<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NUMBER 000-20364
EPRESENCE, INC
(Exact Name of Registrant as Specified in Its Charter)
MASSACHUSETTS 04-2798394
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
120 FLANDERS ROAD
WESTBORO, MASSACHUSETTS 01581
(Address of Principal Executive Offices) (Zip Code)
(508) 898-1000
(Registrant's Telephone Number, Including Area Code)
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
of1934 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
--- ---
Number of shares outstanding of each of the issuer's classes of Common Stock as
of July 31, 2000:
Class Number of Shares Outstanding
----- -----------------------------
Common Stock, par value $.01 per share 23,624,929
<PAGE>
EPRESENCE, INC.
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations
Three and Six months ended June 30, 2000 and
1999 (unaudited) 4
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999 (unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
EXHIBIT INDEX 21
This Quarterly Report on Form 10-Q contains forward-looking statements,
including information with respect to ePresence, Inc.'s ("the Company") plans
and strategy for its business and the Company's liquidity and capital resources
for the next 12 months. For this purpose, any statements contained herein that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects" and similar expressions are intended to identify forward-
looking statements. There are a number of important factors that could cause
actual events or the Company's actual results to differ materially from those
indicated by such forward-looking statements. These factors include, without
limitation, those set forth below under the caption "Factors Affecting Future
Operating Results" included under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part I, Item 2 of this
Quarterly Report on Form 10-Q.
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
EPRESENCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS June 30, 2000 December 31, 1999
----------------------- -----------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31,189 $ 29,920
Marketable securities 140,073 91,653
Accounts receivable, less allowances of $1,079 and $869 16,488 14,482
Other current assets 7,328 2,729
-------- -----------
Total current assets 195,078 138,784
Property and equipment, net 5,035 3,784
Marketable securities 17,822 9,198
Deferred tax asset 9,102 21,655
Goodwill and other assets, net of accumulated amortization
of $1,522 and $596 29,143 1,029
-------- -----------
Total assets $256,180 $ 174,450
======== ===========
LIABILITIES
Current liabilities:
Accounts payable $ 3,907 $ 3,677
Accrued compensation 4,581 4,493
Accrued expenses 8,679 7,538
Income taxes payable 5,599 791
Net liabilities of discontinued operations 1,350 3,264
Other current liabilities 250 250
Long-term debt, current portion 1,027 600
Deferred revenue 7,177 5,728
-------- -----------
Total current liabilities 32,570 26,341
Deferred tax liability 16,672 30,350
Minority interest in consolidated subsidiary 53,785 2,392
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 35,000,000 shares; issued
25,447,649 and 24,783,670 shares 254 248
Accumulated earnings/(deficit) 15,579 (3,436)
Additional paid in capital 136,699 93,648
Unearned compensation (195) (603)
Treasury stock at cost; 1,848,000 common shares (28,564) (28,564)
Accumulated other comprehensive income 29,380 54,074
-------- -----------
Total stockholders' equity 153,153 115,367
-------- -----------
Total liabilities and stockholders' equity $256,180 $ 174,450
======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
EPRESENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Services $14,593 8,636 26,644 16,602
Switchboard 4,766 1,850 8,584 2,978
------- ------- -------- -------
Total revenues 19,359 10,486 35,228 19,580
Cost of revenues:
Services 7,922 5,373 14,522 9,837
Switchboard 1,050 329 1,967 406
------- ------- -------- -------
Total cost of revenues 8,972 5,702 16,489 10,243
------- ------- -------- -------
Gross profit 10,387 4,784 18,739 9,337
Operating expenses:
Sales and marketing 10,264 3,940 22,978 7,399
Product development 872 441 1,485 876
General and administrative 4,479 3,421 8,583 6,653
Amortization of goodwill 517 - 753 -
------- ------- -------- -------
Total operating expenses 16,132 7,802 33,799 14,928
------- ------- -------- -------
Operating loss from continuing operations (5,745) (3,018) (15,060) (5,591)
Other income/(expense):
Interest income 2,345 259 3,335 532
Interest expense (22) (36) ( 52) (66)
Other, net 1,276 3,876 48,737 3,708
------- ------- -------- -------
Total other income/(expense) 3,599 4,099 52,020 4,174
------- ------- -------- -------
(Loss)/income from continuing operations before income taxes (2,146) 1,081 36,960 (1,417)
(Benefit from)/provision for income taxes (1,033) 90 17,745 226
------- ------- -------- -------
Net (loss)/income from continuing operations (1,113) 991 19,215 (1,643)
Income from discontinued operations (net of taxes) - 3,471 - 6,562
------- ------- -------- -------
Net (loss)/income $(1,113) $ 4,462 $ 19,215 $ 4,919
======= ======= ======== =======
Net (loss)/income per common share:
Basic $(0.05) $0.22 $0.82 $0.25
======= ======= ======== =======
Diluted $(0.05) $0.17 $0.70 $0.19
======= ======= ======== =======
Weighted average number of common shares:
Basic 23,683 20,236 23,449 19,714
======= ======= ======== =======
