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, 2001 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 Identification No.)
incorporation or organization)
120 FLANDERS ROAD
WESTBORO, MASSACHUSETTS 01581
(Address of principal executive offices)
(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 July 31, 2001:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock, par value $.01 per share 23,460,382
EPRESENCE, INC.
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
June 30, 2001 and December 31, 2000
Consolidated Statements of Operations 4
Three and six months ended June 30, 2001 and 2000
Consolidated Statements of Cash Flows 5
Six months ended June 30, 2001 and 2000
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 14
Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
EXHIBIT INDEX 18
This Quarterly Report on Form 10-Q contains forward-looking statements,
including information with respect to the Company's plans and strategy for its
business. 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
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EPRESENCE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
(See Note A)
December
June December 31, 2000
30, 2001 31, 2000 Pro forma
(unaudited) (unaudited)
----------- --------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 27,837 $ 39,726 $ 20,953
Marketable securities 11,803 104,207 52,210
Accounts receivable, less allowances of $1,415, $1,278 and $876, respectively 11,654 20,016 12,867
Other current assets 7,068 14,293 6,813
--------- --------- ---------
Total current assets 58,362 178,242 92,843
Property and equipment, net 4,449 5,636 4,207
Marketable securities 25,362 8,249 8,249
Deferred tax asset 5,137 13,265 13,265
Goodwill, net of accumulated amortization of $3,760, $2,263 and $2,217, respectively 28,268 29,330 27,090
Investment in unconsolidated affiliate 31,153 -- 34,658
Other assets, net of accumulated amortization of $0, $876 and $0, respectively 47 9,708 218
--------- --------- ---------
Total assets $ 152,778 $ 244,430 $ 180,530
========= ========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 3,513 $ 4,561 $ 3,273
Accrued compensation 2,897 5,136 4,402
Accrued expenses 7,500 7,577 5,077
Income taxes payable 40 737 737
Deferred revenue 3,299 4,723 3,211
Long-term debt, current portion 89 -- 204
--------- --------- ---------
Total current liabilities 17,338 22,734 16,904
Long-term debt -- 2,000 --
Deferred tax liability 405 13,947 13,947
Minority interests in consolidated subsidiaries -- 56,070 --
SHAREHOLDERS' EQUITY
Common stock, $.01 par value; authorized 100,000,000 shares; issued and
outstanding 26,295,882, 26,063,646 and 26,063,646 shares, respectively 263 261 261
Additional paid-in capital 147,364 144,725 145,093
Unearned compensation (1,776) (2,743) (2,743)
Accumulated earnings 21,785 11,619 11,619
Accumulated other comprehensive income 240 24,547 24,179
Treasury stock at cost; 2,771,500 shares (32,841) (28,730) (28,730)
--------- --------- ---------
Total shareholders' equity 135,035 149,679 149,679
--------- --------- ---------
Total liabilities and shareholders' equity $ 152,778 $ 244,430 $ 180,530
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
3
EPRESENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
(See Note A) (See Note A)
2001 2000 2000 2001 2000 2000
Pro forma Pro forma
-------- -------- -------- -------- -------- --------
Revenues $ 13,115 $ 19,359 $ 14,593 $ 29,082 $ 35,228 $ 26,644
Cost of services 8,964 8,972 7,922 19,413 16,489 14,523
-------- -------- -------- -------- -------- --------
Gross profit 4,151 10,387 6,671 9,669 18,739 12,121
Operating expenses:
Sales and marketing 4,941 10,264 4,619 10,237 22,978 8,598
General and administrative 4,144 4,479 3,665 8,340 8,583 7,043
Product development -- 872 -- -- 1,485 --
Amortization of goodwill and intangibles 800 517 517 1,543 753 753
Other charges 4,000 -- -- 4,000 -- --
-------- -------- -------- -------- -------- --------
Total operating expenses 13,885 16,132 8,801 24,120 33,799 16,394
