Company, whether predicated upon this or any
other contract, shall not constitute a defense to the enforcement by the Company
of said covenants.
13. SURVIVAL. The provisions of Sections 7 through 12 shall survive termination
of this Agreement.
14. INVALIDITY OF ANY PROVISION. It is the intention of the parties hereto that
Sections 7 through 12 of this Agreement shall be enforced to the fullest extent
permissible under the laws and public policies of each state and jurisdiction in
which such enforcement is sought, but that the unenforceability (or the
modification to confirm with such laws or public policies) of any provision
hereof shall not render unenforceable or impair the remainder of this Agreement
which shall be deemed amended to delete or modify, as necessary, the invalid or
unenforceable provisions. The parties further agree to alter the balance of this
Agreement in order to render the same valid and enforceable.
15. CHOICE OF LAW/VENUE. This Agreement is being executed in the State of
Georgia and shall be construed and enforced in accordance with the internal laws
of the State of Georgia, without giving effect to the conflicts laws of such
state. Any action arising out of or related to this Agreement shall be brought
in the Superior Court of Gwinnett County, Georgia or federal court in the
Northern District of Georgia.
16. WAIVER OF BREACH. The waiver by the Company of a breach of any provision of
this Agreement by Executive shall not operate or be construed as a waiver of any
subsequent breach by Executive.
17. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall be binding upon and shall inure to the benefit
of the Company, its Successors and Assigns, and the Company shall require any
Successors and Assigns to expressly assume and agree to perform this Agreement
in the same manner and to the same extent that the Company would be required to
perform it if no such succession or assignment had taken place.
(b) Neither this Agreement nor any right or interest hereunder shall be
assignable or transferable by the Executive, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal personal representative.
18. NOTICES. All deliveries, notices, consents, requests, demands and affidavits
and other communications hereunder shall be in writing and shall be deemed to
have been duly given or delivered if delivered personally or mailed by certified
mail, return receipt requested, with proper postage prepaid or if delivered by a
recognized courier service contracting for same day or next day delivery, as
follows:
Company: eShare Technologies, Inc.
5051 Peachtree Corners Circle
Norcross, Georgia 30092-2500
Attn: Aleksander Szlam, Chairman and Chief Executive Officer
Executive: George Landgrebe
301 West Lyon Farm Drive
Greenwich, Connecticut 06831-4256
Any of the parties may designate such other address by written notice
to the other parties hereto. Any item so mailed shall be deemed to have been
delivered on the third business day following the date on which it is mailed.
Any item delivered by recognized courier service shall be deemed to have been
delivered on the first business day following the date on which it is delivered
to such courier.
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<PAGE> 6
19. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the
parties. This Agreement may not be changed orally but only by an agreement in
writing signed by the party against whom enforcement of any waiver, changes,
modification, extension, or discharge is sought.
20. DEFINITIONS. For purposes of this Agreement, the following terms shall have
the following meanings:
(a) "Accrued compensation" shall mean an amount, including all amounts
earned or accrued through the Termination Date but not paid as of the
Termination Date including, (i) Base Salary of the Executive, (ii) reimbursement
for reasonable and necessary expenses incurred by the Executive on behalf of the
Company as of the Termination Date, and (iii) the performance bonus, if any,
approved by the Board of Directors.
(b) "Cause" shall mean in the context of termination of the Executive's
employment if it is a result of:
(i) any act that the Board of Directors reasonably
determines constitutes, on the part of the Executive, fraud,
dishonesty, gross malfeasance of duty, or conduct grossly
inappropriate to the Executive's office; or
(ii) indictment of the Executive of a felony; or
(iii) willful failure to follow the direct
instructions of the Chairman and/or Chief Executive Officer;
or
provided, however, that in the case of clause (i)
above, such conduct shall not constitute Cause unless (A)
there shall have been delivered to the Executive a written
notice setting forth with specificity the reasons that the
Board of Directors believes the Executive's conduct
constitutes the criteria set forth in clause (i), (B) the
Executive shall have been provided the opportunity to be heard
in person by the Board of Directors (with the assistance of
the Executive's counsel if the Executive so desires) and (C)
after such hearing, the termination for Cause is approved by a
resolution adopted in good faith by two-thirds of the members
of the Board of Directors.
(c) "Disability" shall mean a physical or mental infirmity which
materially impairs the Executive's ability to substantially perform any of the
essential functions of his job with the Company for a period of 180 consecutive
days, as determined by an independent physician selected with the approval of
both the Company and the Executive.
(d) "Effective Date" shall mean December 15, 1999.
(e) "Notice of Termination" shall mean a written notice of termination
from the Company or the Executive which specifies an effective date of
termination, indicates the specific termination provision in this Agreement
relied upon, and sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated.
(f) "Successors and Assigns" shall mean, for a corporation, a
corporation or other entity acquiring all or substantially all the assets and
business of the Company (including this Agreement), and for any individual as
the Executive, the estate, successors or heirs, and/or the legal representative
of the Executive, whether by operation of law or otherwise.
(g) "Termination Date" shall mean, in the case of the Executive's
death, his date of death, and in all other cases, the date specified in the
Notice of Termination.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
EXECUTIVE: COMPANY:
ESHARE TECHNOLOGIES, INC.
