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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 June 30, 2002
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from to
----- -----
Commission file number: 0-20971
Edgewater Technology, Inc.
(Exact Name of Registrant as Specified in its Charter)
Delaware 71-0788538
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
20 Harvard Mill Square
Wakefield, MA 01880-3209
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (781) 246-3343
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 August 14, 2002 was 11,560,006.
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EDGEWATER TECHNOLOGY, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
Page
----
PART I -- FINANCIAL INFORMATION
Item 1 -- Unaudited Financial Statements
Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations for the Three and Six Months Ended 4
June 30, 2002 and 2001
Consolidated Statements of Cash Flows for the Three and Six Months Ended 5
June 30, 2002 and 2001
Notes to Consolidated Financial Statements 6
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business Overview 13
Financial Information 14
Critical Accounting Policies 14
Results for the Three and Six Months Ended June 30, 2002 Compared to
Results for the Three and Six Months Ended June 30, 2001 15
Discontinued Operations 17
Liquidity and Capital Resources 17
New Accounting Pronouncements 18
Legal Proceedings 18
Special Note Regarding Forward Looking Statements 18
Item 3 -- Quantitative and Qualitative Disclosures
About Market Risk 19
PART II -- OTHER INFORMATION
Item 1 -- Legal Proceedings 20
Item 2 -- Changes in Securities and Use of Proceeds 20
Item 4 -- Submission of Matters to a Vote of Security Holders 20
Item 6 -- Exhibits and Reports on Form 8-K 21
(a) Exhibits
(b) Reports on Form 8-K
Signatures 22
2
EDGEWATER TECHNOLOGY, INC.
Consolidated Balance Sheets
(In Thousands Except Per Share Data)
June 30, December 31,
2002 2001
--------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 33,993 $ 40,128
Short-term investments 13,744 11,373
Accounts receivable, net 2,912 4,045
Deferred income taxes, net 491 491
Prepaid expenses and other current assets 688 859
--------- ---------
Total current assets 51,828 56,896
Property and equipment, net 1,787 2,056
Intangible assets, net (Note 10) 19,190 31,807
Deferred income taxes, net (Note 3) 22,673 22,032
Other assets 34 56
--------- ---------
Total assets $ 95,512 $ 112,847
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,541 $ 1,801
Other liabilities including restructuring and discontinued operations 2,489 4,841
Current portion of capital lease obligations 182 293
Accrued payroll and related liabilities 497 629
Other liabilities 225 231
--------- ---------
Total current liabilities 4,934 7,795
Long-term liabilities 3 60
Commitments and contingencies (Note 15)
Stockholders' equity:
Preferred stock, $.01 par value; 10,000 shares authorized,
no shares issued or outstanding -- --
Common stock, $.01 par value; 200,000 shares authorized, 29,596 shares
issued, 11,618 and 11,594 shares outstanding as of June 30, 2002
and December 31, 2001, respectively 296 296
Paid-in capital 217,355 217,438
Treasury stock, at cost, 17,978 and 18,002 shares at June 30, 2002
and December 31, 2001, respectively (139,763) (139,916)
Retained earnings 12,687 27,174
--------- ---------
Total stockholders' equity 90,575 104,992
--------- ---------
Total liabilities and stockholders' equity $ 95,512 $ 112,847
========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
3
EDGEWATER TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------- -------- --------- -------
(Unaudited)
Revenues $ 4,811 $ 6,748 $ 9,393 $14,505
Cost of services 2,873 4,100 6,278 8,341
------- -------- -------- -------
Gross profit 1,938 2,648 3,115 6,164
Operating expenses:
Selling, general and administrative 2,240 2,612 4,458 6,052
Depreciation and amortization (Note 10) 242 1,386 532 2,759
Restructuring charges (Note 6) -- -- 349 --
------- -------- -------- -------
Operating loss (544) (1,350) (2,224) (2,647)
Interest income and other, net 208 441 428 1,377
------- -------- -------- -------
Loss before taxes and extraordinary item (336) (909) (1,796) (1,270)
Tax provision (Note 3) 241 92 241 402
------- -------- -------- -------
Net loss from continuing operations before
extraordinary item and change in accounting principle (577) (1,001) (2,037) (1,672)
Discontinued operations (Note 8):
Loss from operations of discontinued divisions, net of
applicable taxes -- (393) -- (1,403)
Gain on sale of division, net of applicable taxes -- -- -- 6,514
Extraordinary item, net of applicable taxes (Note 9) -- 113 -- (43)
Change in accounting principle (Note 10) -- (12,451) --
------- -------- -------- -------
Net (loss) income ($577) ($1,281) ($14,488) $ 3,396
======= ======== ======== =======
Basic (loss) income per share
Continuing operations ($0.05) ($0.09) ($0.18) ($0.12)
======= ======== ======== =======
Discontinued operations -- ($0.03) -- $0.36
======= ======== ======== =======
Extraordinary item -- $0.01 -- --
======= ======== ======== =======
Change in accounting principle -- -- ($1.07) --
======= ======== ======== =======
Net (loss) income ($0.05) ($0.11) ($1.25) $0.24
======= ======== ======== =======
Diluted (loss) income per share
Continuing operations ($0.05) ($0.09) ($0.18) ($0.12)
======= ======== ======== =======
Discontinued operations -- ($0.03) -- $0.36
======= ======== ======== =======
Extraordinary item -- $0.01 -- --
======= ======== ======== =======
Change in accounting principle -- -- ($1.07) --
======= ======== ======== =======
Net (loss) income ($0.05) ($0.11) ($1.25) $0.24
======= ======== ======== =======
The accompanying notes are an integral part
of these consolidated financial statements.
