<PAGE>
DRAFT
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 SEPTEMBER 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. Employee
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 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
--------- ---------
Number of shares outstanding of each of the issuer's classes of Common Stock as
of October 31, 2000:
Class Number of Shares Outstanding
----- -----------------------------
Common Stock, par value $.01 per share 23,651,097
<PAGE>
EPRESENCE, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2000 (unaudited) and December 31, 1999 3
Consolidated Statements of Operations
Three and Nine months ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows
Nine months ended September 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 18
PART II. OTHER INFORMATION
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 20
EXHIBIT INDEX 21
</TABLE>
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 are 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 September 30, 2000 December 31, 1999
----------------------- -----------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 57,804 $ 29,920
Marketable securities 107,893 91,653
Accounts receivable, less allowances of $978 and $869 20,201 14,482
Other current assets 8,076 2,729
-------- --------
Total current assets 193,974 138,784
Property and equipment, net 5,322 3,784
Marketable securities 12,507 9,198
Deferred tax asset 9,102 21,655
Other assets, net of accumulated amortization of $2,385 and $596 28,285 1,029
-------- --------
Total assets $249,190 $174,450
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 3,931 $ 3,677
Accrued compensation 5,189 4,493
Accrued expenses 9,673 7,788
Income taxes payable 2,302 791
Net liabilities of discontinued operations 820 3,264
Long-term debt, current portion 223 600
Deferred revenue 5,214 5,728
-------- --------
Total current liabilities 27,352 26,341
Deferred tax liability 16,631 30,350
Minority interest in consolidated subsidiary 52,866 2,392
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized 100,000,000 shares; issued
25,493,767 and 24,783,670 shares 255 248
Accumulated earnings/(deficit) 13,958 (3,436)
Additional paid in capital 137,614 93,648
Unearned compensation (95) (603)
Treasury stock at cost; 1,848,000 common shares (28,564) (28,564)
Accumulated other comprehensive income 29,173 54,074
-------- --------
Total stockholders' equity 152,341 115,367
-------- --------
Total liabilities and stockholders' equity $249,190 $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 Nine Months Ended
September 30, September 30,
-------------------- -------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Services $17,005 $ 9,881 $ 43,649 $26,483
Switchboard 5,700 2,286 14,284 5,264
------- ------- -------- -------
Total revenues 22,705 12,167 57,933 31,747
Cost of revenues:
Services 9,372 6,256 23,895 16,093
Switchboard 982 614 2,948 1,020
------- ------- -------- -------
Total cost of revenues 10,354 6,870 26,843 17,113
------- ------- -------- -------
Gross profit 12,351 5,297 31,090 14,634
Operating expenses:
Sales and marketing 12,908 4,826 35,887 12,225
Product development 936 471 2,421 1,347
General and administrative 4,652 3,541 13,235 10,194
Amortization of goodwill 732 - 1,485 -
------- ------- -------- -------
Total operating expenses 19,228 8,838 53,028 23,766
------- ------- -------- -------
Operating loss from continuing operations (6,877) (3,541) (21,938) (9,132)
Other income/(expense):
Interest income 2,251 403 5,587 935
Interest expense (7) (35) (59) (101)
Other, net 1,141 626 49,875 4,377
------- ------- -------- -------
Total other income 3,385 994 55,403 5,211
------- ------- -------- -------
(Loss)/income from continuing operations before income taxes (3,492) (2,547) 33,465 (3,921)
(Benefit from)/provision for income taxes (1,674) 51 16,071 277
------- ------- -------- -------
Net (loss)/income from continuing operations (1,818) (2,598) 17,394 (4,198)
Income from discontinued operations (net of taxes) - 1,613 - 8,132
------- ------- -------- -------
Net (loss)/income $(1,818) $ (985) $ 17,394 $ 3,934
======= ======= ======== =======
Net (loss)/income per common share:
Basic $(0.08) $(0.04) $0.74 $0.19
======= ======= ======== =======
Diluted $(0.08) $(0.04) $0.65 $0.16
======= ======= ======== =======
Weighted average number of common shares:
Basic 23,867 22,380 23,589 20,613
======= ======= ======== =======
Diluted 23,867 22,380 26,795 24,843
======= ======= ======== =======
</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>
Nine Months Ended September 30,
2000 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 17,394 $ 3,934
Adjustments to reconcile net income to net cash (used in) operating activities:
Gain on sale of investments (44,556) (4,043)
Depreciation and amortization 3,452 2,708
Non-cash advertising and promotion 8,794 77
Amortization of unearned compensation 420 787
Loss on disposal of assets - 59
Changes in operating assets and liabilities:
Accounts receivable (2,819) 6,022
Inventories - 175
Other current assets (5,264) 289