Page 6
<PAGE> 7
BY:
- --------------------- -----------------------------
George Landgrebe Aleksander Szlam, Chairman and
Chief Executive Officer
<PAGE> 8
AMENDMENT TO EMPLOYMENT AGREEMENT
This is an amendment ("Amendment") made effective the 14th day of January 2000
to the employment agreement ("Agreement") made and entered into the 15th day of
December 1999 by and between George Landgrebe and eShare Technologies, Inc.,
hereinafter referred to as the "Company".
In consideration of the mutual covenants and agreements contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged and accepted, the parties hereby agree as follows:
1. Definitions. For purposes of this Amendment, the following definitions shall
apply. Any terms not defined in this Amendment but defined in the Agreement
shall have the meaning set forth therein. In the event of a conflict between the
Agreement and this Amendment, the definitions of this Amendment shall control
with respect to the matters contained herein.
A. "Change in Control" shall mean the occurrence during the Term of any
of the following events:
(i) An acquisition (other than directly from the Company) of any voting
securities of the Company (the "Voting Securities") by any "Person" (as
the term person is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934 (the "1934 Act")) immediately after
which such Person has "Beneficial Ownership" (within the meaning of
Rule 13d-3 promulgated under the 1934 Act) of a majority or more of the
combined voting power of the Company's then outstanding Voting
Securities; provided, however, that in determining whether a Change in
Control has occurred, Voting Securities which are acquired in a
"Non-Control Acquisition" (as hereinafter defined) or the acquisition
of voting securities by a Person who, immediately prior to such
acquisition, had Beneficial Ownership of 20% or more of the combined
voting power of the Company's then outstanding voting securities shall
not constitute an acquisition which would cause a Change in Control. A
"Non-Control Acquisition" shall mean an acquisition by (1) an employee
benefit plan (or a trust forming a part thereof) maintained by (x) the
Company, or (y) any corporation or other Person of which a majority of
its voting power or its equity securities or equity interest is owned
directly or indirectly by the Company (a "Subsidiary"), (2) the Company
or any Subsidiary, or (3) any Person in connection with a "Non-Control
Transaction" (as hereinafter defined).
(ii) Approval by a majority of the stockholders of the Company of:
(A) A merger, consolidation or reorganization involving the
Company, unless
(1) the stockholders of the Company, immediately before such
merger, consolidation or reorganization, own, directly or
indirectly, immediately following such merger, consolidation
or reorganization, at least a majority of the combined voting
power of the outstanding voting securities of the corporation
resulting from such merger or consolidation or reorganization
(the "Surviving Corporation") in substantially the same
proportion as their ownership of the Voting Securities
immediately before such merger, consolidation or
reorganization, and
(2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing
for such merger, consolidation or reorganization constitute at
least majority of the members of the board of directors of the
Surviving Corporation.
(A transaction described in clauses (1) and (2) shall herein
be referred to as a "Non-Control Transaction."); or
<PAGE> 9
(B) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person
(other than a transfer to a Subsidiary).
Notwithstanding anything contained in this Amendment to the contrary,
if the Executive's employment is terminated within ninety (90) days
prior to a Change in Control and the Executive demonstrates that such
termination (A) was at the request of a third party who has indicated
an intention or taken steps reasonably calculated to effect a Change in
Control (a "Third Party"), or (B) otherwise occurred in connection
with, or in anticipation of, a Change in Control, then for all purposes
of this Amendment, the date of a Change in Control with respect to the
Executive shall mean the date immediately prior to the date of such
termination of the Executive's employment.
2. Vesting of Options. If a Change in Control of the Company occurs, 100% of all
options to purchase stock of the Company previously granted by the Company to
Executive which are not yet vested at the date of the Change in Control shall
immediate vest and be fully exercisable as of such date. However, no such
options shall vest after the last date of employment with the Company.
3. Except as modified by this Amendment, the terms of the Agreement shall remain
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
date first above written.
EXECUTIVE: COMPANY:
GEORGE LANDGREBE ESHARE TECHNOLOGIES, INC.
By:
- ----------------------- ---------------------------------------
George Landgrebe Aleksander Szlam
Chairman and Chief Executive Officer
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE COMPANY
eShare.com
eShare Technologies, Limited
eShare Technologies, LTDA
eShare Technologies S.A.R.L.
Inventions, Inc.
Melita de Mexico S. de R.L. de C.V.
Melita Finance Company
Melita Intellectual Property, Inc.
Melita International FSC, Ltd.
smallwonder! Softworks, Inc.
Support Groups de R.L. de C.V.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into eShare
Technologies, Inc.'s previously filed Registration Statements File Nos.
333-56299, 333-41503 and 333-89351.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 28, 2000
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
eShare.com, Inc. (formerly
eShare Technology, Inc.);
We have audited the balance sheets 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 (not presented separately herein). 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. (formerly
eShare Technologies, Inc.) as of December 31, 1997 and 1998, and the results of
its operations and its cash flows for the years 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
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
eShare.com, Inc.:
We consent to the incorporation by reference of our report included in this
Form 10-K, dated April 16, 1999, except as to note 12 which is as of June
15, 1999, with respect to the balance sheets of eShare.com, Inc. (formerly
eShare Technologies, Inc.) as of December 31, 1998 and 1997, and the related
statements of operations, redeemable preferred stock and stockholders' deficit
and cash flows for the years then ended, into eShare Technologies, Inc.'s
(formerly Melita International Corporation) previously filed registration
statements on Form S-8 (File Nos. 333-56299, 333-41503 and 333-89351).
