- --------------------------------------------------------------------------------
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 September 30, 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 Mill Square
Wakefield, MA 01880-3209
(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 November 9, 2001 was 11,607,736.
================================================================================
1
EDGEWATER TECHNOLOGY, INC.
--------------------------
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001
--------------------------------------------------
INDEX
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Page
----
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 3
Consolidated Statements of Operations for the Three and Nine Months Ended 4
September 30, 2001 and 2000
Consolidated Statements of Cash Flows for the Nine Months Ended 5
September 30, 2001 and 2000
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 and Nine Months Ended September 30, 2001 Compared to Results for the
Three and Nine Months Ended September 30, 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 17
(a) Exhibits
(b) Reports on Form 8-K
Signatures 18
2
EDGEWATER TECHNOLOGY, INC.
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In Thousands, Except Shares)
September 30, December 31,
2001 2000
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 32,197 $ 145,581
Short-term investments 19,930 -
Accounts receivable, net 3,665 5,875
Income tax receivable 800 16,121
Deferred income taxes 491 900
Prepaid expenses and other current assets 611 6,842
------------- -------------
Total current assets 57,694 175,319
Property and equipment, net 2,091 2,174
Intangible assets, net 32,966 36,530
Deferred income taxes 22,133 25,728
Other assets 83 118
Net assets from discontinued operations (Note 4) - 14,831
------------- -------------
Total Assets $ 114,967 $ 254,700
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,374 $ 2,833
Other liabilities including restructuring and discontinued operations 5,358 10,819
Payroll and related liabilities 1,195 3,195
Current portion of capital lease obligations 340 318
------------- -------------
Total current liabilities 8,267 17,165
Long-term liabilities 98 290
Stockholders' equity:
Preferred stock, $.01 par value; no shares issued or outstanding - -
Common stock, $.01 par value; 11,603,611 and 28,692,766 shares issued and
outstanding as of September 30, 2001 and December 31, 2000, respectively 296 296
Paid-in capital 217,774 217,838
Treasury stock, at cost (140,202) (6,158)
Retained earnings 28,734 25,269
------------- -------------
Total stockholders' equity 106,602 237,245
------------- -------------
Total liabilities and stockholders' equity $ 114,967 $ 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
(Unaudited)
Revenues $ 6,003 $ 8,360 $ 20,453 $ 23,416
Cost of services 3,703 4,111 11,989 11,207
---------- ---------- ---------- ----------
Gross profit 2,300 4,249 8,464 12,209
Operating expenses:
Selling, general and administrative 2,243 3,564 8,296 10,363
Depreciation and amortization 1,351 1,104 4,109 3,261
---------- ---------- ---------- ----------
Operating income (loss) (1,294) (419) (3,941) (1,415)
Interest income (expense) and other, net 376 1,773 1,753 1,138
---------- ---------- ---------- ----------
Income (loss) before income taxes and extraordinary item (918) 1,354 (2,188) (277)
Income tax provision 90 614 492 77
---------- ---------- ---------- ----------
Net income (loss) from continuing operations (1,008) 740 (2,680) (354)
Discontinued operations (Note 4):
Income (loss) from operations of discontinued divisions 1,062 (8,895) (341) (106,471)
Gain on sale of division - 69,733 6,514 63,558
Extraordinary item, net of applicable taxes (Note 5) 16 - (27) -
---------- ---------- ---------- ----------
Net income (loss) $ 70 $ 61,578 $ 3,466 $ (43,267)
========== ========== ========== ==========
Basic earnings per share:
Continuing operations $ (0.09) $ 0.03 $ (0.20) $ (0.01)
========== ========== ========== ==========
Discontinued operations $ 0.10 $ 2.08 $ 0.46 $ (1.46)
========== ========== ========== ==========
Extraordinary item $ - $ - $ - $ -
========== ========== ========== ==========
Net income (loss) $ 0.01 $ 2.11 $ 0.26 $ (1.47)
========== ========== ========== ==========
Diluted earnings per share:
Continuing operations $ (0.09) $ 0.03 $ (0.20) $ (0.01)
========== ========== ========== ==========
Discontinued operations $ 0.10 $ 2.08 $ 0.46 $ (1.46)
========== ========== ========== ==========
Extraordinary item $ - $ - $ - $ -
========== ========== ========== ==========
Net income (loss) $ 0.01 $ 2.11 $ 0.26 $ (1.47)
========== ========== ========== ==========
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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 70 $ 61,578 $ 3,466 $ (43,267)
(Income) loss from operations of discontinued divisions (1,062) 8,895 341 106,471
Gain on sale of division - (69,733) (6,514) (63,558)
Extraordinary item, net of applicable taxes (16) - 27 -
--------- --------- --------- ---------
Net (loss) income from continuing operations (1,008) 740 (2,680) (354)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,351 1,104 4,109 3,261
