10-Q 1 g65305e10-q.txt ESHARE COMMUNICATIONS, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . ---------------- ----------------- Commission file number 0-22317 ------- ESHARE COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in its Charter) GEORGIA 58-1378534 (State or other Jurisdiction of Incorporation (I.R.S. Employer Identification or Organization) Number)
5051 PEACHTREE CORNERS CIRCLE NORCROSS, GEORGIA 30092-2500 (770) 239-4330 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, no par value, outstanding as of November 9, 2000: 21,797,312 shares. 2
PART 1 - FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Unaudited Consolidated Balance Sheets as of September 30, 2000 and December 31, 3 1999. Unaudited Consolidated Statements of Operations for the three months and nine months ended September 30, 2000 and 1999. 4 Unaudited Consolidated Statements of Cash Flows for the nine months ended 5 September 30, 2000 and 1999. Notes to Consolidated Financial Statements. 6 Item 2. Management's Discussion and Analysis of Financial Condition and 10 Results of Operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. 14 PART II - OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits 15 Signatures 16
2 3 ESHARE COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited)
September 30, December 31, 2000 1999 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 14,236 $ 14,873 Accounts receivable, net of allowance for doubtful accounts of $4,492 at September 30, 2000 and $3,014 at December 31, 1999 33,129 32,863 Inventories 2,173 1,967 Deferred taxes 6,341 4,921 Prepaid expenses and other 9,056 7,384 -------- -------- Total current assets 64,935 62,008 Property and equipment, net of accumulated depreciation 10,771 10,963 Intangible assets, net 3,980 4,254 Other assets 173 98 -------- -------- $ 79,859 $ 77,323 Total assets ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,329 $ 3,343 Accrued liabilities 10,503 11,651 Deferred revenue 11,209 8,265 695 12 Other current liabilities 15 141 Current portion of notes payable -------- -------- Total current liabilities 27,751 23,412 Notes payable, excluding current portion -- 74 Stockholders' Equity Common Stock, no par value, 100,000,000 shares authorized 21,797,312 issued and outstanding at September 30, 2000 and 21,386,714 issued and outstanding at December 31, 1999 69 69 Additional paid-in capital 61,886 59,504 Accumulated other comprehensive income (loss) (958) (28) Accumulated deficit (8,889) (5,708) -------- -------- Total stockholders' equity 52,108 53,837 -------- -------- Total liabilities and stockholders' equity $ 79,859 $ 77,323 ======== ========
The accompanying notes are an integral part of these consolidated statements. 3 4 ESHARE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
For the three months ended For the nine months ended September 30, September 30, 2000 1999 2000 1999 -------- -------- -------- -------- Net revenues: Product $ 13,035 $ 10,981 $ 38,902 $ 50,571 Service 9,259 8,146 25,149 24,579 -------- -------- -------- -------- Total revenues 22,294 19,127 64,051 75,150 Cost of revenues: Product 2,173 3,960 7,660 15,512 Service 5,455 4,450 14,612 12,717 -------- -------- -------- -------- Total cost of revenues 7,628 8,410 22,272 28,229 -------- -------- -------- -------- Gross margin 14,666 10,717 41,779 46,921 Operating expenses: Engineering, research and development 2,999 3,922 8,081 10,821 Selling, general and administrative 13,423 12,002 38,920 34,936 Acquisition and restructuring related charges -- 4,700 -- 4,895 Deferred compensation expense -- 2,073 -- 2,271 -------- -------- -------- -------- Total operating expenses 16,422 22,697 47,001 52,923 -------- -------- -------- -------- Loss from operations (1,756) (11,980) (5,222) (6,002) Other income, net 4 173 256 641 -------- -------- -------- -------- Loss before income taxes (1,752) (11,807) (4,966) (5,361) Income tax (benefit) provision (630) (2,459) (1,788) 949 -------- -------- -------- -------- Net loss after income taxes (1,122) (9,348) (3,178) (6,310) Preferred stock preference -- -- -- (5,850) -------- -------- -------- -------- Loss applicable to common shareholders $ (1,122) $ (9,348) $ (3,178) $(12,160) ======== ======== ======== ======== Net loss per share Basic $ (0.05) $ (0.45) $ (0.15) $ (0.59) ======== ======== ======== ======== Diluted $ (0.05) $ (0.45) $ (0.15) $ (0.59) ======== ======== ======== ======== Weighted average common and common equivalent shares Basic 21,956 20,770 21,717 20,686 Diluted 21,956 20,770 21,717 20,686
The accompanying notes are an integral part of these consolidated statements. 4 5 ESHARE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