-------- -------- -------- -------- -------- --------
Operating loss from operations (9,734) (5,745) (2,130) (14,451) (15,060) (4,273)
Other income/(expense):
Interest income 820 2,345 955 1,662 3,335 1,637
Interest expense (9) (22) (20) (13) (52) (43)
Other, net (154) 1,276 (41) 37,396 48,737 44,274
-------- -------- -------- -------- -------- --------
Total other income 657 3,599 894 39,045 52,020 45,868
-------- -------- -------- -------- -------- --------
(Loss)/income from operations before income
taxes and loss from unconsolidated affiliate (9,077) (2,146) (1,236) 24,594 36,960 41,595
Loss from unconsolidated affiliate (2,206) -- (910) (5,044) -- (4,635)
-------- -------- -------- -------- -------- --------
(Loss)/income before income taxes (11,283) (2,146) (2,146) 19,550 36,960 36,960
(Benefit)/provision for income taxes (5,416) (1,033) (1,033) 9,384 17,745 17,745
-------- -------- -------- -------- -------- --------
Net (loss)/income $ (5,867) $ (1,113) $ (1,113) $ 10,166 $ 19,215 $ 19,215
======== ======== ======== ======== ======== ========
Net (loss)/income per share:
Basic $ (0.25) $ (0.05) $ (0.05) $ 0.44 $ 0.82 $ 0.82
Diluted $ (0.25) $ (0.05) $ (0.05) $ 0.42 $ 0.70 $ 0.70
Weighted average number of common shares:
Basic 23,137 23,683 23,683 23,332 23,449 23,449
Diluted 23,137 23,683 23,683 24,438 27,320 27,320
The accompanying notes are an integral part of the consolidated financial
statements.
4
EPRESENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
Six Months Ended June 30,
(See Note A)
2001 2000 2000
Pro forma
-------- -------- --------
Cash flows from operating activities:
Net income $ 10,166 $ 19,215 $ 19,215
Adjustments to reconcile net income to net cash used in operating activities:
Gain on sale of investments (38,678) (44,556) (44,556)
Depreciation and amortization 2,796 1,981 1,641
Investment in unconsolidated affiliate 3,505 -- 4,837
Minority interest -- (4,518) --
Non-cash advertising and promotion -- 7,844 --
Loss on disposal of assets 534 -- --
Loss on sale of subsidiary 828 -- --
Amortization of unearned compensation 967 320 320
Other charges 3,326 -- --
Deferred income taxes (5,414) (1,438) (1,438)
Changes in operating assets and liabilities:
Accounts receivable 675 1,019 2,996
Other current assets (445) (4,441) (3,709)
Other non-current assets 218 (767) (1,011)
Accounts payable and accrued compensation and expenses (3,580) 995 715
Deferred revenue 131 1,573 (443)
-------- -------- --------
Net cash used in operating activities (24,971) (22,773) (21,433)
Cash flows from investing activities:
Capital expenditures (1,533) (1,929) (1,503)
Proceeds from investment 40,805 45,278 45,278
Acquisition of goodwill (2,144) (25,909) (25,909)
Proceeds from marketable securities, net (1,035) (82,380) 5,276
-------- -------- --------
Net cash provided by/(used in) investing activities 36,093 (64,940) 23,142
Cash flows from financing activities:
Sale of equity in subsidiary, net -- 86,842 --
Purchase of treasury stock (4,111) -- --
Proceeds from stock plan purchases, stock options
and warrants 113 1,976 1,771
-------- -------- --------
Net cash (used in)/provided by financing activities (3,998) 88,818 1,771
Effect of exchange rate changes on cash and cash equivalents (240) 164 164
-------- -------- --------
Net increase in cash and cash equivalents 6,884 1,269 3,644
Cash and cash equivalents at beginning of the period 20,953 29,920 26,453
-------- -------- --------
Cash and cash equivalents at end of the period $ 27,837 $ 31,189 $ 30,097
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
5
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
June 30, 2001 and for three and six months ended June 30, 2001, 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 2000 Annual Report
to Stockholders and Annual Report on Form 10-K. The results of operations
for the three-month and six-month periods ended June 30, 2001 are not
necessarily indicative of the results expected for the full fiscal year or
any future interim period.
