UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2001
[_] 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 Mills Square
Wakefield, MA 01880
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (781) 246-3343
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 11, 2001 was 11,673,816.
EDGEWATER TECHNOLOGY, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
Index
-----
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business Overview 11
Discontinued Operations 12
Background 13
Financial Information 13
Results for the Three Months Ended March 31, 2001 Compared to Results for the Three Months
Ended March 31, 2000 13
Liquidity and Capital Resources 15
Special Note Regarding Forward Looking Statements 16
Item 3 -- Quantitative and Qualitative Disclosures
About Market Risk 16
PART II - OTHER INFORMATION
Item 1 -- Legal Proceedings 17
Item 2 -- Changes in Securities and Use of Proceeds 17
Item 4 -- Submission of Matters to a Vote of Security Holders 17
Item 6 -- Exhibits and Reports on Form 8-K 18
(a) Exhibits
(b) Reports on Form 8-K
Signatures 18
2
EDGEWATER TECHNOLOGY, INC.
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In Thousands, Except Shares)
Three Months Ended
March 31, December 31,
2001 2000
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 44,024 $ 145,581
Accounts receivable, net 6,424 5,875
Income tax receivable 15,776 16,121
Deferred income taxes 985 900
Prepaid expenses and other current assets 1,251 6,842
--------- ---------
Total current assets 68,460 175,319
Property and equipment, net 2,238 2,174
Intangible assets, net 35,317 36,530
Other assets 118 118
Deferred income taxes 22,291 25,728
Net assets from discontinued operations (Note 4) - 14,831
--------- ---------
$ 128,424 $ 254,700
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,579 $ 3,151
Other liabilities including restructuring and discontinued operations 15,238 10,819
Payroll and related liabilities 2,075 3,195
--------- ---------
Total current liabilities 18,892 17,165
Long-term liabilities 262 290
Stockholders' equity:
Preferred stock, $.01 par value; no shares issued or outstanding - -
Common stock, $.01 par value; 11,933,216 and 28,692,766 shares issued and
outstanding as of March 31, 2001 and December 31, 2000, respectively 296 296
Paid-in capital 217,866 217,838
Treasury stock, at cost (138,839) (6,158)
Retained earnings 29,947 25,269
--------- ---------
Total stockholders' equity 109,270 237,245
--------- ---------
$ 128,424 $ 254,700
========= =========
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,
2001 2000
------- -------
(Unaudited)
Revenues $ 7,727 $ 7,087
Cost of services 4,211 3,370
------- -------
Gross profit 3,516 3,717
Operating expenses:
Selling, general and administrative 3,440 3,167
Depreciation and amortization 1,373 1,067
------- -------
Operating loss (1,297) (517)
Interest (income) expense and other, net (937) 361
------- -------
Loss before income taxes and extraordinary item (360) (878)
Income tax provision (benefit) 310 (280)
------- -------
Net loss from continuing operations before extraordinary item (670) (598)
Discontinued operations (Note 4):
(Loss) income from operations of discontinued divisions (1,010) 2,529
Gain on sale of division 6,514 --
Extraordinary item, net of applicable taxes (Note 5) (156) --
------- -------
Net income $ 4,678 $ 1,931
======= =======
Basic earnings per share:
Continuing operations ($ 0.04) ($ 0.02)
======= =======
Discontinued operations $ 0.33 $ 0.09
======= =======
Extraordinary item ($ 0.01) $ --
======= =======
Net income $ 0.28 $ 0.07
======= =======
Diluted earnings per share:
Continuing operations ($ 0.04) ($ 0.02)
======= =======
Discontinued operations $ 0.33 $ 0.09
======= =======
Extraordinary item ($ 0.01) $ --
======= =======
Net income $ 0.28 $ 0.07
======= =======
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,
2001 2000
--------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,678 $ 1,931
Loss (income) from discontinued operations 1,010 (2,529)
Gain on sale of division (6,514) --
Extraordinary item, net of applicable taxes 156 --
--------- ---------
Net loss from continuing operations (670) (598)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,373 1,067
Provision for bad debts 50 --
Deferred income taxes 310 --
Other, net (2) 16
Change in operating accounts,
net of effects of dispositions:
Accounts receivable (599) (606)
Prepaid expenses and other current assets 457 (321)
Other assets -- 122
Accounts payable and accrued liabilities 150 222
Payroll and related liabilities (892) (1,045)
Payment of nonrecurring expenses (417) --
--------- ---------
Net cash used in operating activities (240) (1,143)
--------- ---------
Net cash (used in) provided by discontinued operating activities (2,003) 15,346
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses 35,246 --
