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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2002
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to __________
Commission file number: 0-20971
EDGEWATER TECHNOLOGY, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 71-0788538
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20 Harvard Mill Square
Wakefield, MA 01880-3209
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (781) 246-3343
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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 [_]
The number of shares of Common Stock of the Registrant, par value $.01 per
share, outstanding at May 7, 2002 was 11,618,439.
================================================================================
EDGEWATER TECHNOLOGY, INC.
--------------------------
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2002
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INDEX
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Page
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PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2002 and 2001 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business Overview 11
Recent Events 12
Discontinued Operations 12
Financial Information 12
Results for the Three Months Ended March 31, 2002
Compared to Results for the Three Months Ended
March 31, 2001 12
Liquidity and Capital Resources 13
Legal Proceedings 14
Special Note Regarding Forward Looking Statements 14
Item 3 -- Quantitative and Qualitative Disclosures
About Market Risk 15
PART II - OTHER INFORMATION
Item 1 -- Legal Proceedings 16
Item 2 -- Changes in Securities and Use of Proceeds 16
Item 4 -- Submission of Matters to a Vote of Security Holders 16
Item 5 -- Other Information 16
Item 6 -- Exhibits and Reports on Form 8-K 16
(a) Exhibits
(b) Reports on Form 8-K
Signatures 17
EDGEWATER TECHNOLOGY, INC.
Consolidated Balance Sheets
(In Thousands Except Per Share Data)
March 31, December 31,
2002 2001
------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $25,041 $40,128
Short-term investments 23,589 11,373
Accounts receivable, net 2,676 4,045
Deferred income taxes 491 491
Prepaid expenses and other current assets 818 859
---------- ------------
Total current assets 52,615 56,896
Property and equipment, net 1,897 2,056
Intangible assets, net (Note 8) 19,274 31,807
Deferred income taxes 22,673 22,032
Other assets 56 56
---------- ------------
Total assets $96,515 $112,847
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 932 $ 1,801
Other liabilities including restructuring
and discontinued operations 3,238 4,841
Current portion of capital lease
obligations 251 293
Payroll and related liabilities 745 629
Other liabilities 212 231
------------ -----------
Total current liabilities 5,378 7,795
Long-term liabilities: 17 60
Stockholders' equity:
Preferred stock, $.01 par value; 10,000
shares authorized, no shares issued
or outstanding - -
Common stock, $.01 par value; 200,000
shares authorized, 29,596 shares
issued, 11,608 and 11,594 shares
outstanding as of March 31, 2002 and
December 31, 2001, respectively 296 296
Paid-in capital 217,384 217,438
Treasury stock, at cost, 17,988 and 18,002
shares at March 31, 2002 and
December 31, 2001, respectively (139,825) (139,916)
Retained earnings 13,265 27,174
------------ ------------
Total stockholders' equity 91,120 104,992
------------ ------------
Total liabilities and stockholders'
equity $96,515 $112,847
============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
3
EDGEWATER TECHNOLOGY, INC.
--------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(In Thousands, Except Per Share Data)
Three Months Ended
March 31,
2002 2001
-------- ---------
(Unaudited)
Revenue $ 4,582 $ 7,757
Cost of services 3,405 4,241
----------- ---------
Gross profit 1,177 3,516
Operating expenses
Selling, general and administrative 2,218 3,440
Depreciation and amortization (Note 8) 290 1,373
Restructuring Charges 349 -
----------- ---------
Operating loss (1,680) (1,297)
Interest income and other, net (221) (937)
----------- ---------
Loss before income taxes and extraordinary item (1,459) (360)
Income tax provision - 310
----------- ---------
Net loss from continuing operations before
extraordinary item and change in
accounting principle (1,459) (670)
Discontinued operations (Note 6):
Loss from operations of discontinued divisions - (1,010)
Gain on sale of division - 6,514
Extraordinary item, net of applicable taxes (Note 7) - (156)
Change in accounting principle (Note 8) (12,451) -
----------- ---------
Net (loss) income ($13,910) $ 4,678
=========== =========
Basic earnings per share
Continuing operations ($ 0.13) ($0.04)
=========== =========
Discontinued operations - $0.33
=========== =========
Extraordinary item - ($0.01)
=========== =========
Change in accounting principle ($ 1.07) -
=========== =========
Net (loss) income ($ 1.20) $0.28
=========== =========
Diluted earnings per share
Continuing operations ($ 0.13) ($0.04)
=========== =========
Discontinued operations - $0.33
=========== =========
Extraordinary item - ($0.01)
=========== =========
Change in accounting principle ($ 1.07) -
=========== =========
Net (loss) income ($ 1.20) $0.28
=========== =========
The accompanying notes are an integral part
of these consolidated financial statements.
4
EDGEWATER TECHNOLOGY, INC.