KPMG LLP
Melville, New York
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ESHARE TECHNOLOGIES FOR THE YEAR ENDED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,558
<SECURITIES> 11,315
<RECEIVABLES> 35,877
<ALLOWANCES> (3,014)
<INVENTORY> 1,967
<CURRENT-ASSETS> 55,236
<PP&E> 21,948
<DEPRECIATION> (10,985)
<TOTAL-ASSETS> 70,551
<CURRENT-LIABILITIES> 16,640
<BONDS> 0
0
0
<COMMON> 69
<OTHER-SE> 53,768
<TOTAL-LIABILITY-AND-EQUITY> 70,551
<SALES> 94,855
<TOTAL-REVENUES> 94,855
<CGS> 36,163
<TOTAL-COSTS> 36,163
<OTHER-EXPENSES> 70,483
<LOSS-PROVISION> 1,709
<INTEREST-EXPENSE> 44
<INCOME-PRETAX> (11,035)
<INCOME-TAX> (1,077)
<INCOME-CONTINUING> (9,958)
<DISCONTINUED> 0
<EXTRAORDINARY> (5,850)
<CHANGES> 0
<NET-INCOME> (15,808)
<EPS-BASIC> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD LOOKING STATEMENTS
You should consider carefully the following factors in evaluating us
and our business. The risks and uncertainties described below are not the only
ones we face. Additional risks and uncertainties not presently known to us,
which we currently deem immaterial or that are similar to those faced by other
companies in our industry or business in general, may also impair our business
operations. If any of the following risks actually occurs, our business,
financial condition or results of future operations could be materially and
adversely affected. In such case, the trading price of our common stock could
decline, and you could lose all or part of your investment.
RISK FACTORS
You should consider carefully the following factors in evaluating us
and our business. The risks and uncertainties described below are not the only
ones we face. Additional risks and uncertainties not presently known to us,
which we currently deem immaterial or that are similar to those faced by other
companies in our industry or business in general, may also impair our business
operations. If any of the following risks actually occurs, our business,
financial condition or results of future operations could be materially and
adversely affected. In such case, the trading price of our common stock could
decline, and you could lose all or part of your investment.
RISKS RELATED TO OUR BUSINESS
OUR LENGTHY SALES AND IMPLEMENTATION CYCLE COULD ADVERSELY AFFECT US
If we experience delays in, or cancellation of, sales or
implementations of our products and services, our business and financial results
could be hurt. To sell our products, we generally must provide a significant
level of education to prospective customers regarding the use and benefits of
our products. In addition, prospective customers must make a significant
commitment of resources in connection with the implementation of our products,
which typically requires substantial integration efforts by us or our customer.
For these and other reasons, the length of time between the date of initial
contact with the potential customer and the installation and use of our products
is typically six months or more, and may be subject to delays over which we have
little or no control. Our implementation cycle could be lengthened in the future
by increases in the size and complexity of our installations and in the number
of third-party systems with which our products must integrate. In addition, any
unexpected delays in individual implementations could expose us to liability
claims from our customers.
OUR OPERATING RESULTS ARE SUBSTANTIALLY DEPENDENT ON A LIMITED SUITE OF PRODUCTS
AND THE THE MARKET FOR CALL CENTER AND INTERNET BASED SOLUTIONS
We currently derive a majority of our revenues from sales of our
PhoneFrame Explorer products and related services. We introduced PhoneFrame
Explorer in late 1997. We are currently beta testing our new Enterprise Explorer
line of blended call center products and expect to begin commercial shipment in
the first quarter of next year. We anticipate that in the near term, a
significant portion of our future revenue may be attributable to our Enterprise
Explorer product line. We intend to enhance these products and develop related
products. However, any factor adversely affecting the market for call center
solutions in general, or the PhoneFrame products in particular, could hurt our
business and financial results. We may face potential charges resulting from the
impact of having to write down inventory of outdated products that cannot be
sold. The market for call center systems is intensely competitive, highly
fragmented and subject to rapid change. As we move into the internet space, a
new set of challenges arise related to a market which is still evolving.
Currently, our internet product line accounts for a relatively small portion of
our total revenues.
WE RELY ON A FEW CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES
In the call center space, we have historically derived and believe that
we will continue to derive a significant portion of our revenues in any period
from a limited number of large corporate clients. In 1999, our five
<PAGE> 2
largest customers accounted for 28.2% of our total revenues. In 1998, our five
largest customers accounted for 23.2% of our total revenues. Although the
specific customers may change from period to period, we expect that large sales
to a limited number of customers will continue to account for a significant
percentage of our revenues in any particular period for the foreseeable future.