In March 2000, 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
owned approximately 41% of Switchboard's outstanding common stock. At June
30, 2001, the Company owned approximately 38% of Switchboard's outstanding
common stock. Due to the Company's prior control of the Switchboard Board
of Directors through the Switchboard Voting Rights Agreement dated as of
June 30, 1999 that allowed the Company to have a majority vote,
Switchboard's results were consolidated as part of the Company's financial
results through December 31, 2000. In January 2001, the Company, Viacom
and Switchboard agreed to terminate such Voting Agreement. As a result,
the Company no longer controls the Switchboard Board of Directors.
Accordingly, on January 1, 2001, the Company began accounting for its
investment in Switchboard under the equity method. As a result, the
Company's pro rata share of Switchboard's net loss for the three months
and six months ended June 30, 2001 is presented separately in the
Company's unaudited Consolidated Statement of Operations for the three
months and six months ended June 30, 2001. The Company's pro rata share of
Switchboard's equity at June 30, 2001 is included in the investment in
unconsolidated affiliate and additional paid-in capital in the Company's
unaudited Consolidated Balance Sheet at June 30, 2001. For comparative
purposes, the Company has included, a pro forma equity method unaudited
Consolidated Balance Sheet as of December 31, 2000 and a pro forma equity
method unaudited Consolidated Statement of Operations for the three months
and six months ended June 30, 2000 and a pro forma equity method unaudited
Consolidated Statement of Cash Flows for the six months ended June 30,
2000 on a consistent basis with the current period.
In May 2001, the Company closed its office in The Netherlands and booked a
charge as part of other charges for the costs to close its
Netherlands subsidiary.
6
B. BASIC AND DILUTED EARNINGS PER SHARE:
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share
include the dilution of weighted average potential common shares
outstanding during the period. Potential common shares result 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 using the treasury stock method, and the conversion of
preferred stock using the if converted method. The following table
reconciles the numerator and denominator of the basic and diluted earnings
per share computations shown on the unaudited Consolidated Statements of
Operations:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
(in thousands except per share data)
Basic earnings per share
Numerator:
Net (loss)/income $ (5,867) $ (1,113) $ 10,166 $ 19,215
Denominator:
Weighted average common shares outstanding 23,137 23,683 23,332 23,449
-------- -------- -------- --------
Basic earnings per share $ (0.25) $ (0.05) $ 0.44 $ 0.82
======== ======== ======== ========
Diluted earnings per share
Numerator:
Net (loss)income $ (5,867) $ (1,113) $ 10,166 $19,215
Denominator:
Weighted average common shares outstanding 23,137 23,683 23,332 23,449
Weighted average potential common shares -- -- 1,106 3,871
-------- -------- -------- --------
Total shares 23,137 23,683 24,438 27,320
Diluted earnings per share $ (0.25) $ (0.05) $ 0.42 $ 0.70
======== ======== ======== ========
Options and warrants to purchase 3,291,646 and 2,224,000 shares of common
stock outstanding during the three-months ended June 30, 2001 and June 30,
2000, 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 2,985,646 shares of common stock
outstanding during the six-months ended June 30, 2001 and 85,500 shares of
common stock outstanding during the six months ended June 30, 2000, were
excluded from the calculation of diluted net income per share because the
exercise price of those options and warrants outstanding exceed the
average market price of the Company's common stock during the respective
periods.
C. 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 Six Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
(in thousands except per share data)
Net (loss) income $ (5,867) $ (1,113) $ 10,166 $ 19,215
Unrealized gain on marketable securities (20) (2,531) (23,741) (24,614)
Translation adjustment (24) (22) (198) (87)
-------- -------- -------- --------
Comprehensive (loss) $ (5,911) $ (3,666) $(13,773) $ (5,486)
======== ======== ======== ========
7
D. OTHER CHARGES:
In June 2001, as part of the Company's plan to implement cost-cutting
measures, the Company recorded a net pre-tax charge of $4,000,000 related
to a workforce reduction of approximately 20%, office closures and asset
write-offs as further described below. The Company expects to use
$3,400,000 of cash related to these activities.
At June 30, 2001, the Company reduced the liability by approximately
$680,000 in total of which $636,000 was with respect to severance related
costs with the remainder relating to office closures and asset write-offs.