4
EDGEWATER TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------- ------- -------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($ 577) ($1,281) ($14,488) $ 3,396
Loss from operations of discontinued divisions -- 393 -- 1,403
Gain on sale of division -- -- -- (6,514)
Change in accounting principle -- -- 12,451 --
Extraordinary item, net of applicable taxes -- (113) -- 43
------- ------- -------- ---------
Net loss from continuing operations (577) (1,001) (2,037) (1,672)
Adjustments to reconcilenet loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 242 1,386 531 2,759
Provision for bad debts 40 80 86 130
Deferred income taxes -- 92 -- 401
Other, net -- -- -- --
Change in operating accounts, net of effects of
dispositions:
Accounts receivable (276) 776 1,071 177
Prepaid expenses and other current assets 131 391 147 848
Other assets 22 -- 22 --
Accounts payable and accrued liabilities 624 186 (245) 336
Accrued payroll and related liabilities (215) (786) (63) (1,678)
Other liabilities 12 -- (6) --
------- ------- -------- ---------
Net cash provided by (used in) operating activities 3 1,161 (494) 921
------- ------- -------- ---------
Net cash (used in) provided by extraordinary item (56) 37 (85) (380)
------- ------- -------- ---------
Net cash used in discontinued operating activities (708) (8,617) (2,922) (10,620)
------- ------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses -- -- -- 35,246
Purchases of short-term investments 9,845 -- (2,370) --
Purchases of businesses, net of cash acquired -- -- -- (1,200)
Capital expenditures (49) (252) (97) (530)
------- ------- -------- ---------
Net cash provided by (used in) investing activities 9,796 (252) (2,467) 33,516
------- ------- -------- ---------
Net cash used in discontinued investing activities -- -- -- (33)
------- ------- -------- ---------
CASH FLOW FROM FINANCING ACTIVITES:
Payments on borrowings (83) (81) (167) (81)
Proceeds from employee stock plans and stock option
exercises -- -- -- 143
Repurchase of stock -- (1,249) -- (134,441)
------- ------- -------- ---------
Net cash used in financing activities (83) (1,330) (167) (134,379)
------- ------- -------- ---------
Net increase (decrease) in cash and cash equivalents 8,952 (9,038) (6,135) (110,595)
CASH AND CASH EQUIVALENTS, beginning of period 25,041 44,024 40,128 145,581
------- ------- -------- ---------
CASH AND CASH EQUIVALENTS, end of period $33,993 $34,986 $ 33,993 $ 34,986
------- ------- -------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 6 $ 14 $ 16 $ 32
======= ======= ======== =========
Borrowings on capital leases -- -- -- $ 68
======= ======= ======== =========
Income taxes paid -- -- -- $ 180
======= ======= ======== =========
The accompanying notes are an integral part
of these consolidated financial statements.
5
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ORGANIZATION:
Edgewater Technology, Inc. ("Edgewater", "Edgewater Technology" or the
"Company" f/k/a StaffMark, Inc.) is an award-winning strategic consulting firm
that specializes in providing technical consulting, custom software development
and system integration services to middle-market companies and divisions of
large Global 2000 companies. We develop scalable technology solutions, which
expedite business processes and provide our customers with competitive
advantages. Our consultants collaborate with clients to translate business goals
into technology-driven strategies. Headquartered in Wakefield, Massachusetts,
Edgewater Technology has developed a partnership approach with our clients,
targeting strategic, mission-critical applications. With approximately 124
technical consulting professionals, Edgewater Technology services our client
base by leveraging a combination of leading-edge technologies and proven
reengineering techniques provided by our network of strategically positioned
solutions centers.
2. REVENUE RECOGNITION:
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.
For the three months ended June 30, 2002 and 2001, one and three customers,
respectively, each contributed more than 10% of revenues. For the six months
ended June 30, 2002 and 2001, two customers, each contributed more than 10% of
revenues. For the three and six months ended June 30, 2002 our three largest
customers represented 82% and 84% of our revenues in the aggregate,
respectively. For the three and six months ended June 30, 2001 our three largest
customers represented 63% and 57% of our revenues in the aggregate,
respectively.
3. INCOME TAXES:
The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full fiscal year. Cumulative
adjustments to the tax provision are recorded in the interim period in which a
change in the estimated annual effective rate is determined. Provisions recorded
for the three and six months ended June 30, 2002 represent certain franchise
taxes payable.
The Company has deferred tax assets which have arisen primarily in
connection with the sale of non-Solutions business divisions in 2000 and the
loss from operations of discontinued divisions, as well as other temporary
differences between book and tax accounting and certain available tax credits.
The Company has recorded a valuation allowance against the net deferred tax
assets of approximately $15 million as of June 30, 2002 and December 31, 2001
due to uncertainties related to the ability to utilize some of the deferred tax
assets, primarily consisting of certain net operating losses carried forward and
foreign tax credits, before they expire. The Company considers scheduled
reversals of deferred tax liabilities, projected future taxable income, ongoing
tax
6
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
planning strategies and other matters, including the period over which the
deferred tax assets will be recoverable, in assessing the need for, and the
amount of, any valuation allowance. In the event that actual results differ from
these estimates or we adjust these estimates in future periods, an adjustment to
the deferred tax asset may be recorded.
