-----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, DYS+0XHkeHM4xmgRPKU4HaAbe13fsH2gP8O4DQWEWxlw21yT6H6c+LoGEUmB5Lhd 710zB6xlg/FgqNsuIqo+IQ== 0000950144-01-004515.txt : 20010409 0000950144-01-004515.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950144-01-004515 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ESHARE COMMUNICATIONS INC 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-K SEC ACT: SEC FILE NUMBER: 000-22317 FILM NUMBER: 1589154 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: ESHARE TECHNOLOGIES INC/GA DATE OF NAME CHANGE: 19991020 FORMER COMPANY: FORMER CONFORMED NAME: MELITA INTERNATIONAL CORP DATE OF NAME CHANGE: 19970304 10-K 1 g67916e10-k.txt ESHARE COMMUNICATIONS, 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, 2000 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 COMMUNICATIONS, 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 30092-2500 NORCROSS, GEORGIA (Zip Code) (Address of principal executive offices)
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 EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- None N/A
Securities registered pursuant to Section 12(g) of the Act: TITLE OF 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. [ ] 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 21, 2001 as reported by the Nasdaq Stock Market, was $5,694,457. The shares of Common Stock held by each officer and director and by each person known to the company who owns 10% 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 21, 2001, Registrant had 21,799,626 outstanding shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE 2001 ANNUAL MEETING OF SHAREHOLDERS, CURRENTLY EXPECTED TO BE HELD ON OR ABOUT MAY 22, 2001, IS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K TO THE EXTENT STATED HEREIN. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS OVERVIEW Business to customer interaction is no longer a luxury. Customer communication is one of the most critical transactions a business can perform on a daily basis. If the interactions are positive, a business may grow; one misstep and a dissatisfied customer may be created. In a world where a dissatisfied customer can take their business elsewhere with the click of a mouse, businesses must more effectively identify, contact, acquire, and maintain customers using new tools and methodologies. At eshare communications, Inc., we provide Customer Interaction Management ("CIM") solutions that deliver the right information to the right people at the right time. eshare communications, Inc. ("eshare", the "Company", "we", "us", or "our") is a leading provider of CIM solutions. We help businesses overcome the challenge of effectively communicating with customers by providing integrated CIM solutions. These solutions help both Internet-based and traditional businesses establish and maintain high-quality relationships with their customers, while streamlining the entire customer interaction process and reducing operating inefficiencies. Our product offerings consist of a suite of CIM software applications that enable our customers to effectively manage both new and existing customers across multiple communication channels, including voice, e-mail, interactive Web chat, and Voice-over-Internet Protocol ("VoIP"). Our blended CIM solutions bring the strength of traditional call centers together with the flexibility and 24 hours per day, 7 days a week ("24x7") availability of the Internet. We believe our applications deliver some of the most effective and innovative customer interaction solutions to companies and customers around the globe. These applications allow our customers to potentially improve their customer relationships, acquire new customers, improve retention of current customers, increase revenues, improve bottom-line earnings, and more effectively utilize valuable resources. We have been a provider of telephony call center solutions for over 20 years. As an innovator of predictive dialing software, we believe we have established our Conversations(TM) product as one of the industry standards for outbound calling and campaign management for some of the world's largest financial service centers, retailers, and utilities. Our Internet applications enable real-time, 24x7 interactive communications and customer service over the Web. Our NetAgent(TM) Suite and other Internet applications provide Internet-based e-mail management, collaborative media chat, enterprise customer service and support, standard telephony Private Branch Exchange/Automatic Call Distribution ("PBX/ACD") support, customer self-service, instant messaging, live conferencing, distance learning, community chat, threaded discussion forums and a variety of integration tools. eshare's success in the market place can be measured best by the customers that include eshare products in their CIM solutions. 8 of the top ten Fortune 50 and 6 of the top ten Global 50 companies currently use eshare products. In addition, eshare has built a customer base that includes more than 2500 customer sites in over 30 countries. INDUSTRY BACKGROUND Many of today's successful business models place the customer at the center of the their business strategy. The dynamics of today's marketplace are radically changing the way businesses must service their customers. Businesses must learn to listen to, respond to, and interact with customers faster and more cost effectively than ever. Most companies are feeling intensified competition, as well as increased pressure for profitability. These companies understand that they must focus on improving customer service and support to retain existing customers, win new customers and turn them into repeat buyers. 3 Today's customer is not only more informed than in years before, but is also more demanding. The evolution of the Internet has caused customers to demand 24x7 service. Customers expect quick and accurate responses independent of the time when they make their inquiry. We believe the Internet is dramatically altering the essence of CIM. Customer expectations are continually 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 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 need to meet the demand of their customers for Web based services, self-service, e-mail as well as interactive and assisted communications. While e-mail, Web chat, Web collaboration and other Internet communication channels are rapidly gaining in popularity, the phone is still the number one way in which business and consumers communicate. The acceptance of the telephone as a means of customer service fueled the growth of the call center industry. We believe that customers are beginning to 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, a service agent should have access to previous e-mails, faxes, and other customer transaction and interaction history. Similarly, a customer who prefers to contact a business via e-mail or the Web may expect that communication to be as effective as a phone call. Meeting these expectations is key to customer satisfaction, and failure to do so may effectively drive customers away. Moving forward, we believe quality CIM will require integrating live, telephony-based customer service with the ability to process Web-based and e-mail transactions. This dynamic applies equally to traditional brick-and-mortar businesses that have embraced the Web and also to the newer breed of e-commerce players whose customers may still desire contact via traditional telephone means. For both, the integration must be as seamless and transparent to the customer as possible. As a result, traditional call centers are transforming into integrated contact centers. STRATEGY We have established a focused strategy with the goals of returning the Company to profitability and positioning the Company as a leading provider of multi-channel CIM software solutions. Our strategy to achieve these goals includes: - Seamlessly integrate all eshare products - Expand our Expert Services - Leverage our installed base customers - Expand sales both direct and indirect - Expand business partnerships Seamlessly integrate all eshare products: We continue to focus our product development towards providing software applications that are modular, yet integrate seamlessly. All eshare's products in development are being designed to "plug-and-play" allowing customers to easily interface our products with their existing front and back-office applications. We are leveraging our technological expertise to develop solutions that incorporate multi-channel customer contact across the enterprise. Our solutions are offered such that customers can choose to implement capabilities as their business demands, and can be integrated quickly by our Expert Services team. Expand our Expert Services: As the CIM industry continues to grow, eshare will continue to invest in the people and processes to expand our professional services, which we refer to as "Expert Services". eshare's professional staff has a wealth of experience gained by working with hundreds of contact centers around the world. We have traditionally provided system design, application configuration, integration, training and consulting services. We believe the demand for our Expert Services is growing. eshare intends to make the investment in personnel and training to ensure that all our customer's service needs are being met. 2 4 Leverage our installed base of customers: We believe our global installed customer base represents a potential market for future sales of products and Expert Services. We will continue to use our strong customer relationships to sell new products and services to multiple divisions, offices and business units of a customer's organization. eshare's traditional telephone based contact centers need to enhance their existing technologies and offer multiple channels of contact to keep customers satisfied, maximize the value of each customer interaction and keep operating costs to a minimum. Purchasing eshare's Internet products, such as the NetAgent suite provides these businesses with a closely integrated, multi-channel offering, offering these businesses the opportunity to lower costs in servicing their customers. In addition, contact centers solely using Internet contact tools are realizing that many of their customers may prefer to be contacted by phone, creating opportunities to present our Conversations or XChange(TM) telephony solutions. Expand sales both direct and indirect: We currently sell our products through a combination of direct sales force and indirect channels composed of value added resellers ("VARs"), software integrators and other distributors. We intend to commit additional resources to increase our direct sales force worldwide where appropriate. We also currently have relationships with VARs and other distributors in Europe, Latin America and Asia and intend to expand our international operations through the addition of appropriate personnel and forming new relationships in these territories. Expand business partnerships: A significant part of the Company's sales and marketing strategy is to build and develop relationships with companies that will play an important role in the successful marketing of eshare products. We believe that our focus on "plug-and-play" components will enhance our ability to integrate with other Customer Relationship Management ("CRM") solution providers and give our customers an integrated customer interaction solution. These relationships may range from OEM agreements where eshare products will be an embedded component within a company's product to co-marketing efforts. SOLUTIONS AND SERVICES We believe that the optimum customer interaction management solution that will maximize customer satisfaction and company investments consists of a blend of traditional call center and Internet technologies capable of providing fully integrated customer care and consistent quality across all contact channels and touch points. The solutions we offer to address this include: Inbound/Outbound Voice Contact Management We have provided voice-based contact management solutions for over 20 years. Customers worldwide use our contact management solutions to manage their inbound and outbound voice-based contacts for proactive customer service, collections, teleservice, mortgage services, fund raising, and other contact pursuits. These contact solutions help businesses manage the complete customer lifecycle from acquiring new customers to servicing and retaining existing ones, maximizing each customer's value to the business. We were among the first companies to introduce inbound/outbound contact blending so that both ingoing and outgoing voice calls could be handled by the same group of service agents. Contact blending helps a company establish higher levels of agent productivity and improves 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-transaction. Our Conversations contact management solution is highly integrated with other key components of a typical call center, including host business applications/data bases, leading PBX/ACD telephone systems, digital recording devices, reader board display devices, Web servers, email servers and other network based CRM solutions. Our call center solutions utilize industry standard IBM RISC, NT platforms, and Windows/NT operating systems. Our mixed media server platform supports both CTI links to leading PBX/ACD (software 3 5 only solutions) and telephony links through industry standard call processing hardware/software to perform call processing across multiple protocols for multiple countries. Web-based Customer Service Designed to enhance communication between a business and its Web site visitors, Web-based communication is provided by our NetAgent Suite. This collection of customer care applications 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, our NetAgent Suite 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, 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 many leading CRM applications, PBX/ACD, customer care, and legacy systems. These solutions currently support the Windows NT operating environment. Our NetAgent Suite enables our customers 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 Our NetAgent Suite EMAIL(TM) helps companies manage a large volume of e-mails that Web sites typically generate, while minimizing the agent time required to handle them. EMAIL also determines if the message can be responded to automatically and, if it can, the application sends an automated response while the original e-mail is being processed. As with other NetAgent Suite applications, EMAIL provides agents with immediate access to complete customer interaction histories. Our EMAIL enables agents to answer customer e-mail inquiries accurately and cost-effectively, allowing companies to retain satisfied, loyal customers, increase service levels, and generate incremental revenue. On-line Community Chat Our Expressions(TM) product provides a turnkey solution for building communities, providing interactive chat capability, threaded discussion forums, and online presentations to visitors and participants. Expressions promotes community collaboration and dynamic real-time interaction between users by providing the means for conducting virtual meetings, moderated events, live training, conferencing, distance learning, and interactive chat sessions. Our Expressions helps companies build community, increase customer loyalty, and facilitate business-to-business ("B2B"), business-to-employee, business-to-consumer ("B2C"), and consumer-to-consumer ("C2C") collaborations. Instant Messaging Our Connections(TM) product 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, Connections enables user communities to interact directly in a chat-like process. Connections allows users to search for other members and communicate with one another in real time, while also bookmarking Web pages, storing conversation notes, and providing 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. 4 6 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. However, the traditional brick-and-mortar companies wishing to adopt this strategy have been challenged by a customer base accustomed to an assisted service model. Our NetAgent Suite provides the capability to transform those customers into a self-servicing group. This is accomplished in part by Web enabling current business processes and then migrating them to the company Web as self-service pages. NetAgent Suite is integrated with Clarify, Primus, Siebel and other industry-leading solutions that facilitate Web-based customer self-service. NetAgent Suite 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 customers on how to use the site's self-service capabilities. Multi-Channel Administrator and Agent Desktops As contact channels are added to the telephony call center or Web-based contact center, these customer interaction channels must be capable of being administered and managed from a single desktop. In addition, agent desktops must be able to switch between the various duty modes, supporting voice, live collaborations, live chat, e-mail, and assisted forms, among others. Our e360(TM) CIM Suite enables customers who have our Conversations, NetAgent Suite, and Connections applications to administer these from a single desktop. The e360 CIM Suite allows agents to switch between the various interactive voice, chat, e-mail, and messaging duty modes. Expert Services We provide Expert Services including comprehensive business analysis, solutions planning, implementation, training, application integration and customizations, staff augmentation, and project management to our customers. We also offer other special customer services such as custom application development and custom project management. These services enable our customers to develop, maintain, and grow their customer contact centers while increasing call center productivity and reducing operational costs. Installation and integration services consist of configuration and documentation along with the physical installation and integration of the product suite. Training includes introductory training classes that are provided as part of each initial suite purchase, and additional advanced classes that are 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 24x7. Maintenance paying customers also receive ongoing system support and baseline software upgrades. Our customer service group is composed of an Expert Services group which provides services for a fee when contracted by a customer, and a Global Support Services group, which manages the help desk, technical support, maintenance, purchasing, testing and ongoing relations with customers. Services personnel are located throughout the USA, Canada, Mexico, Brazil, UK, France, Singapore and the Philippines. Our VARs and distribution partners provide additional services. Web Customer Service Hosting NetAgent Live(TM), eshare's hosting service, enables our customers to eliminate software, hardware and configuration costs from their Internet customer service strategies by hosting our CIM solutions. Using NetAgent Live, our customers can minimize up-front costs and maximize the return on their investments. The NetAgent Live service gets our NetAgent Suite and other application software up-and-running on a dedicated server within 48 hours of order. With remote access to our applications data and reports, the customer can configure services 24x7. 5 7 CUSTOMERS We primarily license our products and services to companies that engage in various CRM activities. Our products are licensed to leading companies in a variety of industries including financial services, telecommunications and technology, electronic commerce and Web-communities as well as government and education. We provide solutions to call centers, Portals, Application Service Providers ("ASPs"), Internet Service Providers ("ISPs"), dot.coms, Web Exchanges, and Interactive Contact Centers. We have a customer base for our voice contact management products of approximately 600 contact center sites. Our Internet business has a customer base of over 350 NetAgent, EMAIL solutions and approximately 1,500 Expressions customer sites. 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. SALES AND MARKETING We license our voice contact management solutions through a direct sales organization with offices worldwide. Additionally, we maintain a network of distributors and VARs to re-license our products. We do business in the U.S., 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, and Williams Communications. Our Internet products are also licensed through a direct telemarketing sales force and approximately 20 channel partnerships. We maintain strategic relationships with companies such as Snickleways Interactive and Linkshare Corporation to make NetAgent Suite available to approximately 200 online merchants, as well as relationships with America Online and StarMedia to assist in marketing NetAgent Suite to their merchant partners. 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. Our marketing activities include product management, product marketing, direct marketing, public relations, press and analyst communications, event support and management of our Web site. Our business development group is responsible for creating distribution relationships, strategic alliances, joint-marketing agreements and co-development relationships with B2B, B2C, and C2C industry providers. As of December 31, 2000, eshare employed 134 people worldwide in our Sales and Marketing groups. TECHNOLOGY AND PRODUCT DEVELOPMENT Our CIM architecture uses a standards-based framework to provide open solution implementations for best-of-breed products. Our open approach also helps assure that our CIM applications/components integrate easily with other applications and services, when provided by third parties. In particular, our 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; 6 8 - lower application development and implementation costs; - faster development and deployment across multiple platforms; and - 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 seek the continued development of products that adhere to existing and emerging standards. However, there can be no assurance that we 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 CIM solutions. In fiscal 2000, 1999 and 1998, our research and development expenditures were approximately $10.7 million, $14.2 million and $11.8 million, respectively. All of our expenditures for research and development costs have been expensed as incurred. As of December 31, 2000, we employed 83 people in our research and development groups. COMPETITION We compete as part of the larger CRM market, which includes both voice based and Internet based solutions. This market has been characterized by high growth rates, converging technologies and rapid technological innovation. These market dynamics represent both an opportunity and a competitive threat to eshare. We compete with numerous companies in each product category. Several of our competitors compete across many of our product lines, while others offer a more narrow solution. Some of our competitors include, in alphabetical order, Avaya Communications, Cisco Systems, Inc., Davox Corporation, eGain Communications, FaceTime, Genesys Telecommunications Laboratories, Kana Communications, LivePerson, PeopleSupport, and Siebel Systems. Many of our current and potential competitors have greater financial, marketing and technical 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. We believe that the primary competitive factors affecting our markets include the speed of application adaptability based on, flexibility, scalability, interoperability, functionality and ease of use, as well as reputation, quality, performance, price and customer service and support. REGULATORY ENVIRONMENT Federal, state and foreign law regulate certain uses of outbound call management systems. The federal Telephone Consumer Protection Act ("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 ("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 ("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. 7 9 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 ("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 ("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 by state and local governments to online commerce is currently under discussion. 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 use 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(R) and Single System Image View(TM). 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 18 U.S. patents and 28 foreign patents worldwide; and more than 150 patents pending in over 20 countries, including 12 U.S. patents and 140 related foreign patents. EMPLOYEES As of December 31, 2000, we had 443 full-time employees, (143 in professional services and global support services, 134 in sales and marketing, 83 in research and development and 70 in administration), of whom 386 were based in the U.S. and 57 were based in other countries. With the exception of our employees in our Mexico City subsidiary, none of our employees are covered by a collective bargaining agreement. We consider our employee relations to be good. 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. 8 10 EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors, and their ages as of January 31, 2001, are as follows:
NAME AGE POSITION - ---- --- -------- Aleksander Szlam........................... 49 Chairman of the Board and Chief Executive Officer George W. Landgrebe........................ 59 Chief Operating Officer Glen Shipley............................... 50 Chief Financial Officer and Chief Administrative Officer William K. Dumont.......................... 51 President Worldwide Sales Andrew J. Filipowski(1,2).................. 50 Director Donald L. House(1,2)....................... 59 Director Steven Jeffery(1).......................... 45 Director Jack A. Pellicci(1,2)...................... 62 Director James Tito................................. 44 Director
- --------------- (1) Member of the Audit Committee (2) Member of the Compensation Committee ALEKSANDER SZLAM founded eshare (formerly Melita International) in 1979 and has served as our Chairman of the Board since its inception. Mr. Szlam was Chief Executive Officer ("CEO") from 1979 until July 2000 and was again named CEO in January 2001. Prior to founding eshare, Mr. Szlam worked as a design engineer and scientist at Lockheed Corporation, Solid State Systems and NCR. Mr. Szlam received a BSEE and a MSEE from Georgia Institute of Technology and holds over 40 world industry patents. GEORGE W. LANDGREBE has served as our Chief Operating Officer since December 1999, and as our Chief Financial Officer from February 2000 through September 2000. Mr. Landgrebe was a Director of eShare.com, Inc. (formerly eShare Technologies, Inc.) from its inception until its merger with us. Prior to joining eShare.com, Inc., Mr. Landgrebe was managing partner in Performance Leadership, LLC, a business 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. GLEN SHIPLEY has served as our Chief Financial Officer since October 2000. From October 1998 to September 2000, Mr. Shipley was Chief Financial Officer for Vanishing Point, Inc., a venture backed start-up company. From 1996 to September 1998, Mr. Shipley was a corporate financial consultant and attorney in private practice rendering legal and financial advice to commercial enterprises. Other positions he has held include Chief Financial Officer and General Counsel of Advanced Research Management and Chief Financial Officer of MCEG, Inc., where he coordinated the company's initial public offering. Mr. Shipley received a M.B.A. from UCLA and his J.D. from Seattle University. He also holds a certified public accountant certificate. WILLIAM K. DUMONT has served as President Worldwide Sales from February 2001. Mr. Dumont served as Executive Vice President, Business Development, from January 2000 until September 2000 and as Executive Vice President Sales from October 2000 through January 2001. 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. ANDREW J. FILIPOWSKI has served as a director since April 1999. He is President, CEO and Chairman of Divine, Inc, an enterprise web solutions company. Mr. Filipowski was Founder/Chairman/President of 9 11 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. DONALD L. HOUSE has served as a director since June 1997. Mr. House is currently Chairman of the Board of Directors of Ockam Technologies. He served as Chairman of the Board of Directors of Clarus Corporation (formerly known as SQL Financials International, Inc.), from 1993 to 1998. He continues to serve on that Board, where he is a member of its Audit Committee. He is also on the Board of Carreker Corporation, where he is Chairman of the Audit Committee. Since 1988, he has been a 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. STEVEN JEFFERY has served as a director since December 2000. He is Chairman, President and CEO of Clarus Corporation. Mr. Jeffery joined Clarus in 1994 from Hewlett-Packard Company, where he served in a variety of sales, marketing and management positions in the U.S., Europe and Asia Pacific for 15 years. Before that, he was in sales with IBM. Mr. Jeffery holds a bachelor's degree in business from Sheffield City University in the U.K. JACK A. PELLICCI has served as a director since July 2000. He is Vice President of Oracle Corporation's Global Service Industries Group, having joined Oracle in 1992 after retiring from the U.S. Army as a Brigadier General, responsible for the Personnel Information Systems Command. Mr. Pellicci also served as the Deputy Director and acting Director of Training for the U. S. Army and was responsible for policy and funding for technology-based training and education. He is currently the co-chairman of the Armed Forces Communications and Electronics Association ("AFCEA") International's Technical Committee and has served on the Board of Directors of the Washington Chapter of AFCEA. He is a member of the Board of Directors of the Open GIS Consortium, a worldwide organization leading the initiative for interoperability in the GIS/Geo-processing community. Mr. Pellicci serves on the Board of Advisors for the Government Technology Program at the University of Denver. He also serves on the Board of Directors of Sedona, a public company focusing on Geospatial/GIS/Spatially Enabled CRM business. Mr. Pellicci holds a BSEE degree from the U.S. Military Academy at West Point, and a MSEE degree from the Georgia Institute of Technology. JAMES TITO has served as a director since September 1999. Mr. Tito served as our president from October 1999 through December 2000 and as our Chief Executive Officer from July 2000 through December 2000. Mr. Tito was a co-founder of eShare.com, Inc., and served as the Chairman and Chief Executive Officer of eShare.com, Inc. from its inception in October 1996 until its acquisition by us. Prior to co-founding eShare.com, Inc. Mr. Tito served as the president of its predecessor, Interactive Marketing Technologies, a database marketing, consulting and services firm, since 1988. Mr. Tito serves as a director of Long Island's Software Technology Network. 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 Ex- 10 12 hibit 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 36,000 square foot leased facility in Hauppauge, New York. Through the year 2000, we also leased space for several sales and support centers located in the United States, Mexico City, and Paris. In addition, we had leased space in Toronto through October 1999. ITEM 3. LEGAL PROCEEDINGS We are from time to time, subject to legal proceedings and claims that have arisen in the ordinary course of business. We are not currently a party to any legal proceedings that we believe to be material with respect to our financial position or results of operations. 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 fiscal year 2000. 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:
HIGH LOW ---- --- 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............................................. 26 11 1/4 Second Quarter............................................ 12 1/4 4 5/8 Third Quarter............................................. 7 1 7/8 Fourth Quarter............................................ 3 5/8 3/4 2001: First Quarter (through March 21, 2001).................... 2 1/8 11/16
On March 21, 2001, the last sale price of the common stock on Nasdaq was $0.72 per share. As of March 21, 2001, there were 172 holders of record of our common stock. 11 13 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, 2000, 1999, 1998, 1997 and 1996 from our financial statements. On September 1, 1999, we completed the acquisition of eShare.com, Inc. (formerly eShare Technologies, Inc.). The acquisition was accounted for as a pooling of interest; therefore, all prior period amounts have been restated.
YEAR ENDED DECEMBER 31, ------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: NET REVENUES: Product.................................. $ 48,675 $ 63,063 $71,333 $46,481 $32,077 Service.................................. 35,281 31,792 25,748 20,039 15,944 -------- -------- ------- ------- ------- Total revenues................... 83,956 94,855 97,081 66,520 48,021 Cost of revenues: Product.................................. 10,738 19,398 21,680 15,577 11,494 Service.................................. 20,384 16,765 13,346 9,642 6,994 -------- -------- ------- ------- ------- Total cost of revenues........... 31,122 36,163 35,026 25,219 18,488 -------- -------- ------- ------- ------- Gross margin............................... 52,834 58,692 62,055 41,301 29,533 Operating expenses: Engineering, research and development.... 10,658 14,213 11,798 8,003 5,158 Selling, general and administrative...... 57,042 46,467 36,208 26,080 17,655 Write off of purchased software.......... 3,186 -- -- 268 -- Amortization of intangible assets........ 1,021 542 -- -- -- Acquisition and restructuring related charges............................... -- 6,990 -- -- -- Deferred compensation expense............ -- 2,271 -- -- -- -------- -------- ------- ------- ------- Total operating expenses......... 71,907 70,483 48,006 34,351 22,813 -------- -------- ------- ------- ------- (Loss) income from operations.............. (19,073) (11,791) 14,049 6,950 6,720 Other income, net.......................... 414 756 1,067 417 178 -------- -------- ------- ------- ------- (Loss) income before income taxes.......... (18,659) (11,035) 15,116 7,367 6,898 Income tax (benefit) provision: Tax (benefit) provision.................. (7,542) (1,077) 6,576 3,024 2 Deferred tax adjustment.................. -- -- -- (1,473) -- -------- -------- ------- ------- ------- Net (loss) income.......................... $(11,117) $ (9,958) $ 8,540 $ 5,816 $ 6,896 Preferred stock preference................. -- (5,850) -- -- -- -------- -------- ------- ------- ------- Net (loss) income applicable to common shareholders............................. $(11,117) $(15,808) $ 8,540 $ 5,816 $ 6,896 ======== ======== ======= ======= ======= Income before pro forma income taxes....... $ 7,367 $ 6,896 Pro forma income taxes..................... 4,469 2,827 ------- ------- Pro forma net income....................... $ 2,898 $ 4,069 ======= =======
12 14
YEAR ENDED DECEMBER 31, ------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (Loss) earnings per share: Diluted (loss) earnings per share........ $ (0.51) $ (0.76) $ 0.40 $ 0.29 $ 0.39 Pro forma diluted (loss) earnings per share................................. $ (0.51) $ (0.76) $ 0.40 $ 0.14 $ 0.23 Weighted average shares outstanding: Diluted.................................. 21,697 20,758 21,575 20,049 17,475
DECEMBER 31, ----------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities................................. $14,727 $14,873 $30,783 $32,116 $10,973 Working capital.............................. 21,622 38,596 42,656 32,909 9,474 Total assets....................... 72,872 77,323 78,484 58,861 29,167 Long-term debt, net of current portion....... -- 74 2,726 185 -- Total shareholders' equity......... 44,390 53,837 48,394 38,649 12,786
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We are a provider of CIM software applications. Our solutions support voice, e-mail, live interaction/chat and hosting services for approximately 2,500 call center sites, e-businesses, ASPs, ISPs and Portals in approximately 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, hosting and consulting services. Our revenues are derived primarily from product license fees for the use of our software applications and sales of related computer and telephony hardware to utilize the software, service fees for ongoing system support, maintenance, installation, integration, training, and consulting services, and fees for hosting applications for our customers. We recognize product revenue upon delivery of the product if there are no significant post-delivery obligations, if collection is probable and if our fees are fixed and determinable. 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 25.6% of total revenues in 2000. 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 2000, no customer accounted for more than 10% of our total revenues. During 1999, First USA Bank accounted for 11% of our total revenues. During 1998, CitiGroup accounted for 13.1% of our total revenues. Revenues from our five largest customers represented 16.6%, 28.2% and 23.2%, of our total revenues for 2000, 1999 and 1998, 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 VARs and distributors to sell, install and support our products in other countries. Revenues from sales to customers outside the United States accounted for 27.5%, 31.7%, and 23.8% of our total revenues for 2000, 1999 and 1998, respectively. We believe that our continued growth and future profitability will require further expansion of our international operations. In order to successfully expand international sales, we continue to establish additional foreign operations and we plan to 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 British 13 15 pounds or Euro. Our expenses incurred in foreign countries are typically denominated in local currencies. We have recognized pre-tax foreign exchange (losses) gains of approximately $(43,000), $(49,000) and $16,000 in 2000, 1999 and 1998, 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, Inc., a provider of multi-media, web enabled call 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.com, Inc. (formerly 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. 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, telephony and Internet. We believe that these two segments may collapse into a single segment as we integrate our telephony and Internet solutions into a single product offering and as the market place changes from "call center" or telephony centric installations into "contact centers" using blended forms of customer contact technology. Segment information is detailed in the notes to the consolidated financial statements. Although not currently a material segment of business, we are actively pursuing the licensing of our patent portfolio. We believe that our patents are infringed by a number of companies. We intend to selectively move forward to enforce our patents against potential infringers when we can document the infringement and believe that we can recover a combination of damages for past infringements and enter into license agreements for future patent use. We believe this segment may produce material and reportable revenue and income streams in the future. 14 16 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.
YEAR ENDED DECEMBER 31, ----------------------- 2000 1999 1998 ----- ----- ----- Net revenues: Product................................................... 58.0% 66.5% 73.5% Service................................................... 42.0 33.5 26.5 ----- ----- ----- Total revenues.................................... 100.0 100.0 100.0 Cost of revenues: Product................................................... 12.8 20.4 22.3 Service................................................... 24.3 17.7 13.8 ----- ----- ----- Total cost of revenues............................ 37.1 38.1 36.1 ----- ----- ----- Gross margin................................................ 62.9 61.9 63.9 Operating expenses: Engineering, research and development..................... 12.7 15.0 12.2 Selling, general and administrative....................... 67.9 49.0 37.3 Write off of purchased software........................... 3.8 -- -- Amortization of intangible assets......................... 1.2 0.6 -- Acquisition and restructuring related charges............. -- 7.3 -- Deferred compensation expense............................. -- 2.4 -- ----- ----- ----- Total operating expenses.......................... 85.6 74.3 49.5 ----- ----- ----- (Loss) income from operations............................... (22.7) (12.4) 14.4 Other income, net........................................... 0.5 0.8 1.1 ----- ----- ----- (Loss) income before income taxes........................... (22.2) (11.6) 15.5 Income tax (benefit) provision: Tax (benefit) provision................................... (9.0) (1.1) 6.7 ----- ----- ----- Net (loss) income........................................... (13.2)% (10.5)% 8.8% Preferred stock preference.................................. -- (6.2) -- ----- ----- ----- Net (loss) income applicable to common shareholders......... (13.2)% (16.7)% 8.8% ===== ===== =====
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, ----------------------- 2000 1999 1998 ----- ----- ----- Cost of product revenues.................................... 22.1% 30.8% 30.4% Cost of service revenues.................................... 57.8% 52.7% 51.8%
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Revenues Product. Product revenues in 2000 were $48.7 million as compared to $63.1 million in 1999, a decrease of $14.4 million, or 22.8%. Revenue from the sale of telephony product decreased $20.3 million or 36.7% for the comparable periods. 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 $5.9 million, or 79.0%, from $7.6 million in 1999 to $13.5 million in 2000. This increase resulted from continued market acceptance of our Internet-based customer 15 17 interaction products and the growing trend of telephony based call centers to add Internet customer interaction software tools. Service. Service revenue increased by $3.5 million, or 11.0% to $35.3 million in 2000 as compared to service revenue of $31.8 million in 1999. Increased maintenance and consulting service revenue associated with the increase in Internet product sales was the primary source of the new service revenues. Cost of Revenues Product. The cost of product revenues include the cost of material, fees paid to third parties for outsourced hardware assembly and, in certain instances, the cost of sublicensing third-party software. The cost of product revenue for 2000 was $10.7 million, a decrease of $8.7 million, or 44.6%, as compared to $19.4 million in 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. Cost of product revenue for 2000 was 22.1% of related product revenues as compared to 30.8% of related product revenues for 1999. This 8.7% 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 2000 increased to $20.4 million or 57.8% of related service revenues as compared to $16.8 million or 52.9% of related service revenues for 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 X 7 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 $3.5 million, or 24.7%, to $10.7 million in 2000, as compared to $14.2 million in 1999, while as a percentage of product revenue they were 22.0% of product revenues in 2000 as compared to 22.5% of product revenues in 1999. The drop in absolute dollars from 2000 to 1999 was primarily the result of targeting engineering, research and development to approximately 22% of revenues. We intend to continue to invest in product development activities as we combine the telephony and Internet products into a seamless CIM solution for our customers. As a result, we expect that engineering, research and development costs will increase in the future. Selling, general and administrative. Selling, general and administrative expenses consist primarily of employee-related costs for sales, marketing, administrative, finance and human resources personnel. Also included are marketing expenditures for trade shows, advertising, other promotional expenditures, as well as depreciation and bad debt expenses. Our selling, general and administrative expenses increased by $10.5 million, or 22.6%, to $57.0 million in 2000, as compared to $46.5 million in 1999. During fiscal 2000, the Company increased its reserves for bad debts to $4.6 million as compared to reserves for bad debts of $3.0 million in fiscal 1999 for an increase of $1.6 million. In addition, we recorded bad debt expenses of $9.0 million in fiscal 2000 as compared to $2.0 million in fiscal 1999. The bad debt expense increase in 2000 was primarily due to the failure of several dot.com companies and the write-off of problematic foreign product receivables as well as non-collectible receivables from maintenance contracts and charge backs under Expert Services contracts. We do not expect this trend to continue. Write-off of Purchased Software In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of", the Company recorded an impairment loss of $3.2 million in 2000 due to a write-down of 16 18 purchased third party software. Based on the Company's evaluation of the future market potential and recoverability of this software product, the Company wrote off the estimated unrecoverable portion of its investment. This write-down is a onetime event, as the Company has not recorded any other such third party software investments. Other Income (Expense), Net Other income (expense), net decreased by $0.3 million, or 45.2%, to $0.4 million in 2000, as compared to $0.7 million in 1999. These decreases resulted from reduced interest income earned on lower average balances invested in marketable securities over the comparable periods and a loss on disposal of assets of approximately $0.4 million in 2000. Income Tax (Benefit) We recorded a tax benefit of $7.5 million in 2000 as compared to a tax benefit of $1.1 million in 1999. Our effective tax rate was (40.4)% in 2000 primarily due to management's estimate of utilization of the majority of the current net operating loss carryforwards. 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.com, Inc. due to the uncertainty of realizing those losses. 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 slowdown concerns 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. Cost of product revenues decreased from $21.7 million, or 30.4% of related product revenues, in 1998, to $19.4 million, or 30.8% of related product revenues, in 1999. Cost of product revenues for the call 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 call center products. The increase as a percentage of product revenues was primarily due to the impact of personnel and other fixed costs as compared to a reduced base of call 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. 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 17 19 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 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 Internet product development efforts. The increase as a percentage of total revenues was primarily a factor of the reduced call center product revenues. Selling, general and administrative. 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 business segments as a result of the pooling of interest accounting treatment following the acquisition of eShare.com, Inc., which began its principal selling operations in fiscal 1999. Acquisition and Merger-Related Expenses In connection with the fiscal 1999 acquisition of smallwonder! softworks, Inc., and the merger with eShare.com, Inc., we 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, we incurred $2.3 million (non-cash) of indirect deferred compensation expenses related to the conversion of the eShare.com, Inc. stock option plan. We also incurred $0.5 million in amortization of intangible assets related to the purchase of smallwonder! softworks, Inc. Other Income, Net Other income, net decreased from $1.1 million in 1998 to $0.7 million 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. 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.com, Inc. due to the uncertainty of realizing those losses. Our effective tax rate was (9.7)% for 1999 primarily due to the effect of recording some of the benefit on the losses incurred by the Company. 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.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 of eShare.com, Inc. the Series C Preferred Stock was converted to common stock. 18 20 SELECTED QUARTERLY RESULTS The following table shows unaudited statement of operations data for each of the periods indicated. This data has been derived from unaudited interim financial statements prepared on the same basis as the audited financial statements.