Diluted 23,683 25,668 27,320 25,554
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
EPRESENCE, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,215 $ 4,919
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of investments (44,556) (4,043)
Depreciation and amortization 1,981 1,742
Non-cash advertising and promotion 7,844 -
Amortization of unearned compensation 320 511
Changes in operating assets and liabilities:
Accounts receivable 1,019 6,333
Inventories - (56)
Other current assets (4,441) (3)
Deferred tax assets 12,553 -
Other liabilities (4,518) (674)
Accounts payable and accrued compensation and expenses 3,087 (552)
Accrued costs for restructuring and other charges - (259)
Software licenses payable, net - (150)
Net change in net discontinued liabilities (2,090) -
Other non current assets (767) 146
Deferred revenue 1,573 (4,702)
-------- --------
Net cash (used in)/ provided by operating activities (8,780) 3,212
Cash flows from investing activities:
Capital expenditures (1,929) (1,067)
Proceeds from investment 45,276 4,743
(Purchases of)/proceeds from marketable securities, net (96,371) (11,782)
Acquisition of business, net (25,909) -
-------- --------
Net cash (used in) investing activities (78,933) (8,106)
Cash flows from financing activities:
Sale of equity in subsidiary 86,842 4,298
Net proceeds from issuance of warrants - 2,832
Proceeds from stock plan purchases and stock options 1,976 2,751
-------- --------
Net cash provided by financing activities 88,818 9,881
Effect of exchange rate changes on cash and cash equivalents 164 (187)
-------- --------
Net increase in cash and cash equivalents 1,269 4,800
Cash and cash equivalents at beginning of the period 29,920 15,160
-------- --------
Cash and cash equivalents at end of the period $ 31,189 $ 19,960
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
5
<PAGE>
EPRESENCE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its subsidiaries as of June 30, 2000, and have been
prepared by the Company in accordance with generally accepted accounting
principles. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
those of a normal recurring nature, necessary for a fair presentation of the
Company's financial position, results of operations and cash flows at the dates
and for the periods indicated. While the Company believes that the disclosures
presented are adequate to make the information not misleading, these
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
1999 Annual Report to Stockholders and Annual Report on Form 10-K.
In March 2000, the Company's subsidiary Switchboard Incorporated ("Switchboard")
consummated an initial public offering. Pre-offering, the Company owned
approximately 53% of Switchboard's outstanding common stock, and post offering
the Company owns approximately 40% of Switchboard's outstanding common stock.
Due to the Company's control of the Switchboard board of directors,
Switchboard's results will continue to be consolidated as part of the Company's
financial results.
On May 9, 2000, the shareholders of the Company voted to change the name of the
Company to ePresence, Inc. from Banyan Systems Incorporated.
In January 2000, the Company sold its subsidiary Banyan Systems (France) SARL
("Banyan France"). The Company has recorded in its results of operations for the
three-months ended March 31, 2000, a loss on disposal of Banyan France of
approximately $267,000. The transaction included the sale of net assets of
approximately $316,000.
6
<PAGE>
In the fourth quarter of 1999, the Board of Directors of the Company approved a
plan to exit its software business and to focus its resources on its Services
and Switchboard businesses as its sole operating units. The Company has
classified its software business as a discontinued operation, and included in
the fourth quarter of 1999 in its results of operations an estimated loss from
disposal of $3,000,000, net of tax. Accordingly, assets and liabilities for the
discontinued operations have been classified as net liabilities of discontinued
operations. Net operating losses totaling approximately $598,000 and $989,000
from discontinued operations for the three and six months ended June 30, 2000,
respectively, have been netted against the reserve established in the Company's
1999 operating results for the disposal of its software business.
The results of operations for the three-month and six-month periods ended June
30, 2000 are not necessarily indicative of the results expected for the full
fiscal year or any future interim period.
New Account Pronouncements:
In June 1998, the Financial Accounting Standard Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The new standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. The Company
does not expect SFAS No. 133 to have a material effect on its financial position
or results of operations. In the three-months ended March 31, 2000, the Company
entered into two hedging contracts for its remaining 400,000 shares of
Software.com common stock. These arrangements are further described in footnote
F, "Sale of investment."
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
B. REPORTABLE SEGMENTS:
ePresence has two reportable segments: Services and Switchboard. The Company's
Services segment delivers professional services including web site and web
portal design and implementation; directory and security planning, design and
integration; network integration and optimization; and application integration.