The remaining liability at June 30, 2001 is approximately $3,318,000 of
which $2,700,000 is expected to be cash related expenditures. The Company
anticipates that it will charge a substantial portion of the remaining
expenses by the end of fiscal year 2001.
In May 2001, the Company closed its office in The Netherlands and booked a
charge as part of other charges for the costs to close its Netherlands
subsidiary.
Three Months Ended June 30, 2001
(in thousands)
Total Cash Non-cash Accrual
Other Charges Payments Charges Balance
Staff reductions $1,782 $ 636 $ -- $1,146
Office closures and other costs 1,648 38 5 1,605
Asset write-offs 570 -- 3 567
------ ------ ------ ------
$4,000 $ 674 $ 8 $3,318
====== ====== ====== ======
E. SALE OF SUBSIDIARY:
On March 22, 2001, the Company sold its Australian subsidiary to an
Australian-based company. The Company exchanged its shares in the
Australian subsidiary for a 10% interest in the acquiring company. The
Company recorded an $1,039,000 loss as a result of the transaction.
F. SALE OF INVESTMENT:
In 1996, the Company made an equity investment of approximately $2,001,000
in Software.com, Inc., a company, which supplies Internet messaging
solutions to services providers.
On November 17, 2000, Software.com and Phone.com merged and began doing
business as Openwave Systems, Inc. ("Openwave").
In January 2001, the Company liquidated its Openwave position for net
proceeds of approximately $39,266,000.
8
G. STOCK REPURCHASE:
In December 2000, the Board of Directors of ePresence authorized the
repurchase of up to $10,000,000 of its common stock on the open market.
Repurchases of stock will be at management's discretion, depending upon
acceptable prices and availability. Funds used in the repurchase of shares
will come from ePresence's existing cash and investment balances along
with cash generated from operations. As of June 30, 2001, the Company has
expended $4.3 million toward stock repurchases.
H. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires
that all business combinations be accounted for under the purchase method
only and that certain acquired intangible assets in a business combination
be recognized as assets apart from goodwill. SFAS 142 requires that
ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. SFAS 141 is effective for all business
combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001. The provisions of SFAS 142 will be
effective for fiscal years beginning after December 15, 2001, and will
thus be adopted by the Company, as required, in fiscal year 2002. The
impact of SFAS 141 and SFAS 142 on the Company's financial statements has
not yet been determined.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
PRO FORMA EQUITY METHOD PRESENTATION
In March 2000, Switchboard Incorporated ("Switchboard") consummated an
initial public offering. Pre-offering, we owned approximately 53% of
Switchboard's outstanding common stock, and post-offering we owned
approximately 41% of Switchboard's outstanding common stock. At June 30,
2001, we owned approximately 38% of Switchboard's outstanding common
stock. Due to our prior control of the Switchboard Board of Directors,
through the Switchboard Voting Rights Agreement dated as of June 30, 1999,
Switchboard's results were consolidated as part of our financial results
through December 31, 2000. In January 2001, the Company, Viacom and
Switchboard agreed to terminate such Voting Agreement.
Accordingly, on January 1, 2001, we began accounting for our investment in
Switchboard under the equity method. As a result, our pro rata share of
Switchboard's net loss for the three and six months ended June 30, 2001 is
in our unaudited Consolidated Statement of Operations for the three and
six months ended June 30, 2001 as a loss from unconsolidated affiliate.
Our pro rata share of Switchboard's equity at June 30, 2001 is included in
the investment in unconsolidated affiliate and additional paid in capital
in our unaudited Consolidated Balance Sheet at June 30, 2001. For
comparative purposes, the Company has included, a pro forma equity method
unaudited Consolidated Balance Sheet as of December 31, 2000 and a pro
forma equity method unaudited Consolidated Statement of Operations for the
three months and six months ended June 30, 2000 and a pro forma equity
method unaudited Consolidated Statement of Cash Flows for the six months
ended June 30, 2000 on a consistent basis with the current period. For
purposes of management's discussion and analysis of financial condition
and results of operations, we refer to the pro forma results for the
three-month and six-month periods ended June 30, 2000 and as of December
31, 2000.