Therefore, the loss, deferral or cancellation of an order could have a
significant impact on our operating results in a particular quarter. Our current
customers may not place additional orders and we may not obtain orders of
similar magnitude from other customers. If we lose any major customer, suffer
any reduction, delay in or cancellation of orders by any such customer or fail
to market successfully to new customers, our business and financial results
could be hurt.
THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Our sales outside the United States accounted for 18.4%, 24.8% and
31.7% of our total revenues in 1997, 1998 and 1999, respectively. A significant
element of our business strategy is to continue expansion of our operations in
international markets. This expansion will continue to require significant
management attention and financial resources to develop international sales
channels. Because of the difficulty in penetrating new markets, we may not be
able to maintain or increase international revenues. Our international
operations are subject to inherent risks, including:
- - Significant volatility in the level and timing of business;
- - the impact of possible recessionary environments in economies outside
the United States;
- - changes in legal and regulatory requirements, including those relating
to telemarketing activities;
- - changes in tariffs;
- - seasonality of sales;
- - the costs of localizing products for foreign markets and integrating
products with foreign system components;
- - longer accounts receivable collection periods and greater difficulty in
accounts receivable collection;
- - difficulties and costs of staffing and managing foreign operations;
- - reduced protection for intellectual property rights in some countries;
- - potentially adverse tax consequences;
- - political and economic instability; and
- - the higher cost of foreign service delivery.
While our expenses incurred in foreign countries typically are
denominated in the local currencies, revenues generated by our international
sales typically are paid in U.S. dollars or British pounds. Accordingly, while
our exposure to currency fluctuations to date has been insignificant, we could
experience fluctuations in currency exchange rates in the future that would have
a material adverse impact on our international operations.
We currently do not engage in currency hedging activities.
<PAGE> 3
OUR GROWTH IS DEPENDENT UPON THE SUCCESSFUL DEVELOPMENT OF OUR DIRECT AND
INDIRECT SALES CHANNELS
We currently sell our products domestically primarily through our
direct sales force and internationally through both direct and indirect sales
channels. We support our customers with our internal technical and customer
support staff. Our ability to achieve significant revenue growth in the future
will greatly depend on our ability to recruit and train sufficient technical,
customer support and direct sales personnel. We have in the past and may in the
future experience difficulty in recruiting qualified sales, technical and
support personnel. If we are unable to rapidly and effectively expand our direct
sales force and our technical and support staff, our business and financial
results could be hurt.
We believe that our future growth also will depend on developing and
maintaining successful indirect sales channels, including value added resellers,
or VARs, and distributors. Our strategy is to continue to increase the
proportion of customers served through these indirect channels. We are currently
investing, and plan to continue to invest, significant resources to develop
these indirect channels. This could adversely affect our operating results if
these efforts do not generate revenues necessary to offset this investment.
Also, our inability to recruit and retain qualified VARs and distributors could
adversely affect our results of operations. Because lower unit prices are
typically charged on sales made through indirect channels, increased indirect
sales could adversely affect our average selling prices and result in lower
gross margins. In addition, sales of our products through indirect channels will
reduce our gross profits from our services as the VARs and distributors provide
these services. As indirect sales increase, our direct contact with our customer
base will decrease, and we may have more difficulty accurately forecasting
sales, evaluating customer satisfaction and recognizing emerging customer
requirements. In addition, our VARs and distributors may develop, acquire or
market products competitive with our products.
Our strategy of marketing our products directly to customers and
indirectly through VARs and distributors may result in distribution channel
conflicts. Our direct sales efforts may compete with those of our indirect
channels and, to the extent different VARs and distributors target the same
customers, VARs and distributors may also come into conflict with each other.
Any channel conflicts which develop may have a material adverse effect on our
relationships with VARs and distributors or hurt our ability to attract new VARs
and distributors.
THERE ARE SEVERAL RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY
We may in the future continue to engage in selective acquisitions of
businesses that are complementary to ours, including other providers of internet
products, contact management or CTI solutions or technology. We may not be able
to identify suitable acquisition candidates available for sale at reasonable
prices, consummate any acquisition or successfully integrate any acquired
business into our operations. Further, acquisitions involve a number of
additional risks, including diversion of management's attention, failure to
retain key acquired personnel, unanticipated events or circumstances and legal
liabilities, some or all of which could hurt our business and financial results.
Problems with an acquired business could have a material adverse impact on our
performance as a whole.
If we engage in acquisitions in the future, we might finance such
acquisitions with the proceeds from public offerings as well as with possible
debt financing, the issuance of additional equity securities (common or
preferred stock) or a combination of the foregoing. We may not be able to
arrange adequate financing on acceptable terms. If we were to proceed with one
or more significant future acquisitions in which the consideration consisted of
cash, a substantial portion of our available cash could be used to consummate
the acquisitions. As has been the case in the past, if we were to consummate one
or more significant acquisitions in which the consideration consisted of stock,
our shareholders could suffer significant dilution of their interests in us.
Many business acquisitions must be accounted for using purchase
accounting. Most of the businesses that might become attractive acquisition
candidates for us are likely to have significant intangible assets. If we
acquire these businesses and are required to account for them as a purchase, we
would typically be required to recognize substantial goodwill amortization
charges, reducing future earnings. In addition, such acquisitions could involve
non-recurring acquisition-related charges, such as the write-off or write-down
of software development costs or other intangible items.