Purchases of businesses, net of cash acquired (1,200) (459)
Capital expenditures (278) (5)
--------- ---------
Net cash provided by (used in) investing activities 33,768 (464)
--------- ---------
Net cash used in discontinued investing activities (33) (3,089)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings -- 40,585
Payments on borrowings -- (46,543)
Proceeds from employee stock plans and stock option exercises 143 20
Repurchases of stock (133,192) --
--------- ---------
Net cash used in financing activities (133,049) (5,938)
--------- ---------
Net cash used in discontinued financing activities -- (8,202)
--------- ---------
Net decrease in cash and cash equivalents (101,557) (3,490)
CASH AND CASH EQUIVALENTS, beginning of period 145,581 3,718
CASH AND CASH EQUIVALENTS, discontinued operations -- 2,213
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 44,024 $ 2,441
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ -- $ 5,725
========= =========
Income taxes paid $ 180 $ 358
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
5
EDGEWATER TECHNOLOGY, INC.
--------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. ORGANIZATION:
------------
We (Edgewater Technology, Inc.) provide business solutions through our
eSolutions segment, which was acquired effective April 1, 1999. As discussed in
Note 4, we have sold our interests in our Commercial staffing segment, Robert
Walters (finance and accounting staffing services), Strategic Legal Resources
(legal staffing), IntelliMark (information technology staffing and solutions)
and ClinForce (clinical trials support services). As a result of these
transactions, the operating results for these non-eSolutions divisions have been
included in discontinued operations in the accompanying consolidated financial
statements.
We provide eSolutions, eStrategy and Internet solution consulting
services to businesses. These services primarily include the design, development
and implementation of web-based applications as well as eCommerce software
solutions and consulting services to clients throughout the United States. We
have approximately 250 employees and offices in Massachusetts, New Hampshire,
Arkansas, Minnesota, North Carolina and Alabama.
Revenues pursuant to time and materials contracts are generally
recognized as services are provided. Revenues pursuant to fixed-fee 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
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 trends in
client billings. Any significant decline in fees billed to clients or the loss
of 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, and administration salaries, commissions
and related expenses, office facilities, computer system expenditures,
professional fees, promotional expenses, and other general corporate expenses.
On December 21, 2000, we commenced an issuer tender offer (the "Tender
Offer"), which expired on January 23, 2001. As a result of the Tender Offer, we
acquired (effective January 30, 2001) 16.25 million shares of our common stock
at $8 per share 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.
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 2000 Edgewater
Technology, Inc. Annual Report on Form 10-K as filed with the SEC on March 30,
2001.
6
The results of operations for the three months ended March 31, 2001 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 and for Internet 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.
3. BUSINESS TRANSACTIONS:
---------------------
Effective April 1, 1999, we acquired Edgewater Technology (Delaware),
Inc. ("Edgewater"), a full-service provider of eSolutions services located in
Boston's Route 128 technology corridor. For the three months ended March 31,
2001 and 2000, the aggregate consideration paid with respect to Edgewater was
$1.2 million and $0.5 million, respectively.
4. DISCONTINUED OPERATIONS:
-----------------------
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 staffing segment to affiliate entities of 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 staffing segment.
On July 13, 2000, we sold, through two indirect wholly-owned
subsidiaries, all of our equity interests in Robert Walters through an initial
public offering on the London Stock Exchange. Robert Walters had previously been
the finance and accounting platform within our Professional/Information
Technology ("IT") segment. Our two subsidiaries sold 67.2 million ordinary
shares at a price of 170 pence per share (or $2.57 at then current exchange
rates). The shares began trading on a conditional basis on the London Stock
Exchange on July 6, 2000. On July 14, 2000, the underwriters exercised the
over-allotment of 10.4 million ordinary shares. Our share of offering gross
proceeds, including the exercise of the over-allotment option, was $199.2
million prior to offering commissions, fees and expenses.