The Company's Switchboard segment, operated through Switchboard, consummated an
initial public offering of its common stock on March 7, 2000, and is currently
listed on the Nasdaq National Market under the symbol SWBD. Switchboard is an
Internet-based local merchant network interconnecting consumer, merchants and
national advertisers. Switchboard connects consumers searching for specific
products and services with merchants that provide them. The Company's reportable
segments are managed separately because they market and distribute distinct
products and services.
7
<PAGE>
SEGMENT INFORMATION FOR THE THREE AND SIX-MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended June 30, 2000
Total
Services Switchboard Company
-------- --------------------- ---------------------
<S> <C> <C> <C>
Revenues
Services $ 14,593 $ - $ 14,593
Switchboard - 4,766 4,766
-------- -------- --------
Total revenue 14,593 4,766 19,359
Cost of revenues 7,922 1,050 8,972
-------- -------- --------
Gross profits 6,671 3,716 10,387
Operating expenses 8,808 7,324 16,132
-------- -------- --------
Operating loss $ (2,137) $ (3,608) $ (5,745)
======== ======== ========
Total assets $158,378 $ 97,802 $256,180
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, 2000
Total
Services Switchboard Company
-------- --------------------- ---------------------
<S> <C> <C> <C>
Revenues
Services $ 26,644 $ - $ 26,644
Switchboard - 8,584 8,584
-------- -------- --------
Total revenue 26,644 8,584 35,228
Cost of revenues 14,522 1,967 16,489
-------- -------- --------
Gross profits 12,122 6,617 18,739
Operating expenses 16,393 17,406 33,799
-------- -------- --------
Operating loss $ (4,271) $(10,789) $(15,060)
======== ======== ========
Total assets $158,378 $ 97,802 $256,180
======== ======== ========
</TABLE>
8
<PAGE>
C. BASIC AND DILUTED EARNINGS PER SHARE:
Basic earnings per share is based upon the weighted average number of common
shares outstanding during the period. Diluted earnings per share includes the
dilutive effect of potential common stock outstanding during the period.
Potential common stock results from the assumed exercise of outstanding stock
options and warrants, the proceeds of which are then assumed to have been used
to repurchase outstanding common stock shares using the treasury stock method.
The following table reconciles the numerator and denominator of the basic and
diluted earnings per share computations shown on the Consolidated Statements of
Operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Basic earnings per share
Numerator:
Net (loss)/income $(1,113) $ 4,462 $19,215 $ 4,919
Denominator:
Weighted average common shares outstanding 23,683 20,236 23,449 19,714
------- ------- ------- -------
Basic earnings per share $ (0.05) $ 0.22 $ 0.82 $ 0.25
======= ======= ======= =======
Diluted earnings per share
Numerator:
Net (loss)/income $(1,113) $ 4,462 $19,215 $ 4,919
Denominator:
Weighted average common shares outstanding 23,683 20,236 23,449 19,714
Dilutive potential common stock - 5,432 3,871 5,840
------- ------- ------- -------
Total shares 23,683 25,668 27,320 25,554
------- ------- ------- -------
Diluted earnings per share $ (0.05) $ 0.17 $ 0.70 $ 0.19
======= ======= ======= =======
</TABLE>
Options and warrants to purchase 2,224,000 shares of outstanding common stock
during the three-months ended June 30, 2000 were excluded from the calculation
of diluted net loss per share as the effect of their inclusion would have been
anti-dilutive. Options and warrants to purchase 85,500 shares of common stock
outstanding during the six-months ended June 30, 2000 and 98,000 shares of
common stock outstanding during the three-months and six-months ended June 30,
1999, were excluded from the calculation of diluted net income per share because
the exercise price of those options and warrants exceeded the average market
price of the Company's common stock during the respective periods.
9
<PAGE>
D. COMPREHENSIVE INCOME
Other comprehensive income includes unrealized gains or losses on the Company's
available-for-sale investments and foreign currency translation adjustments.
Three months ended
-------------------
For the three months ended June 30, June 30, 2000 June 30, 1999
----------------------------------- ------------- -------------
(in thousands)
Net (loss)/income $ (1,113) $ 4,462
Other comprehensive (expense)/income (2,553) 22,107
-------- -------
Comprehensive (loss)/income $ (3,666) $26,569
======== =======
Six months ended
----------------
For the six months ended June 30, June 30, 2000 June 30, 1999
--------------------------------- ------------- -------------
(in thousands)
Net income $ 19,215 $ 4,919
Other comprehensive (expense)/ income (24,701) 22,119
-------- -------
Comprehensive (loss)/income $ (5,486) $27,038
======== =======
E. ACQUISITION OF BUSINESSES
In January 2000, the Company acquired a privately held e-business services
company based in Red Bank, New Jersey that specializes in web design,
development and integration. Consideration for the acquisition is comprised of
$10,000,000 in cash, of which approximately $9,963,000 had been paid through
June 30, 2000, and the issuance of shares of the Company's common stock based
upon the achievement of certain performance measures. The estimated purchase
price of the acquisition, assuming the achievement of the performance measures,
is approximately $13,750,000 and has been accounted for using the purchase
method of accounting. The Company has recorded an intangible of approximately
$8,400,000, which will be amortized over a ten-year period. Upon execution of
the purchase agreement, the acquired company employed 45 professionals.