Deferred tax assets and liabilities, net (1,479) -
Other liabilities (5,997) (1,342)
Accounts payable and accrued compensation and expenses 641 (318)
Accrued costs for restructuring and other charges - (325)
Software licenses payable, net - (500)
Net change in net discontinued liabilities (2,649) -
Other non current assets (722) 251
Deferred revenue (362) (9,033)
-------- -------
Net cash (used in) operating activities (33,147) (1,259)
Cash flows from investing activities:
Capital expenditures (2,842) (1,443)
Proceeds from investment 45,278 4,743
(Purchases of)/proceeds from marketable securities, net (44,991) (5,511)
Acquisition of business, net of cash acquired (25,959) -
-------- -------
Net cash (used in) investing activities (28,514) (2,211)
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 2,538 3,312
-------- -------
Net cash provided by financing activities 89,380 10,442
Effect of exchange rate changes on cash and cash equivalents 165 (133)
-------- -------
Net increase in cash and cash equivalents 27,884 6,839
Cash and cash equivalents at beginning of the period 29,920 15,160
-------- -------
Cash and cash equivalents at end of the period $ 57,804 $21,999
======== =======
</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 ePresence, Inc. (the Company) and its subsidiaries as of
September 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. As a result of a voting rights agreement with
CBS, the Company maintains majority board control of Switchboard. Due to
the Company's control of the Switchboard board of directors, Switchboard's
results are consolidated as part of the Company's financial results. The
voting rights agreement with CBS terminates on June 30, 2001.
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.
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 $860,000 and $2,509,000 from discontinued operations
for the three and nine months ended September 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 nine-month periods ended
September 30, 2000 are not necessarily indicative of the results expected
for the full fiscal year or any future period.
New Accounting 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
6
<PAGE>
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 December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", ("SAB 101") as
subsequently amended by SAB 101A and SAB 101B, which is effective no later than
the fourth quarter of 2000. SAB 101 clarifies the Securities and Exchange
Commission's views related to revenue recognition and disclosure. The Company
adopted SAB 101 in the fourth quarter of 1999.
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.
SEGMENT INFORMATION FOR THE THREE AND NINE-MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS)
Three months ended September 30, 2000
<TABLE>
<CAPTION>
Total
Services Switchboard Company
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Revenues
Services $ 17,005 $ - $ 17,005
Switchboard - 5,700 5,700
-------- -------- --------
Total revenue 17,005 5,700 22,705
Cost of revenues 9,372 982 10,354
-------- -------- --------
Gross profits 7,633 4,718 12,351
Operating expenses 10,517 8,711 19,228
-------- -------- --------
Operating loss $ (2,884) $ (3,993) $ (6,877)
======== ======== ========
Total assets $153,609 $ 95,581 $249,190
======== ======== ========
</TABLE>
7
<PAGE>
Nine months ended September 30, 2000
<TABLE>
<CAPTION>
Total
Services Switchboard Company
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Revenues
Services $ 43,649 $ - $ 43,649
Switchboard - 14,284 14,284
-------- -------- --------
Total revenue 43,649 14,284 57,933
Cost of revenues 23,895 2,948 26,843
-------- -------- --------
Gross profits 19,754 11,336 31,090
Operating expenses 26,911 26,117 53,028
-------- -------- --------
Operating loss $ (7,157) $(14,781) $(21,938)
======== ======== ========
Total assets $153,609 $ 95,581 $249,190
======== ======== ========
</TABLE>
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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Basic earnings per share
Numerator:
Net (loss)/income $(1,818) $ (985) $17,394 $ 3,934
Denominator:
Weighted average common shares outstanding 23,867 22,380 23,589 20,613
------- ------- ------- -------
Basic earnings per share $ (0.08) $ (0.04) $ 0.74 $ 0.19
======= ======= ======= =======
Diluted earnings per share
Numerator:
Net (loss)/income $(1,818) $ (985) $17,394 $ 3,934
Denominator:
Weighted average common shares outstanding 23,867 22,380 23,589 20,613
Dilutive potential common stock - - 3,206 4,230
------- ------- ------- -------
Total shares 23,867 22,380 26,795 24,843
------- ------- ------- -------
Diluted earnings per share $ (0.08) $ (0.04) $ 0.65 $ 0.16
======= ======= ======= =======
</TABLE>
Options and warrants to purchase 1,305,056 and 6,336,313 shares of outstanding
common stock during the three-months ended September 30, 2000 and 1999,
respectively, 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 2,782,487 and 497,000 shares of common stock outstanding
during nine-months ended September 30, 2000 and 1999, respectively, 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.