Provision for bad debts 30 6 160 6
Deferred income taxes and other, net 90 - 492 16
Change in operating accounts,
net of effects of dispositions:
Accounts receivable 1,936 (1,182) 2,113 (3,115)
Prepaid expenses and other current assets -- 442 848 5,172
Other assets (552) 5 (552) 104
Accounts payable and accrued liabilities (148) 3,778 188 4,512
Payroll and related liabilities (10) (118) (1,688) 598
--------- --------- --------- ---------
Net cash provided by (used in) operating activities 1,689 4,775 2,990 10,200
--------- --------- --------- ---------
Net cash provided by (used in) discontinued operating activities 15,975 (11,858) 5,355 (902)
--------- --------- --------- ---------
Net cash (used in) provided by extraordinary items (51) - (431) -
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses - 198,757 35,246 402,878
Purchases of businesses, net of cash acquired - - (1,200) (1,122)
Capital expenditures (92) (118) (622) (246)
Purchases of Short-term investments (19,930) - (19,930) -
--------- --------- --------- ---------
Net cash (used in) provided by investing activities (20,022) 198,639 13,494 401,510
--------- --------- --------- ---------
Net cash provided by (used in) discontinued investing activities - 3,862 (33) (7,346)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings - - - 58,996
Payments on borrowings - (91,042) - (350,176)
Payments on capital lease obligations (83) (57) (164) (132)
Proceeds from stock option exercises - 231 143 297
Repurchases of stock (297) (6,127) (134,738) (6,127)
--------- --------- --------- ---------
Net cash (used in) provided by financing activities (380) (96,995) (134,759) (297,142)
--------- --------- --------- ---------
Net cash (used in) provided by discontinued financing activities - (3,118) - (14,407)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents (2,789) 95,305 (113,384) 91,913
CASH AND CASH EQUIVALENTS, beginning of period 34,986 1,154 145,581 3,718
CASH AND CASH EQUIVALENTS, discontinued operations - 3,402 4,230
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 32,197 $ 99,861 $ 32,197 $ 99,861
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 12 $ 867 $ 44 $ 10,044
========= ========= ========= =========
Income taxes paid $ - $ 79 $ 180 $ 919
========= ========= ========= =========
Borrowings on capital leases $ - $ 272 $ 68 $ 531
========= ========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
5
EDGEWATER TECHNOLOGY, INC.
--------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. ORGANIZATION:
------------
Founded in 1992, Edgewater Technology is an award-winning strategic
consulting firm that specializes in providing technical consulting, custom
software development and system integration services to middle-market clients.
We develop scalable technology solutions, which expedite business processes and
provide competitive advantages for our clients. Our consultants collaborate with
our clients to translate business goals into technology-driven strategies.
Headquartered in Wakefield, Massachusetts, Edgewater Technology has developed a
partnership approach with its clients, targeting strategic, mission-critical
applications. With over 160 strategic, 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 in Massachusetts, New
Hampshire, Arkansas, Minnesota, and North Carolina.
Our full range of consulting and systems services offer exceptional
advantages to our clients. We focus on business processes and long-term
technology solutions to customize software applications through a
multidisciplinary approach, which provides our clients with a strong return on
investment and reduced operational cost. Our consultants partner with each
client to design, develop and implement scalable applications that support
future growth.
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.
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 $8.00 per share for aggregate consideration of $131.1 million including fees,
and common stock subject to certain vested in-the-money stock options for
aggregate consideration of $0.2 million. In addition, during the first nine
months of 2001, we repurchased 892,600 shares of our common stock for an average
price of $4.07 per share.
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
6
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.
The results of operations for the three and nine months ended September
30, 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 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.
3. BUSINESS TRANSACTIONS:
---------------------
Effective April 1, 1999, we acquired Edgewater Technology (Delaware),
Inc. ("Edgewater"), a full-service provider of technical consulting, custom
software development and system integration services located in Boston's Route
128 technology corridor. Edgewater was acquired for aggregate consideration of $
44.6 million, of which $1.2 million was paid during the nine months ended
September 30, 2001. No further payments are required under the Edgewater
purchase agreement.
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 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.