During the second quarter of 2000, in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," we recorded a
$150 million non-cash charge for the write-down of the goodwill in our
IntelliMark and Strategic Legal Resources divisions to estimated realizable
values. This write-down was largely due to a decline in the revenues, gross
profit and cash flow of these divisions and the overall decrease in market
values within these industries. Accordingly, the carrying values of these assets
were written down to management's estimates of fair value, which were based on
market comparables for companies operating in similar industries.
On September 22, 2000, we sold all of the outstanding stock of Strategic
Legal Resources, the legal staffing platform within our Professional/IT segment,
to a company owned by a group of investors including MidMark Capital II, L.P.
and Edwardstone & Company for $13.25 million, of which $4.25 million was
represented by a promissory note. The balance of this note was collected in
January 2001.
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 adjustment paid to
IntelliMark 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.
7
On December 15, 2000, we entered into a Stock Purchase Agreement to sell
all of our outstanding stock in ClinForce, our clinical trials support services
division, to Cross Country TravCorps, Inc. for approximately $31.0 million in
cash, before fees and expenses and subject to potential upward or downward
post-closing adjustment (the "Transaction"). We held a Special Stockholders'
Meeting on March 14, 2001 to approve the Transaction. After receiving approval
from stockholders, the Transaction was closed on March 16, 2001. We recorded an
after-tax gain of $6.5 million related to the Transaction during the first
quarter of 2001.
During the third and fourth quarters of 2000, as a result of the
impending sale of our remaining non-eSolutions divisions, we recorded
nonrecurring expenses totaling approximately $3.8 million relating to our
divestiture process and costs related to the closing of our former corporate
headquarters (in Fayetteville, Arkansas). The move of the corporate headquarters
to Wakefield, Massachusetts, where Edgewater is located, is expected to be
completed during the second quarter of 2001. All of the remaining corporate
employees (approximately 25) have been or will be severed as a result of this
restructuring. The restructuring expense includes future contractual obligations
to certain employees, which extend through October 2001. The following is a
summary of our restructuring accrual, which has been included in other
liabilities including restructuring and discontinued operations in the
accompanying consolidated balance sheets:
(In Thousands)
Restructuring expenses:
Severance $ 3,003
Facility 613
Relocation 160
---------
3,776
Less cash outlays 715
---------
Accrual at March 31, 2001 $ 3,061
=========
As a result of the completion of the transactions described above, the
operating results for the Commercial staffing segment, Robert Walters, Strategic
Legal Resources, IntelliMark and ClinForce have been included in discontinued
operations in the accompanying consolidated financial statements. Revenues from
discontinued operations were $7.7 million and $287.2 million for the three
months ended March 31, 2001 and 2000, respectively. Operating (loss) income from
discontinued operations was ($1.6) million and $8.3 million for the three months
ended March 31, 2001 and 2000, respectively.
Net assets from discontinued operations in the accompanying balance
sheets represent the net assets of the discontinued operations for ClinForce as
of December 31, 2000.