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In Thousands)
Three Months Ended
March 31,
2002 2001
---------- -------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(13,910) $ 4,678
Loss from discontinued operations - 1,010
Gain on sale of division - (6,514)
Extraordinary item, net of applicable taxes - 156
Change in accounting principle 12,451 -
---------- ---------
Net loss from continuing operations (1,459) (670)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 290 1,373
Provision for bad debts 40 50
Deferred income taxes - 310
Other, net - (2)
Change in operating accounts,
net of effects of dispositions:
Accounts receivable 1,354 (599)
Prepaid expenses and other current assets 16 457
Accounts payable and accrued liabilities (869) 150
Payroll and related liabilities 153 (892)
Other liabilities (19) -
Payment of nonrecurring expenses - (417)
---------- ---------
Net cash used in operating activities (494) (240)
---------- ---------
Net cash used in discontinued operating activities (2,244) (2,003)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses - 35,246
Purchases of short-term investments (12,216) -
Purchases of businesses, net of cash acquired - (1,200)
Capital expenditures (48) (278)
---------- ---------
Net cash (used in) provided by investing activities (12,264) 33,768
---------- ---------
Net cash used in discontinued investing activities - (33)
---------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Payments on borrowings (85) -
Proceeds from employee stock plans and stock
option exercises - 143
Repurchase of stock - (133,192)
---------- ---------
Net cash used in financing activities (85) (133,049)
Net decrease in cash and cash equivalents (15,087) (101,557)
CASH AND CASH EQUIVALENTS, beginning of period 40,128 145,581
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 25,041 $ 44,024
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 10 $ 18
========== =========
Borrowing on capital leases $ - $ 68
========== =========
Income taxes paid $ - $ 180
========== =========
The accompanying notes are an integral part
of these consolidated financial statements.
5
EDGEWATER TECHNOLOGY, INC.
--------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. ORGANIZATION:
------------
Edgewater Technology, Inc. ("Edgewater", "Edgewater Technology" or the
"Company" f/k/a StaffMark, Inc.) is an award-winning strategic consulting firm
that specializes in providing technical consulting, custom software development
and system integration services to middle-market companies and divisions of
large Global 2000 companies. We develop scalable technology solutions, which
expedite business processes and provide our customers with competitive
advantages. Our consultants collaborate with clients to translate business goals
into technology-driven strategies. Headquartered in Wakefield, Massachusetts,
Edgewater Technology has developed a partnership approach with our clients,
targeting strategic, mission-critical applications. With approximately 124
technical consulting professionals, Edgewater Technology services our client
base by leveraging a combination of leading-edge technologies and proven
reengineering techniques provided by our network of strategically positioned
solutions centers.
Revenues pursuant to time and materials contracts are generally recognized
as services are provided. Revenues pursuant to fixed-price contracts are
generally recognized as services are rendered using the percentage-of-completion
method of accounting. Revenues and earnings may fluctuate from quarter to
quarter based on the number, size and scope of projects in which we are engaged,
the contractual terms and degree of completion of such projects, any delays
incurred in connection with a project, employee utilization rates, the adequacy
of provisions for losses, the use of estimates of resources required to complete
ongoing projects, general economic conditions and other factors. Certain
significant estimates include percentage of completion estimates used for
fixed-price contracts and the allowance for doubtful accounts. These items are
frequently monitored and analyzed by management for changes in facts and
circumstances and material changes in these estimates could occur in the future.
Gross profit reflects revenues less direct consultant expenses whether or not
the consultant's time is billed to a client. Gross margin is affected by the
number of workdays in a period and consultant utilization. Any significant
decline in fees billed to clients or the loss of, or any material reduction in
services performed for, a significant client would adversely affect our
revenues, gross margins and net earnings. Selling, general and administrative
expenses consist of sales and marketing, recruiting, human resources,
administration salaries, commissions and related expenses, office facilities,
computer system expenditures, professional fees, promotional expenses, and other
general corporate expenses.
2. BASIS OF PRESENTATION:
----------------------
The accompanying interim financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to those rules and regulations, although
we believe that the disclosures made are adequate to ensure the information
presented is not misleading.
The accompanying interim financial statements reflect all adjustments
(which were of a normal, recurring nature) that, in the opinion of management,
are necessary to present fairly our financial position, results of operations
and cash flows as of and for the interim periods presented. All significant
intercompany transactions have been eliminated in the accompanying consolidated
financial statements. Additionally, certain reclassifications have been made to
prior period balances in order to conform with the current period presentation.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto included in our 2001 Annual Report on
Form 10-K as filed with the SEC on March 27, 2002.
The results of operations for the three months ended March 31, 2002 are not
necessarily indicative of the results to be expected for any future period or
the full fiscal year. Our revenue and earnings may fluctuate from quarter to
quarter based on factors within and outside our control including variability in
demand for Internet related professional services, the length of the sales cycle
associated with our service offerings, the number, size and scope of our
projects, and the efficiency with which we utilize our employees.
As discussed in Note 6, during 2000 and 2001, Edgewater sold its interest
in all of its non-Solutions business divisions. The operating results for these
divisions have been included in discontinued operations in the accompanying
consolidated financial statements.
6
3. SHORT TERM INVESTMENTS:
-----------------------
Short-term investments are classified as held-to-maturity securities, which
are recorded at amortized cost and consist of marketable instruments, which
include but are not limited to municipal government obligations and commercial
paper. All investments that have original maturities greater than three months
are considered short-term investments.
4. RESTRUCTURING CHARGES:
----------------------
In February 2002, due to the economic climate that has postponed or delayed
spending for information technology services, Edgewater announced that it was
undertaking cost cutting measures by realigning its expenses with anticipated
revenue in 2002. Edgewater reduced its overall headcount by 38 employees, or 19%
of its total workforce. The Company recorded a restructuring charge in the first
quarter of 2002 of $350,000, which consisted primarily of severance and similar
employee termination expenses. The restructuring is anticipated to provide
approximately $700,000 in quarterly savings beginning in the second quarter of
fiscal year 2002. Restructuring activities during the three months ended March
31, 2002 consist of the following (in thousands):
Severance and benefit expense $350
Cash payouts 237
-----
Balance Remaining March 31, 2002 $113
Edgewater expects to pay the balance of the restructuring accrual during
the second quarter of 2002.