For the nine months ended September 30, 2000 1999 -------- -------- Cash used by operating activities: Net loss $ (3,178) $(12,160) Adjustments to reconcile net loss to net cash provided by(used in) operating activities: Preferred stock preference -- 5,850 Depreciation and amortization 3,852 2,649 Deferred taxes (808) -- Non cash financing charges 104 84 Non cash compensation expense -- 2,271 Changes in assets and liabilities: Accounts receivable, net (266) (1,175) Inventories (206) (905) Prepaid expenses and other assets (1,672) 36 Accounts payable and accrued expenses 838 (2,605) Deferred revenue 2,944 1,852 Customer deposits 683 (330) Other, net (66) (388) -------- -------- Total adjustments 5,403 7,339 -------- -------- Net cash provided by (used in) operating activities 2,225 (4,821) Cash flows from investing activities: Purchase of business, net of cash (500) (4,605) Purchases of property and equipment (2,917) (4,882) Proceeds from sale of marketable securities 4,500 5,720 -------- -------- Net cash provided by investing activities 1,083 (3,767) Cash flows from financing activities: Net proceeds from issuance of common stock 1,461 1,813 Issuance of convertible notes -- 500 Proceeds from issuance of debt -- 3,444 Repayment of debt (200) (153) -------- -------- Net cash provided by financing activities 1,261 5,604 Effect of foreign currency translation (930) 136 Net change in cash and cash equivalents 3,639 (2,848) Cash and cash equivalents, beginning of period 3,558 8,027 -------- -------- Cash and cash equivalents, end of period 7,197 5,179 Marketable securities 7,039 17,161 -------- -------- Cash, cash equivalents and marketable securities $ 14,236 $ 22,340 ======== ======== Supplemental Disclosures of Cash Flow Information: Income taxes paid $ 12 $ 2,673 ======== ========
The accompanying notes are an integral part of these consolidated statements. 5 6 ESHARE COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollar and share amounts in thousands) (unaudited) 1. Basis of Presentation The unaudited consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim financial statements. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, these consolidated financial statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position as of September 30, 2000 and 1999. The interim results for the three months and nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the full year. These statements should be read in conjunction with the Company's consolidated financial statements for the fiscal year ended December 31, 1999, as filed in its Annual Report on Form 10-K. On September 1, 1999, the Company acquired eShare Technologies, Inc., a Delaware corporation ("eShare.com") for 6,050 shares of its common stock. The acquisition was accounted for using the pooling-of-interest method of accounting and accordingly, all prior period financial statements have been restated to reflect that the acquisition had been completed as of the start of each period. The Company has reclassified the presentation of certain prior period information to conform to the current presentation format. 2. Principles of Consolidation The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. 3. Revenue Recognition The Company generates product revenues primarily from the sale of integrated systems, which are comprised of both hardware and software and software licenses. The Company's service revenues are generated from maintenance contracts that include support, parts, labor, and software update rights as well as fee-based installation, training, hosting and consulting services. The Company recognizes product revenues when persuasive evidence of an agreement exists, the product has been delivered, the license fee is fixed and determinable and collection of the fee is probable. Revenues from maintenance contracts are recognized ratably over the term of the contractual support period, which range from one to four years. Consulting revenues are primarily related to extended services sold under separate service arrangements during the installation period. Revenues from consulting, hosting, installation, and training services are recognized as the services are performed. In contracts where product and services are bundled together, revenue is allocated to each element with 100% of any discount going to product. 4. Acquisitions a. eShare.com, Inc. On September 1, 1999, the Company acquired eShare.com, Inc. for 6,050 shares of common stock. The acquisition was accounted for using the pooling-of-interest method of accounting and accordingly, all prior period financial statements have been restated to reflect that the acquisition had been completed as of the start of each period. 