GENERAL
As a result of unfavorable economic conditions, and resultant lengthened
sales cycles and decreased and deferred technology spending for many of
our customers and potential customers we implemented a cost-reduction
program in the second quarter of fiscal year 2001 to better align the
Company's resources with current revenue expectations. The cost-reduction
program includes staff reductions, office closures and asset write-offs.
As part of the initiative, we closed our office in The Netherlands and
booked a charge as part of other charges for the costs to close this
subsidiary.
Accordingly, in June 2001, as part of the Company's plan to implement
cost-cutting measures, the Company recorded a charge of $4.0 million
related to a workforce reduction of approximately 20%, office closures
and asset write-offs. The charge was composed of $1.8 million for
severance costs, $0.6 million for asset write-offs and $1.6 million for
office closures. The Company expects to use $3.4 million of cash related
to these activities.
At June 30, 2001, the Company reduced the liability by approximately $0.7
million in total of which $0.6 million was with respect to severance
related costs with the remainder relating to office closures and asset
write-offs. The remaining liability at June 30, 2001 is approximately $3.3
million of which $2.7 million is expected to be cash related expenditures.
The Company anticipates that it will charge a substantial portion of the
remaining expenses by the end of fiscal year 2001.
Total revenues for the three-month periods ended June 30, 2001 and 2000
were $13.1 million and $14.6 million, respectively. The decrease in 2001
was principally due to the sale of our Australian subsidiary in March 2001
and closing of our operation in The Netherlands in May 2001. Total
revenues for the six-month periods ended June 30, 2001 and 2000 were $29.1
million and $26.6 million, respectively. The increase in 2001 was
principally due to an increase in customer engagements in portal design
and implementation, directory and network access planning and integration.
International revenues for the three-month periods ended June 30, 2001 and
2000 were $0.9 million and $2.3 million, respectively. International
revenues for the six-month periods ended June 30, 2001 and 2000 were $3.6
million and $3.9 million, respectively. The decreases in 2001 were due
primarily to the sale of our Australian subsidiary in March 2001 and the
closing of our subsidiary in The Netherlands in May 2001. Accordingly, for
the remainder of 2001, we anticipate that our international revenues will
be lower in absolute dollars and percentage of total revenues when
compared to the corresponding periods in the prior year. International
revenues accounted for 7% and 16% of total revenues for the three-month
periods ended June 30, 2001 and
10
2000, respectively, and 12% and 15% of total revenues for the six-month
periods ended June 30, 2001 and 2000.
Cost of services were $9.0 million and $19.4 million for the three-month
and six-month periods ended June 30, 2001, respectively, compared with
$7.9 and $14.5 for the corresponding periods in 2000. The increase for the
three-month comparative was primarily due to the incremental staffing
related to the acquisition of Strategic Network Designs, Inc. in May 2000.
The increase for the six-month comparative was primarily due to staffing
increases in the second half of 2000 in anticipation of continued
expansion of our consulting business as well as increases in third-party
product costs incurred as part of select consultancy engagements. Cost of
services as a percentage of revenues were 68% and 67% for the three-month
and six-month periods ended June 30, 2001, respectively, as compared to
54% and 55%, respectively, for the corresponding periods in the prior
year.
Sales and marketing expenses were $4.9 million and $10.2 million for the
three-month and six-month periods ended June 30, 2001, respectively,
compared with $4.6 and $8.6 for the corresponding periods in 2000. These
increases were due primarily to increases in sales staff. The increase for
the six-month comparative was also attributable to an increase in variable
sales costs, including commissions, which increased due to higher
revenues. Sales and marketing expenses as a percentage of revenues were
38% and 35% for the three-month and six-month periods ended June 30, 2001,
respectively, as compared to 32% for both of the corresponding periods in
the prior year.
General and administrative expenses were $4.1 million and $8.3 million for
the three-month and six-month periods ended June 30, 2001, respectively,
compared with $3.7 and $7.0 for the corresponding periods in 2000. The
increase for the three-month period comparative was primarily attributable
to increased facility and salary expenses related to the increased
staffing level year over year. The increase for the six-month period
comparative was primarily attributable to additional salaries and
depreciation expenses related to the companies acquired by us in 2000 as
well as an incremental bad debt provision. As a result of the other
charges recorded in the three-month period ended June 30, 2001, we
anticipate that we will experience a reduction in facility and salary
expense within general and administrative expenses. General and
administrative expenses as a percentage of revenues were 32% and 29% for
the three-month and six-month periods ended June 30, 2001, respectively,
as compared to 25% and 26%, respectively, for the corresponding periods in
the prior year.
