-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H5XPo+ttVu4EAEJ8WEfvxdqzAWC5Gg89kzHNOQvcXB1UzybYWeBVbk+cWh85EbbL 1x2IZIQADQjFhe+EbzuBpg== 0000950144-00-004262.txt : 20000331 0000950144-00-004262.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950144-00-004262 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESHARE TECHNOLOGIES INC/GA CENTRAL INDEX KEY: 0001034956 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 581378534 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22317 FILM NUMBER: 587763 BUSINESS ADDRESS: STREET 1: 5051 PEACHTREE CORNERS CIRCLE CITY: NORCROSS STATE: GA ZIP: 30092-2500 BUSINESS PHONE: 7702394000 MAIL ADDRESS: STREET 1: 5051 PEACHTREE CORNERS CIRCLE CITY: NORCROSS STATE: GA ZIP: 30092-2500 FORMER COMPANY: FORMER CONFORMED NAME: MELITA INTERNATIONAL CORP DATE OF NAME CHANGE: 19970304 10-K405 1 ESHARE TECHNOLOGIES, INC. 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 --------------- 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 --------------- 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] A-1 2 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. =============================================================================== A-2 3 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. A-3 4 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 A-4 5 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. A-5 6 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. A-6 7 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. A-7 8 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: A-8 9 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. A-9 10 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. A-10 11 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. A-11 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:
NAME AGE POSITION - ---- --- -------- 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
- ---------- (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 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 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.
HIGH LOW 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
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. A-14 15
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: 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
DECEMBER 31, ------------------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: 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
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 A-15 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. A-16 17
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1998 1999 ---- ---- ---- 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%
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:
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1998 1999 ------- ------- ------- Cost of product revenues............ 33.5% 30.4% 30.8% Cost of service revenues............ 48.1% 51.8% 52.7%
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 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. A-18 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 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 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 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:
Securities Sensitive to Market Risk by Maturity As of December 31, 1999 (In thousands) 2000 2001 Total ------ ------ ------- Fixed Rate ($US) $5,970 $5,306 $11,276 Average Interest Rate 4.13% 3.87% 4.00%
A-22 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
PAGE ---- 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
A-23 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 25 ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS 1998 1999 ---------------------------------------------------------- -------- -------- 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 ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1999 ---------------------------------------------------------- -------- -------- 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 ======== ========
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 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)
1997 1998 1999 ------- -------- ------- 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 ======== ======= ========
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 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)
COMMON STOCK OTHER --------------- ADDITIONAL COMPREHEN- RETAINED PAID-IN SIVE DEFERRED EARNINGS SHARES AMOUNT CAPITAL INCOME COMPENSATION (DEFICIT) TOTAL --------- ------ ---------- --------- ------------ --------- ------- 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 ========== === ======== ===== ======= ======== ========
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 28 ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 (IN THOUSANDS)
1997 1998 1999 ------- ------- ------ 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) ======= ======= ========
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 29 ESHARE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999 (IN THOUSANDS)
1997 1998 1999 -------- --------- -------- 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 ======== ======== ========
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 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 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 A-31 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. A-32 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: FOR THE YEAR ENDED DECEMBER 31 1997 1998 ---- ---- (In Thousands) 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 ======== ========
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. A-33 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):
1998 1999 ---- ---- Raw materials $ 143 $ 212 Work in progress 37 920 Finished goods 1,080 835 ------ ------ $1,260 $1,967 ====== ======
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):
1998 1999 ---- ---- Accrued salaries and wages $ 4,935 $3,771 Other current liabilities 7,289 784 Accrued rent 292 324 ------- ------ $12,516 $4,879 ======= ======
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 A-34 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): 2000 $ 1,794 2001 1,540 2002 1,347 2003 1,178 Thereafter 7,137 ------- Total future minimum lease payments $12,996 =======
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. A-35 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):
OPTION OPTIONS PRICE ------- ----- 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 ======
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):
NUMBER OF SHARES WEIGHTED NUMBER WEIGHTED OUTSTANDING AT AVERAGE EXERCISABLE AT AVERAGE EXERCISE DECEMBER 31, EXERCISE DECEMBER 31, EXERCISE PRICES 1999 PRICE 1999 PRICE -------- ------------ -------- ------------ --------- $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
A-36 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:
1997 1998 1999 ---- ---- ---- 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%
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):
Pro Forma Actual ------- ------------------- 1997 1998 1999 ---- ------ ------- 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)
9. BENEFIT PLAN The Company has a defined contribution profit-sharing plan (the "Plan")for substantially all employees meeting the eligibility A-37 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):
1998 1999 ---- ---- 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 ======= =======
The following summarizes the components of the income tax provision for the years ended December 31, 1997, 1998, and 1999 (in thousands):
Pro Forma ------ACTUAL------- 1997 1998 1999 ---- ---- ---- 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) ====== ======= =======
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: A-38 39
Pro Forma ------ACTUAL---- 1997 1998 1999 ---- ---- ---- 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)% ==== ==== ====
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):
FOR THE YEAR ENDED DECEMBER 31, 1997 1998 1999 ---- ---- ---- 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
A-39 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:
FOR THE YEAR ENDED DECEMBER 31, 1997 1998 1999 ---- ---- ---- 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
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." A-40 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
BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND END OF YEAR EXPENSES DEDUCTIONS YEAR ------------ ---------- ---------- ---------- 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
(ii) Report of Independent Public Accountants on Financial Statement Schedule. A-41 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 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:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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).
A-43 44 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
A-44 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.
SIGNATURE TITLE DATE --------- ----- ---- /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
A-45 EX-10.2 2 LEASE AGREEMENT BETWEEN ESHARE TECH & MELITA HOUSE 1 EXHIBIT 10.2 ----------------------------------------------- (1) MELITA HOUSE INC (2) MELITA EUROPE LIMITED LEASE - of - MELITA HOUSE 124 BRIDGE ROAD CHERTSEY SURREY 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 - ------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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:- 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):- 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 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 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 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 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 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 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 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:- 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 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 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 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 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 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 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 EX-10.9 3 EMPLOYMENT AGREEMENT 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. Page 1 2 (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 Page 2 3 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 Page 3 4 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 Page 4 5 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. Page 5 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 7 BY: - --------------------- ----------------------------- George Landgrebe Aleksander Szlam, Chairman and Chief Executive Officer 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 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 EX-21.1 4 LIST OF SUBSIDIARIES OF THE COMPANY 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. EX-23.1 5 CONSENT OF ARTHUR ANDERSEN 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 EX-23.2 6 REPORT OF KPMG LLP 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 EX-23.3 7 CONSENT OF KPMG LLP 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 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 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. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 3,558 11,315 35,877 (3,014) 1,967 55,236 21,948 (10,985) 70,551 16,640 0 0 0 69 53,768 70,551 94,855 94,855 36,163 36,163 70,483 1,709 44 (11,035) (1,077) (9,958) 0 (5,850) 0 (15,808) (0.76) (0.76)
EX-99.1 9 PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 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 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. 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. 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; 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 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. 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 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. 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. 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. -----END PRIVACY-ENHANCED MESSAGE-----