NET INCOME (LOSS) NET APPLICABLE TO DILUTED TOTAL GROSS INCOME COMMON EARNINGS REVENUES MARGIN (LOSS) SHAREHOLDERS PER SHARE -------- ------- ------- ------------- --------- 1999: First Quarter............................... $29,106 $18,896 $ 2,474 $(3,376) $(0.16) ======= ======= ======= ======= Second Quarter.............................. $26,896 $17,308 $ 564 $ 564 $ 0.03 ======= ======= ======= ======= Third Quarter............................... $19,127 $10,717 $(9,348) $(9,348) $(0.45) ======= ======= ======= ======= Fourth Quarter.............................. $19,706 $11,771 $(3,648) $(3,648) $(0.17) ======= ======= ======= ======= 2000: First Quarter............................... $20,456 $13,444 $ (822) $ (822) $(0.04) ======= ======= ======= ======= Second Quarter.............................. $21,301 $13,844 $(1,235) $(1,235) $(0.06) ======= ======= ======= ======= Third Quarter............................... $22,294 $14,666 $(1,122) $(1,122) $(0.05) ======= ======= ======= ======= Fourth Quarter.............................. $19,905 $10,880 $(7,938) $(7,938) $(0.36) ======= ======= ======= =======
FINANCIAL CONDITION Total assets as of December 31, 2000, were $72.9 million, a decrease of $4.4 million from December 31, 1999. The decrease was primarily due to the reduction in Accounts receivable of $6.3 million and Prepaid expenses and other of $2.1 million, offset by an increase in Deferred taxes of $4.3 million. Accounts receivable decreased $6.3 million due to increased collections and the increase in bad debt reserves and write-off of certain receivables. Prepaid expenses and other decreased by $2.1 million primarily caused by a lower tax refund in 2000. Deferred taxes increased $4.3 million primarily due to the recognition of increased net operating loss carryforwards. Current liabilities as of December 31, 2000 were $28.5 million, an increase of $5.1 million from December 31, 1999. The increase was primarily due to an increase in Deferred revenue of $3.2 million and an increase in accounts payable and accrued liabilities of $1.5 million. The increase in deferred revenue was derived principally from increased billings and cash collections of maintenance contracts that are generally one year in length. The timing for payment of and the accrual of liabilities varies from period to period according to the terms of the underlying obligations and is primarily responsible for the increase. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations to date primarily through internally generated cash flow and the proceeds of our 1997 initial public offering. Our operating activities generated cash of $4.6 million in 2000, used cash of $11.8 million in 1999, and used cash of $0.2 million in 1998. In 2000, our source of cash was primarily due to the decrease in accounts receivable of $6.3 million and increases in deferred revenue of $3.2 million and accounts payable and accrued liabilities of $1.5 million, offset by net losses. 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 other current liabilities. Our investing activities used cash of $1.2 million in 2000, generated cash of $0.7 million in 1999, and used cash of $3.3 million in 1998. The use of cash in 2000 was primarily for the purchase of capital equipment offset by a reduction in investments in marketable securities. The generation of cash in 1999 was primarily from a 19 21 reduction in investments in marketable securities offset by purchases of capital equipment and software to support our growth and the purchase of smallwonder! softworks, Inc. 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 Our financing activities generated $1.7 million in 2000, $6.6 million in 1999, and $3.3 million in 1998. The cash generated in 2000 was primarily from redemption of options to purchase common stock. Our cash in 1999 was primarily from the sale of common stock and preferred stock by eShare.com, Inc. Our cash in 1998 was primarily a result of the issuance of convertible notes and the sale of common stock. As of December 31, 2000, we had working capital of $21.6 million. Cash, cash equivalents and marketable securities were $14.7 million. In order to enhance our liquidity, we are exploring the establishment of a line of credit with a commercial lender. There can be no assurance we will complete such a transaction. 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. NEW ACCOUNTING PRONOUNCEMENT In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." The effective date of SFAS No. 133 was delayed through the issuance of SFAS No. 137 and 138 to fiscal year 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments including derivative instruments embedded in other contracts. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities measured based on their fair values. The Company adopted SFAS No. 133 on January 1, 2001 and does not hold any significant derivative financial instruments; therefore, the adoption of this statement did not have a significant impact on the Company's financial statements. 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 risks resulting from our international operations. These risks arise in the normal course of business rather than from trading. During fiscal 2000, the Company did not actively participate in any foreign currency hedging strategies. Our international revenues are denominated primarily in British pounds or Euro. Our expenses incurred in foreign countries are typically denominated in local currencies. The magnitude and direction of any adjustment in the future depends on the relationship of the U.S. dollar to other currencies. In 2000, the unrecognized translation adjustment was primarily due to the decrease in the British pound and Euro compared to 1999. 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 addition, some of our traded assets are exposed to market risks such as interest rate fluctuations. Primarily, this risk comes from securities owned by us through Melita Finance Corporation, our wholly-owned investment subsidiary. At December 31, 2000, the Company was invested primarily in commercial paper and municipal bonds with short-term maturities. The following table provides information about securities owned by us through Melita Finance Corporation that are sensitive to market risks: SECURITIES SENSITIVE TO MARKET RISK BY MATURITY AS OF DECEMBER 31, 2000 (IN THOUSANDS)
2001 2002 TOTAL ------ ----- ----- Fixed Rate ($US)............................................ $6,777 $ 352 7,129 Average Interest Rate..................................... 4.75% 4.59% 4.72%
20 22 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 AND 1999 TOGETHER WITH AUDITORS' REPORT INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................... 22 Consolidated Balance Sheets as of December 31, 2000 and 1999...................................................... 23 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2000............... 24 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 2000..... 25 Consolidated Statements of Comprehensive (Loss) Income for each of the three years in the period ended December 31, 2000...................................................... 26 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000............... 27 Notes to Consolidated Financial Statements.................. 28
21 23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To eshare communications, Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of eshare communications, Inc. (a Georgia corporation) and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations, shareholders' equity, comprehensive (loss) income, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of eshare communications, 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 year ended December 31, 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 consolidated financial statements of eshare communications, Inc. and subsidiaries and reflect total assets and total revenues of 4% and 4% in 1998, respectively, of the related consolidated totals. These statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for eShare.com, Inc., is based solely upon the report of the other auditors. We conducted our audits in accordance with 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 communications, Inc. and subsidiaries as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Atlanta, Georgia February 14, 2001 22 24 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
2000 1999 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 7,598 $ 3,558 Marketable securities..................................... 7,129 11,315 Accounts receivable, net of allowance for doubtful accounts of $4,577 and $3,817 at December 31, 2000 and 1999, respectively..................................... 26,587 32,863 Inventories, net.......................................... 2,157 1,967 Deferred taxes............................................ 1,397 4,921 Prepaid expenses and other................................ 5,236 7,384 -------- -------- Total current assets.............................. 50,104 62,008 -------- -------- Property and equipment, at cost: Furniture and fixtures.................................... 3,322 3,122 Equipment................................................. 17,972 17,436 Leasehold improvements.................................... 1,630 1,390 -------- -------- Total property and equipment...................... 22,924 21,948 Less accumulated depreciation............................. (12,268) (10,985) -------- -------- Property and equipment, net....................... 10,656 10,963 -------- -------- Deferred taxes.............................................. 7,776 -- Intangible assets, net...................................... 4,196 4,254 Other assets................................................ 140 98 -------- -------- Total assets...................................... $ 72,872 $ 77,323 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 7,809 $ 3,343 Accrued liabilities....................................... 8,711 11,651 Deferred revenue.......................................... 11,463 8,265 Other current liabilities................................. 499 12 Current portion of notes payable.......................... -- 141 -------- -------- Total current liabilities......................... 28,482 23,412 -------- -------- Commitments and contingencies (Note 7) Notes payable, excluding current portion.................... -- 74 Shareholders' Equity Preferred stock, no par value: 20,000,000 shares authorized, no shares issued and outstanding at December 31, 2000 and 1999...................................................... -- -- Common Stock, no par value: 100,000,000 shares authorized, 21,797,312 and 21,386,714 issued and outstanding at December 31, 2000 and 1999, respectively............... 69 69 Additional paid-in capital................................ 62,166 59,504 Accumulated other comprehensive loss...................... (1,020) (28) Accumulated deficit....................................... (16,825) (5,708) -------- -------- Total shareholders' equity........................ 44,390 53,837 -------- -------- Total liabilities and shareholders' equity........ $ 72,872 $ 77,323 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 23 25 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998 ---------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues: Product................................................... $ 48,675 $ 63,063 $71,333 Service................................................... 35,281 31,792 25,748 -------- -------- ------- Total revenues.................................... 83,956 94,855 97,081 -------- -------- ------- Cost of revenues: Product................................................... 10,738 19,398 21,680 Service................................................... 20,384 16,765 13,346 -------- -------- ------- Total cost of revenues............................ 31,122 36,163 35,026 -------- -------- ------- Gross margin................................................ 52,834 58,692 62,055 -------- -------- ------- Operating expenses: Engineering, research and development..................... 10,658 14,213 11,798 Selling, general and administrative....................... 57,042 46,467 36,208 Write-off of purchased software........................... 3,186 -- -- Amortization of intangible assets......................... 1,021 542 -- Acquisition and restructuring related charges............. -- 6,990 -- Deferred compensation expense............................. -- 2,271 -- -------- -------- ------- Total operating expenses.......................... 71,907 70,483 48,006 -------- -------- ------- (Loss) income from operations............................... (19,073) (11,791) 14,049 Other income, net........................................... 414 756 1,067 -------- -------- ------- (Loss) income before income taxes........................... (18,659) (11,035) 15,116 Income tax (benefit) provision.............................. (7,542) (1,077) 6,576 -------- -------- ------- Net (loss) income........................................... (11,117) (9,958) 8,540 Preferred stock preference.................................. -- (5,850) -- -------- -------- ------- Net (loss) income applicable to common shareholders......... $(11,117) $(15,808) $ 8,540 ======== ======== ======= (Loss) earnings per share: Basic..................................................... $ (0.51) $ (0.76) $ 0.42 ======== ======== ======= Diluted................................................... $ (0.51) $ (0.76) $ 0.40 ======== ======== ======= Weighted average shares outstanding: Basic..................................................... 21,697 20,758 20,259 ======== ======== ======= Diluted................................................... 21,697 20,758 21,575 ======== ======== =======
The accompanying notes are an integral part of these consolidated statements. 24 26 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
ACCUMULATED OTHER COMMON STOCK ADDITIONAL COMPREHENSIVE RETAINED ------------------- PAID-IN DEFERRED INCOME EARNINGS SHARES AMOUNT CAPITAL COMPENSATION (LOSS) (DEFICIT) TOTAL ---------- ------ ---------- ------------ ------------- --------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance, December 31, 1997........ 20,234,840 $69 $42,848 $ (8) $ 30 $ (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 (303) 96 4,250 48,394 Net loss........................ -- -- -- -- -- (9,958) (9,958) Proceeds from the 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........... -- -- 1,969 (1,830) -- -- 139 Amortization of deferred compensation.................. -- -- -- 2,133 -- -- 2,133 Unrealized loss on marketable securities.................... -- -- -- -- (148) -- (148) Foreign currency translation adjustment.................... -- -- -- -- 24 -- 24 ---------- --- ------- ------- ------- -------- -------- Balance, December 31, 1999........ 21,386,714 69 59,504 -- (28) (5,708) 53,837 Net loss........................ -- -- -- -- -- (11,117) (11,117) Proceeds from the issuance of common stock.................. 410,598 -- 1,888 -- -- -- 1,888 Non-cash stock issuance costs... -- -- 127 -- -- -- 127 Tax benefit from exercise of options....................... -- -- 647 -- -- -- 647 Unrealized gain on marketable securities.................... -- -- -- -- 47 -- 47 Foreign currency translation adjustment.................... -- -- -- -- (1,039) -- (1,039) ---------- --- ------- ------- ------- -------- -------- Balance, December 31, 2000........ 21,797,312 $69 $62,166 $ -- $(1,020) $(16,825) $ 44,390 ========== === ======= ======= ======= ======== ========
The accompanying notes are an integral part of these consolidated statements. 25 27 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998 -------- -------- ------ (IN THOUSANDS) Net (loss) income........................................... $(11,117) $ (9,958) $8,540 -------- -------- ------ Other comprehensive (loss) income, net of tax: Foreign currency translation adjustment................... (1,039) 24 (23) Unrealized gain (loss) on marketable securities........... 47 (148) 89 -------- -------- ------ Other comprehensive (loss) income...................... (992) (124) 66 -------- -------- ------ Comprehensive (loss) income................................. $(12,109) $(10,082) $8,606 ======== ======== ======
The accompanying notes are an integral part of these consolidated statements. 26 28 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998 -------- ------- -------- (IN THOUSANDS) Cash flows from operating activities: Net (loss) income......................................... $(11,117) $(9,958) $ 8,540 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Deferred taxes......................................... (3,605) (1,190) (1,695) Depreciation and amortization.......................... 5,246 3,120 2,463 Write-off of purchased software........................ 3,186 -- -- Non cash financing and compensation expense............ 127 -- 197 Non cash compensation expense.......................... -- 2,271 -- Loss on disposal of property and equipment............. 473 -- -- Changes in assets and liabilities, net of effects of acquisition: Accounts receivable, net............................. 6,276 1,322 (17,723) Inventories.......................................... (190) (595) 1,201 Prepaid expenses and other assets.................... (1,038) (154) (201) Accounts payable and accrued liabilities............. 1,526 (7,961) 5,904 Deferred revenue..................................... 3,198 1,691 2,429 Other current liabilities............................ 487 (803) (1,173) Other, net........................................... (42) 471 (103) -------- ------- -------- Total adjustments................................. 15,644 (1,828) (8,701) -------- ------- -------- Net cash provided by (used in) operating activities...................................... 4,527 (11,786) (161) -------- ------- -------- Cash flows from investing activities: Purchases of property and equipment....................... (4,354) (6,106) (4,585) Sale of marketable securities, net........................ 4,186 11,441 1,302 Acquisition, net of cash acquired......................... (1,000) (4,605) -- -------- ------- -------- Net cash (used in) provided by investing activities...................................... (1,168) 730 (3,283) Cash flows from financing activities: Issuance of convertible notes............................. -- 500 2,500 Deferred offering costs................................... -- -- (335) Net proceeds from issuance of common stock................ 1,888 6,292 1,039 Exercise of warrants...................................... -- -- 1 Proceeds from issuance of debt............................ -- -- 673 Repayment of debt......................................... (215) (205) (554) -------- ------- -------- Net cash provided by financing activities......... 1,673 6,587 3,324 -------- ------- -------- Effect of foreign currency translation............ (992) -- -- Net change in cash and cash equivalents..................... 4,040 (4,469) (120) Cash and cash equivalents, beginning of year................ 3,558 8,027 8,147 -------- ------- -------- Cash and cash equivalents, end of year...................... $ 7,598 $ 3,558 $ 8,027 ======== ======= ======== Marketable securities....................................... $ 7,129 $11,315 $ 22,756 ======== ======= ======== Cash, cash equivalents and marketable securities............ $ 14,727 $14,873 $ 30,783 ======== ======= ======== Supplemental cash flow information: Cash paid for interest during the year.................... $ 11 $ 44 $ 34 ======== ======= ======== Income taxes paid......................................... $ 12 $ 4,042 $ 6,395 ======== ======= ======== Conversion of convertible notes to common stock........... $ -- $ 3,000 $ -- ======== ======= ========
The accompanying notes are an integral part of these consolidated statements. 27 29 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999, AND 1998 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES eshare communications, Inc. (the "Company") is a leading provider of Customer Interaction Management software applications. The Company's solutions support voice, e-mail, live interaction/chat and hosting services for approximately 2,500 call center sites, e-businesses, ASPs, ISPs and Portals in approximately 30 countries. The Company's 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 the Company's 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. The Company offers ongoing maintenance support of the Company's products. The Company also offers fee- based installation, integration, training, hosting and consulting services. The Company, formerly eShare Technologies, Inc. was renamed eshare communications, Inc. on June 8, 2000. Prior to October 4, 1999, the Company was named Melita International Corporation. PRINCIPLES OF CONSOLIDATION The accompanying financial statements 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 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, consulting services and the licensing of patents. The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-9, Staff Accounting Bulletin No. 101 ("SAB101"), "Revenue Recognition" and Emerging Issues Task Force Issue 00-03, "Application of AICPA SOP 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity's Hardware." 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 ranges 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 or over the hosting period, if applicable. In contracts where product and services are bundled together, revenue is allocated to each element with 100% of any discount going to product. 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 28 30 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. Revenues from hosting arrangements are recognized over the hosting period. Revenues from patent settlements are recognized as other income when received. Revenues from patent licenses are recognized per the contract terms and in accordance with SAB101. 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 $11.5 million and $8.3 million at December 31, 2000 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 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, 2000, 1999 and 1998. Therefore, the Company charged all software development costs to expense as incurred for the years ended December 31, 2000, 1999 and 1998. 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. Realized gains and losses were not material to the financial statements for the years ended December 31, 2000, 1999 and 1998. The following table provides information about securities owned by us through our Melita Finance Corporation subsidiary that are sensitive to market risks by maturity as of December 31, 2000 (in thousands):
2001 2002 TOTAL ------ ---- ----- Fixed Rate ($US).................................. $6,777 $352 7,129 Average Interest Rate............................. 4.75% 4.59% 4.72%
FAIR VALUE OF FINANCIAL INSTRUMENTS The book values of accounts receivable, accounts payable, and other financial instruments approximate their fair values at December 31, 2000 and 1999 principally because of the short-term maturities of these instruments. 29 31 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciated using the straight-line method. 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