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 $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
7
the first quarter of 2001. On July 18, 2001, we received approximately $1.4
million from Cross Country TravCorps, Inc. pursuant to a post-closing working
capital adjustment provision that was negotiated as a part of the Transaction.
During the third and fourth quarters of 2000, as a result of the
impending sale of our remaining businesses unrelated to our technology strategy
and solutions division, 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, was complete during the third quarter of 2001. The restructuring
expense includes future contractual obligations to certain employees, which
extend through December 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 3,435
--------
Accrual at September 30, 2001 $ 341
========
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 $0.0 and $7.7 million for the three and nine months
ended September 30, 2001 and were $61.2 million and $635.7 million for the three
and nine months ended September 30, 2000, respectively. Operating loss from
discontinued operations was $0.0 and $1.6 million for the three and nine months
ended September 30, 2001 and was $3.0 million and $141.0 million for the three
and nine months ended September 30, 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. From December
2000 through the first nine months of 2001, we incurred expenses totaling
approximately $1.0 million 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 of $0.3
million and the applicable tax effect, in the accompanying consolidated
statements of operations.
6. EARNINGS PER COMMON SHARE:
-------------------------
A reconciliation of net income (loss) and weighted average shares used
in computing basic and diluted earnings per share is as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
-------- -------- --------- --------
(In Thousands, Except Per Share Data)
Basic earnings per share:
Net income (loss) applicable to common shares $ 70 $ 61,578 $ 3,466 $ (43,267)
========= ========= ========= =========
Weighted average common shares outstanding 11,629 29,175 13,275 29,387
========= ========= ========= =========
Basic earnings (loss) per share of common stock $ 0.01 $ 2.11 $ 0.26 $ ( 1.47)
========= ========= ========= =========
Diluted earnings per share:
Net income (loss) applicable to common shares $ 70 $ 61,578 $ 3,466 $ (43,267)
========= ========= ========= =========
Weighted average common shares outstanding 11,629 29,175 13,275 29,387
Dilutive effect of stock options - 58 - 105
--------- --------- --------- ---------
Weighted average common shares, assuming
dilutive effect of stock options 11,629 29,233 13,275 29,492
========= ========= ========= =========
Diluted earnings (loss) per share of common stock $ 0.01 $ 2.11 $ 0.26 $ ( 1.47)
========= ========= ========= =========
Options to purchase approximately 4.5 million shares of common stock (at
prices ranging from $4.00 to $39.63 per share) were outstanding during the three
and nine months ended September 30, 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 September 30, 2001.
Options to purchase approximately 3.1 million shares of common stock (at
prices ranging from $6.30 to $40.31 per share) and 3.0 million shares of common
stock (at prices ranging from $7.18 to $40.31 per share) were outstanding during
the three and nine months ended September 30, 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.
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
7. SEGMENT INFORMATION:
-------------------
As a result of the divestiture transactions described in Note 4,
Edgewater Technology, the consulting and systems integration division, now
represents our only segment of business; therefore no segment data has been
provided.
8. RELATED PARTY:
-------------
Synapse Group, Inc., a significant customer, which accounted for 45.0%
and 37.9% of our revenues for the three and nine months ended September 30,
2001, is considered a related party as their President and Chief Executive
Officer Michael Loeb is also a member of our Board of Directors.
9. NEW ACCOUNTING PRONOUNCEMENTS:
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", which improves the transparency of the accounting and reporting
for business combinations by requiring that all business combinations be
accounted for under the purchase method of accounting. This statement is
effective for all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued 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 infinite life, will no longer be amortized; however, these assets will be
reviewed for impairment on a periodic basis. This statement becomes effective
January 1, 2002.
As a result of these accounting pronouncements, at the end of our fiscal
year December 31, 2001, we will discontinue amortizing intangible assets related
to goodwill and will periodically review the assets for impairment. Our goodwill
amortization expense for first nine months of 2001 totaled $3.1 million, of
which $1.0 million related to the three months ended September 30, 2001. Our
total unamortized goodwill as of September 30, 2001 was $31.4 million.
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. The Company is
currently reviewing this statement to determine its effect on the Company's
financial statements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Business Overview
Founded in 1992, Edgewater Technology is an award-winning strategic
consulting firm that specializes in providing technical consulting, custom
software development and system integration services to middle-market clients.
We develop scalable technology solutions, which expedite business processes and
provide competitive advantages for our clients. 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 over 160 strategic, 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 in Massachusetts, New
Hampshire, Arkansas, Minnesota, and North Carolina.
