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 March 31, 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 April 30, 2001:
Class Number of Shares Outstanding
-------------------------------------- -----------------------------
Common Stock, par value $.01 per share 23,911,783
1
EPRESENCE, INC.
INDEX
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
March 31, 2001 and December 31, 2000
Consolidated Statements of Operations 4
Three months ended March 31, 2001 and 2000
Consolidated Statements of Cash Flows 5
Three months ended March 31, 2001 and 2000
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 14
Market Risk
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
EXHIBIT INDEX 17
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 F)
ASSETS March December December
31, 2001 31, 2000 31, 2000
Pro forma
---------- ---------- ------------
Current assets:
Cash and cash equivalents $ 35,750 $ 39,726 $ 20,953
Marketable securities 12,939 104,207 52,210
Accounts receivable, less allowances of $1,318, $869 and $876,
respectively 15,476 20,016 12,867
Other current assets 8,508 14,293 6,813
-------- -------- --------
Total current assets 72,673 178,242 92,843
Property and equipment, net 4,744 5,636 4,207
Marketable securities 22,743 8,249 8,249
Deferred tax asset 5,100 13,265 13,265
Goodwill, net of accumulated amortization of $2,961, $2,263 and $2,217,
respectively 26,923 29,330 27,090
Investment in unconsolidated affiliate 32,925 -- 34,658
Other assets, net of accumulated amortization of $0, $876 and $0,
respectively 17 9,708 218
-------- -------- --------
Total assets $165,125 $244,430 $180,530
======== ======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 4,212 $ 4,561 $ 3,273
Accrued compensation 3,650 5,136 4,402
Accrued expenses 4,456 7,577 5,077
Income taxes payable 6,888 737 737
Deferred revenue 3,175 4,723 3,211
Long-term debt, current portion 200 -- 204
-------- -------- --------
Total current liabilities 22,581 22,734 16,904
Long-term debt -- 2,000 --
Deferred tax liability 416 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 26,272,816 and 26,063,646 shares, respectively 263 261 261
Additional paid-in capital 146,842 144,725 145,093
Unearned compensation (2,222) (2,743) (2,743)
Accumulated earnings 27,652 11,619 11,619
Accumulated other comprehensive income 284 24,547 24,179
Treasury stock at cost; 2,235,500 shares (30,691) (28,730) (28,730)
-------- -------- --------
Total shareholders' equity 142,128 149,679 149,679
-------- -------- --------
Total liabilities and shareholders' equity $165,125 $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)
Three Months Ended March 31,
(See Note F)
------------------------ ------------
2001 2000 2000
Pro forma
------------------------ ------------
Revenues $15,967 $15,869 $12,051
Cost of services 10,449 7,517 6,601
------- ------- -------
Gross profit 5,518 8,352 5,450
Operating expenses:
Sales and marketing 5,296 12,714 3,979
General and administrative 4,196 4,104 3,378
Product development -- 613 --
Amortization of goodwill and intangibles 743 236 236
------- ------- -------
Total operating expenses 10,235 17,667 7,593
------- ------- -------
Operating loss from operations (4,717) (9,315) (2,143)
Other income/(expense):
Interest income 842 990 681
Interest expense (5) (30) (2)
Other, net 37,551 47,461 44,288
------- ------- -------
Total other income 38,388 48,421 44,967
------- ------- -------
Income from operations before income taxes and
loss from unconsolidated affiliate 33,671 39,106 42,824
Loss from unconsolidated affiliate (2,838) -- (3,725)
------- ------- -------
Income before income taxes 30,833 39,106 39,099
Provision for income taxes 14,800 18,778 18,771
------- ------- -------
Net income $16,033 $20,328 $20,328
======= ======= =======
Net income per share:
Basic $ 0.68 $ 0.88 $ 0.88
Diluted $ 0.64 $ 0.73 $ 0.73
Weighted average number of common shares:
Basic 23,588 23,218 23,218
Diluted 25,042 27,910 27,910
The accompanying notes are an integral part of the consolidated financial
statements.