8
<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.
<TABLE>
<CAPTION>
For the three months ended September 30, 2000 1999
------------------------------------------ -------- -------
(in thousands)
<S> <C> <C>
Net (loss) $ (1,818) $ (985)
Other comprehensive (expense)/income (207) 20,224
-------- -------
Comprehensive (loss)/income $ (2,025) $19,239
======== =======
<CAPTION>
For the nine months ended September 30, 2000 1999
----------------------------------------- -------- -------
(in thousands)
<S> <C> <C>
Net income $ 17,394 $ 3,934
Other comprehensive (expense)/income (24,901) 42,343
-------- -------
Comprehensive (loss)/income $ (7,507) $46,277
======== =======
</TABLE>
E. ACQUISITION OF BUSINESSES
In January 2000, the Company acquired ePresence Web Consulting, Inc.
(formerly ePresence, Inc.), 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 September 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 $9,505,000, which will
be amortized over a ten-year period.
In May 2000, the Company acquired ePresence CRM, Inc. (formerly 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.
The following are the Company's unaudited proforma results for the nine
months ended September 30, 1999 as compared to the unaudited proforma
results for the nine months ended September 30, 2000, assuming the
acquisitions occurred on January 1, 1999 (in thousands, except for per
share data).
9
<PAGE>
<TABLE>
Nine-months ended September 30, 2000 1999
------------------------------------------------------------------------------------------------
(proforma) (proforma)
<S> <C> <C>
Net revenues $ 64,490 $41,899
Net (loss) from continuing operations $(20,607) $(8,761)
Net income $ 18,721 $ 4,133
Net earnings per common share:
Basic $ 0.79 $ 0.20
Diluted $ 0.70 $ 0.16
Weighted average number of common shares
Basic 23,669 20,835
Diluted 26,875 25,065
</TABLE>
These unaudited proforma 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.
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 nine months ended
September 30, 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 September 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 stockholders' 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 and no
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 and no
higher than $115.90 per common share.
On August 9, 2000, Software.com and Phone.com announced their plans to
merge. Each Software.com shareholder will be entitled to receive 1.6105
Phone.com shares. The merger is expected to be accounted for as a pooling
and is intended to be tax-free to shareholders of both companies. On
October 26, 2000, the Company entered into two hedging contracts for
Phone.com shares effectively rolling over its hedging contracts of
Software.com common shares. The contracts are adjusted to equivalent
Phone.com shares and pricing and maintain the same terms as the original
contracts with the exception of maturities. The hedging contract for
483,150 Phone.com shares matures on March 19, 2001 and the settlement price
can be no lower than $52.18 and no higher than $71.09 per common share. The
hedging contract for 161,050 Phone.com shares matures on April 9, 2001. The
settlement price can be no lower than $52.53 and no higher than $71.96 per
common share.
10
<PAGE>
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, an additional 825,000 shares of its
common stock pursuant to the March 31, 2000 exercise of the underwriters'
over-allotment option in full. The aggregate gross proceeds raised in the
offering were $94,900,000. Total expenses in connection with the offering
were approximately $8,600,000, of which $6,600,000 was for underwriting
discounts and commissions and $2,000,000 was for professional services and
other expenses. Switchboard's net proceeds from the offering were
approximately $86,300,000, of which $74,800,000 was received in March 2000
and $11,500,000 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
SERVICES REVENUES
Total Services revenues from continuing operations for the three-month period
ended September 30, 2000 were $17.0 million, which represented a $7.1 million,
or 72%, increase when compared to the corresponding period in 1999. Total
Services revenues for the nine-month period ended September 30, 2000 were $43.6
million, which represented a $17.2 million, or 65%, increase when compared to
the corresponding period in 1999. These increases 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,
application integration, directory and security planning and in part due to two
acquisitions in the first six months of 2000. International revenues for the
three-month and nine-month periods ended September 30, 2000 were $2.8 million
and $6.7 million, respectively, as compared to $3.1 million and $8.4 million,
respectively, for the corresponding periods in 1999. The decreases in our
international revenues in 2000 were primarily due to the sale of our French
subsidiary in January 2000 and the closing of our Malaysian and Japanese offices
in 1999.
SERVICES GROSS PROFIT
Gross profits for Services were 45%, or $7.6 million, and 45%, or $19.8 million,
for the three-month and nine-month periods ended September 30, 2000,
respectively, compared with 37%, or $3.6 million, and 39%, or $10.4 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.