<PAGE> 4
WE MAY BE CONFRONTED WITH DEFECTS IN OUR SOFTWARE OR THE INABILITY TO ACQUIRE
THIRD-PARTY SOFTWARE OR HARDWARE THAT IS ERROR-FREE
Software products as complex as those we offer may contain errors that
could be detected at any point in the products' life cycles. We have, in the
past, discovered software errors in certain of our products and have experienced
delays in shipment or implementation of products during the period required to
correct these errors. Despite extensive testing by us and by current and
potential customers, errors may still be found. This could result in a loss of,
or delay in, market acceptance and sales, diversion of development resources,
injury to our reputation or increased service and warranty cost. In particular,
the call center environment is characterized by a wide variety of standard and
non-standard configurations that make pre-release testing for programming or
compatibility errors very difficult and time consuming and limit our ability to
uncover all defects prior to shipment and installation at a customer's location.
Certain software used in our products is licensed by us from third parties, and
our products are designed to operate on certain hardware platforms manufactured
by third parties. Such third-party software or hardware may contain errors that
we are dependent upon the third-party to correct.
WE MAY FACE LIABILITY TO CLIENTS IF OUR SYSTEMS FAIL
Our products are often critical to the operations of our clients'
businesses and provide benefits that may be difficult to quantify. If our
product or a client's system fails, the client could make a claim for
substantial damages against us, regardless of our responsibility for such
failure. Although we attempt to limit contractually our liability for damages
arising from product failures or negligent acts or omissions, the limitations of
liability set forth in our contracts may not be enforceable in all instances and
may not otherwise protect us from liability for damages. Although we maintain
general liability insurance coverage, including coverage for product liability
and errors or omissions, this coverage may not continue to be available on
reasonable terms or in sufficient amounts to cover one or more large claims. In
addition, the insurer might disclaim coverage as to any future claim. If we
experience one or more large claims against us that exceed available insurance
coverage or changes in our insurance policies, including premium increases or
the imposition of large deductible or co-insurance requirements, our business
and financial results could be hurt.
WE MUST CONTINUE TO ADVANCE OUR TECHNOLOGY AND COMPLY WITH INDUSTRY REQUIREMENTS
TO REMAIN COMPETITIVE
The market for our products is subject to rapid technological change,
changing customer needs, frequent new product introductions and evolving
industry standards that may render our existing products and services obsolete.
As a result, unforeseen changes in customer and technological requirements for
application features, functions and technologies could rapidly erode our
position in this market. If we are unable, for technological or other reasons,
to develop and introduce new and enhanced products in a timely manner, our
business and financial results could be hurt. Our growth and future operating
results will depend in part upon our ability to enhance existing applications
and develop and introduce new applications that anticipate, meet or exceed
technological advances in the marketplace, that meet changing customer
requirements, that respond to competitive products and that achieve market
acceptance. Our product development and testing efforts have required, and are
expected to continue to require, substantial investments. We may not possess
sufficient resources to make these necessary investments. In addition, we cannot
assure that these products will meet the requirements of the marketplace and
achieve market acceptance, or that our current or future products will conform
to industry standards.
WE MAY EXPERIENCE DELAYS IN DEVELOPMENT OF NEW PRODUCTS
We have in the past experienced delays both in developing new products
and customizing existing products. We could experience similar delays in the
future. Delays could occur for a variety of reasons, including:
- - the complex nature of our products;
- - difficulties in getting newly developed software code to function
properly with existing code;
- - difficulty in recruiting sufficient numbers of programmers with the
proper technical skills and capabilities;
<PAGE> 5
- - loss of programmers with existing technical knowledge of our products;
- - changing standards or protocols within the computer and telephony
equipment with which our products integrate;
- - inherent limitations in, difficulties in integrating with, and
unforeseen problems with using other company or industry products and
software;
- - changes in design specifications once technical problems are uncovered;
and
- - unforeseen problems with the implementation of a distributed,
object-oriented architecture and processing.
THE INABILITY TO ATTRACT AND RETAIN MANAGEMENT AND OTHER PERSONNEL MAY ADVERSELY
AFFECT US
The future success of our growth strategy will depend to a significant
extent on our ability to attract, train, motivate and retain highly skilled
professionals, particularly software developers, sales and marketing personnel
and other senior technical personnel. Highly skilled employees with the
education and training we require are in high demand. If we are unable to hire
and retain such qualified personnel, our ability to adequately manage and
complete our existing sales and to bid for, obtain and implement new sales would
be impaired. Further, we must train and manage our growing employee base,
requiring an increase in the level of responsibility for both existing and new
management personnel.