4
EPRESENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
(See Note F)
--------------------- -------------
2001 2000 2000
pro forma
--------------------- -------------
Cash flows from operating activities:
Net income $ 16,033 $ 20,328 $ 20,328
Adjustments to reconcile net income to net
cash (used in)/provided by operating activities:
Gain on sale of investments (38,678) (44,556) (44,556)
Depreciation and amortization 1,438 603 551
Investment in unconsolidated affiliate 1,733 -- 2,968
Minority interest -- (1,828) --
Non-cash advertising and promotion -- 6,031 --
Loss on disposal of assets 426 -- --
Loss on sale of subsidiary 828 -- --
Amortization of unearned compensation 521 198 198
Deferred income taxes (5,366) (1,489) (1,489)
Changes in operating assets and liabilities:
Accounts receivable (3,133) 2,459 2,911
Other current assets (1,881) (1,877) (1,264)
Other non-current assets (376) 250 6
Accounts payable and accrued compensation and expenses 5,149 5,131 4,043
Deferred revenue 4 1,851 421
-------- -------- --------
Net cash (used in) operating activities (23,302) (12,899) (15,883)
Cash flows from investing activities:
Capital expenditures (1,157) (966) (818)
Proceeds from investment 39,266 45,278 45,278
Goodwill -- (8,931) (8,931)
Proceeds from marketable securities, net 468 (59,557) 16,237
-------- -------- --------
Net cash provided by/(used in) investing activities 38,577 (24,176) 51,766
Cash flows from financing activities:
Sale of equity in subsidiary, net -- 75,333 --
Purchase of treasury stock (1,961) -- --
Proceeds from stock plan purchases, stock options
and warrants 1,707 325 2,576
-------- -------- --------
Net cash (used in)/provided by financing activities (254) 75,658 2,576
Effect of exchange rate changes on cash and cash equivalents (224) 59 59
-------- -------- --------
Net increase in cash and cash equivalents 14,797 38,642 38,518
Cash and cash equivalents at beginning of the period 20,953 29,920 26,453
-------- -------- --------
Cash and cash equivalents at end of the period $ 35,750 $ 68,562 $ 64,971
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Non-cash operating activity:
Non-shareholder change in equity of
unconsolidated affiliate $ 1,105 -- $ 757
Non-cash investing activity:
Issuance of stock related to acquisition $ 577 -- --
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
March 31, 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 period ended March 31, 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
March 31, 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 a voting agreement 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 the
Switchboard Voting Rights Agreement dated as of June 30, 1999. 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
ended March 31, 2001 is in the Company's consolidated statement of
operations for the three months ended March 31, 2001. The Company's pro
rata share of Switchboard's equity at March 31, 2001 is included in the
investment in unconsolidated affiliate and additional paid in capital in
the Company's consolidated balance sheet at March 31, 2001. For comparative
purposes, the Company has included, a pro forma equity method Consolidated
Balance Sheet as of December 31, 2000 and a pro forma equity method
Consolidated Statement of Operations and a pro forma equity method
Consolidated Statement of Cash Flows for the three months ended March 31,
2000 on a consistent basis with the current period.
In January 2000, the Company sold its subsidiary Banyan Systems (France)
SARL ("Banyan France"). For the three months ended March 31, 2000, the
Company recorded in its results of operations a loss on disposal of Banyan
France of approximately $267,000. The transaction included the sale of net
assets of approximately $316,000.
On March 22, 2001, the Company sold its Australian subsidiary to an
Australian-based company. The Company exchanged the shares of its
Australian subsidiary for a 10% equity interest in the acquiring company.
For the quarter ended March 31, 2001, the Company recorded an $843,000 loss
as a result of the transaction.
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 equivalent 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 Consolidated Statements of Operations:
For the three months ended March 31, 2001 2000
----------------------------------------------------- ------- -------
(in thousands except per share data)
Basic earnings per share
Numerator:
Net income $16,033 $20,328
Denominator:
Weighted average common shares outstanding 23,588 23,218
------- -------
Basic earnings per share $ 0.68 $ 0.88
======= =======
Diluted earnings per share
Numerator:
Net income $16,033 $20,328
Denominator:
Weighted average common shares outstanding 23,588 23,218
Weighted average potential common shares 1,454 4,692
------- -------
Total shares 25,042 27,910
------- -------
Diluted earnings per share $ 0.64 $ 0.73
======= =======
Options to purchase 2,596,592 shares of common stock outstanding during the
quarter ended March 31, 2001 were excluded from the calculation of diluted
net income per share, as the effect of their inclusion would have been
anti-dilutive. There were no options or warrants to purchase shares of
common stock outstanding during the quarter ended March 31, 2000 that were
excluded from the calculation of diluted net income per share, because the
exercise price of all options and warrants outstanding had an exercise
price less than the average market price of common stock during the
quarter.