5. BUSINESS TRANSACTIONS:
----------------------
Effective April 1, 1999, we acquired Edgewater Technology (Delaware), Inc.
("Edgewater Delaware"), an award-winning strategic consulting firm that
specializes in providing technical consulting, custom software development and
system integration services to middle-market clients. As the acquisition was
accounted for as a purchase business combination, the consolidated financial
statements include the operating results of Edgewater Delaware from the date of
acquisition. The cost of this acquisition has been allocated based on estimated
fair market value of the assets acquired and liabilities assumed with the excess
costs over fair values of net assets acquired recorded as goodwill. The carrying
value of this goodwill has been adjusted during the period ending March 31,
2002, according to the provisions of SFAS 142, as discussed in Note 8.
Edgewater Delaware was acquired for aggregate consideration of $ 44.6
million, of which $1.2 million was paid during the three months ended March 31,
2001.
6. DISCONTINUED OPERATIONS:
------------------------
During the first quarter of 1999, market values for publicly traded
staffing companies began to decline. At that time, we (Edgewater Technology,
Inc. and subsidiaries, formerly StaffMark, Inc.) were engaged in the temporary
and permanent placement and staffing services businesses, including light
industrial and commercial staffing, finance and accounting staffing and
placement, traditional information technology ("IT") staffing and solutions
services (excluding Solutions project work), legal staffing and placement
services and clinical trials staffing and services. For many staffing companies,
this downward trend subsequently continued or deteriorated further and was
compounded by a Year 2000-related slowdown in demand for IT staffing. These
circumstances contributed to depressed market valuations for publicly-traded
staffing entities.
In response to these developments, the Company began to explore, during the
second half of 1999, strategic alternatives for each of our staffing business
platforms in an effort to maximize stockholder value. After evaluating our
traditional businesses, our systems integration and consulting business and our
debt levels, management and the Board of Directors chose to take decisive
action. The Company decided to undergo a comprehensive program to refocus future
growth initiatives on our systems integration and consulting business, Edgewater
Delaware and to effect the following divestitures of each of our staffing
businesses.
7
Our restructuring included the following disposition and other transactions:
o On June 28, 2000, pursuant to a Purchase Agreement dated May 16, 2000
with Stephens Group, Inc., we sold all of our subsidiaries, and the
assets and liabilities of our Commercial segment to affiliate entities
of the Stephens Group, Inc. As consideration, we received gross
proceeds of $190.1 million in cash before fees, expenses and taxes. As
part of the transaction, we sold the name "StaffMark" as that was the
name used by the Commercial segment. As a result of the transaction,
we changed our name from "StaffMark, Inc." to "Edgewater Technology,
Inc." and our stock symbol from "STAF" to "EDGW."
o On July 13, 2000, we sold, through two indirect wholly-owned
subsidiaries, all of our equity interest in Robert Walters plc
("Robert Walters") through an initial public offering ("IPO") on the
London Stock Exchange. Robert Walters had previously been the finance
and accounting placement and staffing consultancy platform within our
Professional/IT segment. Our share of offering gross proceeds was
$199.2 million prior to offering commissions, fees and expenses.
o On September 22, 2000, we sold all of the outstanding stock of
Strategic Legal Resources, Inc. ("Strategic Legal"), the legal
staffing division within our Professional/IT segment, to a company
owned by a group of investors including MidMark Capital II, L.P. and
Edwardstone & Company for $13.3 million, of which $4.3 million was
represented by a promissory note that was collected in January 2001.
o On November 16, 2000, we sold all of the outstanding shares of stock
of our subsidiaries that comprised IntelliMark, our IT staffing and
solutions division, to IM Acquisition, Inc., an affiliate of
Charlesbank Equity Fund V Limited Partnership, for $40.2 million in
cash, which consisted of $42.7 million paid at the closing date less a
$2.5 million post-closing working capital adjustment paid to IM
Acquisition, Inc. in April 2001. In connection with this sale, we
recorded a $53.9 million non-cash charge for the write-down of the
goodwill in our IntelliMark division to estimated realizable values.
o On December 15, 2000, we executed a definitive agreement to sell
ClinForce, our clinical trials support services division, to Cross
Country TravCorps, Inc. for approximately $31.0 million in cash,
subject to potential upward or downward post-closing working capital
adjustments (the "Transaction"). We consummated the Transaction and
received proceeds on March 16, 2001. On July 18, 2001, we received
approximately $1.4 million from Cross Country TravCorps, Inc. with
respect to the post-closing working capital purchase price adjustment.
In addition, nonrecurring restructuring charges relating to the
closing of our corporate headquarters (in Fayetteville, Arkansas) have
been included, as a result of the sale of ClinForce and consistent
with the treatment of ClinForce results, as a part of discontinued
operations.
o On December 21, 2000, we commenced an issuer tender offer (the "Tender
Offer"), which expired on January 23, 2001, and we acquired (effective
January 30, 2001) 16.25 million shares of our common stock at $8.00
per share (the "Tender Offer Price") for aggregate consideration of
$130 million, and common stock subject to certain vested in-the-money
stock options for aggregate consideration of $0.2 million.