SERVICES OPERATING EXPENSES
Sales and marketing expenses for Services of $6.0 million and $14.6
million for the three-month and nine-month periods ended September 30, 2000,
respectively, represented increases of 148% and 89% compared to the
corresponding periods in 1999. These increases were due primarily to 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. Additionally, we incurred approximately $1.4 million of corporate
rebranding expense in the three-month period ended September 30, 2000 relating
to the change of the Company's name to ePresence. We anticipate additional
promotional spending through the quarter ending March 31, 2001 of approximately
$1.0 million to $1.5 million related to branding the ePresence name. Sales and
marketing expenses as a percentage of Services revenues were 35% and 33% for the
three-month and nine-month periods ended September 30, 2000, respectively, as
compared to 25% and 29% for the corresponding periods in 1999.
General and administrative expenses for Services of $3.8 million and $10.8
million for the three-month and nine-month periods ended September 30, 2000,
respectively, represented increases of 25% and 20% when compared to the
corresponding periods in 1999. These increases were due primarily to additional
recruiting and training expenses related to the staffing of our expanding
consulting services activities. General and administrative
12
<PAGE>
expenses as a percentage of Services revenues were 22% and 25% for the three-
month and nine-month periods ended September 30, 2000, as compared to 31% and
34% for the corresponding periods in 1999.
Amortization of goodwill expenses for Services were $0.7 million and $1.5
million for the three-month and nine-month periods ended September 30, 2000,
respectively, as compared to none in the corresponding periods in 1999. These
increases were due to two acquisitions of e-business services companies in the
first and second quarters of 2000. Amortization of goodwill expenses as a
percentage of Services revenues were 4% and 3% for the three-month and nine-
month periods ended September 30, 2000, as compared to none for the
corresponding periods in 1999.
SWITCHBOARD REVENUES
Total revenues from Switchboard included in consolidation in our continuing
operations for the three-month period ended September 30, 2000 were $5.7
million, which represented a $3.4 million, or 149%, increase when compared to
the corresponding period in 1999. Total revenues for the nine-month period ended
September 30, 2000 were $14.3 million, which represented a $9.0 million, or
171%, increase when compared to the corresponding period in 1999. The increases
in Switchboard revenues were due primarily to an increase in national
advertising revenue and merchant services revenue.
SWITCHBOARD GROSS PROFIT
Gross profits for Switchboard were 83% or $4.7 million, and 79%, or $11.3
million for the three-month and nine-month periods ended September 30, 2000,
respectively, compared with 73%, or $1.7 million and 81%, or $4.2 million, for
the corresponding periods in 1999. These increases in gross profit dollars were
due primarily to increases in revenues offset in part by increases in
amortization of deferred project costs, Web service fees in connection with the
merchant aggregation program and data communication costs to support the
Switchboard website.
SWITCHBOARD OPERATING EXPENSES
Sales and marketing expenses for Switchboard of $6.9 million and $21.3 million
for the three-month and nine-month periods ended September 30, 2000,
respectively, represented increases of 187% and 372% compared to the
corresponding periods in 1999. These increases were due primarily to an increase
in promotional investment in Switchboard, particularly CBS non-cash advertising
and other non-CBS related advertising, intended to increase site traffic. Sales
and marketing expenses as a percentage of Switchboard revenues were 121% and
149% for the three-month and nine-month periods ended September 30, 2000,
respectively, as compared to 105% and 86% for the corresponding periods in 1999.
Product development expenses for Switchboard of $0.9 million and $2.4 million
for the three-month and nine-month periods ended September 30, 2000,
respectively, represented increases of 99% and 80%, respectively, over the
corresponding periods in 1999. These increases were due primarily to increases
in resources devoted to advancing Switchboard technology and services. Product
development expenses as a percentage of Switchboard revenues were approximately
16% and 17% for the three-month and nine-month periods ended September 30, 2000,
respectively, as compared to 21% and 26% for the three-month and nine-month
periods ended September 30, 1999. There were no software development amounts
capitalized during the nine-month periods ended September 30, 2000 and 1999.
General and administrative expenses for Switchboard of $0.9 million and $2.4
million for the three-month and nine-month periods ended September 30, 2000,
respectively, represented increases of 73% and 101% when compared to the
corresponding periods in 1999. These increases were due primarily to additional
staffing. General and administrative expenses as a percentage of Switchboard
revenues were 15% and 17% for the three-month and nine-month periods ended
September 30, 2000, as compared to 22% and 23% for the corresponding periods in
1999.