In May 2000, the Company acquired Strategic Network Designs, Inc., a privately
held e-business services company based in Clark, New Jersey that specializes in
customer relationship management, e-mobility, wireless and custom application
solutions. The total purchase price of $30,500,000, excluding transaction
expenses, included consideration of $17,500,000 in cash, 221,713 shares of
common stock valued at $3,000,000 and a one-year earnout of $10,000,000
contingent on performance. The transaction has been accounted for using the
purchase method of accounting. The Company has recorded an intangible of
approximately $20,500,000, which will be amortized over a ten-year period. Upon
execution of the purchase agreement, the acquired company employed 75
professionals.
The following are the Company's unaudited pro-forma results for the six-months
ended June 30, 1999 as compared to the unaudited pro-forma results for the six-
months ended June 30, 2000, assuming the acquisitions occurred on January 1,
1999 (in thousands, except for per share data).
Six-months ended June 30, 2000 1999
-----------------------------------------------------------------------------
(pro-forma) (pro-forma)
Net revenues $ 41,785 $24,954
Net income/ (loss) from continuing operations $(13,739) $(1,420)
Net income $ 20,539 $ 5,142
Net earnings per common share:
Basic $ 0.87 $ 0.26
Diluted $ 0.75 $ 0.20
Weighted average number of common shares
Basic 23,449 19,714
Diluted 27,320 25,554
These unaudited pro-forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
would have actually resulted had the combinations been in effect on January 1,
1999, or of future results of operations.
10
<PAGE>
F. SALE OF INVESTMENT
In 1996, the Company made an equity investment of approximately $2,001,000 in
Software.com, Inc. ("Software.com"), a company which supplies Internet messaging
solutions to services providers. During the three-months ended March 31, 2000,
the Company sold 491,202 shares of common stock of Software.com, resulting in
net proceeds of $45,276,000 and a realized gain of approximately $44,556,000. At
June 30, 2000, the Company held 400,000 shares of common stock of Software.com
of which 300,000 and 100,000 of said shares were valued at $114.50 and $115.90
per share, respectively, with a total value of $45,940,000. The net unrealized
gain of approximately $29,025,000, net of taxes of approximately $16,308,000, is
included in other comprehensive income within shareholders' equity.
In January 2000, the Company entered into a hedging contract for 300,000 shares
of Software.com common stock. The maturity date for the contract is February 2,
2001. Upon maturity, the Company will receive payment for the value of the
Software.com common shares based upon the average closing price of the ten
consecutive trading days prior to, and including, the maturity date. The
settlement price can be no lower than $84.04 or higher than $114.50 per common
share.
In February 2000, the Company entered into a hedging contract for 100,000 shares
of Software.com common stock. The maturity date for the contract is February 25,
2001. Upon maturity, the Company will receive payment for the value of the
Software.com common shares based upon the average closing price of the ten
consecutive trading days prior to, and including, the maturity date. The
settlement price can be no lower than $84.60 or higher than $115.90 per common
share.
G. SALE OF EQUITY BY SWITCHBOARD
On March 7, 2000, Switchboard sold, at an initial public offering price of
$15.00 per share, 5,500,000 shares of its common stock. On April 6, 2000,
Switchboard sold, at $15.00 per share, the remaining 825,000 shares of its
common stock pursuant to the underwriters' March 31, 2000 exercise of their
over-allotment option in full. The aggregate gross proceeds raised in the
offering were $94.9 million. Total expenses in connection with the offering were
approximately $8.6 million, of which $6.6 million was for underwriting discounts
and commissions, and $2.0 million was paid for professional services and other
expenses. Switchboard's net proceeds from the offering were approximately $86.3
million, of which $74.8 million was received in March 2000 and $11.5 million was
received in April 2000.