4. BASIS OF PRESENTATION:
The accompanying interim financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (the
"SEC"). Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to those rules and regulations, although
we believe that the disclosures made are adequate to ensure the information
presented is not misleading.
The accompanying interim financial statements reflect all adjustments
(which were of a normal, recurring nature) that, in the opinion of management,
are necessary to present fairly our financial position, results of operations
and cash flows as of and for the interim periods presented. All significant
intercompany transactions have been eliminated in the accompanying consolidated
financial statements. Additionally, certain reclassifications have been made to
prior period balances in order to conform with the current period presentation.
These financial statements should be read in conjunction with the audited
financial statements and notes thereto included in our 2001 Annual Report on
Form 10-K as filed with the SEC on March 27, 2002.
The results of operations for the three and six months ended June 30, 2002
are not necessarily indicative of the results to be expected for any future
period or the full fiscal year. Our revenue and earnings may fluctuate from
quarter to quarter based on factors within and outside our control including
variability in demand for Internet related professional services, the length of
the sales cycle associated with our service offerings, the number, size and
scope of our projects, and the efficiency with which we utilize our employees.
As discussed in Note 8, during 2000 and 2001, Edgewater sold its interest
in all of its non-Solutions business divisions. The operating results for these
divisions have been included in discontinued operations in the accompanying
consolidated financial statements.
5. SHORT TERM INVESTMENTS:
Short-term investments are classified as held-to-maturity securities, which
are recorded at amortized cost and consist of marketable instruments, which
include, but are not limited to, municipal government obligations and commercial
paper. All investments having original maturities greater than three months are
considered short-term investments.
6. RESTRUCTURING CHARGES:
In February 2002, due to the economic climate that has postponed or delayed
spending for information technology services, Edgewater announced that it was
undertaking cost cutting measures by realigning its workforce. Edgewater reduced
its overall headcount by 38 employees, or 19% of its total workforce. The
Company recorded a restructuring charge in the first quarter of 2002 of
approximately $350,000, which consisted primarily of severance and similar
employee termination expenses. As of June 30, 2002, all accrued restructuring
amounts have been paid.
7. BUSINESS TRANSACTIONS:
Effective April 1, 1999, the Company acquired Edgewater Technology
(Delaware), Inc. ("Edgewater Delaware"), an award-winning strategic consulting
firm that specializes in providing technical consulting, custom software
development and system integration services to middle-market companies and
divisions of large Global 2000 companies. Edgewater Delaware is the Company's
primary operating subsidiary. As the acquisition was accounted for as a purchase
business combination, the
7
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
consolidated financial statements include the operating results of Edgewater
Delaware from the date of acquisition. The cost of this acquisition was
allocated based on estimated fair market value of the assets acquired and
liabilities assumed with the excess costs over fair values of net assets
acquired recorded as goodwill. The carrying value of the goodwill was reduced
during the first quarter of 2002, according to the provisions of SFAS 142, as
discussed in Note 10.
Edgewater Delaware was acquired for aggregate consideration of $ 44.6
million, of which $1.2 million was paid during the six months ended June 30,
2001.
8. DISCONTINUED OPERATIONS:
During the first quarter of 1999, market values for publicly traded
staffing companies began to decline. At that time, the Company (Edgewater
Technology, Inc. and its subsidiaries, formerly StaffMark, Inc.) was engaged in
the temporary and permanent placement and staffing services businesses,
including light industrial and commercial staffing, finance and accounting
staffing and placement, traditional information technology ("IT") staffing and
solutions services (excluding Solutions project work), legal staffing and
placement services and clinical trials staffing and services. For many staffing
companies, this downward trend subsequently continued or deteriorated further
and was compounded by a Year 2000-related slowdown in demand for IT staffing.
These circumstances contributed to depressed market valuations for
publicly-traded staffing entities.
In response to these developments, the Company began to explore, during the
second half of 1999, strategic alternatives for each of our staffing business
platforms in an effort to maximize stockholder value. After evaluating our
traditional businesses, our systems integration and consulting business and our
debt levels, management and the Board of Directors chose to take decisive
action. The Company decided to undergo a comprehensive program to refocus future
growth initiatives on our systems integration and consulting business, Edgewater
Delaware, and to effect the following divestitures of each of our staffing
businesses.
Our restructuring included the following disposition and other
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."
. On July 13, 2000, we sold, through two indirect wholly-owned
subsidiaries, all of our equity interest in Robert Walters plc
("Robert Walters") through an initial public offering ("IPO") on the
London Stock Exchange. Robert Walters had previously been the finance
and accounting placement and staffing consultancy platform within our
Professional/IT segment. Our share of the offering gross proceeds was
$199.2 million prior to offering commissions, fees and expenses.
. On September 22, 2000, we sold all of the outstanding stock of
Strategic Legal Resources, Inc. ("Strategic Legal"), the legal
staffing division within our Professional/IT segment, to a company
owned by a group of investors including MidMark Capital II, L.P. and
Edwardstone & Company for $13.3 million, of which $4.3 million was
represented by a promissory note that was collected in January 2001.
8
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
. 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 executed a definitive agreement to sell
ClinForce, our clinical trials support services division, to Cross
Country TravCorps, Inc. for approximately $31.0 million in cash,
subject to potential upward or downward post-closing working capital
adjustment (the "Transaction"). We consummated the Transaction and
received proceeds on March 16, 2001. On July 18, 2001, we received
approximately $1.4 million from Cross Country TravCorps, Inc. with
respect to the post-closing working capital purchase price adjustment.