The Company's cost and related accumulated depreciation applicable to assets retired or sold are removed from the accounts and the gain or loss on disposition is recognized in income. During 2000, the Company recorded a loss of approximately $0.4 million on the disposal of obsolete computer equipment. Depreciation expense for the years ended December 31, 2000, 1999 and 1998 was $4.2 million, $2.6 million, and $2.5 million, respectively. LONG-LIVED ASSETS The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company uses the undiscounted future cash flow to determine if an impairment loss is to be recognized. In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of", the Company recorded an impairment loss of $3.2 million in 2000 due to a write-down of purchased software. Based on the Company's evaluation of the future market potential and recoverability of this software product, which was made available to customers in 2000, the Company wrote off the unamortized costs. WARRANTY COSTS The Company generally warranties its call center products for 90 days and its Internet products for 30 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 the Company's European subsidiaries are translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency Translation." Net assets of these subsidiaries 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. Gains and losses on foreign currency transactions are included in Other Income, net in the Consolidated Statements of Operations. The Company has recognized pre-tax foreign exchange (losses) gains of approximately $(43,000), $(49,000) and $16,000 in 2000, 1999 and 1998, respectively. INCOME TAXES The Company uses the liability method of accounting for income taxes, as set forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred tax assets or liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to be settled or realized. A valuation allowance is established for deferred tax assets when it is more likely than not that the benefits of such assets will not be realized. 30 32 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) BASIC AND DILUTED NET EARNINGS PER SHARE Basic earnings per share are computed using net income divided by the weighted average number of shares of common stock outstanding ("Weighted Shares") for the period presented. 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 are computed using net income divided by the sum of (i) Weighted Shares and (ii) the treasury stock method effect of CESs outstanding of 1,316,000 for the year ended December 31, 1998. The CESs for 2000 and 1999 were anti-dilutive 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. NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The effective date of SFAS No. 133 was delayed through the issuance of SFAS No. 137 and 138 to fiscal year 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments including derivative instruments embedded in other contracts. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities measured based on their fair values. The Company adopted SFAS No. 133 on January 1, 2001 and does not hold any significant derivative financial instruments; therefore, the adoption of this statement did not 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 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 31 33 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) interests, therefore, all prior period amounts have been restated. A reconciliation between revenue and net income as previously reported in fiscal 1998 and as restated follows:
FOR THE YEAR ENDED DECEMBER 31, 1998 ------------------ (IN THOUSANDS) Revenue: As previously reported.................................... $93,410 eShare.com, Inc. ......................................... 3,671 ------- As restated............................................... $97,081 ======= Net Income (loss): As previously reported.................................... $11,685 eShare.com, Inc. ......................................... (3,145) ------- As restated............................................... $ 8,540 =======
On June 15, 1999, the Company purchased smallwonder! softworks, Inc. of Leesburg, Virginia for $4.6 million in net cash and a prospective earnout of up to an additional $3.0 million, based on achievement of certain defined criteria. During 2000, $1.0 million of the earnout was paid. During 1999, none of the earnout was paid. The operations of smallwonders! softworks, Inc. are included in the accompanying statements from June 15, 1999. The acquisition was accounted for using the purchase method of accounting. 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, 2000 and 1999 (in thousands):
2000 1999 ------ ------- Raw materials............................................... $1,050 $ 1,288 Work in progress............................................ 497 920 Finished goods.............................................. 778 835 ------ ------- 2,325 3,043 Less, reserve............................................... (168) (1,076) ------ ------- $2,157 $ 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 years ended December 31, 2000 and 1999 was approximately $1.0 million and $0.5 million, respectively. Accumulated amortization as of December 31, 2000 and 1999 was $1.5 million and $0.5 million, respectively. 32 34 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. ACCRUED LIABILITIES Accrued liabilities at December 31, 2000 and 1999 include the following (in thousands):
2000 1999 ------ ------- Accrued salaries and wages.................................. $5,091 $ 3,771 Other current liabilities................................... 3,263 7,556 Accrued rent................................................ 357 324 ------ ------- $8,711 $11,651 ====== =======
6. NOTES PAYABLE The Company had outstanding notes payable of approximately $0.2 million as of December 31, 1999. These notes were payable over 36 months and required the Company to maintain certain financial covenants. In February of 1999, the Company issued 10% convertible notes for an aggregate amount of $0.5 million. These notes were converted to equity in February of 1999. 7. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS At December 31, 2000, the future minimum operating lease payments (including leases with related parties) under noncancellable operating leases were as follows (in thousands): 2001........................................................ $ 1,903 2002........................................................ 1,851 2003........................................................ 1,808 2004........................................................ 1,830 Thereafter.................................................. 6,706 ------- Total future minimum lease payments............... $14,098 =======
The Company's leases are primarily for equipment and facilities. Total rental expense for operating leases was $2.0 million, $1.4 million and $1.0 million in 2000, 1999, and 1998, respectively. The Company has entered into lease agreements with a related party to lease land and buildings. One agreement provides for annual rentals of approximately $0.5 million to $0.6 million per year over a ten-year term, which began in 1995. The other agreement provides for annual rentals of approximately $0.5 million per year over a fifteen-year term. Total rent expense, under both agreements, paid to the related party was $1.1 million, $0.6 million and $0.6 million in 2000, 1999, and 1998, respectively. LEGAL MATTERS Many of the Company's installations involve products that are critical to the operations of its clients' businesses. Any failure in a Company product could result in a claim for substantial damages against the Company, regardless of the Company's responsibility for such failure. Although the Company attempts to limit contractually its liability for damages arising from product failures or negligent acts or omissions, there can be no assurance the limitations of liability set forth in its contracts will be enforceable in all instances. The Company is subject to legal proceedings and claims, which have arisen, in the ordinary course of business. In the opinion of management, the amount of potential liability with respect to these actions will not materially affect the financial position or results of operations of the Company. 33 35 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 or authorized 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 October 1996, eShare.com, Inc. approved, as amended, a stock option and restricted stock purchase plan (the "1996 Plan") for which 2,300,000 shares of common stock were originally authorized for issuance. Upon the acquisition of eShare.com, Inc. the 1996 Plan options were converted into options for the common stock of eshare communications, Inc. as adjusted by the acquisition conversion ratio. The activity of the 1996 Plan, as audited, has been added to the option activity listed below. No additional options will be granted under the 1996 Plan. In 1999 and 1998, eShare.com, Inc. granted options from the 1996 Plan 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 $1.8 million and $0.4 million, 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. In connection with the merger with eShare.com, Inc., the Company incurred $2.3 million (non-cash) of indirect deferred compensation expenses related to the conversion of the eShare.com, Inc. stock option plan. Activity for the 1992 Plan, 1996 Plan and 1997 Plan is as follows (number of shares in thousands):
OPTIONS OPTION PRICES ------- -------------- Outstanding at December 31, 1997............................ 1,605 $0.43 - $10.00 Granted................................................... 1,287 $0.43 - $14.50 Exercised................................................. (103) Forfeited/repurchased..................................... (534) $0.43 - $14.50 ------ -------------- Outstanding at December 31, 1998............................ 2,255 $0.43 - $14.50 Granted................................................... 2,076 $0.43 - $20.88 Exercised................................................. (1,093) Forfeited/repurchased..................................... (564) $2.81 - $20.88 ------ -------------- Outstanding at December 31, 1999............................ 2,674 $0.43 - $20.88 Granted................................................... 1,577 $2.13 - $17.06 Exercised................................................. (266) Forfeited/repurchased..................................... (982) $2.13 - $20.88 ------ -------------- Outstanding at December 31, 2000............................ 3,003 $0.43 - $20.88 ====== ==============
34 36 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 2000, options to purchase 1,133,841 shares were available for future grant and options were exercisable to purchase 975,771 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 2000 PRICE 2000 PRICE - --------------- ---------------- -------- -------------- -------- $ 0.43 - $ 2.13 57 $0.72 48 $0.45 $ 2.25 - $ 2.25 448 2.25 11 2.25 $ 2.75 - $ 3.00 89 2.82 89 2.82 $ 4.00 - $ 4.00 658 4.00 205 4.00 $ 4.07 - $ 5.50 116 5.01 70 4.74 $ 5.88 - $ 5.88 589 5.88 195 5.88 $ 6.00 - $ 9.06 403 7.71 102 8.96 $ 9.38 - $10.75 320 10.27 155 10.20 $10.81 - $20.00 120 14.12 50 13.86 $20.88 - $20.88 203 20.88 51 20.88 ----- ----- --- ----- 3,003 $6.76 976 $7.01 ===== ===== === =====
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 2000, 1999, and 1998:
2000 1999 1998 ----------- ----------- ----------- Risk-free interest rate................... 4.8% - 6.9% 4.3% - 5.4% 4.0% - 5.5% Expected dividend yield................... -- -- -- Expected lives............................ Five years Five years Five years Expected volatility....................... 146% 65% 65%
35 37 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The total value of the options granted during the years ended December 31, 2000, 1999, and 1998 were computed as approximately $7.4 million, $14.0 million and $8.6 million, 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 net (loss) income and (loss) earnings per share for the years ended December 31, 2000, 1999, and 1998 would have (increased) decreased to the following amounts (in thousands, except per share amounts):
2000 1999 1998 -------- -------- ------ Net (loss) income: As reported in the financial statements.................... $(11,117) $(15,808) $8,540 Pro forma in accordance with SFAS No. 123.................. (14,835) (24,306) 6,578 Basic (loss) earnings per share: As reported in the financial statements.................... $ (0.51) $ (0.76) $ 0.42 Pro forma in accordance with SFAS No. 123.................. (0.68) (1.17) 0.32 Diluted (loss) earnings per share: As reported in the financial statements.................... $ (0.51) $ (0.76) $ 0.40 Pro forma in accordance with SFAS No. 123.................. (0.68) (1.17) 0.30
Under the Company's 1997 Employee Stock Purchase Plan (ESPP), the Company is authorized to sell up to 250,000 shares of Common Stock (subject to adjustments for changes in the Company's capitalization) to full-time employees. Per the terms of the ESPP, employees may elect to have up to 10% of their annual compensation withheld to purchase the Company's Common Stock at 85% of the fair market value. Fair market value is the price of the Common Stock on the preceding trading day of purchase. 9. BENEFIT PLAN The Company has a defined contribution profit-sharing plan (the "Plan") for substantially all employees meeting the eligibility requirements as defined in the plan agreement. The Plan provides for annual contributions by the Company at the discretion of the board of directors. The Plan also contains a 401(k) feature which allows participants to contribute up to 15% of their eligible compensation, as defined, and provides for discretionary employer matching contributions. Total contributions by the Company to the Plan were approximately $0.5 million, $0.4 million, and $0.4 million for the years ended December 31, 2000, 1999, and 1998, respectively. 36 38 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 10. INCOME TAXES The tax effects of temporary differences that give rise to the total net deferred tax assets as of December 31, 2000 and 1999 were as follows (in thousands):
2000 1999 ------ ------ Net operating loss carryforwards............................ $9,047 $4,923 Deferred revenue............................................ 2,791 1,930 Accrued liabilities......................................... 782 527 Allowance for doubtful accounts............................. 1,555 1,020 Depreciation and amortization............................... 983 40 Foreign tax credits......................................... 273 561 Inventory................................................... 128 366 State tax credits........................................... 170 -- ------ ------ Total deferred tax assets......................... 15,729 9,367 Valuation allowance......................................... (6,556) (4,446) ------ ------ Total net deferred tax assets..................... $9,173 $4,921 ====== ======
The following summarizes the components of the income tax provision for the years ended December 31, 2000, 1999, and 1998 (in thousands):
2000 1999 1998 ------- ------- ------ Current domestic taxes: Federal.............................................. $(4,085) $(1,136) $6,304 State................................................ 743 (327) 552 Foreign taxes.......................................... 52 1,576 1,143 Deferred taxes......................................... (4,252) (1,190) (1,423) ------- ------- ------ Tax provision..................................... $(7,542) $(1,077) $6,576 ======= ======= ======
A reconciliation from the federal statutory rate to the tax (benefit) provision for the years ended December 31, 2000, 1999, and 1998 is as follows:
2000 1999 1998 ----- ----- ---- Statutory federal tax rate.................................. (35.0)% (35.0)% 35.0% State income taxes, net of federal tax benefit.............. (6.2) (3.0) 2.4 Foreign operations.......................................... 1.6 30.6 (0.8) Valuation allowance......................................... 2.0 -- (0.6) Other....................................................... (2.8) (2.3) 7.3 ----- ----- ---- Effective tax rate........................................ (40.4)% (9.7)% 43.3% ===== ===== ====
As of December 31, 2000 and 1999, the Company has net operating loss carryforwards of approximately $23.3 million and $12.8 million, respectively, which expire through 2020. At December 31, 2000 and 1999, the Company has established a partial 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. CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk with respect to accounts receivable are limited due to the wide variety of customers and markets for which the Company's services are provided as well as their dispersion across many 37 39 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) different geographic areas. As a result, as of December 31, 2000 and 1999, the Company did not consider itself to have any significant concentrations of credit risk. During 2000, no customers 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 2000, 1999, and 1998, the Company's five largest customers accounted for approximately 16.6%, 28.2% and 23.2%, respectively, of total revenues. These sales were predominantly to customers in the financial services industry. Although the particular customers may change from period to period, the Company expects that large sales to a limited number of customers will continue to account for a significant percentage of its revenues in any particular period for the foreseeable future. 12. SEGMENT INFORMATION In the fourth quarter of 1999, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for the way public companies report information about operating segments in annual financial statements and 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 Company is a multinational business operating in two segments, telephony and Internet. The Company's management primarily evaluates these segments on income from operations. The telephony business segment includes the sale of hardware and software for telephone call centers in all geographic areas, including inbound/outbound voice contact management. The Internet business segment includes the sale of software such as NetAgent and Expressions in all geographic areas. The results of these segments are as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 --------- --------- -------- Revenues: Telephony.............................................. $ 66,160 $ 85,887 $93,410 Internet............................................... 17,796 8,968 3,671 -------- -------- ------- Total Revenues.................................... $ 83,956 $ 94,855 $97,081 ======== ======== ======= (Loss) income from operations: Telephony................................................. $ (7,952) $ (5,361) $17,065 Internet.................................................. (11,121) (6,430) (3,016) -------- -------- ------- Total (loss) income from operations:.............. $(19,073) $(11,791) $14,049 ======== ======== ======= Depreciation & amortization: Telephony................................................. $ 4,748 $ 2,775 $ 2,212 Internet.................................................. 498 345 251 -------- -------- ------- Total depreciation & amortization:................ $ 5,246 $ 3,120 $ 2,463 ======== ======== ======= Deferred compensation expense: Telephony................................................. $ -- $ -- $ -- Internet.................................................. -- 2,271 -- -------- -------- ------- Total deferred compensation expense:.............. $ -- $ 2,271 $ -- ======== ======== =======
38 40 ESHARE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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, 2000, 1999, and 1998 (in thousands):
FOR THE YEAR ENDED DECEMBER 31, --------------------------- 2000 1999 1998 ------- ------- ------- United States: Total revenues............................................ $60,813 $64,784 $73,960 Long-lived assets......................................... 10,323 10,494 7,608 Europe: Total revenues............................................ 13,687 14,350 9,939 Long-lived assets......................................... 312 435 234 Latin America: Total revenues............................................ 3,850 10,580 7,381 Long-lived assets......................................... 21 33 58 Other: Total revenues............................................ 5,606 5,141 5,801 Long-lived assets......................................... -- 1 1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 39 41 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 2000 fiscal year ended December 31, 2000 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 2000 fiscal year ended December 31, 2000 under the heading "Compensation and Other Information Concerning Directors and Officers." 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 2000 fiscal year ended December 31, 2000 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 2000 fiscal year ended December 31, 2000 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 21 for a list of the financial statements and supplementary data filed herewith. 2. Financial Statement Schedule (i) The following Financial Statement Schedule of eshare communications, Inc. for the Years Ended December 31, 2000, 1999 and 1998 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 communications, Inc. 40 42 ESHARE COMMUNICATIONS, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT BEGINNING OF COSTS AND END OF YEAR EXPENSES DEDUCTIONS YEAR ------------ ---------- ---------- ---------- 2000: Allowance for doubtful accounts................. $3,817,000 $9,048,000 $8,288,500 $4,576,500 Allowance for inventory obsolescence............ $1,076,000 $ (681,800) $ 226,100 $ 168,100 1999: Allowance for doubtful accounts................. $2,600,000 $2,020,000 $ 803,000 $3,817,000 Allowance for inventory obsolescence............ $ 957,000 $ 712,000 $ 593,000 $1,076,000 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
(ii) Report of Independent Public Accountants on Financial Statement Schedule. 41 43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To eshare communications, Inc. and subsidiaries: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of eshare communications, Inc. and subsidiaries included in this Form 10-K and have issued our report thereon dated February 14, 2001. We did not audit the financial statements as of and for the year ended December 31, 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 consolidated financial statements of eshare communications, Inc. and subsidiaries and reflect total assets and total revenues of 4% and 4% in 1998, respectively, of the related consolidated totals. These statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for eShare.com, Inc., is based solely upon the report of the other auditors. 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 based on our audit and the report of other auditors, 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 14, 2001 42 44 (b) Reports on Form 8-K Filed during the Fourth Quarter of 2000: None. (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 (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on form 10-K (File No. 000-22317) filed on March 30, 2000). 10.3 -- Lease Agreement between eshare communications, Inc. (formerly eShare Technologies, Inc.) and Heartland Associates dated March 31, 2000. 10.4 -- 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). 10.5 -- 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). 10.6 -- 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). 10.7 -- 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). 10.8 -- 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). 10.9 -- Employment Agreement between the Company and William Dumont dated March 22, 2001. 10.10 -- 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). 10.11 -- Form S-1 (File 333-22855) filed March 6, 1997). 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). 21.1 -- List of Subsidiaries of the Company.