11
<PAGE>
EPRESENCE, INC.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
Total revenues for the three-month period ended June 30, 2000 were $19.4
million, which represented an 85% increase when compared to the corresponding
period in 1999. Total revenues for the six-month period ended June 30, 2000 were
$35.2 million, which represented an 80% increase when compared to the
corresponding period in 1999. The increase in 2000 was due to an increase in
revenues from both our Services and Switchboard segments. Services revenues
increased by $5.9 million, or 69%, and $10.0 million, or 60%, for the three-
month and six-month periods ended June 30, 2000, when compared to the
corresponding periods in 1999. The increases in Services revenues, which were in
part as a result of two acquisitions in the first six months of 2000, were
primarily due to revenues generated from consulting services due to an increase
in customer engagements, particularly in web-site design and implementation,
network integration and directory and security planning. Switchboard revenues
increased by $2.9 million, or 158%, and $5.6 million, or 188%, for the three-
month and six-month periods ended June 30, 2000, when compared to the
corresponding periods in 1999. The increases in Switchboard revenues were due
primarily to an increase in advertising revenue resulting from increased traffic
and productivity on the Switchboard web-site, an increase in merchant services
revenue as well as an increase in syndication and licensing revenues due to new
customer agreements. International revenues for the three-month and six-month
periods ended June 30, 2000 were $2.3 million and $3.9 million, respectively, as
compared to $3.1 million and $5.3 million, respectively, for the corresponding
periods in 1999. The decreases in revenues in 2000 were primarily due to the
sale of the Company's French subsidiary in January 2000 and the closing of the
Malaysian and Japanese offices in 1999.
Gross profits for Services were 46%, or $6.7 million, and 45%, or $12.1 million,
for the three-month and six-month periods ended June 30, 2000, respectively,
compared with 38%, or $3.3 million, and 41%, or $6.8 million, for the
corresponding periods in 1999. The increases in gross profit dollars and
percentages were primarily due to increases in revenues from consulting services
and improved billing rates, offset in part by an increase in delivery personnel
and related costs to expand consulting services.
Gross profits for Switchboard were 78% or $3.7 million, and 77%, or $6.6 million
for the three-month and six-month periods ended June 30, 2000, respectively,
compared with 82%, or $1.5 million and 86%, or $2.6 million, for the
corresponding periods in 1999. The increases in gross dollars were due to
increases in advertising revenues generated by Switchboard, offset in part by an
increase in variable costs related to advertising arrangements. The decreases
in gross profit percentages were due primarily to additional costs in connection
with Switchboard's merchant aggregation program, deferred project costs, and
data licensing fees, offset in part by additional advertising revenues.
Sales and marketing expenses of $10.3 million and $23.0 million for the three-
month and six-month periods ended June 30, 2000, respectively, represented
increases of 161% and 211% compared to the corresponding periods in 1999. The
increases in 2000 were due primarily to an increase in promotional investment in
Switchboard, particularly CBS non-cash advertising, intended to increase site
traffic, increases in sales staff in our expanded consulting services activities
and an increase in variable sales costs, including commissions, which increased
due to higher revenues. We anticipate promotional spending in our Services
segment of approximately $1.0 million to $2.0 million over each of the next two
quarters related to the branding of the ePresence name. Sales and marketing
expenses as a percentage of revenues were 53% and 65% for the three-month and
six-month periods ended June 30, 2000, as compared to 38% for the corresponding
periods in 1999.
12
<PAGE>
Product development expenses of $0.9 million and $1.5 million for the three-
month and six-month periods ended June 30, 2000, respectively, represented
increases of 98% and 70%, respectively, over the corresponding periods in 1999.
The increases were due to increases in resources devoted to advancing
Switchboard technology and services. Product development expenses as a
percentage of revenues were approximately 5% and 4% for the three-month and six-
month periods ended June 30, 2000, respectively, as compared to 4% for both the
corresponding periods in 1999.
General and administrative expenses of $4.5 million and $8.6 million for the
three-month and six-month periods ended June 30, 2000, respectively, represented
increases of 31% and 29% when compared to the corresponding periods in 1999. The
increases were due primarily to additional recruiting and training expenses
related to the staffing of our expanding consulting services activities, as well
as additional staffing related to the Switchboard business segment. General and
administrative expenses as a percentage of revenues were 23% and 24% for the
three-month and six-month periods ended June 30, 2000, as compared to 33% and
34% for the corresponding periods in 1999.
Other income and expense was $3.6 million from $52.0 million for the three-month
and six-month periods ended June 30, 2000, compared to $4.1 million and $4.2
million for the same periods in 1999. The Company recognized gains on sales of
Software.com stock of approximately $44.6 million and $4.0 million for the three
months periods ended March 31, 2000 and June 30, 1999, respectively. For the
three-month period ended June 30, 2000, the Company had greater funds available
for investment.
Our effective tax rate for the three-months ended June 30, 2000 was 48%. This
was negatively impacted by our deconsolidation of Switchboard for tax purposes
upon our percentage ownership change on June 30, 1999. No tax provision, other
than that required for foreign income and foreign withholding taxes, was
recorded for the three-months ended June 30, 1999 due to our previously recorded
net operating losses.