In addition, nonrecurring restructuring charges relating to the
closing of our corporate headquarters (in Fayetteville, Arkansas) have
been included, as a result of the sale of ClinForce and consistent
with the treatment of ClinForce results, as a part of discontinued
operations.
. On December 21, 2000, we commenced an issuer tender offer (the "Tender
Offer"), which expired on January 23, 2001, and we acquired (effective
January 30, 2001) 16.25 million shares of our common stock at $8.00
per share (the "Tender Offer Price") for aggregate consideration of
$130 million, and common stock subject to certain vested in-the-money
stock options for aggregate consideration of $0.2 million.
As a result of the completion of the non-Solutions strategic alternative
transactions described above, the operating results for ClinForce for 2001 and
our corporate transition costs have been included in discontinued operations in
the accompanying consolidated financial statements. Revenues and operating loss
from discontinued operations were $7.7 million and $1.6 million, respectively,
for the six months ended June 30, 2001.
9. EXTRAORDINARY ITEM - WAKEFIELD TRAGEDY:
On December 26, 2000, a tragedy occurred at our Wakefield, Massachusetts
office, where seven employees were murdered. We incurred expenses totaling
approximately $1.0 million through June 30, 2002, for items such as legal fees,
foundation costs, family and employee counselors, and property and facility
expenses. These costs are presented as an extraordinary item, net of insurance
proceeds and the applicable tax effect, in the accompanying consolidated
statements of operations. For the three months ended June 30, 2001, amounts
recorded as extraordinary item represent insurance proceeds, net of the
applicable income tax effect. For the six months ended June 30, 2001, amounts
recorded as extraordinary item represent additional accruals, net of insurance
proceeds, and the applicable income tax effect.
10. CHANGE IN ACCOUNTING PRINCIPLE:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." This statement applies to intangibles and goodwill
acquired after June 30, 2001, as well as goodwill and intangibles previously
acquired. Under this statement, goodwill, as well as other intangibles
determined to have an indefinite life, are no longer amortized; however, these
assets will be reviewed for impairment on a periodic basis. This statement
became effective January 1, 2002 and as a result, beginning January 1, 2002, we
discontinued amortizing intangible assets related to goodwill. Our goodwill
amortization expense for the three and six months ending June 30, 2001 totaled
$1.1 million and $2.2 million, respectively. Adjusted reported net income (loss)
assuming the exclusion of goodwill amortization for the three and six months
ended June 30, 2001 would have been ($0.2) million or ($0.02 EPS) and
$5.5 million or $0.39 EPS, respectively.
9
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company adopted SFAS No. 142 during the quarter ended March 31, 2002. In
connection with the adoption of this new standard, the Company obtained an
independent valuation of its business during the first quarter of 2002. As a
result of this evaluation, in which the declining market values of the IT
services sector played a major factor, the Company recorded a non-cash, goodwill
impairment charge of $12.5 million. Due to the non-deductibility of this
goodwill, the Company did not record a tax benefit in connection with the
impairment. Unamortized goodwill as of December 31, 2001 was $30.7 million. Our
total unamortized goodwill, net of the impairment charge, as of June 30, 2002
amounts to $18.3 million. This charge was recorded as a change in accounting
principle in the accompanying consolidated statement of operations.
11. EARNINGS PER SHARE:
A reconciliation of net (loss) income and weighted average shares used in
computing basic and diluted earnings per share is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- -------
(In Thousands, Except Per Share Data)
Basic earnings per share:
Net (loss) income applicable to common shares ($ 577) ($ 1,281) ($14,488) $ 3,396
======== ======== ======== =======
Weighted average common shares outstanding 11,616 11,700 11,611 14,098
======== ======== ======== =======
Basic (loss) income per share of common stock ($ 0.05) ($ 0.11) ($ 1.25) $ 0.24
======== ======== ======== =======
Diluted earnings per share:
Net (loss) income applicable to common shares ($ 577) ($ 1,281) ($14,488) $ 3,396
======== ======== ======== =======
Weighted average common shares outstanding 11,616 11,700 11,611 14,098
Dilutive effect of stock options -- -- -- --
======== ======== ======== =======
Weighted average common shares, assuming
dilutive effect of stock options 11,616 11,700 11,611 14,098
======== ======== ======== =======
Diluted (loss) earnings per share of common stock ($ 0.05) ($ 0.11) ($ 1.25) $ 0.24
======== ======== ======== =======
Options to purchase approximately 3.1 and 3.2 million shares of common
stock were outstanding during the three and six months ended June 30, 2002,
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. The prices of these options range from $4.00 to
$39.63 per share for the three and six months ended June 30, 2002. These options
were still outstanding as of June 30, 2002.
Options to purchase approximately 4.5 million shares of common stock were
outstanding during the three and six months ended June 30, 2001, 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.
The prices of these options ranged from $4.22 to $39.63 per share for the three
months ended June 30, 2001 and from $4.58 to $39.63 for the six months ended
June 30, 2001.
10
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. SEGMENT INFORMATION:
As a result of the divestiture transactions described in Note 8, Edgewater
Delaware, the consulting and systems integration operating subsidiary, now
represents our only segment of business; therefore no segment data has been
provided.