WE MUST SUCCESSFULLY MANAGE OPERATIONS
Our ability to grow will be dependent on properly managing our
operations. Our inability manage effectively could have a material adverse
effect on the quality of our services and projects, our ability to attract and
retain key personnel, our business prospects and our financial results. In
particular, we will have to continue to train our personnel, particularly
skilled technical, marketing and management personnel, and continue to develop
and improve our operational, financial, communications and other internal
systems. -
YEAR 2000 RISKS MAY RESULT IN MATERIAL ADVERSE EFFECTS ON OUR BUSINESS
Many companies have needed to upgrade their computer systems and
software products in order to ensure that these systems and software are able to
distinguish 21st century dates from 20th century dates. While our current
products are designed to comply with these "Year 2000" requirements, we may
still face claims resulting from system problems associated with the century
change. Our software products that are designed to be Year 2000 compliant may
not contain all necessary date code changes. Customers using earlier versions of
our products that were not Year 2000 compliant may have to install a later
version of the software that is Year 2000 compliant or implement a modification
to correct that version. Because our software system is often integrated with
hardware and operating or interface software over which we exert little control,
the failure of the manufacturers of those systems to ensure that they are Year
2000 compliant may cause the integrated system to fail. Any Year 2000 problems
with our products and implementations that are not satisfactorily corrected
could hurt our business and financial results.
We believe that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues in a variety of ways. Expenditures
by many companies to address Year 2000 issues may result in reduced funds
available to purchase software products such as those that we offer. 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
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 customers, to reevaluate their current software needs and as a
result switch to other systems or
<PAGE> 6
suppliers. Any of the foregoing could hurt our business and financial results.
Please see Item 7: "Management's Discussion and Analysis of Financial Condition
and Results of Operation--Year 2000 Readiness."
In addition, Year 2000 non-compliance in our internal information
technology, or IT, systems and non-IT systems on which our operations rely could
hurt our business and financial results. In spite of our best efforts to upgrade
our systems, we may still face Year 2000 compliance issues.
WE MAY NOT BE ABLE TO CONTINUE TO COMPETE SUCCESSFULLY WITH OTHER COMPANIES
The market for our products is intensely competitive,
fragmented and subject to rapid change. Because our principal products are call
management systems, which include both software applications and hardware, we
compete with a variety of companies that provide these components independently
or as an integrated system. We may not be able to compete successfully against
current and future competitors and competitive pressures faced by us could hurt
our business and financial results. Our primary competitors in the field of
integrated inbound/outbound telephony-based call management systems are Davox
Corporation, or Davox; EIS International, Inc., or EIS; and Mosaix
International, Inc., or Mosaix. We compete primarily against Davox and Mosaix in
the collections segment of the outbound call management systems market, and
against EIS in the telemarketing and telesales segments of the inbound/outbound
call management systems market. We also compete in the CTI segment of the
market, where principal competitors include Firstwave Technologies, Inc.,
Genesys Telecommunications Laboratories, Inc., GeoTel Communications
Corporation, Information Management Associates, Inc., and Quintus Corporation,
among others. Some of our competitors may align themselves with
telecommunications equipment providers, such as providers of private branch
exchange, or PBX, and automatic call distribution, or ACD, equipment, other
telecommunications equipment providers or other vendors in an effort to increase
sales potential for their products. We may also face additional direct
competition from PBX/ACD vendors, other telecommunications equipment providers,
telecommunications service providers, computer hardware and software vendors and
others. We may also face competition from non-traditional competitors in the
emerging computer telephony market. These competitors may include Interactive
Intelligence Inc., Oracle Corporation, IBM and others. We generally face
competition from one or more of our principal competitors on major installations
and believe that price is a major factor considered by our prospective
customers. Increased competition has contributed significantly to price
reductions, and we expect these price reductions to continue. In addition,
increased competition may result in reduced operating margins and loss of market
share. Many of our current and potential competitors have significantly greater
financial, technical, marketing and other resources than we do. As a result,
they may be able to respond more quickly to new or emerging technologies and
changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products than we could.
The market for our internet based products is new and rapidly evolving,
and is expected to become increasingly competitive as current competitors expand
their product offerings and new companies enter the market. The principal
competitive factors in the community and e-commerce software and services market
include adherence to emerging Web-based technology standards; comprehensiveness
of applications; reliability and security; adaptability, flexibility and
scalability; real-time, interactive capability with customers, partners, vendors
and suppliers; integration with a variety of communications media; ease of use;
ease of implementation; customer service and support; and price. Although we
believe that we currently compete favorably with respect to these factors, there
can be no assurance that we can maintain our competitive position against
current and potential competitors, especially those with longer operating
histories, greater name recognition and substantially greater financial,
technical, marketing, management, service, support and other resources. We
expect that these solutions will continue to be a principal source of
competition for the foreseeable future.
We face competition in the community market from Web Crossing, O'Reilly
Web Board, The Palace Server and Koz iChat and our competitors in the live
interaction market include Webline, Kana Communications, eGain, Acuity and
Business Evolutions, Inc. In addition, traditional call center software
providers and customer relationship vendor managers are trying to penetrate the
interactive communication market by joining with established strategic partners
in the industry.
<PAGE> 7
We also may face competition from systems integrators which design and develop
custom systems and perform custom integration. Some of these firms may possess
industry-specific expertise or reputations among potential customers for
offering enterprise solutions to e-commerce needs. These systems integrators may
be resellers of our products and may engage in joint marketing and sales efforts
with us. We rely on these firms for recommendations of our products during the
evaluation stage of the purchase process, as well as for implementation and
customer support services. These systems integrators may have similar, and often
more established, relationships with our competitors, and there can be no
assurance that these firms will not develop, market or recommend competing
software applications.