As a result of the completion of the non-Solutions strategic alternative
transactions described above, the operating results for ClinForce for 2001 and
our corporate transition costs have been included in discontinued operations in
the accompanying consolidated financial statements. Revenues and operating loss
from discontinued operations were $7.7 million and $1.6 million, respectively,
for the three months ended March 31, 2001.
7. EXTRAORDINARY ITEM - WAKEFIELD TRAGEDY:
---------------------------------------
On December 26, 2000, a tragedy occurred at our Wakefield, Massachusetts
office, where seven employees were murdered. As a result of this tragedy, the
Wakefield office was closed during the last week of December 2000. We incurred
expenses totaling approximately $0.9 million through March 31, 2002, for items
such as legal fees, foundation costs, family and employee counselors, and
property and facility expenses. These costs are presented as an extraordinary
item, net of insurance proceeds and the applicable tax effect, in the
accompanying consolidated statements of operations.
8
8. CHANGE IN ACCOUNTING PRINCIPLE:
-------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." This statement applies to intangibles and goodwill
acquired after June 30, 2001, as well as goodwill and intangibles previously
acquired. Under this statement, goodwill, as well as other intangibles
determined to have an indefinite life, are no longer amortized; however, these
assets will be reviewed for impairment on a periodic basis. This statement
became effective January 1, 2002 and as a result, beginning January 1, 2002, we
discontinued amortizing intangible assets related to goodwill. Our goodwill
amortization expense for the period ending March 31, 2001 totaled $1.1 million.
Adjusted reported net income assuming the exclusion of goodwill amortization for
the three months ended March 31, 2001 would have been $5.8 million.
The Company adopted SFAS No. 142 during the quarter ended March 31, 2002.
In connection with the adoption of this new standard, the Company obtained an
independent valuation of its business during the first quarter of 2002. As a
result of this evaluation, in which the declining market values of the IT
services sector played a major factor, the Company recorded a non-cash, goodwill
impairment charge of $12.5 million. Due to the non-deductibility of this
goodwill, the Company did not record a tax benefit in connection with the
impairment. Unamortized goodwill as of December 31, 2001 was $30.7 million. Our
total unamortized goodwill, net of the impairment charge, as of March 31, 2002
amounts to $18.3 million. This charge was recorded as a change in accounting
principle in the accompanying consolidated statement of operations.
9. EARNINGS PER SHARE:
-------------------
A reconciliation of net (loss) income and weighted average shares used in
computing basic and diluted earnings per share is as follows:
Three Months Ended March 31,
-----------------------------------
2002 2001
----------------- ---------------
(In Thousands, Except Per Share Data)
Basic earnings per share:
Net income applicable to common shares ($ 13,910) $4,678
======== ======
Weighted average common shares outstanding 11,607 16,497
======== ======
Basic earnings per share of common stock ($ 1.20) $ 0.28
======== ======
Diluted earnings per share:
Net income applicable to common shares ($ 13,910) $4,678
======== ======
Weighted average common shares outstanding 11,607 16,497
Dilutive effect of stock options 3 9
-------- ------
Weighted average common shares, assuming
dilutive effect of stock options 11,610 16,506
======== ======
Diluted earnings per share of common stock ($ 1.20) $ 0.28
======== ======
Options to purchase approximately 3.3 million shares of common stock (at
prices ranging from $3.72 to $39.63 per share) and 5.5 million shares of common
stock (at prices ranging from $4.97 to $40.31 per share) were outstanding during
the three months ended March 31, 2002 and 2001, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of our common shares.
These options were still outstanding as of March 31, 2002.
Options outstanding under the Amended and Restated 1996 Edgewater Stock
Option Plan (the "Plan") vested 100% upon the closing of the Transaction as this
constituted a "Change in Control" as defined in the Plan, except for 1.1 million
stock options granted under the Plan to officers of our technology strategy and
solutions division in August 2000. Although most options expire ten years from
the date of grant, approximately 1.4 million options held by employees of the
Commercial segment and IntelliMark were terminated on April 16, 2001, which was
30 days following the "Change in Control." Employees of ClinForce held
approximately 0.1 million options, which were terminated on June 14, 2001, which
was 90 days following the "Change in Control."
9
10. SEGMENT INFORMATION:
-------------------
As a result of the divestiture transactions described in Note 6, Edgewater
Technology, the consulting and systems integration division, now represents our
only segment of business; therefore no segment data has been provided.
11. RELATED PARTY:
--------------
Synapse Group, Inc., one of our significant customers, is considered a
related party as its President and Chief Executive Officer is also a member of
the Company's Board of Directors. As of March 31, 2002, the Company maintained
an accounts receivable balance of $1.1 million from Synapse Group, Inc., which
balance was within normal business terms.
12. NEW ACCOUNTING PRONOUNCEMENTS:
------------------------------
In November 2001, the Emerging Issues Task Force released Topic D-103,
"Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred". This announcement requires that
reimbursement received for out-of-pocket expenses be recorded as revenue and not
as a reduction of expenses. This announcement is mandatory for financial
reporting periods beginning after December 15, 2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", and the accounting and reporting provisions of APB No. 30. SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and is effective for fiscal years beginning after
December 15, 2001, and interim periods with those fiscal years.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
Business Overview
Edgewater Technology, Inc. ("Edgewater", "Edgewater Technology" or the
"Company" f/k/a StaffMark, Inc.) is an award-winning strategic consulting firm
that specializes in providing technical consulting, custom software development
and system integration services to middle-market companies and divisions of
large Global 2000 companies. We develop scalable technology solutions, which
expedite business processes and provide our customers with competitive
advantages. Our consultants collaborate with clients to translate business goals
into technology-driven strategies. Headquartered in Wakefield, Massachusetts,
Edgewater Technology has developed a partnership approach with our clients,
targeting strategic, mission-critical applications. With approximately 124
technical consulting professionals, Edgewater Technology services our client
base by leveraging a combination of leading-edge technologies and proven
reengineering techniques provided by our network of strategically positioned
solutions centers.