43 45
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23.1 -- Consent of Arthur Andersen LLP. 23.2 -- Report of Independent Auditors. 23.3 -- Consent of KPMG LLP. 99.1 -- Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements
44 46 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 communications, Inc. By: /s/ ALEKSANDER SZLAM ------------------------------------ Aleksander Szlam Chairman of the Board and Chief Executive Officer March 30, 2001 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 Chief April 2, 2001 - -------------------------------------------------------- Executive Officer Aleksander Szlam /s/ GEORGE W. LANDGREBE Chief Operating Officer April 2, 2001 - -------------------------------------------------------- George W. Landgrebe /s/ GLEN SHIPLEY Chief Financial and April 2, 2001 - -------------------------------------------------------- Administrative Officer Glen Shipley /s/ ANDREW J. FILIPOWSKI Director April 2, 2001 - -------------------------------------------------------- Andrew J. Filipowski /s/ DONALD L. HOUSE Director April 2, 2001 - -------------------------------------------------------- Donald L. House /s/ STEPHEN JEFFERY Director April 2, 2001 - -------------------------------------------------------- Stephen Jeffery /s/ JACK PELLICCI Director April 2, 2001 - -------------------------------------------------------- Jack Pellicci /s/ JAMES TITO Director April 2, 2001 - -------------------------------------------------------- James Tito
45 EX-10.3 2 g67916ex10-3.txt LEASE AGREEMENT 1 EXHIBIT 10.3 STANDARD FORM OF LOFT LEASE THE REAL ESTATE BOARD OF NEW YORK, INC. AGREEMENT OF LEASE, made as of this 31st day of March 2000, between Heartland Associates, 1 Executive Drive, Edgewood, New York 11717 party of the first part, hereinafter referred to as OWNER, and/ Landlord and eShare Technologies, Inc., a corporation duly organized and existing under the law of the state of Georgia with an office of 5051 Peachtree Corners Circle, Norcross, Georgia 30092 party of the second part, hereinafter referred to as TENANT. WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner those certain premises as more particularly cross-hatched in red on Exhibit "A" attached to and made part of this Lease in the building known as 425 Oser Avenue, Hauppauge, New York, for the term (or until such term shall sooner cease and expire as hereinafter provided) to commence on the 15th day of June two thousand, and to end on the 30th day of June two thousand six and both dates inclusive, at an annual rental rate as more particularly set forth in paragraph 41 of the rider attached to and made part of this Lease which Tenant agrees to pay in lawful money of the United States which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, in equal monthly installments in advance on the first day of each month during said term, at the office of Owner or such other plan as Owner may designate, without any set off or deduction whatsoever, except that Tenant shall pay the first monthly installment(s) on the execution hereof (unless this lease be a renewal). In the event that, at the commencement of the term of this lease, or thereafter, Tenant shall be in default in the payment of rent to Owner pursuant to the terms of another lease with Owner or with Owner's predecessor in interest, Owner may at Owner's option and without notice to Tenant add the amount of such arrears to any monthly installment of rent payable hereunder and the same shall be payable to Owner as additional rent. The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, successors and assigns, hereby covenant as follows: RENT: 1. Tenant shall pay the rent as above and as hereinafter provided. OCCUPANCY: 2. Tenant shall use and occupy demised premises for general office use (continued at rider paragraph 51(A)) ALTERATIONS: 3. Tenant shall make no changes in or to the demised premises of any nature without Owner's prior written consent / which consent shall not be unreasonably withheld for non-structural items. Subject to the prior written consent of Owner, and to the provisions of this article, Tenant, at Tenant's expense, may make alterations, installations, additions or improvements which are nonstructural and which do not affect utility services or plumbing and electrical lines, in or to the interior of the demised premises using contractors or mechanics first approved in each instance by Owner. Tenant shall, at its expense, before making any alterations, additions, installations or improvements obtain all permits, approval and certificates required by any governmental or quasi-governmental bodies and (upon completion) certificates final approval thereof and shall deliver promptly duplicates of all such permits, approvals and certificates to Owner. Tenant agrees to carry and will cause Tenant's contractors and sub-contractors to carry such workman's compensation, general liability, personal and property damage insurance as Owner may require. If any mechanic's lien is filed against the demised premises, or the building of which the same forms a part, for work claimed to have been done for, or materials furnished to, Tenant, whether or not done pursuant to this article, the same shall be discharged by Tenant within thirty days thereafter, at Tenant's expense, by payment or filing the bond required by law or otherwise. All fixtures and all paneling, partitions, railings and like installations, installed in the premises at any time, either by Tenant or by Owner on Tenant's behalf, shall, upon installation, become the property of Owner and shall remain upon and be surrendered with the demised premises unless Owner, by notice to Tenant no later than twenty days prior to the date fixed as the termination of this leases, elects to relinquish Owner's right thereto and to have them removed by Tenant, in which event the same shall be removed from the demised premises by Tenant prior to the expiration of the lease, at Tenant's expense. Nothing in this Article shall be construed to give Owner title to or to prevent Tenant's removal of trade fixtures, moveable office furniture and equipment, but upon removal of any such from the premises or upon removal of other installations as may be required by Owner, Tenant shall immediately and at its expense, repair and restore the premises to the condition existing prior to installation and repair any damage to the demised premises or the building due to such removal. All property permitted or required to be removed by Tenant at the end of the term remaining in the premises after Tenant's removal shall be deemed abandoned and may, at the election of Owner, either be retained as Owner's property or removed from the premises by Owner, at Tenant's expense. REPAIRS: 4. Owner shall maintain and repair the public portions of the building. Tenant shall, throughout the term of this lease, take good care of the demised premises including the bathrooms and lavatory facilities and the windows and window frames and, the fixtures and appurtenances therein and at Tenant's sole cost and expense promptly make all repairs thereto and to the building, whether structural or non-structural in nature, caused by or resulting from the carelessness, omission, neglect or improper conduct of Tenant, Tenant's servants, employees, invitees, or licensees, and whether or not arising from such Tenant conduct or omission, when required by other provisions of this lease, including Article 6. Tenant shall also repair all damage to the building and the demised premises caused by the moving of Tenant's fixtures, furniture or equipment. All the aforesaid repairs shall be of quality or class equal to the original work or construction. If the demised premises be or become infested with vermin, Tenant shall, at its expense, cause the same to be exterminated. Tenant shall give Owner prompt notice of any defective condition in any plumbing, heating system or electrical lines located in the demised premises and following such notice, Owner shall remedy the condition with due diligence, but at the expense of Tenant, if repairs are necessitated by damage or injury attributable to Tenant, Tenant's servants, agents, employees, invitees or licensees as aforesaid. Except as specifically provided in Article 9 or elsewhere in this lease, there shall be no allowance to the Tenant for a diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner, Tenant or others making or failing to make any repairs, alterations, additions or improvements in or to any portion of the building or the demised premises or in and to the fixtures, appurtenances or equipment thereof. It is specifically agreed that Tenant shall not be entitled to any set off or reduction of rent by reason of any failure of Owner to comply with the covenants of this or any other article of this lease. Tenant agrees that Tenant's sole remedy at law in such instance will be by way of any action for damages for breach of contract. The provisions of this Article 4 with respect to the making of repairs shall not apply in the case of fire or other casualty with regard to which Article 9 hereof shall apply. WINDOW CLEANING: 5. Tenant will not clean nor require, permit, suffer or allow any window in the demised premises to be cleaned from the outside in violation of Section 202 of the New York State Labor Law or any other applicable law or the Rules of the Board of Standards and Appeals, or of any other Board or body having or asserting jurisdiction. REQUIREMENTS OF LAW, FIRE INSURANCE: 6. Prior to the commencement of the lease term, if Tenant is then in possession, and at all times thereafter Tenant shall, at Tenant's sole cost and expense, promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters, or the Insurance Services Office, or any similar body which shall impose any violation, order or duty upon Owner or Tenant with respect to the demised premises, whether or not arising out of Tenant's use or manner of use thereof, or, with respect to the building, if arising out of Tenant's use or manner of use of the demised premises of the building (including the use permitted under the lease). Except as provided in Article 30 hereof, nothing herein shall require Tenant to make structural repairs or alterations unless Tenant has, by its manner of use of the demised premises or method of operation therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto. Tenant shall not do or 46 2 permit any act or thing to be done in or to the demised premises which is contrary to law, or which will invalidate or be in conflict with public liability, fire or other policies of insurance at any time carried by or for the benefit of Owner. Tenant shall not keep anything in the demised premises except as now or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating Organization and other authority having jurisdiction, and then only in such manner and such quantity so as not to increase the rate for fire insurance applicable to the building, nor use the premises in a manner which will increase the insurance rate for the building or any property located therein over that in effect prior to the commencement of Tenant's occupancy. If by reason of failure to comply with the foregoing the fire insurance rate shall, at the beginning of this lease or at any time thereafter, be higher than it otherwise would be, then Tenant shall reimburse Owner, as additional rent hereunder, for that portion of all fire insurance premiums thereafter paid by Owner which shall have been charged because of such failure by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a schedule or "make-up" or rate for the building or demised premises issued by a body making fire insurance rates applicable to said premises shall be conclusive evidence of the facts therein stated and of the several items and charges in the fire insurance rates then applicable to said premises. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which it was designed to carry and which is allowed by law. Owner reserves the right to prescribe the weight and position of all safes, business machines and mechanical equipment. Such installations shall be placed and maintained by Tenant, at Tenant's expense, in settings sufficient, in Owner's judgement, to absorb and prevent vibration, noise and annoyance. SUBORDINATION: 7. This lease is subject and subordinate to all ground or underlying leases and to all mortgages which may now or hereafter affect such leases or the real property of which demised premises are a part and to all renewals, modifications, consolidations, replacements and extensions of any such underlying leases and mortgages. This clause shall be self-operative and no further instrument or subordination shall be required by any ground or underlying lessor or by any mortgagee, affecting any lease or the real property of which the demised premises are a part. In confirmation of such subordination, Tenant shall from time to time execute promptly any certificate that Owner may request. TENANT'S LIABILITY INSURANCE PROPERTY LOSS, DAMAGE, INDEMNITY: 8. Owner or its agents shall not be liable for any damage to property of Tenant or of others entrusted to employees of the building, nor for loss of or damage to any property of Tenant by theft or otherwise, nor for any injury or damage to persons or property resulting from any cause of whatsoever nature, unless caused by or due to the negligence of Owner, its agents, servants or employees; Owner or its agents shall not be liable for any damage caused by other tenants or persons in, upon or about said building or caused by operations in connection of any private, public or quasi public work. If at any time any windows of the demised premises are temporarily closed, darkened or bricked up (or permanently closed, darkened or bricked up) (if required by law), Owner shall not be liable for any damage Tenant may sustain thereby and Tenant shall not be entitled to any compensation therefor nor abatement or diminution of rent nor shall the same release Tenant from its obligations hereunder nor constitute an eviction. Tenant shall indemnify and save harmless Owner against and from all liabilities, obligations, damages, penalties, claims, costs and expenses for which Owner shall not be reimbursed by insurance, including reasonable attorney's fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's agents, contractors, employees, invitees, or licensees, of any covenant or condition of this lease, or the carelessness, negligence or improper conduct of the Tenant, Tenant's agents, contractors, employees, invitees or licensees. Tenant's liability under this lease extends to the acts and omissions of any sub-tenant, and any agent, contractor, employee, invitee or licensee of any sub-tenant. In case any action or proceeding is brought against Owner by reason of such claim, Tenant, upon written notice from Owner, will, at Tenant's expense, resist or defend such action or proceeding by counsel approved by Owner in writing, such approval not to be unreasonably withheld. DESTRUCTION, FIRE AND OTHER CASUALTY: 9. (a) If the demised premises or any part thereof shall be damaged by fire or other casualty, Tenant shall give immediate notice thereof to Owner and this lease shall continue in full force and effect except as hereinafter set forth. (b) If the demised premises are partially damaged or rendered partially unusable by fire or other casualty, the damages thereto shall be repaired by and at the expense of Owner and the rent and other items of additional rent, until such repair shall be substantially completed, shall be apportioned from the day following the casualty according to the part of the premises which is usable. (c) If the demised premises are totally damaged or rendered wholly unusable by fire or other casualty, then the rent and other items of additional rent as hereinafter expressly provided shall be proportionately paid up to the time of the casualty and thenceforth shall cease until the date when the premises shall have been repaired and restored by Owner (or sooner reoccupied in part by Tenant then rent shall be apportioned as provided in subsection (b) above), subject to Owner's right to elect not to restore the same as hereinafter provided. (d) If the demised premises are rendered wholly unusable or (whether or not the demised premises are damaged in whole or in part) if the building shall be so damaged that Owner shall decide to demolish it or to rebuild it, then, in any of such events, Owner may elect to terminate this lease by written notice to Tenant, given within 90 days after such fire or casualty, or 30 days after adjustment of the insurance claim for such fire or casualty, whichever is sooner, specifying a date for the expiration of the lease, which date shall not be more than 60 days after the giving of such notice, and upon the date specified in such notice the term of this lease shall expire as fully and completely as if such date were the date set forth above for the termination of this lease and Tenant shall forthwith quit, surrender and vacate the premises without prejudice however, to Owner's rights and remedies against Tenant under the lease provisions in effect prior to such termination, and any rent owing shall be paid up to such date and any payments of rent made by Tenant which were on account of any period subsequent to such date shall be returned to Tenant. Unless Owner shall serve a termination notice as provided for herein, Owner shall make the repairs and restorations under the conditions of (b) and (c) hereof, with all reasonable expedition, subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Owner's control. After any such casualty, Tenant shall cooperate with Owner's restoration by removing from the premises as promptly as reasonably possible, all of Tenant's salvageable inventory and movable equipment, furniture, and other property. Tenant's liability for rent shall resume five (5) days after written notice from Owner that the premises are substantially ready for Tenant's occupancy. (e) Nothing contained hereinabove shall relieve Tenant from liability that may exist as a result of damage from fire or other casualty. Notwithstanding the foregoing, including Owner's obligation to restore under subparagraph (b) above, each party shall look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent that such insurance is in force and collectible and to the extent permitted by law, Owner and Tenant each hereby releases and waives all right of recovery with respect to subparagraphs (b), (d) and (e) above, against the other or any one claiming through or under each of them by way of subrogation or otherwise. The release and waiver herein referred to shall be deemed to include any loss or damage to the demised premises and/or to any personal property, equipment, trade fixtures, goods and merchandise located therein. The foregoing release and waiver shall be in force only if both releasors' insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance. If, and to the extent, that such waiver can be obtained only by the payment of additional premiums, then the party benefitting from the waiver shall pay such premium within ten days after written demand or shall be deemed to have agreed that the party obtaining insurance coverage shall be free of any further obligation under the provisions hereof with respect to waiver of subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's furniture and or furnishings or any fixtures or equipment, improvements, or appurtenances removable by Tenant and agrees that Owner will not be obligated to repair any damage thereto or replace the same. (f) Tenant hereby waives the provisions of Section 227 of the Real Property Law and agrees that the provisions of this article shall govern and control in lieu thereof. EMINENT DOMAIN: 10. If the whole of the demised premises shall be acquired or condemned by Eminent Domain for any public or quasi public use or purpose, then and in that event, the term of this lease shall cease and terminate from the date of title vesting in such proceeding and Tenant shall have no claim for the value of any unexpired term of said lease. Tenant shall have the right to make an independent claim to the condemning authority for the value of Tenant's moving expenses and personal property, trade fixtures and equipment, provided Tenant is entitled pursuant to the terms of the lease to remove such property, trade fixtures and equipment at the end of the term and provided further such claim does not reduce Owner's award. ASSIGNMENT, MORTGAGE, ETC.: 11. If this lease be assigned, or if the demised premises or any part thereof be underlet or occupied by anybody other than Tenant, Owner may, after default by Tenant, collect rent from the assignee, under-tenant or occupant, and apply the net amount collected to the rent herein reserved, but no such assignment, underletting, occupancy or collection shall be deemed a waiver of this covenant, or the acceptance of the assignee, under-tenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of covenants on the part of Tenant herein contained. The consent by Owner to an assignment or underletting shall not in any wise be construed to relieve Tenant from obtaining the express consent in writing of Owner to any further assignment or underletting. ELECTRIC CURRENT: 12. Rates and conditions in respect to submetering or rent inclusion, as the case may be, to be added in RIDER attached hereto. Tenant covenants and agrees that at all times its use of electric current shall not exceed the capacity of existing feeders to the building or the risers or wiring installation and Tenant may not use any electrical equipment which, in Owner's opinion, reasonably exercised, will overload such installations or interfere with the use thereof by other tenants of the building. The change at any time of the character of electric service shall in no wise make Owner liable or responsible to Tenant, for any loss, damages or expenses which Tenant may sustain. ACCESS TO PREMISES: 13. Owner or Owner's agents shall have the right (but shall not be obligated) to enter the demised premises in any emergency at any time without notice and, at other reasonable times, with reasonable prior notice (which notice may be by telephone), to examine the same and to make such repairs, replacements and improvements as Owner may deem necessary and reasonably desirable to any portion of the building, or for the purpose of complying with laws, regulations and other directions of governmental authorities. Tenant shall permit Owner to use and maintain and replace pipes and conduits in and through the demised premises and to erect new pipes and conduits therein provided, wherever possible, they are within walls or otherwise concealed. Owner may, during the progress of any work in the demised premises, take all necessary materials and equipment into said premises without the same constituting an eviction nor shall the Tenant be entitled to any abatement of rent while such work is in progress nor to any damages by reason of loss or interruption of business or otherwise. Throughout the term hereof Owner shall have the right to enter the demised premises at reasonable hours for the purpose of showing the