(In Thousands)
Accounts receivable, net $ 4,689
Prepaid expenses and other current assets (857)
Property and equipment, net 404
Intangible assets, net 11,779
Other assets 30
Accounts payable and accrued liabilities (67)
Payroll and related liabilities (1,147)
---------
Net assets from discontinued operations $ 14,831
=========
8
5. 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. In December
2000, we incurred expenses totaling approximately $0.5 million for items such as
legal fees, foundation costs, family and employee counselors, and property and
facility expenses. During the three months ended March 31, 2001, we incurred an
additional $0.2 million of expenses related to this tragedy. The costs incurred
during the three months ended March 31, 2001 are presented as an extraordinary
item, net of the applicable tax effect, in the accompanying consolidated
statements of operations. The following is a summary of our accrual relating to
the tragedy, which has been included in accounts payable and other accrued
liabilities in the accompanying consolidated balance sheets:
(In Thousands)
Costs incurred during:
Fourth quarter 2000 $513
First quarter 2001 249
----
762
Less cash outlays 487
----
Accrual at March 31, 2001 $275
====
6. EARNINGS PER COMMON SHARE:
-------------------------
A reconciliation of net income and weighted average shares used in
computing basic and diluted earnings per share is as follows:
Three Months Ended March 31,
----------------------------
2001 2000
--------- ---------
(In Thousands, Except Per Share Data)
Basic earnings per share:
Net income applicable to common shares $ 4,678 $ 1,931
======== =========
Weighted average common shares outstanding 16,497 29,461
======== =========
Basic earnings per share of common stock $ 0.28 $ 0.07
======== =========
Diluted earnings per share:
Net income applicable to common shares $ 4,678 $ 1,931
======== =========
Weighted average common shares outstanding 16,497 29,461
Dilutive effect of stock options 9 215
-------- ---------
Weighted average common shares, assuming
dilutive effect of stock options 16,506 29,676
======== =========
Diluted earnings per share of common stock $ 0.28 $ 0.07
======== =========
Options to purchase approximately 5.5 million shares of common stock (at
prices ranging from $4.97 to $40.31 per share) and 2.3 million shares of common
stock (at prices ranging from $8.94 to $40.75 per share) were outstanding during
the three months ended March 31, 2001 and 2000, 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, 2001.
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 eSolutions business 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
9
IntelliMark were terminated on April 16, 2001, which was 30 days following the
"Change in Control." Employees of ClinForce hold approximately 0.1 million
options, which will terminate on June 14, 2001, which is 90 days following the
"Change in Control."
7. SEGMENT INFORMATION:
-------------------
As a result of the divestiture transactions described in Note 4, our
eSolutions division now represents our only segment of business, therefore no
segment data has been provided.
8. RELATED PARTY:
-------------
Synapse Group, Inc., one of our significant customers discussed in Note
9, is considered a related party as their President and Chief Executive Officer
Michael Loeb is also a member of our Board of Directors. As of March 31, 2001,
we maintained an accounts receivable balance of $2.4 million from Synapse Group,
Inc.
9. SIGNIFICANT CUSTOMERS:
---------------------
The following table summarizes the revenue and accounts receivable from
customers in excess of 10% of reported amounts for the periods presented:
Three Months Ended
March 31,
-----------------------------
2001 2000
-------------- --------------
Revenue
Synapse Group, Inc. 30.5% 29.3%
HomeRuns.com 14.6% 17.4%
Robert Walters 11.6% -
American Student Assistance - 21.7%
March 31, December 31,
2001 2000
-------------- --------------
Accounts Receivable
Synapse Group, Inc. 37.5% 36.9%
HomeRuns.com 11.5% 16.5%
Robert Walters 14.0% -
American Student Assistance - 10.3%
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Business Overview
Our eSolutions business, acquired effective April 1, 1999, is a full-
service provider of consulting and system integration services with a particular
focus on middle market enterprises. With approximately 250 employees, Edgewater
operates eSolutions centers located in Massachusetts, New Hampshire, Arkansas,
and Minnesota with additional offices in North Carolina and Alabama. We focus on
helping customers increase market competitiveness, improve customer business
productivity, and reduce operational costs through implementation of business
strategies utilizing the Internet and other technologies. Edgewater devises
systems that allow our customers to improve and expedite the processing and
delivery of information to end users, allowing for quicker implementation of
business strategies, easier adaptation to change, and effective delivery of
results.
Edgewater offers an end-to-end platform of e-business solutions to help
organizations tackle the barriers of technology transition, including:
(1) eStrategy -- consulting services that aid customers in translating
business goals into eSolutions strategies by taking full advantage of
Internet technologies. eStrategy services include analyzing a customer's
market, business processes and existing technology infrastructure,
evaluating both packaged and custom alternative solutions and formulating
recommendations for a solution or strategy. Edgewater then provides a
tactical road map that customers can implement immediately.
(2) eSolutions -- designing, building, and deploying large-scale
enterprise-wide systems. eSolutions 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 presences, customer service and back-office legacy
systems e-business applications.