Edgewater Technology offers an end-to-end platform of technology-driven
business solutions to assist organizations tackle the barriers of technology
transition, including:
(1) Strategy -- Our consulting services aid customers in translating
business goals into technology-driven strategies by taking full
advantage of Internet and other technologies. Strategy 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) 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 presences, 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.
Since our inception in 1992, Edgewater Technology has focused on five
key core values that differentiates it from the competition:
(1) Delivery Excellence -- We have an enviable delivery history that is
built upon nine years of 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 throughout the entire process.
(2) Strong Operational Metrics - Since our founding in 1992, 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 above average utilization,
gross profit and a strong balance sheet.
(3) Technology Excellence - We extend proven key strategic technologies
through the focus of vertical business practices to build scalable
custom solutions providing a solid return on the investment and thereby
competitive advantage to the clients. Edgewater's area of technical
expertise include Web-based solutions, architectural strategy,
Internet/Intranet/Extranet; e-commerce; computer telephony, transaction
processing and legacy systems integration.
(4) Middle-Market Focus -- We are positioned to serve the technology needs
of the middle-market through our strategy of positioning solutions
centers in the 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) 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 and deliver our products and services
include Financial Services (retail banking; insurance; portfolio/asset
management);
11
Health Care; Transportation/Logistics (eTail/Retail; Trucking
Transportation) and Emerging Markets (food/agriculture; education).
Discontinued Operations
Our financial statements reflect discontinued operations arising as a
result of 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 IM Acquisition, Inc. 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. 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 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 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 $0.0 and $7.7 million for the three and nine months
ended September 30, 2001 and were $61.2 million and $635.7 million for the three
and nine months ended September 30, 2000, respectively. Operating loss from
discontinued operations was $0.0 and $1.6 million for the three and nine months
ended September 30, 2001 and was $3.0 million and $141.0 million for the three
and nine months ended September 30, 2000, respectively.
12
Background
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, 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 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 and Nine Months Ended September 30, 2001 Compared To
Results For The Three and Nine Months Ended September 30, 2000
Revenues. Revenues for the three months ended September 30, 2001 decreased
$2.4 million, or 28%, to $6.0 million compared to $8.4 million for the three
months ended September 30, 2000. Revenues decreased $2.9 million, or 13%, to
$20.5 million for the nine months ended September 30, 2001 compared to $23.4
million for the nine months ended September 30, 2000. 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 September 30, 2001 and 2000, one and three customers each
contributed more than 10% of revenues. For the nine months ended September 30,
2001 and 2000, one and three customers each contributed more than 10% of
revenues. Our project backlog as of September 30, 2001 was $17.3 million,
an increase of 37% over the same period last year and includes $11.9 million of
services to be delivered in 2002.
Cost of Services. Project personnel costs consist principally of salaries,
payroll taxes, employee benefits and un-reimbursed travel expenses for personnel
dedicated to client projects. These costs represent the most significant expense
we incur in providing our services. Project personnel costs decreased $0.4
million, or 10%, to $3.7 million for the three months ended September 30, 2001
compared to $4.1 million for the three months ended September 30, 2000. For the
nine months ended September 30, 2001 project personnel costs increased $0.8
million, to $12.0 million compared to $11.2 million during the same period a
year ago. Utilization is a function of our ability to utilize our billable
professionals and generate revenues. Our utilization rates have been
historically above 80%, but have declined to 69% during the current quarter,
resulting in lower gross profit and gross margin as compared to previous
periods. This decrease is primarily the result of lower revenues and the planned
retention of our non-utilized consultant base in order to effectively respond to
increased demand for the consulting, software development and integration
services we provide.
13
Gross Profit. Gross profit for the three months ended September 30, 2001
decreased $1.9 million, or 46%, to $2.3 million compared to $4.2 million for the
three months ended September 30, 2000. Gross profit decreased $3.7 million, or
31%, to $8.5 million for the nine months ended September 30, 2001 compared to
$12.2 million for the nine months ended September 30, 2000. The decrease in
gross profit directly relates to the decrease in revenues and utilization during
the period. Gross profit margin for the three and nine months ended September
30, 2001 was 38.3% and 41.4%, respectively, compared to 50.8% and 52.1% during
the same periods one year ago.