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CONSOLIDATED OTHER INCOME/(EXPENSE) AND INCOME TAXES
Consolidated other income and expense was $3.4 million and $55.4 million for the
three-month and nine-month periods ended September 30, 2000, compared to
$1.0 million and $5.2 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 nine months periods ended September 30, 2000 and 1999,
respectively. For the three-month and nine-month periods ended
September 30, 2000 the Company had greater funds available for investment,
primarily due to the sales of Software.com stock and proceeds raised for
Switchboard in its initial public offering, as compared to the corresponding
periods in the prior year.
Our effective tax rate for the three months ended September 30, 2000 was 48%.
This was negatively impacted by our deconsolidation of Switchboard for tax
purposes, as Switchboard net losses are not included in our tax return, 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 September 30, 1999 due to our previously recorded net
operating losses.
OTHER
In the fourth quarter of 1999, our Board of Directors approved a plan to exit
our software business and to focus on Services and Switchboard business 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
$2.5 million from discontinued operations for the nine months ended September
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 $166.2
million at September 30, 2000. At September 30, 2000, cash and cash equivalents
combined with marketable securities were $178.2 million, compared with $130.8
million at December 31, 1999. Cash and cash equivalents increased $27.9 million
resulting in a cash balance of $57.8 million at September 30, 2000. This
increase was due primarily to $86.3 million raised from Switchboard's sale of
equity in its initial public offering and $45.3 million in proceeds generated
from the sale by us of marketable securities. These increases were offset in
part by $45.0 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 September 30, 2000, the
Company held $91.6 million and Switchboard held $86.6 million in cash and
marketable securities, respectively, 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. On August 9, 2000, Software.com and
Phone.com announced their plans to merge. Pursuant to the terms announced, each
Software.com shareholder will be entitled to receive 1.6105 Phone.com shares,
the merger is expected to be accounted for as a pooling and is intended to be
tax-free to shareholders of both companies. On October 26, 2000, we entered into
two hedging contracts for Phone.com shares effectively rolling over its hedging
contracts of Software.com common shares. These contracts are adjusted to
equivalent Phone.com shares and pricing and maintain the same terms as the
original contracts with the exception of maturities. The hedging contract for
483,150 Phone.com shares matures on March 19, 2001 and the hedging contract
for 161,050 Phone.com shares matures on April 9, 2001.
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If held to maturity, on March 19, 2001, we will receive payment for the value of
Phone.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 $52.18 or not higher than $71.09 per share for
the first 300,000 shares. If held to maturity, on April 9, 2001, we will
receive payment for the value of Phone.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 $52.53 or not higher than
$71.96 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 purchase
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 ePresence Web Consulting, Inc. (formerly
ePresence, Inc.), 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, assuming the achievement of the performance
measures, using the purchase method of accounting.
In May 2000, we acquired ePresence CRM, Inc. (formerly 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.
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 $11.5 million, net
of expenses, through the sale of the over allotment of shares by its
underwriters.
We terminated our line of credit with Foothill Capital Corporation effective
September 4, 2000. On October 6, 2000, we entered into a new $10.0 million line
of credit agreement with Fleet National Bank.
In general, the Company's obligations under this credit agreement bear interest
at the variable base rate per annum. This credit agreement has a three-year
term. The line of credit contains covenants relating to the maintenance of
financial ratios and limits the payment of cash dividends. We had no borrowings
under the line of credit outstanding at September 30, 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.
New Accounting 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.
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In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements",
("SAB 101") as subsequently amended by SAB 101A and SAB 101B, which is effective
no later than the fourth quarter of 2000. SAB 101 clarifies the Securities and
Exchange Commission's views related to revenue recognition and disclosure. The
Company adopted SAB 101 in the fourth quarter of 1999.
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 rebranding and other 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 new 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. In 2000, we have effected two acquisitions, described elsewhere
herein. Any failure by us to effectively identify and acquire additional
companies, integrate and assimilate acquired companies, and any failure of
acquired companies to perform as expected, 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.
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.
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.
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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 condition. 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 2001 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
. Switchboard's expenses, which are largely fixed, particularly in the short-
term, are partially based on expectations regarding future revenue.
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.
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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 significant changes in the Company's market risk during the
three and nine-month periods ended September 30, 2000.
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EPRESENCE, INC.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
(a) On July 21, 2000, David Mahoney resigned from the Board of Directors of
the Company.
(b) On November 1, 2000, Robert Burke, Senior Vice President of Worldwide
Sales and Services, terminated his employment with the Company.
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 an Amendment to Current Report on Form 8-K/A on July
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.
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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: November 13, 2000 By: /s/ Richard M. Spaulding
------------------------
Richard M. Spaulding
Chief Financial Officer, Treasurer and Clerk
(Principal Financial Officer and Principal
Accounting Officer)
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EXHIBIT INDEX
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27 Financial Data Schedule.
21