(3) Internet Outsourcing -- providing a spectrum of post-deployment
support services, including Internet application outsourcing, site
maintenance and 7x24 hour monitoring.
Since its inception in 1992, Edgewater has continually focused on five key
core values:
(1) Excellence in Execution-- successfully developing and deploying
custom solutions that meet customers' needs;
(2) Maintaining Strong Operational Metrics -- building a growing
organization with formal processes to drive operational excellence and
sustain strong metrics;
(3) Middle Market Focus -- positioning Edgewater service offerings to
middle market companies, or divisions of companies, with annual revenues
of between $50 million and $1 billion and organizations in under-served
smaller cities through strategically positioned regional solutions
centers;
(4) Vertical Expertise -- integrating our business and technology skills
to create competitive advantages for our customers among a multitude of
industries; and
(5) Technology Excellence -- utilizing innovative technology to build
and deploy complex and scalable high-volume systems.
11
Discontinued Operations
Our restructuring included the following sale transactions:
. 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." The proceeds from this transaction
were used to repay a portion of our outstanding borrowings under our
credit facility.
. On July 13, 2000, we sold, through two indirect wholly-owned
subsidiaries, all of our equity interest in Robert Walters through an
initial public offering 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 two
subsidiaries sold 67.2 million ordinary shares at a price of 170 pence
per share (or $2.57 at then current exchange rates). The shares began
trading on a conditional basis on the London Stock Exchange on July 6,
2000. On July 14, 2000, the underwriters exercised the over-allotment of
10.4 million ordinary shares. Our share of offering gross proceeds,
including the exercise of the over-allotment option, was $199.2 million
prior to offering commissions, fees and expenses. After repaying the
remaining outstanding borrowings under our credit facility,
approximately $90 million was invested in short-term securities.
. On September 22, 2000, we sold all of the outstanding stock of Strategic
Legal Resources, 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 $13.25 million, of which
$4.25 million was represented by a promissory note that was collected in
January 2001.
. 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 adjustment paid to IntelliMark in April 2001.
. On December 15, 2000, we executed a definitive agreement to sell
ClinForce, our clinical trials support services division, to Cross
Country TravCorps for approximately $31.0 million in cash, subject to
potential upward or downward post-closing adjustments (the
"Transaction"). As the closing of the Transaction was conditioned upon
our receipt of stockholder approval and the satisfaction of other
customary conditions to closing, we held a Special Stockholders' Meeting
on March 14, 2001, where our stockholders approved the Transaction. We
consummated the Transaction and received proceeds on March 16, 2001. In
accordance with Emerging Issues Task Force No. 95-18, we have reported
ClinForce's operating results in discontinued operations for the periods
presented. 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.
As a result of the completion of the above sale transactions, the
operating results for the Commercial segment, Robert Walters, Strategic Legal
Resources, IntelliMark and ClinForce have been included in discontinued
operations in the accompanying financial statements. Revenues from discontinued
operations were $7.7 million and $287.2 million for the three months ended March
2001 and 2000, respectively. Operating (loss) income from discontinued
operations was ($1.6) million and $8.3 million for the three months ended March
31, 2001 and 2000, respectively.
12
Background
Revenues pursuant to time and materials contracts are generally
recognized as services are provided. Revenues pursuant to fixed-fee 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
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 trends in
client billings. Any significant decline in fees billed to clients or the loss
of 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, and administration salaries, commissions
and related expenses, office facilities, computer system expenditures,
professional fees, promotional expenses, and other general corporate expenses.
Financial Information
The financial results for all periods presented have been restated to
present the Commercial segment, Robert Walters, Strategic Legal Resources,
IntelliMark and ClinForce as discontinued operations. 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
(loss) income 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, 2001 Compared To Results For The
Three Months Ended March 31, 2000
Revenues. Revenues increased $0.6 million, or 9.0%, to $7.7 million for
the three months ended March 31, 2001 compared to $7.1 million for the three
months ended March 31, 2000. Revenues increased due to new customers, higher
revenues from existing customers and higher billable headcount as we have opened
or expanded offices in Arkansas, Minnesota and New Hampshire during the last
twelve months. Including $10.6 million of projects for 2002, our current project
backlog at March 31, 2001 was $24.5 million, an increase of 71.3% over the same
period last year. Although revenues increased from 2000 to 2001, we estimate
that approximately $0.4 million of additional revenues were lost during the
three months ended March 31, 2001 as a result of the Wakefield tragedy. While we
are seeing a high level of activity, we are unable to reasonably estimate our
short term growth rates due to the soft economy and delayed spending in the
eSolutions industry. We continue to be optimistic about our long term prospects
with $10.6 million already in our backlog for 2002.