Amortization of goodwill expenses were $0.8 million and $1.5 million for
the three-month and six-month periods ended June 30, 2001, respectively,
compared with $0.5 and $0.8 for the corresponding periods in 2000. These
increases were due to the acquisition of two services companies in the
first and second quarters of 2000. Amortization of goodwill expenses as a
percentage of revenues were 6% and 5% for the three-month and six-month
periods ended June 30, 2001, respectively, as compared to 3% for both of
the corresponding periods in the prior year.
Other charges were $4.0 million for both the three-month and six-month
periods ended June 30, 2001, respectively, compared with none for the
corresponding periods in 2000. These increases were due to the costs
charged in the three-month period ended June 30, 2001 associated with
reducing our workforce by approximately 20%, closing offices and asset
write-offs. Other charges as a percentage of revenues were 30% and 14% for
the three-month and six-month periods ended June 30, 2001, respectively,
as compared to none for the corresponding periods in the prior year.
Other income was $0.7 million and $39.0 million for the three-month and
six-month periods ended June 30, 2001, respectively, compared with $0.9
and $45.9 for the corresponding periods in 2000. The decrease for the
three-month period comparative was due to lower available funds invested
year over year. The decrease for the six-month period comparative was due
primarily to a gain of approximately $38.7 million from the sale of shares
in Openwave in the six-month period ended June 30, 2001 as compared to a
gain of approximately $44.6 million from the sale of shares in
Software.com in the six-month period ended June 30, 2000.
Losses from unconsolidated affiliate were $2.2 million and $5.0 million
for the three-month and six-month periods ended June 30, 2001,
respectively, compared with $0.9 and $4.6 for the corresponding periods in
2000. These increases were due to increases in the unconsolidated
affiliate's net loss for the three-month and six-month periods ended June
30, 2001, compared to the corresponding periods in 2000.
Our effective tax rate for the three-month and six-month periods ended
June 30, 2001 and 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-month and six-month periods ended June 30, 2001 and 2000 due
to our previously recorded net operating losses.
11
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased from $75.9 million at December 31, 2000 to $41.0
million at June 30, 2001. This decrease was primarily due to repositioning
approximately $17.1 million in marketable securities to a long-term
position, $14.5 million operating loss, $5.4 million net decrease in
deferred taxes, $1.2 million decrease in accounts payable and accrued
expenses and $4.1 million in treasury stock repurchases. This decrease was
offset in part by various operating, investing and financing activities.
At June 30, 2001, cash and cash equivalents combined with marketable
securities were $65.0 million, compared with $81.4 million at December 31,
2000. Cash and cash equivalents increased $6.9 million from December 31,
2000 resulting in a cash balance of $27.8 million at June 30, 2001.
During the six months ended June 30, 2000, we sold shares of Software.com
common stock resulting in a net realized gain of approximately $44.6
million. On November 17, 2000, Software.com and Phone.com merged and began
doing business as Openwave Systems, Inc. ("Openwave"). During the six
months ended June 30, 2001, we sold shares of Openwave common stock
resulting in a net realized gain of approximately $38.7 million.
In January 2000, we acquired ePresence, Inc. (now named ePresence Web
Consulting, Inc.), a privately held e-business services company based in
Red Bank, New Jersey that specialized in web-design, development and
integration. Consideration for the acquisition is comprised of $10.6
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 $12.6 million. The acquisition is accounted
for, assuming the achievement of the performance measures, using the
purchase method of accounting.
In May 2000, we acquired Strategic Network Designs, Inc. (now named
ePresence CRM, Inc.), a privately held e-business services company based
in Clark, New Jersey, that specialized 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 $2.4 million and a one-year earnout of $10.0 million
contingent on performance. In April 2001, the Company made a $2.0 million
payment in satisfaction of the earnout consideration. The transaction has
been accounted for using the purchase method of accounting.