OTHER COMPANIES MAY CLAIM THAT OUR PRODUCTS INFRINGE THEIR INTELLECTUAL PROPERTY
RIGHTS.
We cannot assure that third parties will not claim that we are infringing their
intellectual property rights. We expect that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in our industry grows and the functionality of products in different
industry segments overlaps. In furtherance of the development of our services or
products, we may need to acquire licenses for intellectual property to avoid
infringement of a third party's product. Such licenses may not be available on
commercially reasonable terms, if at all. We also cannot assure that former
employees of our present and future employers will not assert claims that such
employees have improperly disclosed confidential or proprietary information to
us. Any such claims, with or without merit, could be time consuming to defend,
result in costly litigation, divert management's attention and resources, cause
product shipment delays or require us to pay money damages or enter into royalty
or licensing agreements. Such royalty or licensing agreements may not be
available on terms acceptable to us, if at all. In the event of a successful
claim of product infringement against us and our failure or inability to license
the infringed or similar technology, our business, operating results and
financial condition could be materially and adversely affected.
OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT US
We rely on a combination of patent, copyright, trade secret and
trademark laws, confidentiality procedures and contractual provisions to protect
our proprietary rights in our products and technology. These measures may not be
adequate to protect our trade secrets and proprietary technology. Further, we
may be subject to additional risks as we enter into transactions in countries
where intellectual property laws are not well developed or are poorly enforced.
Legal protections of our rights may be ineffective in such countries. If we must
engage in litigation to defend and enforce our intellectual property rights,
either domestically or in other countries, we could face substantial costs and
diversion of resources, regardless of the final outcome of such litigation.
Despite our efforts to safeguard and maintain our proprietary rights both in the
United States and abroad, we may not be successful in doing so and the steps we
take in this regard may not be adequate to deter misappropriation or independent
third-party development of our technology or to prevent an unauthorized third
party from copying or otherwise obtaining and using our products or technology.
Others may independently develop similar technologies or duplicate any
technology developed by us.
With certain exceptions, we historically have not actively pursued
infringements of our patents, and any future attempt by us to enforce our
patents might not be successful or result in royalties that exceed the cost of
such enforcement efforts. We may not be able to detect all instances of
infringement. We have entered into agreements with certain of our distributors
giving them a limited, non-exclusive right to use portions of our source code to
create foreign language versions of our products for distribution in foreign
markets. In addition, we have entered into agreements with a number of our
customers requiring us to place our source code in escrow. These escrow
arrangements typically provide that these customers have a limited,
non-exclusive right to use this code in the event that there is a bankruptcy
proceeding by or against us, if we cease to do business or if we fail to meet
our support obligations. These arrangements may increase the likelihood of
misappropriation by third parties. As the number of call management software
applications in the industry increases and the functionality of these products
further overlaps, software development companies like us may increasingly become
subject to claims of infringement or misappropriation of the intellectual
property rights of others. Although we believe that our software components and
other intellectual property do not infringe on the intellectual property rights
of others, we still face the risk that such a claim will be asserted against us
in the future, that assertion of such claims will result in litigation and that
we
<PAGE> 8
might not prevail in such litigation or be able to obtain a license for the use
of any infringed intellectual property from a third party on commercially
reasonable terms. Furthermore, litigation, regardless of its outcome, could
result in substantial cost to us, divert management's attention from our
operations and delay customer purchasing decisions.
OUR SUCCESS DEPENDS ON OUR KEY EXECUTIVES
Our success will depend in large part upon the continued availability
of the services of our senior executives, including Aleksander Szlam, our
Chairman and Chief Executive Officer. Although we have an employment agreement
with Mr. Szlam, the agreement does not obligate him to continue his employment
with us. We might not be able to retain the services of Mr. Szlam. We do not
maintain key man life insurance on Mr. Szlam.
ONLINE SECURITY BREACHES COULD HARM OUR BUSINESS.
A party that is able to circumvent our security systems or the security
systems of our customers could steal proprietary information or cause
interruptions in our operations. Security breaches also could damage our
reputation and expose us to a risk of loss or litigation and possible liability.
Our insurance policies have coverage limits and exclusions that may prevent
reimbursement for losses caused by security breaches.
Furthermore, our servers may be vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions. We may need to expend
significant additional capital and other resources to protect against security
breaches or to alleviate problems caused by any breaches. We cannot assure that
we can prevent all security breaches.
IF INTERNET USAGE DECREASES, OUR BUSINESS COULD BE MATERIALLY ADVERSELY
AFFECTED.
Our future success is substantially dependent on the continued growth
in the use of the Internet and e-commerce. The Internet is relatively new and is
rapidly evolving. Our business would be adversely affected if Internet usage and
e-commerce does not continue to grow. Growth in Internet usage and e-commerce
may be inhibited for a number of reasons, such as:
- - the Internet infrastructure may not be able to support the demands
placed on it, or its performance and reliability may decline as usage
grows;
- - security and authentication concerns with respect to transmission over
the Internet of confidential information, such as credit card numbers,
and attempts by unauthorized computer users, commonly referred to a
hackers, to penetrate online security systems; and
- - privacy concerns, such as those related to the placement by Web sites
on a user's hard drive without the user's knowledge or consent of
certain information to gather user information, known as "cookies."