6 7 b. smallwonder! softworks, Inc. On June 15, 1999, the Company acquired smallwonder!softworks, Inc. ("smallwonder") for $4,600 in cash and a prospective earnout of up to an additional $1,000, based on achievement of certain defined criteria. On August 18, 2000, $500 of the earnout was paid. The acquisition was accounted for using the purchase method of accounting. The excess of the cost over the fair value of net assets acquired of $4,759 is being amortized over 5 years. 5. Non-recurring charges a. Acquisition and restructuring related charges For the three and nine months ended September 30, 1999, the Company incurred charges of $4,700 and $4,895, respectively, principally related to professional services and other costs associated with the acquisitions of eShare.com (see note 4 above). b. Deferred compensation expense For the three and nine months ended September 30, 1999, the Company incurred a non-cash charge of $2,073 and $2,271, respectively, associated with the conversion of the eShare.com Employee Stock Option Plan into the Company's stock option plan. 6. Preferred Stock Preference Included in results of operations for the nine months ended September 30, 1999, is a non-recurring, non-cash charge of $5,850, which represents the difference between the estimated fair value of common stock of eShare.com at February 19, 1999 and the purchase price of certain Series C Preferred Stock issued on that date. As part of the acquisition, the Series C Preferred Stock was converted to common stock. 7. Inventories Inventories are stated at the lower of first-in, first-out (FIFO) cost or market and consist of the following at:
September 30, 2000 December 31, 1999 ------------------ ----------------- Raw materials $ 891 $ 212 Work in process 789 920 Finished goods 493 835 ------- ------ Total inventories $2,173 $1,967 ======= ========
8. Net (loss) income per share Net (loss) income per share is computed using the weighted-average number of common stock and diluted common stock equivalent ("CSE") shares from stock options (using the treasury stock method) outstanding during each period. CSEs are not included in periods where they are antidilutive. The following table presents the components of diluted weighted average shares outstanding.
For the three months ended For the nine months ended September 30, September 30, 2000 1999 2000 1999 ------ ------ ------ ------ Weighted average shares outstanding Basic weighted average shares outstanding 21,956 20,770 21,717 20,686 Weighted average common equivalent shares -- -- -- -- ------ ------ ------ ------ Diluted weighted average shares outstanding 21,956 20,770 21,717 20,686 ====== ====== ====== ======
7 8 9. Other Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The changes in the components of other comprehensive income (loss) are reported as follows:
For the three months ended For the nine months ended September 30, September 30, 2000 1999 2000 1999 ------- ------- ------- -------- Net loss as reported $(1,122) $(9,348) $(3,178) $(12,160) ======= ======= ======= ======== Other comprehensive income (loss): Foreign currency translation $ (224) $ 5 $ (963) $ (24) Unrealized gains (losses) on securities, net (3) 112 33 160 ------- ------- ------- -------- Other comprehensive income (loss) $ (227) $ 117 $ (930) $ 136 ======= ======= ======= ========
10. Business Segment and Geographic Area 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 business segments are as follows:
For the three months ended September 30, For the nine months ended September 30, 2000 1999 2000 1999 -------- -------- -------- -------- Revenues: Telephony $ 16,509 $ 16,621 $ 48,503 $ 69,182 Internet 5,785 2,506 15,548 5,968 -------- -------- -------- -------- Total Revenues $ 22,294 $ 19,127 $ 64,051 $ 75,150 ======== ======== ======== ======== (Loss) income from operations: Telephony $ 1,544 $ (9,065) $ 1,089 $ (149) Internet (3,300) (2,915) (6,311) (5,853) -------- -------- -------- -------- Total (loss) income from operations $ (1,756) $(11,980) $ (5,222) $ (6,002) ======== ======== ======== ========
8 9 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 three and nine months ended September 30, 2000 and 1999:
For the three months ended September 30, For the nine months ended September 30, 2000 1999 2000 1999 ------- ------- ------- ------- TOTAL REVENUES: United States $16,262 $15,192 $48,515 $53,786 Europe 3,865 2,872 10,390 9,010 Mexico/Latin America 781 839 2,395 8,783 Other 1,386 224 2,751 3,571 ------- ------- ------- ------- $22,294 $19,127 $64,051 $75,150 ======= ======= ======= ======= 2000 1999 ------- -------- LONG-LIVED ASSETS AT SEPTEMBER 30: United States $10,421 $ 9,962 Europe 338 441 Mexico/Latin America 12 40 ------- ------- $10,771 $10,443 ======= =======