The Company has a $10.0 million line of credit agreement with Fleet
National Bank. We had no borrowings under the line of credit outstanding
at June 30, 2001.
In December 2000, the Board of Directors of ePresence authorized the
repurchase of up to $10.0 million of its common stock on the open market.
Repurchases of stock will be at management's discretion, depending upon
acceptable prices and availability. Funds used in the repurchase of shares
will come from ePresence's existing cash and investment balances along
with cash generated from operations. As of June 30, 2001, the Company has
expended $4.3 million toward stock repurchases.
In the three-month period ended June 2001, we recorded a charge of $4.0
million for the reduction of staff, facilities closures and asset
write-offs. We anticipate expending approximately $3.4 million in cash.
Through June 30, 2001, we have expended $0.7 million.
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 twelve months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires
that all business combinations be accounted for under the purchase method
only and that certain acquired intangible assets in a business combination
be recognized as assets apart from goodwill. SFAS 142 requires that
ratable amortization of goodwill be replaced with periodic tests of the
goodwill's impairment and that intangible assets other than goodwill be
amortized over their useful lives. SFAS 141 is effective for all business
combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001. The provisions of SFAS 142 will be
effective for fiscal years beginning after December 15, 2001, and will
thus be adopted by the Company, as required, in fiscal year 2002. The
impact of SFAS 141 and SFAS 142 on the Company's financial statements has
not yet been determined.
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 our
business, statements relating to the sufficiency of cash and cash
equivalent balances, anticipated expenditures, the anticipated effects of
our cost reduction measures and the discontinuation of our Australian and
Dutch
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operations, the deconsolidation of Switchboard and our 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:
The recent stock market decline and broad economic slowdown has affected
the demand for consulting services, lengthened the sales cycles and caused
decreased technology spending for many of our customers and potential
customers. These events could have a material effect on us, including,
without limitation, on our future revenues and earnings.
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 have continued to provide consulting
services to our customers, we no longer market software, nor have we
advanced 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.
As part of our strategic focus on services, on January 11, 1999, we
announced a global alliance with Microsoft Corporation ("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. Conditions affecting any of our
clients could cause them to become unable or unwilling to pay us in a
timely manner, or at all, for services we have already performed. Our
financial results and condition could be adversely affected by credit
losses.
During 2000 and 2001 we entered into a number of partnerships and
alliances with software vendors under which the Company provides services
around such vendors' products. Any failure of these alliances to generate
the anticipated level of sales, or the loss of one or more of these
alliances, or the failure to enter into additional strategic alliances,
could have a material adverse effect on us.
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.
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 completed 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.
In the three-month periods ended June 30, 2001 and 2000, international
revenues accounted for 7% and 16%, respectively, of the Company's
revenues. International revenues may be adversely affected by factors such
as local or global economic conditions, political uncertainty, currency
fluctuations and governmental regulation. For example, our results of
operations in 1998 were adversely affected by global economic uncertainty,
and in particular, the financial market instability in Asia. There can be
no assurance such uncertainty will not continue to adversely affect our
operating results. In addition, there can be no assurance that the
termination of the Company's operations in Australia and The Netherlands
will positively affect our operating results.
As part of Viacom's 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 Viacom pursuant to our
indemnification obligations to Viacom. If we are required under the
13
Advertising and Promotion Agreement to indemnify Viacom it may have a
material adverse effect on us.
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.
Through 2000, Switchboard's results of operations are consolidated as part
of our results of operations. Beginning in 2001, Switchboard's results of
operations are accounted for under the equity method of accounting,
whereby we will include our pro rata share of Switchboard's net income or
loss as a separate line item in our statement of operations. Switchboard,
which has a history of incurring net losses, expects its net losses to
continue through at least 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:
o 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;
o Switchboard's ability to attract and retain consumers, local
merchants and national advertisers to its web site;
o the amount and timing of expenditures for expansion of
Switchboard's operations, including the hiring of new
employees, capital expenditures and related costs;
o technical difficulties or failures affecting Switchboard's
systems or the Internet in general;
o the cost of acquiring, and the availability of, content,
including directory information and maps; and
o 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 limited
experience in addressing various business challenges without the support
of a corporate parent. It may not be successful as a stand-alone company.