Edgewater Technology offers an end-to-end platform of technology-driven
business solutions to help organizations tackle the barriers of technology
transition, including:
(1) Strategy -- We advise our customers on how to apply technology to
support the achievement of their business goals - whether their goals are
reduction in cost, process improvements, customer service improvements or
expanding into new markets and product lines. Our strategy services include
analyzing the customer's business goals, business processes and existing
technology infrastructure. We typically evaluate both packaged and custom
software alternatives to solve their problem and formulate recommendations for a
technology solution strategy. We emphasize quantifying the projected business
impact of our recommended solutions in financial terms, as a means to ensure
that our strategy recommendations drive business value. We provide a tactical
road map that our customers can implement immediately, as opposed to the type of
high-level consulting advice that requires additional planning prior to being
implemented.
(2) Solutions -- We design, build, and deploy large-scale enterprise-wide
systems. Edgewater Technology's solutions services include developing and
implementing custom applications as well as "blend-in" packaged applications to
create flexible, scalable custom solutions that integrate a customer's Web
presence, customer service and back-office legacy systems into technology-driven
applications.
(3) Support -- We provide a spectrum of post-deployment support services,
including Internet application outsourcing, site maintenance and 7x24 hour
monitoring.
With a ten year history, Edgewater Technology has focused, through our operating
subsidiary company, on five key core values that differentiates us from the
competition:
(1) Delivery Excellence -- We have an enviable delivery history that is
built upon a proven methodology and processes. Our delivery excellence is a
derivative of a well-defined business plan, highly trained professionals, strong
technical expertise, established implementation and support methodologies and
most importantly, effective and continued communication with our clients
throughout the entire process.
(2) Vertical Expertise -- We bring vertical industry knowledge together
with a broad base of key strategic technologies. Edgewater uses an iterative
development methodology, with a focus on quality assurance and project
management, to achieve rapid deployment capability and success in assisting
organizations move through the barriers of technology transition. The primary
vertical markets where we have developed core competencies to deliver our
products and services include: Financial Services (retail banking, insurance,
portfolio/asset management); Health care (managed care, life sciences); Retail
and Emerging Markets (higher education, transportation), while we also focus on
service offerings that cross each vertical such as Customer Service and Supply
Chain.
(3) Technology Excellence -- We extend our services through proven key
strategic technologies that focus on vertical business practices to build
scalable custom solutions providing a solid return on the investment and thereby
competitive advantage to our clients. Edgewater Technology's areas of technical
expertise include: Web-based solutions; architectural strategy;
Internet/Intranet/Extranet; e-commerce; computer telephony; transaction
processing and legacy systems integration.
11
(4) Middle-Market Focus -- We are well positioned to serve the technology
needs of the middle-market through our solutions centers based in second-tier
cities in which middle-market enterprises typically reside. The middle-market,
defined as companies and/or subsidiaries of large corporations with $50 million
to $1 billion in revenue, is a large growing segment of the economy.
(5) Strong Operational Metrics -- Edgewater Technology's original
management team has built an organization that is defined by a record of
operational excellence, using electronic processes and systems to manage our
consultant resources, and disciplined financial practices resulting in
predictable utilization, gross profit and a strong balance sheet.
Recent Events
On February 28, 2002, Edgewater Technology implemented a workforce
reduction that adjusted our Company's headcount by nineteen percent (19%), or
approximately 38 positions. The Company recorded a restructure charge of
approximately $350,000 in the first quarter of 2002, consisting principally of
severance pay and similar employee termination costs. The workforce reduction
was designed to right-size our Company's expenses with our current revenue
outlook.
Discontinued Operations
As a result of the completion of the non-Solutions strategic alternative
transactions described in footnote six (6) to the consolidated financial
statements, the operating results for ClinForce for 2001 and our corporate
transition costs have been included in discontinued operations in the
accompanying consolidated financial statements. Revenues and operating loss from
discontinued operations were $7.7 million and $1.6 million, respectively, for
the three months ended March 31, 2001.
Financial Information
The financial information provided below has been rounded in order to
simplify its presentation. The amounts and percentages below have been
calculated using the detailed financial information contained in the audited
financial statements, the notes thereto and the other financial data included in
this Quarterly Report on Form 10-Q. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") is included in the following discussion
because we believe the year-to-year change in EBITDA is a meaningful measure
since the non-cash expenses of depreciation and amortization have a significant
impact on operating income (loss) and operating margins. EBITDA should not be
construed as an alternative measure of the amount of our income or cash flows
from operating activities as EBITDA excludes certain significant costs of doing
business.