9 10 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollar and share amounts in thousands) Overview eshare communications, Inc., along with its acquired wholly-owned subsidiaries; eShare.com and smallwonder, is a leading provider of unified web and telephony customer communications solutions for customer contact centers, e-commerce and online communities. On September 1, 1999, we acquired eShare.com for 6,050 shares of common stock. We accounted for the acquisition using the pooling-of-interest method of accounting. On June 15, 1999, we acquired smallwonder, for $4,600 in cash and a prospective earnout of an additional $1,000, based on achievement of certain defined criteria. On August 18, 2000, $500 of the earnout was paid. The acquisition was accounted for using the purchase method of accounting; and accordingly, we have included smallwonder results from the date of the acquisition. We are amortizing the excess of the cost over the fair value of net assets acquired over 5 years. Certain statements contained in this filing are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements related to plans for future business development activities, anticipated costs of revenues, product mix and service revenues, research and development, and selling, general and administrative activities, and liquidity and capital needs and resources. Such forward-looking statements are subject to risks, uncertainties and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Investors are cautioned that any forward looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward looking statements. A discussion of certain risk factors that may cause actual results to differ from these forward-looking statements can be found in Exhibit 99.1 to in the Company's Annual Report on Form 10-K for the period ended December 31, 1999, on file with the SEC. Results of Operations Revenues Product. Product revenues for the quarter ended September 30, 2000 were $13,035 as compared to $10,981 for the same period ended September 30, 1999, an increase of $2,054, or 18.7%. Revenue from the sale of telephony product was flat for the comparable periods, while sales of Internet product increased to $4,325 for the quarter ended September 30, 2000 from $2,125 in the quarter ended September 30, 1999, an increase of $2,200 or 103.5%. For the nine months ended September 30, 2000, product revenues decreased $11,669 or 23.1% to $38,902 as compared to product revenue of $50,571 for the nine-month period ended September 30, 1999. Revenue from telephony product decreased $18,967, or 41.6%, to $26,592 in the nine-month period ended September 30, 2000 as compared to telephony product revenue of $45,559 for the nine months ended September 30, 1999. This decrease is principally due to a slowdown in purchases from telephony customers and ongoing pricing pressures within the telephony based call center industry. This reduction was partially offset by an increase in Internet product revenues of $7,298, or 145.6%, from $5,012 for the period ended September 30, 1999 to $12,310 for the period ended September 30, 2000. This increase resulted from continued market acceptance of our Internet-based customer interaction products and the growing trend of telephony based call centers to add Internet customer interaction software applications. Service. Service revenue increased by $1,113, or 13.7% to $9,259 for the quarter ended September 30, 2000, as compared to service revenue of $8,146 for the quarter ended September 30, 1999. Increased maintenance and consulting service revenue associated with the increase in Internet product sales was the primary source of the new service revenues. Service revenues increased by $570, or 2.3% to $25,149 for the nine months ended September 30, 2000 as compared to $24,579 in the nine month period ended September 30, 1999. This increase is again the result of the increases in consulting and maintenance service revenue associated with the increase in Internet product revenue. Cost of Revenues Product. The cost of product revenues include the cost of material, fees paid to third parties for outsourced product assembly and, in certain instances, the cost of sublicensing third-party software. The cost of product revenue for the quarter ended September 30, 2000 was $2,173, a decrease of 10 11 $1,787, or 45.1%, as compared to $3,960 for the quarter ended September 30, 1999. This