In the fourth quarter of 1999, our Board of Directors approved a plan to exit
our software business and to focus on the Services and Switchboard businesses as
our sole operating units. Included in the fourth quarter of 1999 results of
operations is an estimated loss from disposal of discontinued operations of $3.0
million, net of tax. Net operating losses, net of tax, totaling approximately
$1.6 million from discontinued operations for the six-months ended June 30, 2000
have been netted against the reserve established in the Company's 1999 operating
results for the disposal of its software business.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased from $112.4 million at December 31, 1999 to $162.5
million at June 30, 2000. At June 30, 2000, cash and cash equivalents combined
with marketable securities were $189.1 million, compared with $130.8 million at
December 31, 1999. Cash and cash equivalents increased $1.3 million resulting in
a cash balance of $31.2 million at June 30, 2000. This increase was due
primarily to $86.3 million from Switchboard's sale of equity in its initial
public offering and $45.3 million in proceeds from the sale of marketable
securities held by ePresence. These increases were offset in part by $96.4
million in net purchases of marketable securities, $25.9 million for the
acquisitions of two privately held services companies and other various
operating, investing and financing activities. At June 30, 2000, ePresence, Inc.
held $99.8 million and Switchboard held $89.3 million in cash and marketable
securities for use in their respective businesses.
During the three-months ended March 31, 2000, we sold 491,202 shares of
Software.com's common stock resulting in net proceeds of approximately $45.3
million and a net realized gain of approximately $44.6 million. At June 30,
2000, we owned 400,000 shares of Software.com. During January and February of
2000, we entered into hedging contracts for the remaining 400,000 shares of
Software.com common stock.
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If held to maturity, on February 2, 2001, we will receive payment for the value
of Software.com common shares based upon the average closing price of the ten
consecutive trading days prior to, and including the maturity date with a
settlement price not lower than $84.04 or higher than $114.50 per share for the
first 300,000 shares. If held to maturity, on February 25, 2001, we will receive
payment for the value of Software.com common shares based upon the average
closing price of the five consecutive trading days prior to and including the
maturity date with a settlement price not lower than $84.60 or higher than
$115.90 per share for the remaining 100,000 shares.
On January 11, 1999, we announced a strategic alliance with Microsoft
Corporation ("Microsoft"). As part of the agreement, Microsoft has committed to
contributing $10.0 million to us over a three-year period to fund the training
of at least 500 professionals, marketing and development costs and the
acquisition of a warrant to purchase 1.75 million shares of our Common Stock.
The first of three payments to be made by Microsoft to us was received in
January 1999 in the amount of $5.9 million. The second payment of $2.5 million
was received in December 1999. The remaining payment of $1.6 million is
scheduled to be received on or before December 31, 2000.
In January 2000, we acquired a privately held e-business services company based
in Red Bank, New Jersey that specializes in web design, development and
integration. Consideration for the acquisition is comprised of $10.0 million in
cash and the issuance of shares of our common stock based on the achievement of
certain performance measures. The estimated purchase price of the acquisition,
assuming the achievement of the performance measures, is approximately $13.75
million. The acquisition is accounted for, using the purchase method of
accounting. At acquisition, ePresence employed 45 professionals.
In May 2000, the Company acquired Strategic Network Designs, Inc., a privately
held e-business services company based in Clark, New Jersey, that specializes in
customer relationship management, e-mobility, wireless and custom application
solutions. The total purchase price of $30.5 million, excluding transaction
expenses, included consideration of $17.5 million in cash, 221,713 shares of
common stock valued at $3.0 million and a one-year earnout of $10.0 million
contingent on performance. The transaction has been accounted for using the
purchase method of accounting. Upon execution of the purchase agreement, the
acquired company employed 75 professionals.
In March 2000 Switchboard, raised approximately $82.5 million, prior to offering
expenses, through an initial public offering of its common stock. Subsequently,
in April 2000, Switchboard raised an additional $12.4 million through the sale
of the over allotment of shares by its underwriters.
The Company terminated its line of credit with Foothill Capital Corporation
effective September 4, 2000.
We believe that existing cash and marketable securities, combined with cash
expected to be generated from operations, will be sufficient to fund the
Company's operations through at least the next 12 months.
14
<PAGE>
FACTORS AFFECTING FUTURE OPERATING RESULTS
Certain of the information contained in this form 10-Q, including, without
limitation, information with respect to our plans and strategy for the business,
statements relating to the sufficiency of cash and cash equivalent balances,
anticipated expenditures, the intended effects of our discontinuation of the
software business and sales and marketing and product development efforts,
consists of forward-looking statements. Any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "expects,"
"anticipates," "plans" and similar expressions are intended to identify forward-
looking statements. Important factors that could cause actual results to differ
materially from the forward-looking statements include the following factors:
In October 1999, we announced a plan to exit our software business. Until the
fourth quarter of 1998, a majority of our revenues were attributable to the
software business. While we will continue to provide consulting services to our
customers, we will no longer market software, nor will we advance our software
technology through product development. Our future success will depend in part
upon our ability to continue to grow our Services business, enter into new
strategic alliances, acquire additional Services customers and adapt to changing
technologies and customer requirements. Any failure to do so could have a
material adverse effect on us. We have a limited operating history as a services
company. There can be no assurance we will be successful in our strategic focus
on services, including e-services.