13. RELATED PARTY:
Synapse Group, Inc., one of our significant customers, is considered a
related party as its President and Chief Executive Officer is also a member of
the Company's Board of Directors. Revenues from Synapse group amounted to $3.2
million and $6.3 million, respectively, for the three and six months ended June
30, 2002. Revenues from Synapse group amounted to $2.7 million and $5.1 million,
respectively, for the three and six months ended June 30, 2001. Payments
received from Synapse Group for the six months ended June 30, 2002 and 2001,
amounted to $6.1 million and $3.8 million, respectively. Included in the
accounts receivable balance as of June 30, 2002 and December 31, 2001, is $2.1
million and $2.0 million from Synapse Group, Inc., which balance was within the
Company's normal business terms.
14. NEW ACCOUNTING PRONOUNCEMENTS:
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
adopted this new pronouncement during the first quarter of 2002, the adoption of
which did not have a material impact upon the Company's consolidated results of
operations, financial position or cash flows.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
SFAS 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections". SFAS 145 rescinds Statement No. 4, "Reporting Gains and Losses
from Extinguishments of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements". SFAS 145 also rescinds FASB Statement No. 44, "Accounting for
Intangible Assets of Motor Carriers". SFAS 145 amends FASB Statement No. 13,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to sale
leaseback transactions. SFAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provision of SFAS 145
related to the rescission of Statement No. 4 shall be applied in fiscal year
beginning after May 15, 2002. The provisions of SFAS 145 related to Statement
No. 13 should be for transactions occurring after May 15, 2002. Early
application of the provisions of this Statement is encouraged. The Company does
not expect the adoption of SFAS 145 will have a significant impact on its
consolidated results of operations, financial position or cash flows.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146 nullifies EITF No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity," which required a liability be recognized at the commitment date to an
exit plan. The Company is required to adopt the provisions of SFAS No. 146
effective for exit or disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of SFAS 146 will have a significant impact
on its consolidated results of operations, financial position or cash flows.
11
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. COMMITMENTS AND CONTINGENCIES:
On August 15, 2001, we filed a lawsuit in Delaware Chancery Court (the
"Delaware Action") against Staffmark Investment, LLC and a number of its
Delaware subsidiaries (collectively, the "LLC"). The LLC is a majority owned
subsidiary of Stephens Group, Inc. (the "Stephens Group"), which purchased our
company's commercial staffing business on June 28, 2000 (the "Commercial Sale")
pursuant to a purchase agreement dated May 16, 2000 (the "Purchase Agreement")
involving our company and the Stephens Group. In the Delaware Action, we
requested the Delaware Chancery Court to interpret the Purchase Agreement and
agree with our conclusion that our company has no contractual or other
responsibility to the LLC under or in connection with the Purchase Agreement. In
the Delaware Action, we also requested the court to prohibit and otherwise
enjoin any claims by the LLC under or in connection with the Purchase Agreement,
which is governed by Delaware law. On January 10, 2002, the Delaware Chancery
Court transferred the Delaware Action to Delaware Superior Court, which is a
court that adjudicates legal claims, as opposed to equitable claims.
On August 23, 2001, the LLC and the Stephens Group filed a lawsuit in
Washington County Circuit Court in Arkansas against our company (the "Arkansas
Action"), seeking in excess of $13 million of alleged actual, incidental and
consequential damages and not less than $25 million in punitive damages
concerning alleged breaches and alleged misrepresentations, respectively, under
and in connection with the Purchase Agreement. On December 21, 2001, the Judge
in the Washington County Circuit Court in Arkansas granted our motion to stay
the Arkansas Action in favor of the Delaware Action. On March 8, 2002, the
Stephens Group and the LLC dismissed the Arkansas Action and on the same day
filed an answer to the Delaware Action and a counterclaim in Delaware Superior
Court against our company alleging misrepresentations and breaches under and in
connection with the Purchase Agreement and requesting damages in an amount to be
proved at the trial (the "Counterclaim"). We believe that the Counterclaim is
without merit and we will vigorously pursue the Delaware Action, while
vigorously defending against the Counterclaim. Discovery is in process with
respect to the Delaware Action and the Counterclaim. A trial date of November
18, 2002 has been set for the Delaware Action and the Counterclaim.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Business Overview
Edgewater Technology, Inc. ("Edgewater", "Edgewater Technology" or the
"Company" f/k/a StaffMark, Inc. together with its operating subsidiary Edgewater
Delaware) is an award-winning strategic consulting firm that specializes in
providing technical consulting, custom software development and system
integration services to middle-market companies and divisions of large Global
2000 companies. We develop scalable technology solutions, which expedite
business processes and provide our customers with competitive advantages. Our
consultants collaborate with clients to translate business goals into
technology-driven strategies. Headquartered in Wakefield, Massachusetts,
Edgewater Technology has developed a partnership approach with our clients,
targeting strategic, mission-critical applications. With approximately 124
technical consulting professionals, Edgewater Technology services our client
base by leveraging a combination of leading-edge technologies and proven
reengineering techniques provided by our network of strategically positioned
solutions centers.
Edgewater Technology offers an end-to-end platform of technology-driven
business solutions to help organizations tackle the barriers of technology
transition, including:
(1) Strategy -- We advise our customers on how to apply technology to
support the achievement of their business goals - whether their goals are
reduction in cost, process improvements, customer service improvements or
expanding into new markets and product lines. Our strategy services include
analyzing the customer's business goals, business processes and existing
technology infrastructure. We typically evaluate both packaged and custom
software alternatives to solve their problem and formulate recommendations for a
technology solution strategy. We emphasize quantifying the projected business
impact of our recommended solutions in financial terms, as a means to ensure
that our strategy recommendations drive business value. We provide a tactical
road map that our customers can implement immediately, as opposed to the type of
high-level consulting advice that requires additional planning prior to being
implemented.