Results For The Three Months Ended March 31, 2002 Compared To Results For The
Three Months Ended March 31, 2001
Revenues. Revenues for the three months ended March 31, 2002 decreased $3.2
million, or 40.9%, to $4.6 million compared to $7.8 million for the three months
ended March 31, 2001. Revenues decreased primarily due to an economic slowdown
that has affected spending for information technology services, resulting in
postponed or delayed projects. For the three months ended March 31, 2002 and
2001, two and three customers, respectively, each contributed more than 10% of
revenues. Our project backlog at March 31, 2002 was $9.6 million.
Cost of Services. Project personnel costs consist principally of salaries,
payroll taxes, employee benefits and un-reimbursed travel expenses for personnel
dedicated to customer projects. These costs represent the most significant
expense we incur in providing our services. Project personnel costs decreased
$0.8 million, or 19.8%, to $3.4 million for the three months ended March 31,
2002 compared to $4.2 million for the three months ended March 31, 2001.
Utilization is a function of our ability to utilize our billable professionals
and generate revenues. Our utilization rates have been historically above 75%,
but have declined to slightly below 60% during the first quarter of 2002,
resulting in lower gross profit and gross margin as compared to previous
periods. This decrease is primarily the result of lower revenues from previous
quarters.
Gross Profit. Gross profit for the three months ended March 31, 2002
decreased $2.3 million, or 66.5%, to $1.2 million compared to $3.5 million for
the three months ended March 31, 2001. The decrease in gross profit directly
relates to the decrease in revenues and utilization during the period. Gross
profit margin for the three months ended March 31, 2002 was 25.7% compared to
45.3% during the same period one year ago.
12
SG&A. Selling, general and administrative expenses ("SG&A") decreased $1.2
million, or 35.5%, to $2.2 million for the three months ended March 31, 2002
compared to $3.4 million for the three months ended March 31, 2001. SG&A as a
percentage of revenue was 48.4% and 44.4% for the three months ended March 31,
2002 and 2001, respectively. SG&A decreased primarily as a result of lower
payroll and bonus expense and a reduction in recruiting expense and associated
costs of hiring new staff.
EBITDA. EBITDA before restructuring charges decreased $1.1 million to
($1.0) million for the three months ended March 31, 2002 as compared to $0.8
million for the same period in 2001. EBITDA as a percentage of revenues was
(22.7%) and 1.0% for the three months ended March 31, 2002 and 2001,
respectively. The decrease in EBITDA and EBITDA margin is primarily the result
of the economic slowdown, which resulted in lower revenues, higher project
personnel costs associated with our retention of non-utilized consultant base
through February 28, 2002, and the restructuring charges associated with our
workforce reduction, which were in part offset by decreased SG&A as described
above.
Depreciation and Amortization Expense. Depreciation and amortization
expense decreased $1.1 million to $0.3 million for the three months ended March
31, 2002 as compared to $1.4 million for the same period last year. This
decrease is a direct result of the implementation of SFAS 142, in which
goodwill, as well as other intangibles determined to have an indefinite life,
are no longer being amortized. Accordingly, as of January 1, 2002, we have
discontinued amortizing our intangible assets related to goodwill. Our goodwill
amortization expense for the three months ended March 31, 2001 amounted to $1.0
million. Our unamortized goodwill as of March 31, 2002 was $18.3 million.
Restructuring Charges. As a result of reduced revenue, we implemented a
workforce reduction in February 2002 to better align our consultant base to our
expected revenues in the first half of 2002. The Company adjusted headcount by
nineteen percent (19%), or approximately 38 positions resulting in a
restructuring charge of $350,000, which consisted primarily of severance and
similar employee termination expenses. We expect to reduce ongoing expenses of
approximately $700,000 per quarter, beginning in the second quarter of 2002.
Operating Loss. Operating loss increased $0.4 million to $1.7 million for
the three months ended March 31, 2002 compared to $1.3 million for the same
period last year. Operating losses increased from the prior year primarily due
to lower revenues, gross profit and the restructuring charges as discussed
above, offset by the elimination of goodwill expense due to SFAS 142.
Interest Income (Expense), Net. We earned net interest income of $0.2
million for the three months ended March 31, 2002, as compared to net interest
income of $0.9 million for the three months ended March 31, 2001. This decrease
is due primarily to the decrease in interest rates, and a lower average cash
balance during 2002, as a result of a tender offer in January, 2001.
Net Loss From Continuing Operations. We recognized a net loss from
continuing operations of $1.5 million for the three months ended March 31, 2002
compared to $0.7 million for the three months ended March 31, 2001. Net margin
from continuing operations was (31.9%) and (8.5%) for the three months ended
March 31, 2002 and 2001, respectively.
Net (Loss) Income. We recognized a net loss of ($13.9) million for the
three months ended March 31, 2002 compared to net income of $4.7 million for the
three months ended March 31, 2001. The net loss increased substantially due to
the adoption of SFAS 142, which required the Company's goodwill to be revalued,
resulting in an impairment charge of $12.5 million for the three months ended
March 31, 2002. Net income for the three months ended March 31, 2001 included a
gain on the sale of our non-solutions division, net of loss from operations of
the discontinued division of $5.5 million.
A Look Ahead. Our backlog, as of April 24, 2002 is $10.2 million. We are
seeing increased sales activity with higher closure rates, as compared to the
previous quarter. We are hopeful for continued sales improvement, and if this
trend continues, we would expect to see increasing revenues, and utilization
rates steadily climbing back to historical levels, resulting in positive cash
flow for the year.