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 you should not rely
upon these comparisons as indicators of our future performance. 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
MARKETEBLE SECURITES
The Company had $37.1 million of marketable securities as of June 30,
2001, which are invested in US agencies, bonds and notes and repurchase
agreements. Each 10 percent decrease in the market value of these
securities would decrease the Company's total assets by $3.7 million.
While the Company has in the past used hedging contracts to manage
exposure to changes in the value of marketable securities, the Company is
not currently a party to any such contract. The Company may use hedging
contracts in the future. A significant decline in the value of the
Company's marketable securities would have a material adverse effect on
the Company's financial condition.
14
INTEREST RATE
The Company is exposed to fluctuations in interest rates. A significant
portion of the Company's cash is invested in short-term interest-bearing
securities. Assuming an average investment level in short-term interest-
bearing securities of $36.5 million (which approximates the average amount
invested in these securities during the six months ended June 30, 2001),
each 1 percentage point decrease in the applicable interest rate would
result in a $0.4 million decrease in annual investment income. The Company
does not currently use interest rate derivative instruments to manage
exposure to interest rate changes. To date, interest rate fluctuations
have not had a material effect on the Company's operating results or
financial condition.
FOREIGN CURRENCY
Most of the Company's international revenues are denominated in foreign
currencies. During the three months ended June 30, 2001, foreign currency
translation resulted in a $33 thousand decline in net revenues. The
Company's exposure is mitigated, in part, by the fact that it incurs
certain operating costs in the same foreign currencies in which revenues
are denominated. The Company does not currently use foreign currency
hedging contracts to manage exposure to foreign currency fluctuations. To
date, foreign currency exchange rate fluctuations have not had a material
effect on the Company's operating results or financial condition.
15
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Annual Meeting of Stockholders held on May 9, 2001, our
stockholders approved the following items:
1. The election of William P. Ferry and Albert A. Notini as Class
III Directors for the ensuing three years.
2. The adoption of our 2001 Stock Incentive Plan pursuant to
which we may grant options and other stock-based awards for
the purchase of an aggregate of 1,200,000 shares of our common
stock.
3. The ratification of the appointment of PricewaterhouseCoopers
LLP as our independent auditors for the current year.
The other directors of the Company whose terms of office continued after
the Annual Meeting are John F. Burton, John J. Rando, Fontaine K.
Richardson and Robert M. Wadsworth. There were 24,086,446 shares of our
common stock issued, outstanding and eligible to vote on the record date
of March 22, 2001. The results of the voting for each matter are set forth
below. There were no broker non-votes for any matter.
Election of Directors Votes For Votes Withheld
--------------------- --------- --------------
William P. Ferry 19,061,681 3,165,391
Albert A. Notini 20,477,276 1,749,796
Approval of the
2001 Stock Incentive Plan Votes For Votes Against Abstentions
------------------------- --------- ------------- -----------
14,492,743 7,103,278 631,051
Ratification of Auditors Votes For Votes Against Abstentions
------------------------ --------- ------------- -----------
22,055,392 157,314 14,366
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits listed on the Exhibit Index immediately preceding such
exhibits are filed as part of this report.
During the quarter ended June 30, 2001, the Company filed one report on
Form 8-K, dated May 8, 2001. The Form 8-K was filed pursuant to Item 9 of
Form 8-K regarding an analysts presentation. No other reports on Form 8-K
were filed during the quarter ended June 30, 2001.
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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: August 14, 2001 By: /s/ Richard M. Spaulding
-------------------------------
Richard M. Spaulding
Senior Vice President and Chief Financial
Officer, Treasurer and Clerk
(Principal Financial Officer and Principal
Accounting Officer)
17
EXHIBIT INDEX
Exhibit Number Title of Document
-------------- -----------------
10.1 2001 Stock Incentive Plan, as amended.
10.2 Form of Incentive Stock Option Agreement under the 2001 Stock
Incentive Plan, as amended.
10.3 Form of Non-Statutory Stock Option Agreement under the 2001
Stock Incentive Plan, as amended.
18