(2) Solutions -- We design, build, and deploy large-scale enterprise-wide
systems. Edgewater Technology's solutions services include developing and
implementing custom applications as well as "blend-in" packaged applications to
create flexible, scalable custom solutions that integrate a customer's Web
presence, customer service and back-office legacy systems into technology-driven
applications.
(3) Support -- We provide a spectrum of post-deployment support services,
including Internet application outsourcing, site maintenance and 7x24 hour
monitoring.
With a ten year history, Edgewater Technology has focused, through our operating
subsidiary company, on five key core values that differentiates us from the
competition:
(1) Delivery Excellence -- We have an enviable delivery history that is
built upon a proven methodology and processes. Our delivery excellence is a
derivative of a well-defined business plan, highly trained professionals, strong
technical expertise, established implementation and support methodologies and
most importantly, effective and continued communication with our clients
throughout the entire process.
(2) Vertical Expertise -- We bring vertical industry knowledge together
with a broad base of key strategic technologies. Edgewater uses an iterative
development methodology, with a focus on quality assurance and project
management, to achieve rapid deployment capability and success in assisting
organizations move through the barriers of technology transition. The primary
vertical markets where we have developed core competencies to deliver our
products and services include: Financial Services (retail banking, insurance,
portfolio/asset management); Health care (managed care, life sciences); Retail
and Emerging Markets (higher education, transportation), while we also focus on
service offerings that cross each vertical such as Customer Service, Supply
Chain and Web Services/.Net.
(3) Technology Excellence - We extend our services through proven key
strategic technologies that focus on vertical business practices to build
scalable custom solutions providing a solid return on the investment and thereby
competitive advantage to our clients. Edgewater Technology's areas of technical
expertise include: Web-based solutions; architectural strategy;
Internet/Intranet/Extranet; e-commerce; computer telephony; transaction
processing and legacy systems integration.
13
(4) Middle-Market Focus - We are well positioned to serve the technology
needs of the middle-market through our solutions centers based in second-tier
cities in which middle-market enterprises typically reside. The middle-market,
defined as companies and/or subsidiaries of large corporations with $50 million
to $1 billion in revenue, is a large growing segment of the economy.
(5) Strong Operational Metrics - Edgewater Technology's original management
team has built an organization that is defined by a record of operational
excellence, using electronic processes and systems to manage our consultant
resources, and disciplined financial practices resulting in predictable
utilization, gross profit and a strong balance sheet.
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.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their three
to five most "critical accounting policies" in Managements Discussion & Analysis
("MD&A"). The SEC indicated that a "critical accounting policy" is one which is
both important to the portrayal of the company's financial condition and results
and requires management's most difficult, subjective or complex judgments, often
as a result of the need to make estimates about the effect of matters that are
inherently uncertain.
Our company's discussion and analysis of its financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires our company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate estimates,
including those related to intangible assets, deferred tax assets, discontinued
operations, contingencies and litigation, among others. We base our estimates on
historical experience and on various other assumptions that are believed
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We have identified the policies below as critical to our business
operations and the understanding of our results of operations. The impact and
any associated risks related to these policies on our business operations are
discussed throughout MD&A where such policies affect our reported and expected
financial results.
Revenue Recognition. Substantially all of the our Company's contracts are
billed on a time and materials basis. 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 based on the ratio of costs
incurred to total estimated costs. 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.
Accounting for Income Taxes. As part of the process of preparing our
consolidated financial statements, significant judgment is required in
determining our provision for income taxes, our deferred tax assets and
liabilities and the valuation allowance recorded against our net deferred tax
assets. We have recorded a valuation allowance against our net deferred tax
assets of approximately $15 million as of June 30, 2002 and December 31, 2001
due to uncertainties related to our ability to utilize some of our deferred tax
assets, primarily consisting of certain net operating losses carried forward and
foreign tax credits, before they expire. The Company considers scheduled
reversals of deferred tax liabilities, projected future taxable income, ongoing
tax planning strategies and other matters, including the period over which our
deferred tax assets will be recoverable, in assessing the need for and the
amount of the valuation allowance. In the event that actual results differ from
these estimates or we adjust these
14
estimates in future periods, an adjustment to the deferred tax asset may be
recorded, which could materially impact our financial position and net income
(loss) in the period.
Valuation of Long-lived and Intangible Assets. We assess the impairment of
identifiable intangibles, long-lived assets and related goodwill annually and
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important, which could trigger an
impairment review include; significant negative industry or economic trends,
significant operating underperformance relative to expected historical or
projected future results, significant decline in our stock price or the stock
price of our industry peers, our market capitalization relative to our net book
value. Our judgments regarding the existence of impairment indicators are based
upon legal factors, market conditions and operational performance. We recorded a
goodwill impairment charge during the first quarter 2002 of $12.5 million. See
Note 10 to the consolidated financial statements included elsewhere herein.