decrease in product cost is principally the result of software only upgrades for our existing telephony customers and the lower cost of software only Internet products. The cost of product revenue for the nine-month period ended September 30, 2000 was $7,660, a decrease of $7,852, or 50.6%, as compared to a product cost of $15,512 for the nine-month period ended September 30, 1999. Cost of product revenue for the nine-month period ended September 30, 2000 was 19.7% of related product revenues as compared to 30.7% of related product revenues for the nine-month period ended September 30, 1999. This 11% decrease in absolute dollar terms in the cost of product revenue was due to the decline in telephony hardware product revenue and a higher percentage of software products in total product revenue as compared to the prior year. Service. The cost of service revenues primarily consist of employee-related costs and outsourcing costs for customer support, consulting and field service personnel, as well as fees paid to third parties for installation services and post installation, help desk, and hardware maintenance services. The Company's cost of service revenues for the quarter ended September 30, 2000 increased to $5,455, or 58.9% of related service revenues as compared to $4,450 or 54.6% of related service revenues for the quarter ended September 30, 1999. Cost of service revenues increased to $14,612 or 58.1% of related service revenues for the nine months ended September 30, 2000 from $12,717 or 51.7% of related service revenues for the nine-month period ended September 30, 1999. This increase in cost of service revenues is related to the addition of personnel primarily to support Internet services plus investments to increase our customer support to a global, 24 hours a day, 7 days a week coverage. Operating Expenses Engineering, research and development. Engineering, research and development expenses primarily consist of employee-related costs for engineering personnel involved with Internet and telephony software product development. Also included are outside contractor costs for development projects. Engineering, research and development expenses decreased by $923, or 23.5%, to $2,999 in the quarter ended September 30, 2000, as compared to $3,922 in the quarter ended September 30, 1999. Engineering, research and development expenses decreased by $2,740, or 25.3%, to $8,081 in the nine-month period ended September 30, 2000 as compared to $10,821 for the nine-month period ended September 30, 1999. Engineering, research and development costs decreased as a percentage of product revenue from 20.8% of product revenues for the nine-month period ended September 30, 2000 as compared to 21.4% of product revenues in the nine-month period ended September 30, 1999. We intend to continue to invest heavily in product development activities as we combine the telephony and Internet products into a seamless customer interaction management ("CIM") solution for our customers. As a result, we expect that engineering, research and development expense will increase in the future. Selling, general and administrative. Selling, general and administrative expenses consist primarily of employee-related costs for sales, marketing, administrative, finance and human resources personnel. Also included are marketing expenditures for trade shows, advertising, and other promotional expenditures. Our selling, general and administrative expenses increased by $1,421, or 11.8%, to $13,423 for the quarter ended September 30, 2000, as compared to $12,002 for the quarter ended September 30, 1999. Selling, general and administrative costs increased to $38,920 for the nine-month period ended September 30, 2000 from $34,936 for the quarter ended September 30, 1999, or an 11.4% increase. The majority of the increase related to investments in globally marketing, selling and supporting our Internet solutions. We intend to continue expanding our sales, marketing, and sales support operations related to the integration of our CIM suite of products. As a result, we expect selling, general and administrative costs will continue to increase in the future. Other Income (Expense), Net. Other income (expense), net decreased by $169, or 97.8%, to $4 in the quarter ended September 30, 2000, as compared to $173 in the quarter ended September 30, 1999. Other income (expense), net decreased to $256 for the nine-month period ended September 30, 2000 from $641 for the nine-month period ended September 30, 1999. These decreases resulted from reduced interest income earned on lower average balances invested in marketable securities over the comparable nine month periods and a loss on disposal of assets of approximately $159 in the quarter ended September 30, 2000. Income Tax Provision (Benefit). For the quarter ended September 30, 2000, we recorded a tax benefit of $630 as compared to a tax benefit of $2,459 for the quarter ended September 30, 1999 as the result of having a smaller operating loss for the quarter ended September 30, 2000. For the nine months ended September 30, 2000, we recorded a tax benefit of $1,788, as compared to a tax provision of $949 for the nine months ended September 30, 1999. 