SG&A. Selling, general and administrative expenses ("SG&A") decreased $1.4
million, or 39%, to $2.2 million for the three months ended September 30, 2001
compared to $3.6 million for the three months ended September 30, 2000. SG&A
decreased $2.1 million, or 20%, to $8.3 million for the nine months ended
September 30, 2001 compared to $10.4 million for the nine months ended September
30, 2000. SG&A as a percentage of revenue was 37.4% and 42.6% for the three
months ended September 30, 2001 and 2000, respectively, and was 40.6% and 44.3%
for the nine months ended September 30, 2001 and 2000, respectively. SG&A
decreased primarily as a result of our scheduled reduction in corporate staff,
which was due to the divestiture of our businesses unrelated to our technology
strategy and solutions division.
EBITDA. EBITDA decreased $.6 million to $0.1 million for the three months
ended September 30, 2001 as compared to $0.7 million for the same period in
2000. EBITDA decreased $1.6 million to $0.2 million for the nine months ended
September 30, 2001 as compared to $1.8 million for the comparable period in
2000. EBITDA as a percentage of revenues was 1.0% and 8.2% for the three months
ended September 30, 2001 and 2000, respectively, and was .8% and 7.9% for the
nine months ended September 30, 2001 and 2000, respectively. The decrease in
EBITDA and EBITDA margins is primarily the result of the economic slowdown,
which resulted in lower revenues, and higher project personnel costs associated
with our planned retention of non-utilized consultant base which were in part
offset by decreased SG&A as described above. As our consultant costs are
relatively fixed, the loss of revenue resulting from the Wakefield tragedy
directly affected 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 three months ended
September 30, 2001 as compared to $1.1 million for the same period last year.
Depreciation and amortization expense increased $.8 million to $4.1 million for
the nine months ended September 30, 2001 as compared to $3.3 million for the
nine months ended September 30, 2000. These increases are a result of our
reallocation of Edgewater's purchase price between goodwill and intangible
assets during the fall of 2000.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under this statement, goodwill, as well as other intangibles determined
to have an infinite life, will no longer be amortized; however, these assets
will be reviewed for impairment on a periodic basis. This statement is effective
beginning January 1, 2002. Accordingly, at the end of our fiscal year December
31, 2001 we will discontinue amortizing our intangible assets related to
goodwill and will periodically review the assets for impairment.
Our goodwill amortization expense for first nine months of 2001 totaled
$3.1 million, of which $1.0 million related to the three months ended September
30, 2001. Our unamortized goodwill as of September 30, 2001 was $31.4 million.
Operating Loss. Operating loss increased $0.9 million to $1.3 million for
the three months ended September 30, 2001 compared to $0.4 million for the same
period last year. Operating loss increased $2.5 million to $3.9 million for the
nine months ended September 30, 2001 compared to $1.4 million for the comparable
period in 2000. Operating losses increased from the prior year primarily due to
lower revenues, gross profit and higher amortization expense as discussed above.
Interest Income (Expense), Net. We earned net interest income of $0.4
million and $1.7 million for the three and nine months ended September 30, 2001,
respectively, as compared to net interest income of $1.0 million and $0.3
million for the three and nine months ended September 30, 2000, respectively.
Historically, 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 were placed in cash and 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.
14
Net (Loss) Income From Continuing Operations. We recognized a net loss
from continuing operations of $1.0 million for the three months ended September
30, 2001 compared to net income from continuing operations of $0.7 million for
the three months ended September 30, 2000. Net loss from continuing operations
increased $2.3 million to $2.7 million for the nine months ended September 30,
2001 as compared to net loss of $0.4 million for the comparable period in 2000.
Net margin from continuing operations was (16.8%) and 8.9% for the three months
ended September 30, 2001 and 2000, respectively, and was (13.1%) and (1.5%) for
the nine months ended September 30, 2001 and 2000, respectively. In addition to
the matters discussed above, the net losses from continuing operations in the
current year were negatively affected by the tax provisions of $0.1 million and
$0.5 million for the three and nine months ended September 30, 2001,
respectively, which is the result of non-deductible goodwill amortization. The
federal taxes are not expected to be paid out in cash, as we plan to utilize net
operating loss carryforwards to offset taxable income. Our tax losses relate to
the sale of our businesses unrelated to our technology strategy and solutions
division and resulted in a deferred tax asset of $22.6 million for use to offset
taxable income in future years and a current tax receivable of approximately
$0.8 million for VAT tax claims related to the sale of Robert Walters.
A Look Ahead. Our project backlog, as of October 24, 2001 was $18.9
million, of which $13.1 million relates to 2002 revenues. We will maintain our
focus on developing new client relationships and will continue to provide
impeccable delivery while being diligent with our business practices. We plan to
grow both organically and through strategic acquisition opportunities that would
augment our vertical businesses and/or increase our geographic presence.