Liquidity and Capital Resources
Our primary historical sources of funds are from operations, the proceeds
from securities offerings and borrowings under our former credit facility with a
consortium of banks. Our principal historical uses of cash have been to fund
acquisitions, working capital requirements and capital expenditures. We
generally pay our consultants and associates bi-weekly for their services, while
receiving payments from customers 30 to 60 days from the date of the invoice.
13
In July 2000, the Board of Directors authorized management, subject to
legal requirements, to use up to $30 million to repurchase our common stock over
a twelve month period (unless shortened or extended by the Board of Directors).
Our repurchase program was again extended by the Board of Directors on August
23, 2001 for an additional twelve months for repurchases of up to $20.0 million.
Repurchases have been and will be made from time to time on the open market at
prevailing market prices or in negotiated transactions off the market. Under
this program from January 1, 2001 through March 31, 2001, we repurchased 542,900
shares of our common stock for approximately $2.6 million. No shares were
repurchased during the three months ending March 31, 2002.
Net cash used by continuing operating activities was $0.5 million and $0.2
million for the three months ended March 31, 2002 and 2001, respectively. The
net cash used by continuing operating activities for the periods presented was
primarily attributable to net loss, partially offset by the change in accounting
principle and changes in operating assets and liabilities.
Net cash (used in) provided by continuing investing activities was ($12.3)
million and $33.8 million for the three months ended March 31, 2002 and 2001,
respectively. Cash used in continuing investing activities was primarily
attributable to cash paid for the purchase of short-term investments. In 2001,
cash provided by continuing investing activities was primarily attributable to
the proceeds from the sale of our various businesses unrelated to our solutions
division.
Net cash used in continuing financing activities was $0.1 million and
$133.0 million for the three months ended March 31, 2002 and 2001, respectively.
For the three months ended March 31, 2002, cash used in continuing financing
activities was primarily related to repayments on our capital lease obligations.
For the three months ended March 31, 2001, cash used in continuing financing
activities was primarily related to the Tender Offer in January 2001 to
repurchase 16.25 million shares of common stock for approximately $131.1
million, including fees.
Net cash used by discontinued operations was $2.2 million and $2.0 million
for the three months ended March 31, 2002 and 2001, respectively. These amounts
relate to expenses incurred or accrued related to discontinued operations.
As a result of the above, and as a result of cash flows from discontinued
operations, our combined cash and cash equivalents decreased $15.1 million and
$101.2 million for the three months ended March 31, 2002 and 2001, respectively.
As of March 31, 2002 cash and marketable securities amounted to $48.6 million
compared to $51.5 million as of December 31, 2001.
We believe that our cash flows from operations and available cash will
provide sufficient liquidity for our existing operations for the foreseeable
future. We periodically reassess the adequacy of our liquidity position, taking
into consideration current and anticipated operating cash flow, anticipated
capital expenditures, business combinations, and public or private offerings of
debt or equity securities.
Legal Proceedings
We are pursuing a claim against Stephens Group, Inc. and Staffmark
Investment, LLC with respect to the purchase agreement in connection with the
sale of our Commercial Staffing Segment in June 2000 in Delaware Superior Court.
Stephens Group, Inc. and Staffmark Investment, LLC are pursuing a counterclaim
against our company in connection with the same purchase agreement for the sale
of our Commercial Staffing Segment in the same court. This matter is described
and detailed in "Part II, Item 1, Legal Proceedings," of this Form 10-Q with our
claim being referenced as the Delaware Action and the Stephens Group, Inc. and
Staffmark Investment, LLC counterclaim being referenced as the Counterclaim.
Special Note Regarding Forward Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q (this "10-Q")
constitute forward-looking statements under Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, including statements made with respect to significant customers,
revenues, backlog, competitive and strategic initiatives, growth plans,
potential stock repurchases, future results, tax consequences, liquidity needs
and litigation matters. These statements involve known and unknown risks,
uncertainties and other factors that may cause results, levels of activity,
growth, performance, tax consequences or achievements to be materially different
from any future results, levels of activity, growth, performance, tax
consequences or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, those listed below, as
well as those further set forth under the heading "Business - Factors Affecting
Finances, Business Prospects and Stock Volatility" in our 2001 Annual Report on
Form 10-K as filed with the SEC on March 27, 2002.
The forward-looking statements included in this Form 10-Q relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "believe," "enable"
"will," "provide," "anticipate," "future," "could," "growth," "increase,"
"modifying," "reacting," or the negative of such terms or comparable
terminology. These forward-looking statements inherently involve certain risks
and uncertainties, although they are based on our current plans or assessments
which are believed to be reasonable as of the date of this 10-Q. Factors that
may cause actual results, financial statement effects, disposition plans or
proceeds, goals, targets, objectives or repurchases to differ materially from
those contemplated, projected, forecast, estimated, anticipated, planned or
budgeted in such forward-looking statements include, among others, the following
possibilities: (1) inability to effect a business combination, execute upon
growth objectives, pay a dividend or repurchase shares in the future on terms
acceptable to us; (2) changes in industry trends, such as a decline in the
demand for Solutions services or delays in industry-wide IT spending, whether on
a temporary or permanent basis and/or delays by customers in initiating new
projects or continuing new project milestones; (3) costs or savings from
workforce reductions; (4) failure of our
14
backlog to be recorded as revenue; (5) inability of increased sales to result in
increased revenues and/or increased consultant utilization rates; (6)adverse
developments and volatility involving debt, equity, currency or technology
market conditions; (7) the occurrence of lawsuits or adverse results in
litigation matters, including but not limited to the Staffmark Investment, LLC
and the Stephens Group, Inc. litigation; (8) failure to obtain new customers or
retain significant existing customers; (9) loss of key executives; (10) general
economic and business conditions (whether foreign, national, state or local)
which include, but are not limited to, changes in interest or currently exchange
rates; (11) failure of the middle-market and the needs of middle-market
enterprises for business services to develop as anticipated; (12) inability to
recruit and retain professionals with the high level of information technology
skills and experience needed to provide our services; (13) expanding outsourcing
services to generate additional revenue; and/or (14) any changes in ownership
that would result in a limitation on the use of the net operating loss
carry-forward under applicable tax laws, which is referred to as a deferred tax
asset of approximately $23.2 million. In evaluating these statements, you should
specifically consider various factors described above as well as the risks
outlined under Item I "Business - Factors Affecting Finances, Business Prospects
and Stock Volatility" in our 2001 form 10-K filed with the SEC on March 27,
2002. These factors may cause our actual results to differ materially from those
contemplated, projected, anticipated, planned or budgeted in any such
forward-looking statements.