In 1999, we announced our intention to acquire additional professional services
companies in an attempt to strengthen our expanding consulting services business
activities. Any failure by us to effectively identify, acquire, integrate and
assimilate acquisitions could have a material adverse effect on us.
As part of our strategic focus on services, on January 11, 1999, we announced a
global alliance with Microsoft to deliver integrated messaging, networking and
Internet solutions and the collaboration on the design and implementation of
packaged services, solutions and support offerings based on Microsoft's
enterprise platform. The agreement contains various obligations and milestones
that must be met by us, including the certification of 500 Microsoft-trained
professionals. The failure to meet such obligations and milestones could result
in a termination of the agreement, which could have a material adverse effect on
us.
As part of CBS' June 1999 investment in Switchboard, Switchboard and ePresence
entered into an Advertising and Promotion Agreement with CBS under which CBS
agreed to arrange for the placement of up to $95.0 million of advertising and
promotion of the Switchboard web site. Under this agreement, we agreed to
indemnify CBS for any breach by Switchboard of Switchboard's representations,
warranties or covenants in the agreement. Our indemnification obligations with
respect to the covenants expire upon the first to occur of (i) the first
business day after June 30, 2001 when we own or control less than a majority of
Switchboard's voting power and (ii) the first business day after any person owns
or controls more of Switchboard's voting power than do we. Switchboard has
agreed to indemnify us for amounts that we may be required to pay CBS pursuant
to our indemnification obligations to CBS. If we are required under the
Advertising and Promotion Agreement to indemnify CBS it may have a material
adverse effect on us.
15
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We own 9,802,421 shares of Switchboard's common stock, which is traded on the
Nasdaq National Market. The trading price of Switchboard's common stock is
likely to be volatile and may be influenced by many factors, including, without
limitation, variations in financial results, changes in earnings estimates by
industry research analysts, the failure or success of branding and strategic
initiatives (including Switchboard's relationship with CBS) and investors'
perceptions. Volatility in the trading price of Switchboard's common stock could
have a material adverse effect on our financial results. In addition, due to our
level of ownership of Switchboard, the trading price of our common stock is
likely to be influenced by the trading price of Switchboard's common stock. If
Switchboard's trading price declines, the trading price of our common stock will
likely decline, as well.
Switchboard's results of operations are consolidated as part of our results of
operations. Switchboard has a history of incurring net losses, expects its net
losses to continue throughout 2000 as a result of planned increases in operating
expenses and may never achieve profitability. In addition, Switchboard's
quarterly results of operations have fluctuated significantly in the past and
are likely to fluctuate significantly from quarter to quarter in the future.
Factors that may cause Switchboard's results of operations to fluctuate include:
. the addition or loss of relationships with third parties that are
Switchboard's source of new merchants for its local merchant network or that
license Switchboard's services for use on their own web sites;
. Switchboard's ability to attract and retain consumers, local merchants and
national advertisers to its web site;
. the amount and timing of expenditures for expansion of Switchboard's
operations, including the hiring of new employees, capital expenditures and
related costs;
. technical difficulties or failures affecting Switchboard's systems or the
Internet in general;
. the cost of acquiring, and the availability of, content, including directory
information and maps; and
. that Switchboard's expenses are partially based on expectations regarding
future revenue and are largely fixed in nature, particularly in the short-
term.
In addition, Switchboard has only a limited operating history and until March
2000, had no operating history as a stand-alone company and no experience in
addressing various business challenges without the support of a corporate
parent. It may not be successful as a stand-alone company.
William P. Ferry, our Chairman of the Board, President and Chief Executive
Officer, is Switchboard's Chairman of the Board and both Richard M. Spaulding,
our Senior Vice President and Chief Financial Officer, and Robert M. Wadsworth,
one of our directors, are also directors of Switchboard. Serving as a director
of Switchboard and either a director or an officer of ePresence could create, or
appear to create, potential conflicts of interest when those directors and
officers are faced with decisions that could have different implications for us
than for Switchboard. Such conflicts, or potential conflicts, of interest could
hinder or delay our management's ability to make timely decisions regarding
significant matters relating to our business.
We sell our services principally through a direct sales force to customers in a
broad range of industries. We do not require collateral or other security to
support customer receivables. Our financial results and condition could be
adversely affected by credit losses.