C. COMPREHENSIVE INCOME
Other comprehensive income includes unrealized gains or losses on the
Company's available-for-sale investments and foreign currency translation
adjustments.
For the three months ended March 31, 2001 2000
----------------------------------------------- -------- --------
(in thousands)
Net income $ 16,033 $ 20,328
Unrealized gain on marketable securities (23,721) (22,083)
Translation adjustment (174) (65)
-------- --------
Comprehensive (loss) $ (7,862) $ (1,820)
======== ========
7
D. 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.
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 $843,000 loss as a result of the transaction.
F. PRO FORMA PRESENTATION OF FINANCIAL STATEMENTS
For comparative purposes, the Company has included a pro forma equity
method Consolidated Balance Sheet as of December 31, 2000 and a pro forma
equity method Consolidated Statement of Operations and a pro forma equity
method Consolidated Statement of Cash Flows for the three months ended
March 31, 2000 on a consistent basis with the current period.
8
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 March 31,
2001, we owned approximately 38% of Switchboard's outstanding common stock.
Due to our prior control of the Switchboard board of directors, through a
voting agreement, 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 the Switchboard Voting Rights
Agreement dated as of June 30, 1999.
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 months ended March 31, 2001 is in our
Consolidated Statement of Operations for the three months ended March 31,
2001 as a loss from unconsolidated affiliate. Our pro rata share of
Switchboard's equity at March 31, 2001 is included in the investment in
unconsolidated affiliate and additional paid in capital in our consolidated
balance sheet at March 31, 2001. For comparative purposes, we have included
a pro forma equity method Consolidated Balance Sheet as of December 31,
2000 and a pro forma equity method Consolidated Statement of Operations and
a pro forma equity method Consolidated Statement of Cash Flows for the
three months ended March 31, 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 period ended March 31, 2000 and as of December 31, 2000.
GENERAL
Total revenues for the three-month periods ended March 31, 2001 and 2000
were $16.0 million and $12.1 million, respectively. The increase in 2001
was principally due to an increase in revenues generated from consulting
services due to an increase in customer engagements, particularly in web-
site design and implementation, network integration, and directory and
security planning. The increase was also due to the Company's acquisition
of Strategic Network Designs, Inc. in May of 2000. International revenues
for the three-month periods ended March 31, 2001 and 2000 were $2.8 million
and $1.6 million, respectively. The increase in 2001 was due primarily to
third party product sales. In March 2001, we sold our Australian subsidiary
and in April 2001 we announced plans to close our operations in The
Netherlands as these businesses had not historically been profitable and
were not strategic to the Company's operating objectives. The Company's
businesses in Australia and The Netherlands accounted for approximately 11%
of revenues in the three-month period ended March 31, 2001. Accordingly, we
anticipate that our international revenues will decrease in absolute
dollars and as a percentage of total revenue in 2001. International
revenues accounted for 17% and 13% of total revenues for the three-month
periods ended March 31, 2001 and 2000, respectively.
Cost of services increased 58% from $6.6 million to $10.4 million for the
three-month period ended March 31, 2001, compared to the corresponding
period in 2000. This increase was attributable to an increase in
consulting personnel and related costs to expand the delivery of services
as well as an increase in third-party product costs incurred as part of
select consultancy engagements. Cost of services as a percentage of
revenues were 65% and 55% for the three-month periods ended March 31, 2001
and 2000, respectively.
9
Sales and marketing expenses increased 33% from $4.0 million to $5.3
million for the three-month period ended March 31, 2001, compared to the
corresponding period in 2000. This increase was 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. Sales and marketing expenses as a percentage of
revenues were 33% and 33% for the three month periods ended March 31, 2001
and 2000, respectively.
General and administrative expenses increased 24% from $3.4 million to $4.2
for the three-month period ended March 31, 2001, compared to the same
period in 2000. This increase was attributable to additional recruiting
expenses related to the staffing of our expanding consulting services
activities as well as incremental bad debt provisions. General and
administrative expenses as a percentage of revenues were 26% and 28% for
the three-month periods ended March 31, 2001 and 2000, respectively.