Legal Contingencies. We are currently involved in certain legal proceedings
with respect to alleged misrepresentations and breaches of contract in
connection with the sale of our commercial segment in June 2000. As discussed in
Note 15 of our consolidated financial statements in this 10-Q and in the Legal
Proceedings section below, we believe that the Counterclaim involving the
Stephens Group, Inc., Staffmark Investment, LLC and their affiliates
(collectively "Staffmark Investment") is without merit and deny all of the
allegations in the Counterclaim. In addition, we will vigorously pursue our
claim against Staffmark Investment, while vigorously defending against the
Counterclaim. Since we do not believe any recovery by Staffmark Investment with
respect to the Counterclaim is probable, no amount has been reserved or accrued
for in our company's consolidated financial statements as to this legal
proceedings matter. See Note 15 to the consolidated financial statements
included elsewhere herein.
Results For The Three Months and Six Months Ended June 30, 2002 Compared To
Results For The Three and Six Months Ended June 30, 2001
Revenues. Revenues for the three months ended June 30, 2002 decreased $1.9
million, or 28.7%, to $4.8 million compared to $6.7 million for the three months
ended June 30, 2001. Revenues decreased $5.1 million, or 35.3%, to $9.4 million
for the six months ended June 30, 2002 compared to $14.5 million for the six
months ended June 30, 2001. Revenues decreased primarily due to an economic
slowdown that has affected spending for information technology services,
resulting in postponed or delayed projects. For the three months ended June 30,
2002 and 2001, one and three customers, respectively, each contributed more than
10% of revenues. For the six months ended June 30, 2002 and 2001, two customers,
each contributed more than 10% of revenues. For the three and six months ended
June 30, 2002 our three largest customers represented 82% and 84% of our
revenues in the aggregate, respectively. For the three and six months ended June
30, 2001 our three largest customers represented 63% and 57% of our revenues in
the aggregate, respectively. See Note 13 to the consolidated financial
statements included elsewhere herein.
Cost of Services. Project personnel costs consist principally of salaries,
payroll taxes, employee benefits and un-reimbursed travel expenses for personnel
dedicated to customer projects. These costs represent the most significant
expense we incur in providing our services. Project personnel costs decreased
$1.2 million, or 30%, to $2.9 million for the three months ended June 30, 2002
compared to $4.1 million for the three months ended June 30, 2001. For the six
months ended June 30, 2002, project personnel costs decreased $2.1 million, or
24.7%, to $6.3 million compared to $8.3 million for the six months ended June
30, 2001. Utilization is a function of our ability to utilize our billable
professionals and generate revenues. Our utilization rates for the three and six
months ended June 30, 2002 amounted to 70% and 65%, respectively.
Gross Profit . Gross profit for the three months ended June 30, 2002
decreased $0.7 million, or 26.8%, to $1.9 million compared to $2.6 million for
the three months ended June 30, 2001. For the six months ended June 30, 2002,
gross profit decreased $3.0 million or 49.5%, to $3.1 million compared to $6.2
million for the six months ended June 30, 2001. The decrease in gross profit
directly relates to the decrease in revenues and utilization during the period.
Gross profit margin for the three months ended June 30, 2002 was 40.3% compared
to 39.2% during the three months ended June 30, 2001. Gross profit for the six
months ended June 30, 2002 was 33.2% compared to 42.5% during the six months
ended June 30, 2001.
SG&A. Selling, general and administrative expenses ("SG&A") decreased $0.4
million, or 14.3%, to $2.2 million for the three months ended June 30, 2002
compared to $2.6 million for the three months ended June 30, 2001. For the six
months ended June 30, 2002, SG&A decreased $1.6 million or 26.4% to $4.5 million
compared to $6.1 million for the six months ended June 30, 2001. SG&A as a
percentage of revenue was 46.6% and 38.7% for the three months ended June 30,
2002 and 2001, respectively, and was 47.5% and 41.7% for the six months ended
June 30, 2002 and 2001,
15
respectively. SG&A decreased primarily as a result of lower payroll and bonus
expense and a reduction in recruiting expense and associated costs of hiring new
staff.
Depreciation and Amortization Expense. Depreciation and amortization
expense decreased $1.1 million to $0.2 million for the three months ended June
30, 2002 as compared to $1.4 million for the same period last year. Depreciation
and amortization expense also decreased $2.2 million to $0.5 million for the six
months ended June 30, 2002 as compared to $2.8 million for the same period a
year ago. This decrease is a direct result of the implementation of SFAS 142, in
which goodwill, as well as other intangibles determined to have an indefinite
life, are no longer amortized. Accordingly, as of January 1, 2002, we
discontinued amortizing our intangible assets related to goodwill. Our goodwill
amortization expense for the three and six months ended June 30, 2001 amounted
to $1.1 million and $2.2 million, respectively. Our net unamortized goodwill as
of June 30, 2002 was $18.3 million.
Restructuring Charges. As a result of reduced revenue, we implemented a
workforce reduction in February 2002 to better align our consultant base to our
expected revenues in the first half of 2002. The Company adjusted headcount by
nineteen percent (19%), or approximately 38 positions resulting in a
restructuring charge of approximately $350,000, which consisted primarily of
severance and similar employee termination expenses. All amounts have been paid
as of June 30, 2002.
Operating Loss. Operating loss decreased $0.8 million to $0.5 million for
the three months ended June 30, 2002 compared to $1.4 million for the same
period last year. Operating loss decreased $0.4 million to $2.2 million for the
six months ended June 30, 2002 compared to $2.6 million for the same period last
year. Operating losses decreased from the prior year primarily due to a
reduction in project personnel costs associated with the restructuring that
occurred in the first quarter and by the elimination of goodwill amortization
due to the adoption of SFAS 142 in the first quarter in addition to higher
revenues in the second quarter.