Gross Profit. Gross profit decreased $0.2 million, or 5.4%, to $3.5
million for the three months ended March 31, 2001 compared to $3.7 million for
the three months ended March 31, 2000. Gross profit as a percentage of revenue
decreased from 52.4% in the first quarter of 2000 to 45.5% in the first quarter
2001. While utilization rates were above 75% during the three months ended March
31, 2001, gross profit and gross margin were lower than the same period last
year primarily as a result of the planned increase in consultant bench time that
was necessary for future growth and the Wakefield tragedy.
13
SG&A. Selling, general and administrative expenses ("SG&A") increased
$0.2 million, or 8.6%, to $3.4 million for the three months ended March 31, 2001
compared to $3.2 million for the three months ended March 31, 2000. SG&A as a
percentage of revenue was 44.5% and 44.7% for the three months ended March 31,
2001 and 2000, respectively. SG&A increased as a result of our planned increases
in sales, marketing and recruiting expenses to support our revenue growth plans.
Unallocated corporate SG&A was $0.2 million and $0.9 million for the three
months ended March 31, 2001 and 2000, respectively, and decreased primarily as a
result of our corporate downsizing, which was due to the divestiture of our
non-eSolutions businesses and divisions. As the 2000 unallocated corporate costs
were incurred in historical periods based on a larger public company and a
different corporate structure, these costs are not necessarily indicative of the
future corporate costs that will be necessary to operate our eSolutions business
unit as a stand-alone public company.
EBITDA. EBITDA decreased $0.4 million to $0.1 million for the three
months ended March 31, 2001 as compared to $0.5 million for the same period in
2000. EBITDA as a percentage of revenues was 1.0% and 7.8% for the three months
ended March 31, 2001 and 2000, respectively. The decrease in EBITDA and EBITDA
margins are primarily the result of the revenues lost due to the Wakefield
tragedy and the increased SG&A as described above. As our consultant costs are
relatively fixed, the loss of revenue from the Wakefield tragedy directly
affects our gross profit, EBITDA and operating loss results.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $0.3 million to $1.4 million for the first quarter of 2001 as
compared to $1.1 million for the same period last year. This increase is a
result of our reallocation of Edgewater's purchase price between goodwill and
intangible assets during the fall of 2000.
Operating Loss. Operating loss increased $0.8 million to $1.3 million
for the three months ended March 31, 2001 compared to $0.5 million for the same
period last year. Operating loss increased from the prior year primarily due to
our planned increase in consultants and planned increases in sales, marketing
and recruiting expenses to support our revenue growth plans as well as higher
amortization expense.
Interest Income (Expense), Net. We earned net interest income of $0.9
million for the three months ended March 31, 2001 as compared to the incurrence
of interest expense of $0.4 million for the three months ended March 31, 2000.
Interest expense was primarily related to borrowings on our credit facility to
fund working capital requirements, the cash portion of our acquisitions and
additions to property and equipment. Using the proceeds from the sale of our
various divisions, all borrowings were repaid in July 2000 and excess cash
amounts have been placed in short-term investments, used to fund the Tender
Offer, repurchase shares of our common stock under our stock purchase program
and for general corporate purposes. Interest income is primarily related to
interest generated from the investment of excess cash amounts.