Amortization of goodwill expenses increased 215% from $0.2 million to $0.8
million for the three-month period ended March 31, 2001, compared to the
same period in 2000. This increase was 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 was 5% and 2% for the
three-month periods ended March 31, 2001 and 2000, respectively.
Other income and expense decreased $6.6 million from $45.0 million for the
three-month period ended March 31, 2001, compared to the same period in
2000. This decrease was due primarily to a gain of approximately $44.6
million from the sale of shares in Software.com in the three-month period
ended March 31, 2000 as compared to a gain of approximately $ 38.7 million
from the sale of shares in Openwave in the three-month period ended March
31, 2001.
Loss from unconsolidated affiliate decreased $0.9 million from $(3.7)
million to $(2.8) million for the three-month period ended March 31, 2001,
compared to the same period in 2000. This decrease was due to a decrease
in our minority interest in the unconsolidated affiliate as well as a
decrease in the unconsolidated affiliate's net loss for the three-month
period ended March 31, 2001, compared to the same period in 2000.
Our effective tax rate for the three-month periods ended March 31, 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 periods
ended March 31, 2001 and 2000 due to our previously recorded net operating
losses.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased from $76.1 million at December 31, 2000 to $50.1
million at March 31, 2001. This decrease was primarily due to
repositioning approximately $14.5 million in marketable securities to a
long position, $5.3 million net decrease in deferred taxes, $2.6 million
increase in accounts receivable and $2.0 million in treasury stock
10
repurchases. At March 31, 2001, cash and cash equivalents combined with
marketable securities were $71.4 million, compared with $81.4 million at
December 31, 2000. Cash and cash equivalents increased $14.8 million
resulting in a cash balance of $35.8 million at March 31, 2001. This
increase was due primarily to $38.7 million in proceeds from the sale of
shares of Openwave. These increases were offset in part by $4.7 million in
net operating loss, $5.3 million net decrease in deferred taxes, $2.6
million increase in accounts receivable, $2.0 million in treasury tock
repurchases, as well as other various operating, investing and financing
activities.
During the three months ended March 31, 2000, we sold shares of
Software.com common stock resulting in a net realized gain of approximately
$44.6 million. During the three months ended March 31, 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 specializes 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 $13.8 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 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 $2.4 million and a one-year earnout of $10.0 million contingent
on performance. In March 2001, the Company agreed to 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 March 31, 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 March 31, 2001, the Company has
expended $2.1 million toward stock repurchases.
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.
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
the discontinuation of our Australian and Dutch operations, the
deconsolidation of Switchboard and our sales and marketing and product
11
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 e-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 new 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 stategic 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.
12
In the three-month periods ended March 31, 2001 and 2000, international
revenues accounted for 17% and 13%, 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
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:
. 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
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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
----------------------------------------------------------
Marketable Securities
The Company had $35.7 million of marketable securities as of March 31,
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 $3.6 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.
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 $44.7 million (which approximates the average amount
invested in these securities during the three months ended March 31, 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 March 31, 2001, foreign currency
translation resulted in a $43 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.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
Recent Sales of Unregistered Securities
Pursuant to the terms of a stock purchase agreement dated as of January 7,
2000 (the "Agreement"), on January 31, 2001, the Company issued an
aggregate of 96,170 shares (the "Shares") of Common Stock of the Company to
(i) the three former stockholders (the "Stockholders") of ePresence Inc.
(now named ePresence Web Consulting, Inc.) (the "Seller") and (ii) the
financial advisor for the Seller and the Stockholders. Pursuant to the
Agreement, the Company acquired from the Stockholders all of the
outstanding capital stock of the Seller. Under the terms of the Agreement,
the Shares were issued as additional consideration as a result of the
Seller meeting certain financial performance targets, and the Shares were
deemed to have a value upon issuance of $1.75 million. The Shares were
offered and sold in reliance upon exemptions set forth in Sections 3(b) and
4(2) of the Securities Act of 1933, as amended, or Regulation D promulgated
thereunder, relating to sales by an issuer not involving a public offering.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits listed in the Exhibit Index filed as part of this report are
filed as part of or are included in this report.
During the quarter ended March 31, 2001, the Company filed one report on
Form 8-K, dated February 12, 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 March 31, 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: May 15, 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)
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EXHIBIT INDEX
Exhibit Number TITLE OF DOCUMENT
-------------- -----------------
None.
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