We are dependent upon the continued services of our key management and technical
personnel. Competition for qualified personnel is intense, and there can be no
assurance we will be able to attract and retain qualified management and other
key employees.
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<PAGE>
Because of the foregoing factors and the other factors we have disclosed from
time to time, we believe that period-to-period comparisons of our financial
results are not necessarily meaningful and we expect that our results of
operations may fluctuate from period-to-period in the future.
EURO CONVERSION DISCLOSURE
On January 1, 1999, the participating member countries of the European Union
adopted the Euro as the common legal currency and fixed conversion rates between
their existing sovereign currencies and the Euro. We do not believe that the
Euro conversion will have a material impact on our operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk during the
three and six month periods ended June 30, 2000.
17
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EPRESENCE, INC.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 9, 2000, the Company amended its Second Amended and Restated Articles of
Organization to (i) change its name from Banyan Systems Incorporated to
ePresence, Inc. and (ii) increase the number of authorized shares of Common
Stock from 35,000,000 to 100,000,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of stockholders held on May 9, 2000, the
following proposals were adopted by the vote specified below:
<TABLE>
<CAPTION>
Proposal For Against Abstain
---------- ------- -------
<S> <C> <C> <C>
1. Election of three directors:
John F. Burton 20,615,730 708,069 ----
Fontaine K. Richardson 20,627,352 696,447 ----
Robert M. Wadsworth 20,627,552 696,247 ----
2. Approval of amendment to
the Company's Second Restated
Articles of Organization
increasing authorized shares 19,141,561 2,158,494 23,744
3. Approval of amendment to
the Company's Second Restated
Articles of Organization
changing name of Company 21,110,460 183,756 29,583
4. Ratification and approval of
amendment to the Company's
1992 Stock Incentive Plan 17,015,097 4,281,185 27,517
5. Ratification and approval of
amendment to the Company's
1992 Director Stock Option Plan 20,326,142 970,821 26,836
6. Ratification of the selection of
PricewaterhouseCoopers LLP
as the Company's independent
accountants 21,259,658 48,476 15,665
</TABLE>
In addition to the Directors elected at the Annual Meeting, the term of office
of the following Directors also continued following the meeting: William P.
Ferry, David C. Mahoney, Albert A. Notini and John J. Rando.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits listed in the Exhibit Index filed as part of this report are
filed as part of or are included in this report.
(b) The Company filed a Form 8-K on May 25, 2000 regarding the acquisition of
Strategic Network Designs, Inc. The Company filed no other Form 8-K during
the fiscal quarter for which this report is filed.
19
<PAGE>
EPRESENCE, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPRESENCE, INC.
Date: August 14, 2000 By: /s/ Richard M. Spaulding
------------------------
Richard M. Spaulding
Chief Financial Officer, Treasurer and Clerk
(Principal Financial Officer and Principal
Accounting Officer)
20
<PAGE>
Exhibit Index
-------------
2* Stock Purchase Agreement by and among ePresence, Inc. (the "Company"),
Strategic Network Designs, Inc. and the Stockholders of Strategic
Network Designs, Inc. dated May 11, 2000.
3 Articles of Amendment to Second Amended and Restated Articles of
Organization, as filed with the Secretary of the Commonwealth of
Massachusetts on May 9, 2000.
10.1** Deferred Compensation Plan of the Company, effective March 24, 2000.
10.2 Common Stock Purchase Warrant issued to HarbourVest Venture Partners V-
Direct Fund L.P. on June 30, 2000, replacing the Series B Convertible
Preferred Stock Purchase Warrant, dated as of March 5, 1998.
10.3 Common Stock Purchase Warrant issued to HarbourVest Venture Partners V-
Direct Fund L.P. on June 30, 2000, replacing the Series C Convertible
Preferred Stock Purchase Warrant, dated as of March 5, 1998.
10.4 Promissory Note issued to the Company by William P. Ferry, dated May 5,
2000.
10.5 Secured Promissory Note issued to the Company by Richard M. Spaulding,
dated May 5, 2000.
10.6 Secured Promissory Note issued to the Company by Anthony Bellantuoni,
dated May 5, 2000.
10.7 Secured Promissory Note issued to the Company by Robert Burke, dated May
5, 2000.
10.8 Pledge Agreement between the Company and Richard M. Spaulding, dated May
5, 2000.
10.9 Pledge Agreement between the Company and Anthony Bellantuoni, dated May
5, 2000.
10.10 Pledge Agreement between the Company and Robert Burke, dated May 5,
2000.
27 Financial Data Schedule.
___________________
* Incorporated herein by reference to the exhibits to the Company's Current
Report on Form 8-K, filed May 25, 2000 (File No. 000-20364).
** Incorporated herein by reference to the exhibits to the Registration
Statement on Form S-8, filed June 22, 2000 (File No. 333-39860).
21