Net Loss From Continuing Operations. Net loss from continuing operations
increased $0.1 million, or 12.0%, to $0.7 million for the three months ended
March 31, 2001 as compared to $0.6 million for the three months ended March 31,
2000. Net margin from continuing operations was (8.7%) and (8.4%) for the three
months ended March 31, 2001 and 2000, respectively. In addition to the matters
discussed above, the net loss from continuing operations for the current period
was negatively affected by the tax provision of $0.3 million which is the result
of non-deductible goodwill amortization. These taxes will not be paid out in
cash as we will utilize net operating loss carryforwards to offset taxable
income. Our tax losses relate to the sale of our non-eSolutions businesses and
divisions and resulted in a deferred tax asset of $23.3 million for use to
offset taxable income in future years and a receivable of approximately $15.8
million related to a carryback claims to recover prior years' taxes.
14
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.
The gross proceeds from the Commercial segment and Robert Walters
transactions were used to repay our outstanding borrowings under the credit
facility of approximately $288 million. The remaining transaction proceeds were
invested in cash and short-term marketable securities and were used to fund the
Tender Offer, repurchase shares of our common stock under our stock purchase
program and for general corporate purposes.
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
the following twelve months (unless shortened or extended by the Board of
Directors). 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 during 2000, we repurchased 944,000 shares of our common
stock for approximately $6.2 million. From January 1, 2001 through May 10, 2001,
we repurchased 814,300 shares of our common stock for approximately $3.3
million.
The credit facility was secured by all of the issued and outstanding
capital stock of our domestic subsidiaries and 65% of the issued and outstanding
capital stock of our first-tier foreign subsidiaries. Interest on any borrowings
was computed at our option of either the bank group's prime rate or the London
interbank offered rate, incrementally adjusted based on our operating leverage
ratios. We paid a quarterly facility fee determined by multiplying the total
amount of the Credit Facility by a percentage, which varied based on our
operating leverage ratios. In May 1999, we expanded the credit facility from
$300 million to $325 million. Additionally, during December 1999, we obtained a
commitment from two members of our credit facility to increase our borrowing
capacity for an additional $10 million through January 2000 as a buffer for
unexpected Year 2000 issues. This $10 million borrowing increase was not
utilized by us. On March 31, 2000, the maximum amount of borrowings under the
credit facility reverted back to $300 million. In April 2000, we obtained a
commitment from one member of our credit facility to increase our borrowing
capacity for an additional $7.5 million through May 2000 as a buffer for
unexpected costs. This $7.5 million borrowing increase was never utilized by us.
Under the credit facility, we had net borrowings of $6.0 million in the three
months ended March 31, 2000. In July 2000, we paid-off all of our outstanding
borrowings under the credit facility and terminated the credit facility.
Net cash used in continuing operating activities was $0.2 million and
$1.1 million for the three months ended March 31, 2001 and 2000, respectively.
The net cash provided by continuing operating activities for the periods
presented was primarily attributable to net (loss) income and changes in
operating assets and liabilities. Excluding payment of nonrecurring expenses,
net cash provided by continuing operations was $0.2 million for the three months
ended March 31, 2001.
Net cash provided by (used in) continuing investing activities was $33.8
million and ($0.5) million for the three months ended March 31, 2001 and 2000,
respectively. Cash provided by continuing investing activities was primarily
attributable to the proceeds from the sale of our various non-eSolutions
divisions and cash used in continuing investing activities was primarily
attributable to cash paid for acquisitions and for additional contingent
consideration paid for acquisitions completed during prior periods.
Net cash used in continuing financing activities was $133.0 million and
$5.9 million for the three months ended March 31, 2001 and 2000, respectively.
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 the three months ended
March 31, 2000, cash provided by financing activities was primarily related to
borrowings under our credit facility to finance several of the acquisitions and
contingent consideration payments completed during these periods.
As a result of the above, and as a result of cash flows from
discontinued operations, our combined cash and cash equivalents decreased $101.6
million and $3.5 million in the three months ended March 31, 2001 and 2000,
respectively.
15
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.
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 planned Edgewater unit
positioning, the corporate headquarters move, competitive and strategic
initiatives, potential stock repurchases, expected litigation results, future
results, tax consequences, liquidity needs and restructuring efforts. 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 listed under "Business - Factors
Affecting Finances, Business Prospects and Stock Volatility" and elsewhere in
our 2000 Annual Report on Form 10-K as filed with the SEC on March 30, 2001.