Although we believe that the expectations in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance, growth, earnings per share or achievements. However, neither we nor
any other person assumes responsibility for the accuracy and completeness of
such statements. We are under no duty to update any of the forward-looking
statements after the date of this Form 10-Q to conform such statements to actual
results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Our primary financial instruments include investments in money market
funds, short-term municipal bonds, commercial paper and U.S. government
securities that are sensitive to market risks and interest rates. The investment
portfolio is used to preserve our capital until it is required to fund
operations or to fund strategic acquisitions. None of our market-risk sensitive
instruments are held for trading purposes. We do not purchase derivative
financial instruments.
15
PART II
ITEM 1. LEGAL PROCEEDINGS
On August 15, 2001, we filed a lawsuit in Delaware Chancery Court (the
"Delaware Action") against Staffmark Investment, LLC and a number of its
Delaware subsidiaries (collectively, the "LLC"). The LLC is a majority owned
subsidiary of Stephens Group, Inc. (the "Stephens Group"), which purchased our
company's commercial staffing business on June 28, 2000 (the "Commercial Sale")
pursuant to a purchase agreement dated May 16, 2000 (the "Purchase Agreement")
involving our company and the Stephens Group. In the Delaware Action, we
requested the Delaware Chancery Court to interpret the Purchase Agreement and
agree with our conclusion that our company has no contractual or other
responsibility to the LLC under or in connection with the Purchase Agreement. In
the Delaware Action, we also requested the court to prohibit and otherwise
enjoin any claims by the LLC under or in connection with the Purchase Agreement,
which is governed by Delaware law. On January 10, 2002, the Delaware Chancery
Court transferred the Delaware Action to Delaware Superior Court, which is a
court that adjudicates legal claims, as opposed to equitable claims.
On August 23, 2001, the LLC and the Stephens Group filed a lawsuit in
Washington County Circuit Court in Arkansas against our company (the "Arkansas
Action"), seeking in excess of $13 million of alleged actual, incidental and
consequential damages and not less than $25 million in punitive damages
concerning alleged breaches and alleged misrepresentations, respectively, under
and in connection with the Purchase Agreement. On December 21, 2001, the Judge
in the Washington County Circuit Court in Arkansas granted our motion to stay
the Arkansas Action in favor of the Delaware Action. On March 8, 2002, the
Stephens Group and the LLC dismissed the Arkansas Action and on the same day
filed an answer to the Delaware Action and a counterclaim in Delaware Superior
Court against our company alleging misrepresentations and breaches under and in
connection with the Purchase Agreement and requesting damages in an amount to be
proved at the trial (the "Counterclaim"). We believe that the Counterclaim is
without merit and we will vigorously pursue the Delaware Action, while
vigorously defending against the Counterclaim. Discovery is in process with
respect to the Delaware Action and the Counterclaim. A trial date of November
18, 2002 has been set for the Delaware Action and the Counterclaim.
We are also a party to litigation incidental to our business. We believe
that these routine legal proceedings will not have a material adverse effect on
the results of operations or financial condition of our company. We maintain
insurance in amounts, with coverages and deductibles that we believe are
reasonable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On April 24, 2002 we announced our earnings for the first quarter of
2002. A copy of the press release related to such announcement is
included with this 10-Q as Exhibit 99.1.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Statement re: computation of per share earnings, reference is
made to Note 10 of the Edgewater Technology, Inc. Consolidated
Financial Statements contained in this Form 10-Q.
99.1 Press Release relating to the Company's first quarter 2002 earnings
announcement.
(b) Reports on Form 8-K
1. A Form 8-K was filed with the SEC on January 11, 2002 relating to
the announcement of our completion of the transition of our
corporate headquarters to Wakefield, MA.
2. A Form 8-K was filed with the SEC on February 14, 2002 relating
to the announcement of our fourth quarter and year-end 2001
financial results.
3. A Form 8-K was filed with the SEC on March 1, 2002 relating to
the announcement of our reduction in work force.
16
SIGNATURES
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.
EDGEWATER TECHNOLOGY, INC.
Date: May 7, 2002 /s/ SHIRLEY SINGLETON
--------------------------------
Shirley Singleton
President and Chief Executive Officer
Date: May 7, 2002 /s/ KEVIN R. RHODES
-----------------------------
Kevin R. Rhodes
Chief Financial Officer