RISKS RELATED TO OUR INDUSTRY
WE MAY BE SUBJECT TO CHANGING GOVERNMENTAL REGULATIONS
Federal, state or foreign agencies may and have adopted laws or
regulations affecting the use of outbound call processing systems as well as the
Internet as a commercial medium. These laws or regulations could limit the
market for our products, which could materially adversely affect our business,
operating results and financial condition. Although many of these laws or
regulations may not apply to our business directly, we expect that laws and
regulations relating to user privacy, pricing, content and quality of products
and services could indirectly affect our business. It is possible that these
laws or regulations could expose companies involved in outbound call processing
systems as well as e-commerce to liability, which could limit the growth of
commerce on the Internet generally.
<PAGE> 9
THE APPLICATION OF SALES AND OTHER TAXES TO ONLINE COMMERCE COULD ADVERSELY
AFFECT DEMAND FOR OUR PRODUCTS AND SERVICES
The application of sales and other taxes by state and local governments
to online commerce is uncertain and may take years to resolve. In particular,
the federal government and a number of states are currently reviewing the
appropriate tax treatment of online commerce, and new federal laws or state tax
regulations may subject online commerce to additional state sales and income
taxes. Any adverse impact on the growth of online commerce may reduce the sales
of our software and adversely affect our revenues and earnings.
RISKS RELATED TO THE MARKET FOR OUR SECURITIES
OUR OPERATING RESULTS COULD FLUCTUATE, CAUSING OUR STOCK PRICE TO FALL
Our revenues and operating results could vary substantially from
quarter to quarter. If our quarterly revenues or operating results fall below
the expectations of investors or public market analysts, the price of our common
stock could fall substantially. Our quarterly revenues and operating results may
vary as a result of a number of factors, including:
- changes in the demand for our products;
- the level of product and price competition;
- the length of our sales and implementation process;
- our ability to control costs;
- the size and timing of individual transactions;
- the mix of products and services sold;
- software defects and other product quality problems;
- any delay in or cancellation of customer installations;
- our success in expanding our direct sales force and indirect
distribution channels;
- the timing of new product introductions and enhancements by us
or our competitors;
- customer order deferrals in anticipation of enhancements or
new products offered by us or our competitors;
- changes in foreign currency exchange rates;
- customers' fiscal constraints; and
- general economic conditions.
In addition, a limited number of relatively large customer orders has
accounted for and is likely to continue to account for a substantial portion of
our total revenues in any particular quarter. Any delay or deferral of customer
orders may cause significant variations in our operating results from quarter to
quarter. A high percentage of our costs are for staffing and operating expenses
and are fixed in the short term based on anticipated revenue levels.
<PAGE> 10
Therefore, variations between anticipated order dates and actual order dates, as
well as non-recurring or unanticipated large orders, can cause significant
variations in our operating results from quarter to quarter.
OUR CHARTER AND BYLAWS AND GEORGIA LAW MAY INHIBIT A TAKEOVER OF ESHARE
The Board of Directors has authority to issue up to 20,000,000 shares
of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of the preferred stock without further
vote or action by our shareholders. The rights of the holders of our common
stock will be subject to, and may be adversely affected by, the rights of the
holders of preferred stock that may be issued in the future. While we have no
present intention to issue shares of preferred stock, such issuance could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock. In addition, our charter and bylaws contain
provisions that may discourage proposals or bids to acquire us. These provisions
could have the effect of making it more difficult for a third party to acquire
control of us and adversely affect prevailing market prices for our common
stock.
OUR STOCK PRICE HAS BEEN VOLATILE
The market price of our common stock could be subject to significant
fluctuations in response to variations in quarterly operating results and other
factors. In addition, the securities markets have experienced significant price
and volume fluctuations from time to time that have often been unrelated or
disproportionate to the operating performance of particular companies. Any
announcement with respect to any adverse variance in revenue or earnings from
levels generally expected by securities analysts or investors for a given period
would have an immediate and significant adverse effect on the trading price of
the common stock. In addition, factors such as announcements of technological
innovations or new products by us, our competitors or third parties, rumors of
such innovations or new products, changing conditions in the market for call
center systems, changes in estimates by securities analysts, announcements of
extraordinary events, such as acquisitions or litigation, or general economic
conditions may have a significant adverse impact on the market price of the
common stock.
OUR PRINCIPAL SHAREHOLDER CONTINUES TO CONTROL OUR AFFAIRS
Aleksander Szlam, our Chairman of the Board, Chief Executive Officer
and principal shareholder, is the beneficial owner of approximately 50.1% of the
outstanding shares of our common stock. Accordingly, Mr. Szlam is in a position
to control our affairs through his ability to control any election of members of
our Board of Directors, as well as any decision whether to merge or sell our
assets, to amend our charter and bylaws, or to take other actions requiring the
vote or consent of our shareholders. This concentration of ownership could also
discourage bids for the shares of common stock at a premium to, or create a
depressive effect on, the market price of the common stock.