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) potential miscalculations of the capital requirements,
competitive and strategic repositioning and growth of our eSolutions business;
(2) inability to execute upon growth objectives; (3) changes in industry trends,
such as decline in the demand for eSolutions services; (4) failure to obtain new
customers or retain significant existing customers; (5) loss of key executives;
(6) 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; (7) failure of the middle market and the needs of
middle market enterprises for e-business services to develop as anticipated; (8)
inability to recruit and retain professionals with the high level of information
technology skills and experience needed to provide our services; (9) the
inability to collect the $15.8 million receivable relating to the use of net
operating losses to recover prior years' taxes; and/or (10) 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 $23.3 million in this Form 10-Q. Actual events or results
may differ materially. These factors may cause our actual results to differ
materially from any 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
None
16
PART II
ITEM 1. LEGAL PROCEEDINGS
We have been subject to a number of stockholder lawsuits alleging that
we and one of our officer/directors violated federal securities laws. Such
actions were consolidated into one action in United States District Court for
the Eastern District of Arkansas (the "Court"). On January 11, 2000, the
plaintiffs amended their complaint, which superseded all other complaints. The
amended complaint named us and one of our officer/directors as defendants. We
filed a motion to dismiss this amended consolidated complaint. On June 29, 2000,
the Court issued a Memorandum Opinion and Order (the "Order") dismissing most of
the allegations in the consolidated complaint. As to the remaining allegations
in the consolidated complaint, following the Order, on July 12, 2000, we filed a
motion for partial reconsideration to dismiss the remaining allegations in the
consolidated complaint. The lead plaintiffs filed a response to our partial
reconsideration motion on July 24, 2000 and we filed a reply motion to the
response by the lead plaintiffs on July 26, 2000. On November 27, 2000, the
Court granted our motion for partial reconsideration and dismissed all of the
remaining allegations in the complaint. The lead plaintiffs filed a motion for
reconsideration on December 11, 2000. We filed a response to the lead
plaintiffs' motion for reconsideration on December 20, 2000. On January 9, 2001,
the Court rejected the lead plaintiffs' request for reconsideration resulting in
the entire consolidated complaint being dismissed by the Court. On February 9,
2001, the lead plaintiffs appealed the dismissal of the consolidated complaint
by the Court to the Eighth Circuit Court of Appeals (the "Eighth Circuit Court")
in St. Louis, Missouri. However on April 24, 2001, the lead plaintiffs dismissed
their appeal to the Eighth Circuit Court. The Eighth Circuit Court is expected
to issue an order dismissing the plaintiffs' appeal in the near future. In light
of the anticipated order of dismissal by the Eighth Circuit Court and the
dismissal of the consolidated complaint by the Court, this litigation matter
will be concluded without our company having any responsibility or liability as
to this matter.
We also are 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. 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
On March 14, 2001, we held our Special Stockholders' Meeting (the
"Meeting") to approve the sale of our wholly-owned subsidiaries, ClinForce, Inc.
and CFRC, Inc. (collectively "ClinForce"), to Cross Country TravCorps, Inc. for
approximately $31.0 million in cash, subject to potential upward or downward
post-closing adjustments. Of the 12,477,684 shares of outstanding common stock
entitled to vote at the Meeting, 7,189,950 shares, or approximately 57.6% of the
shares entitled to vote, were represented either in person or by proxy at the
Meeting. The stockholders voted on and approved the sale of ClinForce at the
Meeting as described below:
For Against Abstain
----------------- ------------- ------------
6,928,707 232,510 28,733
17
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 6 of the Edgewater
Technology, Inc. Consolidated Financial Statements
contained in this Form 10-Q.
(b) Reports on Form 8-K
1. A Form 8-K was filed with the SEC on February 22, 2001 relating
to the announcement of our fourth quarter and year-end 2000
financial results.
2. A Form 8-K was filed with the SEC on March 14, 2001 relating to
our stockholders' vote involving the sale of our ClinForce
division.
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 11, 2001 /s/ CLETE T. BREWER
------------------------------------
Clete T. Brewer
Chief Executive Officer and Chairman
Date: May 11, 2001 /s/ TERRY C. BELLORA
------------------------------------
Terry C. Bellora
Chief Financial Officer
18