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
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 during 2000, we repurchased 944,000 shares of our common stock for
approximately $6.2 million. From January 1, 2001 through September 30, 2001, we
repurchased 892,600 shares of our common stock for approximately $3.6 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 Offering 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. Under the credit facility, we had net payments of
$91.0 million and $291.2 million for the three and nine months ended September
30, 2000, respectively. In July 2000, we paid-off all of our outstanding
borrowings under the credit facility and terminated the credit facility.
Net cash provided by continuing operating activities was $1.7 million
and $4.8 million for the three months ended September 30, 2001 and 2000,
respectively, and was $3.0 million and $10.0 million for the nine months ended
September 30, 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.
Net cash provided by (used in) continuing investing activities was
($20.0) million and $198.6 million for the three months ended September 30, 2001
and 2000, respectively, and was $13.5 million and $401.5 million for the nine
months ended September 30, 2001 and 2000, respectively. Cash provided by
continuing investing activities was primarily attributable to the proceeds from
the sale of our various businesses unrelated to our technology strategy and
solutions
15
division. Cash used in continuing investing activities was primarily
attributable to cash paid for contingent consideration for acquisitions
completed during prior periods as well as capital expenditures.
Net cash used in continuing financing activities was $0.4 million and
$97.0 million for the three months ended September 30, 2001 and 2000,
respectively, and was $134.8 million and $297.1 million for the nine months
ended September 30, 2001 and 2000, respectively. For the nine months ended
September 30, 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. For the three and nine months
ended September 30, 2000, cash used in financing activities was primarily
related to repayments on our credit facility.
Net cash provided by discontinued operations was $16.0 million and $5.4
million for the three months and nine months ended September 30, 2001,
respectively. These amounts relate to expenses incurred or accrued related to
discontinued operations and tax refunds received during the third quarter.
As a result of the above, and as a result of cash flows from
discontinued operations, our combined cash and cash equivalents decreased $2.8
million and $113.4 million for the three and nine months ended September 30,
2001, respectively, and increased $95.3 million and $91.9 million in the three
and nine months ended September 30, 2000, respectively.
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 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 (A) under the headings "Summary - Risks of Not
Approving the Transaction", "Summary - Recent Events", " Edgewater Following
Completion of the Transaction", "Factors Affecting Edgewater Following the
Transaction" and "Forward Looking Statements" in our Proxy Statement filed with
the Securities and Exchange Commission on February 6, 2001 and (B) under the
heading "Business - Factors Affecting Finances, Business Prospects and Stock
Volatility" 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) inability to execute upon growth objectives; (2) changes in
industry trends, such as decline in the demand for Solutions, Strategy and
Support services; (3) failure to obtain new customers or successfully retain
significant existing customers; (4) loss of key executives; (5) general economic
and business conditions (whether foreign, national, state or local) which
include, but are not limited to, slowdown in information technology services
spending; (6) failure of the general economy or IT services spending to rebound
or otherwise improve; (7) lack of attractive growth opportunities; (8) the
inability to grow revenues, backlog, utilization or market share; (9) the
strength or visibility of the company's backlog of business; (10) inability to
recruit and retain professionals with the high level of information technology
skills and experience needed to provide our services; (11) 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 $22.1 million in this Form 10-Q; and (12) an adverse
finding, outcome or result with respect to the matter described in Part II, Item
I, "Legal Proceedings" of this 10-Q involving our company, Staffmark
Investment, LLC and affiliates of Staffmark Investment, LLC. Actual events or
results may differ materially. These factors may cause our actual results to
differ materially from any forward-looking statements.
16
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.
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 are
requesting 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 request 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 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 of alleged punitive damages
concerning alleged breaches and alleged misrepresentations, respectively, under
and in connection with the Purchase Agreement. We believe that the Arkansas
Action is without merit and deny all of the allegations involving breach of
contract and misrepresentation in the Arkansas Action. Our company will
vigorously pursue the Delaware Action and vigorously defend the Arkansas Action.
The parties in both the Delaware Action and the Arkansas Action, with the
concurrence of both courts, have agreed to a motion and briefing calendar to
determine the forum for these litigation matters in the near future.
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 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
None
17
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: November 9, 2001 /s/ CLETE T. BREWER
------------------------------
Clete T. Brewer
Chairman and Chief Executive Officer
Date: November 9, 2001 /s/ TERRY C. BELLORA
------------------------------
Terry C. Bellora
Chief Financial Officer
18