same to prospective purchasers or mortgagees of the building, and during the last six months of the term for the purpose of showing the same to prospective tenants and may, during said six months period, place upon 47 3 the demised premises the usual notices "To Let" and "For Sale" which notices Tenant shall permit to remain thereon without molestation. If Tenant is not present to open and permit an entry into the demised premises, Owner or Owner's agents may enter the same whenever such entry may be necessary or permissible by master key or forcibly (only in the event of an emergency) and provided reasonable care is exercised to safeguard Tenant's property, such entry shall not render Owner or its agents liable therefor, nor in any event shall the obligations of Tenant hereunder be affected. If during the last month of the term Tenant shall have removed all or substantially all of Tenant's property therefrom, Owner may immediately enter, alter, renovate or redecorate the demised premises without limitation or abatement of rent, or incurring liability to Tenant for any compensation and such act shall have no effect on this lease or Tenant's obligation hereunder. OCCUPANCY: 15. Tenant will not at any time use or occupy the demised premises in violation of the certificate of occupancy issued for the building of which the demised premises are a part. Tenant has inspected the premises and accepts them as is, subject to the riders annexed hereto with respect to Owner's work, if any. In any event, Owner makes no representation as to the condition of the premises and Tenant agrees to accept the same subject to violations, whether or not of record. If any governmental license or permit shall be required for the proper and lawful conduct of Tenant's business, Tenant shall be responsible for and shall procure and maintain such license or permit. BANKRUPTCY: 16. (a) Anything elsewhere in this lease to the contrary notwithstanding, this lease may be cancelled by Owner by sending of a written notice to Tenant within a reasonable time after the happening of any one or more of the following events: (1) the commencement of a case in bankruptcy or under the laws of any state naming Tenant as the debtor; or (2) the making by Tenant of an assignment or any other arrangement for the benefit of creditors under any state statute. Neither Tenant nor any person claiming through or under Tenant, or by reason of any statute or order of court, shall thereafter be entitled to possession of the premises demised but shall forthwith quit and surrender the premises. If this lease shall be assigned in accordance with its terms, the provisions of this Article 16 shall be applicable only to the party then owning Tenant's interest in this lease. (b) It is stipulated and agreed that in the event of the termination of this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any other provisions of this lease to the contrary, be entitled to recover from Tenant as and for liquidated damages an amount equal to the difference between the rental reserved hereunder for the unexpired portion of the term demised and the fair and reasonable rental value of the demised premises for the same period. In the computation of such damages the difference between any installment of rent becoming due hereunder after the date of termination and the fair and reasonable rental value of the demised premises for the period for which such installment was payable shall be discounted to the date of termination at the rate of four percent (4%) per annum. If such premises or any part thereof be relet by the Owner for the unexpired term of said lease, or any part thereof, before presentation of proof of such liquidated damages to any court, commission or tribunal, the amount of rent reserved upon such reletting shall be deemed to be the fair and reasonable rental value for the part or the whole of the premises so re-let during the term of the re-letting. Nothing herein contained shall limit or prejudice the right of the Owner to prove for and obtain as liquidated damages by reason of such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of the difference referred to above. DEFAULT: 17. (1) If Tenant defaults in fulfilling any of the covenants of this lease other than the covenants for the payment of rent or additional rent; or if the demised premises becomes vacant or deserted "or if this lease be rejected under ss. 235 of Title 11 of the U.S. Code (bankruptcy code);" or if any execution or attachment shall be issued against Tenant or any of Tenant's property whereupon the demised premises shall be taken or occupied by someone other than Tenant; or if Tenant shall make default with respect to any other lease between Owner and Tenant; or if Tenant shall have failed, after five (5) days written notice, to redeposit with Owner any portion of the security deposited hereunder which Owner has applied to the payment of any rent and additional rent due and payable hereunder or failed to move into or take possession of the premises within thirty (30) days after the commencement of the term of this lease, of which fact Owner shall be the sole judge; then in any one or more of such events, upon Owner serving a written twenty (20) days notice upon Tenant specifying the nature of said default and upon the expiration of said twenty (20) days, if Tenant shall have failed to comply with or remedy such default, or if the said default or omission complained of shall be of a nature that the same cannot be completely cured or remedied within said twenty (20) day period, and if Tenant shall not have diligently commenced during such default within such twenty (20) day period, and shall not thereafter with reasonable diligence and in good faith, proceed to remedy or cure such default, then Owner may serve a written five (5) days' notice of cancellation of this lease upon Tenant, and upon the expiration of said five (5) days this lease and the term thereunder shall end and expire as fully and completely as if the expiration of such five (5) day period were the day herein definitely fixed for the end and expiration of this lease and the term thereof and Tenant shall then quit and surrender the demised premises to Owner but Tenant shall remain liable as hereinafter provided. (2) If the notice provided for in (1) hereof shall have been given, and the term shall expire as aforesaid; or if Tenant shall make default in the payment of the rent reserved herein or any item of additional rent herein mentioned or any part of either or in making any other payment herein required; then and in any of such events Owner may without notice, re-enter the demised premises either by force or otherwise, and dispossess Tenant by summary proceedings or otherwise, and the legal representative of Tenant or other occupant of demised premises and remove their effects and hold the premises as if this lease had not been made, and Tenant hereby waives the service of notice of intention to re-enter or to institute legal proceedings to that end. If Tenant shall make default hereunder prior to the date fixed as the commencement of any renewal or extension of this lease, Owner may cancel and terminate such renewal or extension agreement by written notice. REMEDIES OF OWNER AND WAIVER OF REDEMPTION: 18. In case of any such default, re-entry, expiration and/or dispossess by summary proceedings or otherwise, (a) the rent, and additional rent, shall become due thereupon and be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner may re-let the premises or any part or parts thereof, either in the name of Owner or otherwise, for a term or terms, which may at Owner's option be less than or exceed the period which would otherwise have constituted the balance of the term of this lease and may grant concessions or free rent or charge a higher rental than that in this lease, (c) Tenant or the legal representatives of Tenant shall also pay Owner as liquidated damages for the failure of Tenant to observe and perform said Tenant's covenants herein contained, any deficiency between the rent hereby reserved and or covenanted to be paid and the net amount, if any, of the rents collected on account of the subsequent lease or leases of the demised premises for each month of the period which would otherwise have constituted the balance of the term of this lease. The failure of Owner to re-let the premises or any part or parts thereof shall not release or affect Tenant's liability for damages. In computing such liquidated damages there shall be added to the said deficiency such expenses as Owner may incur in connection with re-letting, such as legal expenses, reasonable attorneys' fees, brokerage, advertising and for keeping the demised premises in good order or for preparing the same for re-letting. Any such liquidated damages shall be paid in monthly installments by Tenant on the rent day specified in this lease and any suit brought to collect the amount of the deficiency for any month shall not prejudice in any way the rights of Owner to collect the deficiency for any subsequent month by a similar proceeding. Owner, in putting the demised premises in good order or preparing the same for re-rental may, at Owner's option, make such alterations, repairs, replacements, and/or decorations in the demised premises as Owner, in Owner's sole judgment, considers advisable and necessary for the purpose of re-letting the demised premises, and the making of such alterations, repairs, replacements, and/or decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever for failure to re-let the demised premises, or in the event that the demised premises are re-let, for failure to collect the rent thereof under such re-letting, and in no event shall Tenant be entitled to receive any excess, if any, of such net rents collected over the sums payable by Tenant to Owner hereunder. In the event of a breach or threatened breach by Tenant of any of the covenants or provisions hereof, Owner shall have the right of injunction and the right to invoke any remedy allowed at law or in equity as if re-entry, summary proceedings and other remedies were not herein provided for. Mention in this lease of any particular remedy, shall not preclude Owner from any other remedy, in law or in equity. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws. FEES AND EXPENSES: 19. If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any article of this lease, after notice if required and upon expiration of any applicable grace period if any, (except in an emergency), then, unless otherwise provided elsewhere in this lease, Owner may immediately or at any time thereafter and without notice perform the obligation of Tenant thereunder. If Owner, in connection with the foregoing or in connection with any default by Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to reasonable attorney's fees, in instituting, prosecuting or defending any action or proceedings, then Tenant will reimburse Owner for such sums so paid or obligations incurred with interest and costs. The foregoing expenses incurred by reason of Tenant's default shall be deemed to be additional rent hereunder and shall be paid by Tenant to Owner within ten (10) days of rendition of any bill or statements to Tenant therefor. If Tenant's lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Owner as damages. BUILDING ALTERATIONS AND MANAGEMENT: 20. Owner shall have the right at any time without the same constituting an eviction and without incurring liability to Tenant therefor to change the arrangement and or location of public entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets or other public parts of the building and to change the name, number or designation by which the building may be known. There shall be no allowance to Tenant for diminution of rental value and no liability on the part of Owner by reason of inconvenience, annoyance or injury to business arising from Owner or other Tenant making any repairs in the building or any such alterations, additions and improvements. Furthermore, Tenant shall not have any claim against Owner by reason of Owner's imposition of any controls of the manner of access to the building by Tenant's social or business visitors as the Owner may deem necessary for the security of the building and its occupants. 48 4 NO REPRESENTATIONS BY OWNER: 21. Neither Owner nor Owner's agents have made any representations or promises with respect to the physical condition of the building, the land upon which it is erected or the demised premises, the rents, leases, expenses of operation or any other matter or thing affecting or related to the demised premises or the building except as herein expressly set forth and no rights, easements or licenses are acquired by Tenant by implication or otherwise except as expressly set forth in the provisions of this lease. Tenant has inspected the building and the demised premises and is thoroughly acquainted with their condition and agrees to take the same "as is" on the date possession is tendered and acknowledges that the taking of possession of the demised premises by Tenant shall be conclusive evidence that the said premises and the building of which the same form a part were in good and satisfactory condition at the time such possession was so taken, except as to latent defects. All understandings and agreements heretofore made between the parties hereto are merged in this contract, which alone fully and completely expresses the agreement between Owner and Tenant and any executory agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in whole or in part, unless such executory agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. END OF TERM: 22. Upon the expiration or other termination of the term of this lease, Tenant shall quit and surrender to Owner the demised premises, broom clean, in good order and condition, ordinary wear and damages which Tenant is not required to repair as provided elsewhere in this lease excepted, and Tenant shall remove all its property from the demised premises. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this lease. If the last day of the term of this Lease or any renewal thereof, falls on Sunday, this lease shall expire at noon on the preceding Saturday unless it be a legal holiday in which case it shall expire at noon on the preceding business day. QUIET ENJOYMENT: 23. Owner covenants and agrees with Tenant that upon Tenant paying the rent and additional rent and observing and performing all the terms, covenants and conditions, on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the premises hereby demised, subject, nevertheless, to the terms and conditions of this lease including, but not limited to, Article 34 hereof and to the ground leases, underlying leases and mortgages hereinbefore mentioned. FAILURE TO GIVE POSSESSION: 24. If Owner is unable to give possession of the demised premises on the date of the commencement of the term hereof, because of the holding-over or retention of possession of any tenant, undertenant or occupants or if the demised premises are located in a building being constructed, because such building has not been sufficiently completed to make the premises ready for occupancy or because of the fact that a certificate of occupancy has not been procured or if Owner has not completed any work required to be performed by Owner, or for any other reason, Owner shall not be subject to any liability for failure to give possession on said date and the validity of the lease shall not be impaired under such circumstances, nor shall the same be construed in any wise to extend the term of this lease, but the rent payable hereunder shall be abated (provided Tenant is not responsible for Owner's inability to obtain possession or complete any work required) until after Owner shall have given Tenant notice that Owner is able to deliver possession in the condition required by this lease. If permission is given to Tenant to enter into the possession of the demised premises or to occupy premises other than the demised premises prior to the date specified as the commencement of the term of this lease, Tenant covenants and agrees that such possession and/or occupancy shall be deemed to be under all the terms, covenants, conditions and provisions of this lease, except the obligation to pay the fixed annual rent set forth in page one of this lease. The provisions of this article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law. NO WAIVER: 25. The failure of Owner to seek redress for violation of, or to insist upon the strict performance of any covenant or condition of this lease or of any of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not prevent a subsequent act which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Owner of rent with knowledge of the breach of any covenant of this lease shall not be deemed a waiver of such breach and no provision of this lease shall be deemed to have been waived by Owner unless such waiver be in writing signed by Owner. No payment by Tenant or receipt by Owner of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent, nor shall any endorsement or statement of any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction, and Owner may accept such check or payment without prejudice to Owner's right to recover the balance of such rent or pursue any other remedy in this lease provided. All checks tendered to Owner as and for the rent of the demised premises shall be deemed payments for the account of Tenant. Acceptance by Owner of rent from anyone other than Tenant shall not be deemed to operate as an attornment to Owner by the payor of such rent or as a consent by Owner to an assignment or subletting by Tenant of the demised premises to such payor, or as a modification of the provisions of this lease. No act or thing done by Owner or Owner's agents during the term hereby demised shall be deemed an acceptance of a surrender of said premises and no agreement to accept such surrender shall be valid unless in writing signed by Owner. No employee of Owner or Owner's agent shall have any power to accept the keys of said premises prior to the termination of the lease and the delivery of keys to any such agent or employee shall not operate as a termination of the lease or a surrender of the premises. WAIVER OF TRIAL BY JURY: 26. It is mutually agreed by and between Owner and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other (except for personal injury or property damage) on any matters whatsoever arising out of or in any way connected with this lease, the relationship of Owner and Tenant, Tenant's use of or occupancy of said premises, and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Owner commences any proceeding or action for possession including a summary proceeding for possession of the premises, Tenant will not interpose any counterclaim of whatever nature or description in any such proceeding including a counterclaim under Article 4 except for statutory mandatory counterclaims. INABILITY TO PERFORM: 27. This Lease and the obligation of Tenant to pay rent hereunder and perform all of the other covenants and agreements hereunder on part of Tenant to be performed shall in no wise be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease or to supply or is delayed in supplying any service expressly or impliedly to be supplied or is unable to make, or is delayed in making any repair, additions, alterations or decorations or is unable to supply or is delayed in supplying any equipment, fixtures or other materials if Owner is prevented or delayed from doing so by reason of strike or labor troubles or any cause whatsoever beyond Owner's sole control including, but not limited to, government preemption or restrictions or by reason of any rule, order or regulation of any department or subdivision thereof of any government agency or by reason of the conditions which have been or are affected, either directly or indirectly, by war or other emergency. BILLS AND NOTICES: 28. Except as otherwise in this lease provided, a bill statement, notice or communication which Owner may desire or be required to give to Tenant, shall be deemed sufficiently given or rendered if, in writing, delivered to Tenant personally or sent by registered or certified mail addressed to Tenant at the building or which the demised premises form a part or at the last known residence address of business address of Tenant or left at any of the aforesaid premises addressed to Tenant, and the time of the rendition of such bill or statement and of the giving of such notice or communication shall be deemed to be the time when the same is delivered to Tenant, mailed, or left at the premises as herein provided. Any notice by Tenant to Owner must be served by registered or certified mail addressed to Owner at the address first hereinabove given or at such other address as Owner shall designate by written notice. WATER CHARGES: 29. If Tenant requires, uses or consumes water for any purpose in addition to ordinary lavatory purposes (of which fact Tenant constitutes Owner to be the sole judge) Owner may install a water meter and thereby measure Tenant's water consumption for all purposes. Tenant shall pay Owner for the cost of the meter and the cost of the installation, thereof and throughout the duration of Tenant's occupancy Tenant shall keep said meter and installation equipment in good working order and repair at Tenant's own cost and expense in default of which Owner may cause such meter and equipment to be replaced or repaired and collect the cost thereof from Tenant, as additional rent. Tenant agrees to pay for water consumed, as shown on said meter as and when bills are rendered, and on default in making such payment Owner may pay such charges and collect the same from Tenant, as additional rent. Tenant covenants and agrees to pay, as additional rent, the sewer rent, charge or any other tax, rent, levy or charge which now or hereafter is assessed, imposed or a lien upon the demised premises or the realty of which they are part pursuant to law, order or regulation made or issued in connection with the use, consumption, maintenance or supply of water, water system or sewage or sewage connection or system. If the building or the demised premises or any part thereof is supplied with water through a meter through which water is also supplied to other premises Tenant shall pay to Owner, as additional rent Tenant's Share, as, and when billed of the total meter charges as Tenant's portion. Independently of and in addition to any of the remedies reserved to Owner hereinabove or elsewhere in this lease, Owner may sue for and collect any monies to be paid by Tenant or paid by Owner for any of the reasons or purposes hereinabove set forth. SPRINKLERS: 30. Anything elsewhere in this lease to the contrary notwithstanding, if the New York Board of Fire Underwriters or the New York Fire Insurance Exchange or any bureau, department or official of the federal, state or city government recommend or require the installation of a sprinkler system or that any changes, modifications, alterations, or additional sprinkler heads or other equipment be made or supplied in an existing sprinkler system by reason of Tenant's business, or