11 12 FINANCIAL CONDITION Total assets at September 30, 2000, were $79,859, an increase of $2,536 over total assets of $77,323 at December 31, 1999. This increase is primarily due to increased Prepaid expenses and other as well as Deferred taxes. Current liabilities were $27,751 at September 30, 2000, up from $23,412 at December 31, 1999. This increase is due primarily to an increase in Deferred revenue and Accounts payable. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2000, the Company had $14,236 in cash, cash equivalents and marketable securities, compared to $14,873 as of December 31, 1999. Cash remained relatively unchanged due to a Company effort to reduce its average days sales outstanding ("DSO"). Overall DSO decreased 18 days in the third quarter ended September 30, 2000 as compared to December 31, 1999 as total cash collections were approximately $22 million for the quarter ended. Cash provided by investing activities included the sale of $4,500 of marketable securities, offset by the purchase of property and equipment of $2,917. Net cash provided by financing activities of $1,261 was primarily due to the proceeds of issuance of common stock through the Company sponsored option program and employee stock purchase plan. The Company's working capital was $37,184 at September 30, 2000 as compared to $38,596 at December 31, 1999. The Company anticipates that existing cash and cash equivalents will be adequate to meet its cash requirements for the next twelve months. 12 13 IMPACT OF THE YEAR 2000 ISSUE 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. 13 14 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. Foreign Exchange During the three and nine months ended September 30, 2000, total revenues from the Company's international operations were approximately 27.1% and 24.3%, respectively, of the Company's total revenues for all operations. The Company's international business is subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the Company's future results could be materially adversely impacted by changes in these or other factors. The effect of foreign exchange rate fluctuations on the Company during the third quarter of 2000 was not material. Interest Rates The Company invests its cash in a variety of financial instruments, including taxable and tax-advantaged variable rate and fixed rate obligations of corporations, municipalities, and local, state and national governmental entities and agencies. These investments are denominated in U.S. dollars. Cash balances in foreign currencies are operating balances. Interest income on the Company's investments is carried in "Other income (expense), net" on the Consolidated Financial Statements. The Company accounts for its investment instruments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). All of the cash equivalents and short-term investments are treated as available-for-sale under SFAS 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, the Company's future investment income may fall short of expectations due to changes in interest rates, or the Company may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. The weighted-average interest rate on investment securities at September 30, 2000 was approximately 3.95% based on predominately tax-free instruments. The fair value of securities held at September 30, 2000 was $7.0 million. 14 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings. 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 not currently party to any material legal proceedings. Item 2. Changes in Securities. None. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Information. None Item 6. Exhibits. (a) Exhibit 27 Financial Data Schedule (for SEC use only). 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ESHARE COMMUNICATIONS, INC. Date: November 14, 2000 By: /s/ James Tito ------------------------------------------ James Tito Chief Executive Officer Date: November 14, 2000 By: /s/ Glen Shipley ------------------------------------------ Glen Shipley Chief Financial and Administrative Officer 16