the location of partitions, trade fixtures, or other contents of the demised premises, or for any other reason, or if any such sprinkler system installations, modifications, alterations, additional sprinkler heads or other such equipment, become necessary to prevent the imposition of a penalty or charge against the full allowance for a sprinkler system in the fire insurance rate set by any said Exchange or by any fire insurance company, Tenant shall, at Tenant's expense, promptly make such sprinkler system installations, changes, modifications, alterations, and supply additional sprinkler heads or other equipment as required whether the work involved shall be structural or non-structural in nature. Tenant shall pay to Owner as additional rent Tenant's Share, as and when billed during the term of this lease, as Tenant's portion of the contract price for sprinkler supervisory/alarm and maintenance service. ELEVATORS, HEAT, CLEANING: 31. As long as Tenant is not in default under any the covenants of this lease beyond the applicable grace period provided in this lease for the curing of such defaults, Owner shall: 49 5 (d) clean the public halls and public portions of the building which are used in common by all tenants. Tenant shall, at Tenant's expense, keep the demised premises, including the windows, clean and in order, to the reasonable satisfaction of Owner, and for that purpose shall employ the person or persons, or corporation approved by Owner. Tenant shall pay to Owner the cost of removal of any of Tenant's refuse and rubbish from the building. Bills for the same shall be rendered by Owner to Tenant at such time as Owner may elect and shall be due and payable hereunder, and the amount of such bills shall be deemed to be, and be paid as, additional rent. Tenant shall, independently contract for the removal of such rubbish and refuse. Under such circumstances, however, the removal of such refuse and rubbish by others shall be subject to such rules and regulations as, in the judgment of Owner, are necessary for the proper operation of the building. Owner reserves the right to stop service of the heating, elevator, plumbing and electric systems, when necessary, by reason of accident, or emergency, or for repairs, alterations, replacements or improvements, in the judgment of Owner desirable or necessary to be made, until said repairs, alterations, replacements or improvements shall have been completed. If the building of which the demised premises are a part supplies manually operated elevator service, Owner may proceed diligently with alterations necessary to substitute automatic control elevator service without in any way affecting the obligations of Tenant hereunder. SECURITY: 32. Tenant has deposited with Owner the sum of $40,000.00 as ---------- security for the faithful performance and observance by Tenant of the terms, provisions and conditions of this lease; it is agreed that in the event Tenant defaults in respect of any of the terms, provisions and conditions of this lease, including, but not limited to, the payment of rent and additional rent, Owner may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rent and additional rent or any other sum as to which Tenant is in default or for any sum which Owner may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, covenants and conditions of this lease, including but not limited to, any damages or deficiency in the reletting of the premises, whether such damages or deficiency accrued before or after summary proceedings or other re-entry by Owner. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this lease, the security shall be returned to Tenant thirty (30) days after the date fixed as the end of the Lease and after delivery of entire possession of the demised premises to Owner. In the event of a sale of the land and building or leasing of the building, of which the demised premises form a part, Owner shall have the right to transfer the security to the vendee or lease and Owner shall thereupon be released by Tenant from all liability for the return of such security; and Tenant agrees to look to the new Owner solely for the return of said security, and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new Owner. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the monies deposited herein as security and that neither Owner nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. CAPTIONS: 33. The Captions are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this lease not the intent of any provision thereof. DEFINITIONS: 34. The term "Owner" as used in this lease means only the owner of the fee or of the leasehold of the building, or the mortgagee in possession, for the time being of the land and building (or the owner of a lease of the building or of the land and building) of which the demised premises form a part, so that in the event of any sale or sales of said land and building or of said lease, or in the event of a lease of said building, or of the land and building, the said Owner shall be and hereby is entirely freed and relieved of all covenants and obligations of Owner hereunder, and it shall be deemed and construed without further agreement between the parties or their successors in interest, or between the parties and the purchaser, at any such sale, or the said lessee of the building, or of the land and building, that the purchaser or the lessee of the building has assumed and agreed to carry out any and all covenants and obligations of Owner hereunder. The words "re-enter" and "re-entry" as used in this lease are not restricted to their technical legal meaning. The term "rent" includes the annual rental rate whether so expressed or expressed in monthly installments, and "additional rent." "Additional rent" means all sums which shall be due to Owner from Tenant under this lease, in addition to the annual rental rate. The term "business days" as used in this lease, shall exclude Saturdays, Sundays and all days observed by the State or Federal Government as legal holidays and those designated as holidays by the applicable building service union employees service contract or by the applicable Operating Engineers contract with respect to HVAC service. Wherever it is expressly provided in this lease that consent shall not be unreasonably withheld, such consent shall not be unreasonably delays. ADJACENT EXCAVATION SHORING: 35. If an excavation shall be made upon land adjacent to the demised premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the demised premises for the purpose of doing such work as said person shall deem necessary to preserve the wall or the building of which demised premises form a part from injury or damage and to support the same by proper foundations without any claim for damages or indemnity against Owner, or diminution or abatement of rent. RULES AND REGULATIONS: 36. Tenant and Tenant's servants, employees, agents, visitors, and licensees shall observe faith fully, and comply strictly with, the Rules and Regulations annexed hereto and such other and further reasonable Rules and Regulations as Owner or Owner's agents may from time to tome adopt. Notice of any additional rules or regulations shall be given in such manner as Owner may elect. In case Tenant disputes the reasonableness of any additional Rule or Regulation hereafter made or adopted by Owner or Owner's agents, the parties hereto agree to submit the question of the reasonableness of such Rule or Regulation for decision to the New York office of the American Arbitration Association, whose determination shall be final and conclusive upon the parties hereto. The right to dispute the reasonableness of any additional Rule or Regulation upon Tenant's part shall be deemed waived unless the same shall be asserted by service of a notice, in writing upon Owner within thirty (30) days after the giving of notice thereof. Nothing in this lease contained shall be construed to impose upon Owner any duty or obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease, as against any other tenant and Owner shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. GLASS: 37. Tenant shall replace, at the expense of the Tenant, any and all plate and other glass damaged or broken from any cause whatsoever in and about the demised premises. Tenant shall insure, and keep insured, at Tenant's expense, all plate and other glass in the demised premises for and in the name of Owner. ESTOPPEL CERTIFICATE: 38. Tenant, at any time, and from time to time, upon at least 10 days' prior notice by Owner, shall execute, acknowledged and deliver to Owner, and/or to any other person, firm or corporation specified by Owner, a statement certifying that this Lease is unmodified in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating the modifications), stating the dates to which the rent and additional rent have been paid, and stating whether or not there exists any default by Owner under this Lease, and, if so, specifying each such default and stating such other matters as may reasonably be requested. DIRECTORY BOARD LISTING: 39. If, at the request of and as accommodation to Tenant, Owner shall place upon the directory board in the lobby of the building, one or more names of persons other than Tenant, such directory board listing shall not be construed as the consent by Owner to an assignment or subletting by Tenant to such person or persons. SUCCESSORS AND ASSIGNS: 40. The covenants, conditions and agreements contained in this lease shall bind and inure to the benefit of Owner and Tenant and their respective heirs, distributees, executors, administrators, successors, and except as otherwise provided in this lease, their assigns. A rider consisting of 34 pages is attached hereto and made part hereof. IN WITNESS WHEREOF, Owner and Tenant have respectively signed and sealed this lease as of the day and year first above written. OWNER/LANDLORD: Witness for Owner: HEARTLAND ASSOCIATES [SEAL] ---------------------------------------- - ------------------------------------ By: /s/ Gerald Wolkoff, partner [L.S.] ------------------------------------- Gerald Wolkoff, partner TENANT: Witness for Tenant eShare Technologies, Inc. [SEAL] ---------------------------------------- /s/ Randall E. Borst By: /s/ George Landgrebe [L.S.] - ------------------------------------- ------------------------------------ Randall E. Borst George Landgrebe 50 6 Address Premises =============================================================================== TO =============================================================================== STANDARD FORM OF [SEAL] LOFT [SEAL] LEASE THE REAL ESTATE BOARD OF NEW YORK, INC. (C) Copyright 1994. All rights Reserved. Reproduction in whole or in part prohibited. =============================================================================== Dated 19 Rent Per Year Rent Per Month Term From To Drawn by -------------------------------------------------------------- Checked by -------------------------------------------------------------- Entered by -------------------------------------------------------------- Approved by -------------------------------------------------------------- =============================================================================== ACKNOWLEDGEMENTS CORPORATE TENANT STATE OF NEW YORK, ss.: COUNTY OF On this day of , 19 , before me personally came to me known, who being by me duly sworn, did depose and say that he resides in that he is in the of the corporation described in and which executed the foregoing instrument, as TENANT; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. INDIVIDUAL TENANT STATE OF NEW YORK, ss.: COUNTY OF On this day of , 19 , before me personally came to be known and known to me to be the individual described in and who, as TENANT, executed the foregoing instrument and acknowledged to me that he executed the same. ---------------------------------------- [==] IMPORTANT -- PLEASE READ [==] RULES AND REGULATIONS ATTACHED TO AND MADE A PART OF THIS LEASE IN ACCORDANCE WITH ARTICLE 36. 1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules, stairways, corridors or halls shall not be obstructed or encumbered by any Tenant or used for any purpose other than for ingress or egress from the demised premises and for delivery of merchandise and equipment in a prompt and efficient manner using elevators and passageways designated for such delivery by Owner. There shall not be used in any space, or in the public hall of the building, either by any Tenant or by jobbers or others in the delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires and sideguards. If said premises are situated on the ground floor of the building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk and curb in front of said premises clean and free from ice, snow, dirt and rubbish. 2. The water and wash closets and plumbing fixtures shall not be used for any purposes other than those for which they were designed or constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein, and the expense of any breakage, stoppage, or damage resulting from the violation of this rule shall be borne by the Tenant who, or whose clerks, agents, employees or visitors, shall have caused it. 3. No carpet, rug or other article shall be hung or shaken out of any window of the building; and no Tenant shall sweep or throw or permit to be swept or thrown from the demised premises any dirt or other substances into any of the corridors of halls, elevators, or out of the doors or windows or stairways of the building and Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the demised premises, or permit or suffer the demised premises to be occupied or used in a manner offensive or objectionable to Owner or other occupants of the buildings by reason of noise, odors, and or vibrations, or interfere in any way, with other Tenants or those having business therein, nor shall any bicycles, vehicles, animals, fish, or birds be kept in or about the building. Smoking or carrying lighted cigars or cigarettes in the elevators of the building is prohibited. 4. No awnings or other projections shall be attached to the outside walls of the building without the prior written consent of Owner. 5. No sign, advertisement, notice or other lettering shall be exhibited, inscribed, painted or affixed by any Tenant on any part of the outside of the demised premises or the building or on the inside of the demised premises if the same is visible from the outside of the premises without the prior written consent of Owner, except that the name of Tenant may appear on the entrance door of the premises. In the event of the violation of the foregoing by any Tenant, Owner may remove same without any liability and may charge the expense incurred by such removal to Tenant or Tenants violating this rule. Interior signs on doors and directory tablet shall be inscribed, painted or affixed for each Tenant by Owner at the expense of such Tenant, and shall be of a size, color and style acceptable to Owner. 6. No Tenant shall mark, paint, drill into, or in any way deface any part of the demised premises or the building of which they form a part. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of Owner, and as Owner may direct. No Tenant shall lay linoleum, or other similar floor covering, so that the same shall come in direct contact with the floor of the demised premises, and, if linoleum or other similar floor covering is desired to be used an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material, soluble in water, the use of cement or other similar adhesive material being expressly prohibited. 7. Each Tenant must, upon the termination of his Tenancy, restore to Owner all keys of stores, offices and toilet rooms, either furnished to, or otherwise procured by, such Tenant, and in the event of the loss of any keys, so furnished, such Tenant shall pay to Owner the cost thereof. 8. Freight, furniture, business equipment, merchandise and bulky matter of any description shall be delivered to and removed from the premises only on the freight elevators and through the service entrances and corridors, and only during hours and in a manner approved by Owner. Owner reserves the right to inspect all freight to be brought into the building and to exclude from the building all freight which violates any of these Rules and Regulations of the lease of which these Rules and Regulations are a part. 9. Canvassing, soliciting and peddling in the building is prohibited and each Tenant shall cooperate to prevent the same. 10. Owner reserves the right to exclude from the building all persons who do not present a pass to the building signed by Owner. Owner will furnish passes to persons for whom any Tenant requests same in writing. Each Tenant shall be responsible for all persons for whom he requests such pass and shall be liable to Owner for all acts of such persons. Tenant shall not have a claim against Owner by reason of Owner excluding from the building any person who does not present such pass. 11. Owner shall have the right to prohibit any advertising by any Tenant which in Owner's opinion, tends to impair the reputation of the building or its desirability as a loft building, and upon written notice from Owner, Tenant shall refrain from or discontinue such advertising. 12. Tenant shall not bring or permit to be brought or kept in or on the demised premises, any inflammable, combustible, or explosive, or hazardous fluid, material, chemical or substance, or cause or permit any odors of cooking or other processes, or any unusual or other objectionable odors to permeate in or emanate from the demised premises. 13. Tenant shall not use the demised premises in a manner which disturbs or interferes with other Tenants in the beneficial use of their premises. 51 EX-10.9 3 g67916ex10-9.txt EMPLOYMENT AGREEMENT 1 EXHIBIT 10.9 EMPLOYMENT AGREEMENT THIS AGREEMENT is executed as of the 22nd day of March, 2001 by and between eshare communications, Inc. a Georgia corporation with offices located at 5051 Peachtree Corners Circle, Norcross, Georgia 30092 ("eshare" or "Corporation") and William K. Dumont (the "Employee"). WHEREAS, the Employee is currently employed by the Corporation as its Executive Vice President of Sales, and WHEREAS, the Employee and the Corporation desire to enter into this Agreement, superseding and replacing all prior agreements and understandings respecting Employee's employment with the Corporation; NOW THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties hereto hereby agree as follows: 1 Services; Salary; Stock Options; Bonus. (a) The Corporation hereby employs Employee and Employee agrees to serve as President of Worldwide Sales, driving eshare's sales efforts. Employee's salary during the Employment Term (as defined in Section 5(a) below) shall be paid in accordance with eshare's regular payroll practices (less lawful deductions) as earned at an initial rate of $250,000 per annum. Increases shall be on a schedule consistent with other employees of eshare consistent with corporate policy and practice. In no event may Employee's salary be decreased below the annual rate. Employee will be eligible for a cash bonus, sales and direct profit incentive plan based on achievement of goals set by the Chief Executive Officer and Chief Operating Officer. eshare agrees to guarantee Employee $50,000 bonus potential payable in equal quarterly payments of $12,500 (less lawful deductions) and reconciled consistent with the sales and direct profit incentive plan. Employee will report to eshare's Chief Operating Officer. (b) Subject to approval of the eshare's Board of Directors, following final execution of this Agreement, Employee will be awarded five hundred fifty thousand options to purchase shares of eshare, under eshare's 1997 Stock Option Plan ("Plan"), such options to be awarded on a seven year vesting schedule under the terms of the Plan. Employee will be covered by the Change in Control Policy under the Plan, which describes a plan for accelerated vesting of stock options held by Executive Management Team members in the event of a change in control of the Corporation. (c) Employee shall be reimbursed by the Corporation for customary and reasonable expenses incurred in the normal performance of his duties, without being required to seek the Corporation's prior approval for such expenses. Employee shall be entitled to participate in the Corporation's health insurance plan and all other benefits during the Employment Term, on the same basis as those granted to other management-level Employees. 2. Employee's Commitment of Business Time to the Corporation. Employee agrees to commit all of his energies during business time to the Corporation during the Employment Term. Employee agrees that he will not engage in any other employment or business endeavor (other than personal investing, as limited by Section 4 below) while he is employed by the Corporation. 3. Disclosure and Assignment of Technology to Corporation. Employee has previously executed a Nondisclosure and Development Agreement which remains in full force and effect. In the event of a conflict between that agreement and the provisions of this Agreement, the provisions of this Agreement shall control. 4. Non-Competition and Non-Solicitation. (a) During the time of Employee's employment with the Corporation, and for a period of two (2) years immediately following the termination of Employee's employment under this Agreement, for any reason 52 2 whatsoever (the "Restricted Period"), Employee shall not, directly or indirectly, on Employee's own behalf, or as a representative of any person or entity unless approved in advance, in writing by the Corporation's CEO: (i) provide services to any person or entity engaged in developing or delivering Customer Interaction Management ("CIM") solutions within the United States ("Territory"), unless approved in writing by eshare; (ii) call upon, solicit, induce, recruit or attempt to hire any employee of the Corporation or of eshare for the purpose or with the intent of enticing such employee away from or out of the employ of the Corporation or eshare or their respective affiliates or to enter employment with any other person or entity; or (iii) solicit or call upon any customer of the Corporation or eshare for the purpose of providing services competitive with the Corporation. Notwithstanding the above, the foregoing covenants shall not be deemed to prohibit Employee from acquiring, as a passive investor with no involvement in the operations of the business, not more than two percent (2%) of the capital stock of a CIM related business whose stock is publicly traded on a national securities exchange or over-the counter. (b) Proprietary Information and Trade Secrets. In connection with Employee's employment hereunder, the Corporation or eshare may disclose to Employee Proprietary Information and Trade Secrets, as defined below. Employee may use the Proprietary Information and Trade Secrets solely for the benefit of the Corporation while Employee is employed by the Corporation. Except for purposes of performing Employee's duties and responsibilities hereunder, Employee will hold in confidence and not reproduce, distribute, transmit, reverse engineer, decompile, disassemble, disclose or transfer, directly or indirectly, in any form, by any means, or for any purpose, the Proprietary Information and Trade Secrets or any portion thereof. Employee acknowledges and agrees that the Proprietary Information and Trade Secrets shall remain the sole and exclusive property of the Corporation or a third party providing such information to the Corporation. The disclosure of this Proprietary Information and Trade Secrets to Employee does not confer upon Employee any license, interest, or rights of any kind in or to the Proprietary Information and Trade Secrets, except as provided under this Agreement. Employee agrees to return to the Corporation, upon request, the Proprietary Information and trade Secrets and all materials developed by or on behalf of Employee containing or based upon the Proprietary Information and Trade Secrets. During the two (2) year period immediately following the termination of Employee's employment under this Agreement, Employee shall not, at any time or for any reason, disclose any Proprietary Information. Employee shall not, at any time or for any reason after termination of Employee's employment under this Agreement, disclose any Trade Secret, for so long as such information shall remain a trade secret under applicable law. Under the terms of this Agreement, "Proprietary Information" shall mean information in any form, other than Trade Secrets, that is of value to its owner and treated as confidential, and "Trade Secrets" means information constituting a trade secret within the meaning of Section 10-1-761(4) of the Georgia Trade Secrets Act of 1990, including all amendments hereafter adopted. Employee acknowledges that this Agreement and its terms constitute Proprietary Information and shall not be disclosed to any person other than Employee's legal and financial advisors, and immediate family members, and in such case only under an agreement of confidentiality. (c) Injunction; Remedies; Costs. Employee acknowledges that a breach by him of any part of this Agreement will result in irreparable and continuing damage to the Corporation or eshare, which cannot be fully redressed by the payment of damages to the Corporation or eshare. Accordingly, Employee agrees that the Corporation or eshare shall be entitled, in addition to any other right or remedy it may have at law or in equity, to specific performance by temporary as well as permanent injunction in the event of any breach or threatened breach of the covenants provided in this Section 4. In addition, the Corporation and eshare shall be entitled to withhold any payments of amounts otherwise owed to Employee during the pendency of any dispute with Employee regarding compliance with the terms of this Agreement. 53 3 (d) Severability; Reformation. The covenants in this Section 4 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. 5. Return of Corporation Property. All records, designs, patents, business plans, financial statements, manuals, memoranda, lists and other property delivered to or compiled by Employee by or on behalf of the Corporation, eshare or their representatives, vendors or customers pertaining to the business of the Corporation or eshare shall be and remain the property of the Corporation or eshare, as the case may be, and be subject at all times to their discretion and control. Likewise, all correspondence, reports, records, charts, advertising materials, price lists, sales manuals, customer lists, supplier lists, documents containing Proprietary Information or Trade Secrets, and other similar data pertaining to the business, activities or future plans of the Corporation or eshare that is collected by Employee shall be delivered, together with all copies thereof, promptly to the Corporation without request by it upon termination of Employee's employment. 6. Inventions and Other Intellectual Property. Employee hereby agrees that all right, title, and interest in and to all "Work Product" shall be the exclusive property of the Corporation. For purposes of this Agreement, "Work Product" shall mean the data, materials, documentation, computer programs, inventions (whether or not patentable), and al works of authorship, including all worldwide rights therein under patent, copyright, trade secret, confidential information, or other property right, created or developed in whole or in part by Employee during the course of performing Employee's duties and responsibilities hereunder. All Work Product shall be considered work made for hire by Employee and owned by the Corporation. If any of the Work Product may not, by operation of law or otherwise, be considered work made for hire by Employee for the Corporation, or if ownership of all right, title, and interest of the intellectual property rights therein shall not otherwise vest exclusively in the Corporation, Employee hereby assigns to the Corporation, and upon the future creation thereof automatically assigns to the Corporation, without further consideration, the ownership of all Work Product. The Corporation shall have the right to obtain and hold in its own name copyrights, patents, registrations, and any other protection available in the Work Product. Employee agrees to perform, at the Corporation's expense, such further acts as may be necessary or desirable to transfer, perfect, and defend the Corporation's ownership of the Work Product that are reasonably requested by the Corporation. 7. Term and Termination. (a) Unless earlier terminated as hereafter provided, the term of Employee's employment under this Agreement shall be for a period beginning on the effective date hereof and ending thirty-six months thereafter (the "Employment Term"). If the Employee's employment hereunder is terminated prior to the end of the initial thirty-six month period, such shorter period will also be referred to herein as the "Employment Term." Employee's employment with the Corporation may be terminated by the Corporation (i) at any time during the Employment Term for cause (as defined in Section 9), (ii) for any reason, with or without cause, upon the agreement of a majority of the Corporation's Board of Directors, or (iii) for the death or Disability (as hereinafter defined) of the Employee in accordance with this Section. (b) Employee may initiate a Voluntary Termination at any time during the Employment Term and for any reason. However, Employee agrees to provide ninety (90) days advance notice prior to the effective date of a Voluntary Termination. (c) If the Corporation terminates Employee's employment during the initial Employment Term of this Agreement without cause (except as set forth in this paragraph) as defined in Section 9, or for Employee's failure to achieve quarterly sales revenue and margin targets set by the Corporation for either two consecutive quarters or two quarters in a four quarter period, as the sole remedy hereunder Employee shall be entitled to receive his base salary for twelve (12) months following the date of such termination (the "Severance Amount"). 54 4 (d) Employee's termination of his employment for "Good Reason" as defined in Section 7(e) below shall be treated as a termination by the Corporation without cause for purposes of this Section 7. (e) Employee shall be entitled to terminate this Agreement for "Good Reason" if (i) the Corporation desires to make a material and substantial change in Employee's titles, duties or levels of responsibility or authority for a reason other than that set forth in Section 7(f), the Board of Directors and the Employee have discussed the proposal and decision and, after good faith discussion and attempts to resolve the change to the satisfaction of all parties, the Employee elects to terminate or (ii) in the event that the Corporation breaches any of its obligations in the Agreement and does not cure any such breach within 30 days following notice from Employee. (f) If the Employee fails to achieve quarterly sales revenue and margin targets set by the Corporation and communicated in writing to Employee, for either two consecutive quarters or two quarters in a four quarter period, in lieu of termination, the Corporation may modify Employee's titles, duties or levels of responsibilities by written notice to Employee, without a change in income. Written notification will be given to Employee of failure to meet documented targets by eshare's Chief Executive Officer or Chief Operating Officer. (g) This Agreement shall terminate immediately upon the death or "Disability" of Employee. "Disability" shall mean an inability of the Executive to perform each of the material duties of his position with the Corporation due to injury or sickness, under such terms as are set forth in the Corporation's Disability Plan, as may be amended from time to time. In the event of termination of this Agreement upon the death or Disability of Employee, employee shall receive, as sole consideration, his base salary and a pro rata portion of his earned bonus, less lawful deductions, through the date of termination. The foregoing shall not affect any disability insurance coverage to which Employee is entitled under the Corporation's Disability Plan. 8. Governing Law: Consent to Jurisdiction. This Agreement shall be governed by the laws of the State of Georgia without giving effect to the principles of conflicts of law applicable thereto. Each of the parties submits to the jurisdiction of any state or Federal Court sitting in Gwinnett County, Georgia, in any action or proceeding arising out of or related to this Agreement and agrees that all claims in respect of any such action or proceeding may be heard and determined in any such Court; provided, in the event that Employee has a claim for damages against the Corporation under this Agreement, Employee may bring such claim in any state or Federal Court sitting in Suffolk County, New York or in Gwinnett County, Georgia. 9. Cause. For purposes of this Agreement, "cause" shall be defined as (i) dishonesty that is detrimental to the Corporation, (ii) habitual insobriety or drug addition, (iii) commitment of an act of moral turpitude, (iv) violation of the covenant not to compete or solicit set forth in Section 4 above, (v) violation of the covenant not to disclose confidential information set forth herein or in the Nondisclosure and Development Agreement, (vi) failure to achieve quarterly sales revenue and margin targets set by the Corporation for either two consecutive quarters or two quarters in a four quarter period, (vii) failure to act in good faith toward the Corporation, or (viii) ongoing refusal or failure (other than due to disability), following receipt of notice from the Corporation, to perform the lawful duties reasonably assigned to Employee by the Board of Directors or to follow the reasonable lawful orders of the Board of Directors. 10. Notice. Notices given hereunder shall be deemed to have been duly given on the date of personal delivery, on the date of receipt if mailed by certified or registered mail, return receipt requested at his or its address specified on the applicable signature page hereto or such other address as the addressee may subsequently notify the other parties of in writing. 11. No Waiver. Any waiver of a breach of any of the terms of this Employment Agreement shall not operate as a waiver of any other breach of such terms or conditions or any other terms or conditions, nor shall any failure to enforce any provision of this Employment Agreement operate as a waiver of the provision or any other provision. 12. Successors and Assigns. The rights, benefits and obligations of the Corporation under this Agreement and all covenants and agreements hereunder shall inure to the benefit of and be enforceable by or against its successors and assigns. This Agreement shall be binding upon Employee's successors and assigns. Neither this Agreement nor 55 5 any rights or obligations hereunder shall be assigned by Employee. eshare agrees that in the event the Corporation fails to pay a salary or severance payment due and owing by the Corporation to Employee, if such failure to pay continues for than thirty (30) days following written notice to eshare, eshare will make such payment. 13. Entire Agreement; Amendment. This Agreement constitutes the entire agreement among the parties hereto, oral or written, relating to the subject matter hereof, and supersedes and replaces all prior agreements, understandings and representations. This Agreement may not be amended or modified, except by means of written instruments signed by the Corporation and Employee. 14. Severability. If any provision of this Agreement or the application thereof is held invalid or unenforceable, the invalidity or unenforceability thereof shall not affect any other provisions or applications of this Agreement which can be given affect without the invalid or unenforceable provision or application. To that end, the provisions of this Agreement are to be severable. IN WITNESS WHEREOF, the Corporation has caused below this Agreement to be signed, and Employee has executed this Agreement, as of the date first above written. eshare communications, Inc. By: /s/ ALEKSANDER SZLAM - ------------------------------------------------- Aleksander Szlam Employee: /s/ WILLIAM K. DUMONT - ------------------------------------------------- William K. Dumont 56 EX-21.1 4 g67916ex21-1.txt LIST OF SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES OF THE COMPANY eShare.com, Inc. 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. 57 EX-23.1 5 g67916ex23-1.txt CONSENT OF ARTHUR ANDERSEN LLP 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 communications, Inc.'s previously filed Registration Statements File Nos. 333-56299, 333-41503, 33-89351 and 333-42220. ARTHUR ANDERSEN LLP Atlanta, Georgia March 30, 2001 58 EX-23.2 6 g67916ex23-2.txt REPORT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' REPORT The Board of Directors eShare.com, Inc. (formerly eShare Technologies, Inc.): We have audited the balance sheet of eShare.com, Inc. (formerly eShare Technologies, Inc.) as of December 31, 1998, and the related statements of operations, redeemable preferred stock and stockholders' deficit and cash flows for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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, 1998, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ KPMG LLP Melville, New York April 16, 1999, except for Note 12, which is as of June 15, 1999 59 EX-23.3 7 g67916ex23-3.txt CONSENT OF KPMG LLP 1 CONSENT OF KPMG LLP 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 sheet of eShare.com, Inc. (formerly eShare Technologies, Inc.) as of December 31, 1998 and the related statements of operations, redeemable preferred stock and stockholders' deficit and cash flows for the year then ended, into eshare communications, Inc.'s (formerly eShare Technologies, Inc.) previously filed registration statements on Form S-8 (File Nos. 333-56299, 333-41503 and 333-89351). /s/ KPMG LLP Melville, New York March 30, 2001 60 EX-99.1 8 g67916ex99-1.txt SAFE HARBOR COMPLIANCE STATEMENT 1 EXHIBIT 99.1 SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD LOOKING STATEMENTS You should consider carefully the following factors in evaluating our business and us. 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 our business and us. 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. 61 2 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 our customer or us. 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 MARKET FOR CALL CENTER AND INTERNET BASED SOLUTIONS We currently derive a majority of our revenues from sales of our Conversations(TM) products and related services. We introduced Conversations in early 2000. We anticipate that in the near term, a significant portion of our future revenue may be attributable to our Conversations 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 Conversations 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 markets for both call center systems and Internet products are intensely competitive, highly fragmented and subject to rapid change. Additionally, the recent turmoil in the Internet space has fostered a new set of challenges related to a market, which is still evolving 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 2000, our five largest customers accounted for 16.6% of our total revenues. In 1999, our five largest customers accounted for 28.2% 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. 62 3 THERE ARE MANY RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS Our sales outside the United States accounted for 27.5%, 31.7% and 23.8% of our total revenues in 2000, 1999 and 1998 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; - currency fluctuation; 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, Euros or Pounds Sterling. Accordingly, 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. 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 63 4 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 that 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 RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS 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 CIM 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 64 5 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. WE MAY BE CONFRONTED WITH DEFECTS IN OUR SOFTWARE OR THE INABILITY TO ACQUIRE THIRD-PARTY SOFTWARE OR HARDWARE THAT IS ERROR-FREE Our software products are complex and 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. We license certain software used in our products 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. Additionally, we may experience difficulties in obtaining support and maintenance of third party hardware and software that is integrated with our products and distributed by us. 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 65 6 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; - 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 to manage effectively could have a material adverse effect on the quality of our services and projects, our 66 7 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. 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; Genesys Telecommunications Laboratories, or Genesys; and Lucent/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 Genesys and Mosaix in the telemarketing and telesales segments of the inbound/outbound call management systems market. We also compete in the CIM segment of the market, where principal competitors include Interactive Intelligence, Firstwave Technologies, Inc., Genesys, Telecommunications Laboratories, GeoTel Communications Corporation, Information Management Associates, Inc., and Avaya 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 call center 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, 67 8 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. We also may face competition from systems integrators that 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 68 9 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. We have undertaken a program of actively pursuing infringers of our patents. These efforts 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. Additionally, we may incur significant expenses in enforcing our patents, as well as be susceptible to counterclaims files by the parties against whom we have filed infringement actions. These expenses and liabilities may exceed the revenue we realize from license agreements we consummate. We are also at risk that as a consequence of litigation, one or more of the patents we hold may be determined to be invalid. 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 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. 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. OUR SUCCESS DEPENDS ON OUR KEY EXECUTIVES Our success will depend in large part upon the continued availability and performance of our senior executives, including Aleksander Szlam, our Chairman and Chief Executive Officer, George Landgrebe, our Chief Operating Officer, William K. Dumont, our President-Worldwide Sales, and Glen Shipley, our Chief Financial Officer. Although we have employment agreements with Messrs. Szlam and Dumont, the agreements do not obligate them to continue their employment with us. We might not be able to retain the services of these key executives. We do not maintain key man life insurance on any of these executives. A significant portion of the Company's senior management team has been in place for only a relatively short period of time. Mr. Landgrebe joined the company in December 1999, and Mr. Shipley joined the company in October 2000. Accordingly, these individuals have been involved with only the most recent operating activity of the Company. The Company's success will depend to a significant extent on the ability of its new executive officers to integrate themselves into the Company's daily operations, to gain the trust and confidence of the Company's other employees and to work effectively as a team. 69 10 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 growth in the use of the Internet and e-commerce. The Internet is relatively new and is rapidly evolving. Our business has been impacted by the volatility of the e-commerce market and will continue to be adversely affected if Internet usage and e-commerce does not 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 as 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. 70 11 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 CONTINUE TO 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 71 12 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. 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. THE LOW PRICE OF OUR COMMON STOCK COULD RESULT IN THE DELISTING OF OUR COMMON STOCK FROM THE NASDAQ STOCK MARKET. Our Common Stock is currently listed on the Nasdaq National Market System of the Nasdaq Stock Market. We must satisfy Nasdaq's minimum listing maintenance requirements to maintain our listing on the Nasdaq Stock Market. Nasdaq listing maintenance requirements include a series of financial tests relating to net tangible assets, public float, number of market makers and shareholders, and maintaining a minimum bid price of $1.00 for shares of our Common Stock. The minimum bid price of our Common Stock has recently dropped below $1.00. There is no guarantee that it will return to a minimum bid price of $1.00 or higher. If the minimum bid price of our Common Stock remains below $1.00 for 30 consecutive trading days, or if we are unable to continue to meet Nasdaq's standards for any other reason, our Common Stock could be delisted from the Nasdaq Stock Market. If our Common Stock is delisted, the liquidity for our Common Stock would be adversely affected. Delisting could make trading our shares more difficult for investors, leading to further declines in share price. It would also make it more difficult for us to raise additional capital. In addition, we would incur additional costs under state blue sky laws to sell equity if our Common Stock is delisted. 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. 72 13 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. 73 -----END PRIVACY-ENHANCED MESSAGE-----