Interest Income (Expense), Net. We earned net interest income of $0.2
million for the three months ended June 30, 2002, as compared to net interest
income of $0.4 million for the three months ended June 30, 2001. Net interest
income for the six months ended June 30, 2002 and 2001 was $0.4 and $1.4
million, respectively. This decrease is due primarily to the decrease in
interest rates, and a lower average cash balance during 2002, as a result of our
issuer tender offer and stock repurchases in 2001.
Net Loss From Continuing Operations. We recorded a net loss from continuing
operations of $0.6 million for the three months ended June 30, 2002 compared to
a loss of $1.0 million for the three months ended June 30, 2001. Net loss from
continuing operations for the six months ended June 30, 2002 and 2001 was $2.0
million and $1.7 million, respectively. Net margin from continuing operations
was (12.0%) and (14.8%) for the three months ended June 30, 2002 and 2001,
respectively, and was (21.7%) and (11.5%) for the six months ended June 30, 2002
and 2001, respectively.
Tax Provision. The Company provides for income taxes at the end of each
interim period based on the estimated effective tax rates for the full fiscal
year. Cumulative adjustments to the tax provision are recorded in the interim
period in which a change in the estimated annual effective rare is determined.
The tax provision for the three and six months ended June 30, 2002 represents
amounts due and payable to the state of Delaware for franchise taxes. For all
other jurisdictions, the estimated effective tax rate for the three and six
months ended June 30, 2002 and 2001 was 37%. We expect the effective tax rate to
remain at approximately 37% for the remainder of 2002. We have recorded a
valuation allowance against our net deferred tax assets of approximately $15
million as of June 30, 2002 and December 31, 2001 due to uncertainties related
to our ability to utilize some of our deferred tax assets, primarily consisting
of certain net operating losses carried forward and foreign tax credits, before
they expire.
Extraordinary Item. The Company recorded certain costs, net of insurance
proceeds and the applicable tax effect, associated with the Wakefield Tragedy,
as an extraordinary item in the financial statements. See Note 9 to the
consolidated financial statements.
Change in Accounting Principle. We recorded a non-cash, goodwill impairment
charge of $12.5 million during the six months ended June 30, 2002 due to the
adoption of SFAS No. 142. See Note 10 to the consolidated financials statements.
Net (Loss) Income. We recognized a net loss of ($0.6) million for the three
months ended June 30, 2002 compared to ($1.3) million for the three months ended
June 30, 2001. We recognized a net loss of ($14.5) for the six months ended June
30,
16
2002 and net income of $3.4 million for the six months ended June 30, 2001. Net
loss for the three months ended June 30, 2002 decreased primarily due to lower
project personnel costs due to the first quarter 2002 restructuring and other
changes discussed above. The net loss increased substantially for the six months
ended June 30, 2002 due to the adoption of SFAS 142, which required the our
goodwill to be revalued, resulting in an impairment charge of $12.5 million for
the six months ended June 30, 2002. Net income for the six months ended June 30,
2001 included a gain on the sale of our non-solutions division, net of loss from
operations of the discontinued division of $5.1 million.
Discontinued Operations and Other Matters
As a result of the completion of the non-Solutions strategic alternative
transactions described in Note 8 to the consolidated financial statements, the
operating results for ClinForce for 2001 and our corporate transition costs have
been included in discontinued operations in the accompanying consolidated
financial statements. Revenues and operating loss from discontinued operations
were $7.7 million and $1.6 million, respectively, for the six months ended June
30, 2001. There were no revenues or operating losses from discontinued
operations during the three and six months ended June 30, 2002.
Our Company was recently notified by the Internal Revenue Service, that it
would be auditing our consolidated income tax returns for the 1998, 1999 and
2000 fiscal years. During this time period, we owned non-Solutions staffing
related businesses, which were sold during the 2000 and 2001 fiscal years, as
described above.
Liquidity and Capital Resources
Our primary historical sources of funds are from operations and the
proceeds from sales of businesses. Our principal historical uses of cash have
been to fund 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.
In July 2000, the Board of Directors authorized management, subject to
legal requirements, to use up to $30 million to repurchase our common stock over
a twelve month period (unless shortened or extended by the Board of Directors).
Our repurchase program was again extended by the Board of Directors on August
23, 2001 for an additional twelve months for repurchases of up to $20.0 million.
Repurchases have been and will be made from time to time on the open market at
prevailing market prices or in negotiated transactions off the market. Under
this program from January 1, 2001 through June 30, 2001, we repurchased 814,300
shares of our common stock for approximately $3.7 million. No shares were
repurchased during the six months ending June 30, 2002.
Net cash provided by (used in) continuing operating activities was $0.003
million and ($0.5) million for the three and six months ended June 30, 2002,
respectively. Net cash provided by operating activities was $1.2 million and
$0.9 million for the three and six months ended June 30, 2001, respectively. The
net cash used by continuing operating activities for the six months ended June
30, 2002 was primarily attributable to our net loss position, partially offset
by the change in accounting principle and changes in operating assets and
liabilities.
Net cash provided by (used in) continuing investing activities was $9.8
million and ($2.5) million for the three and six months ended June 30, 2002,
respectively. Net cash (used in) provided by continuing investing activities was
($0.3) million and $33.5 million for the three and six months ended June 30,
2001, respectively. Cash provided by (used in) continuing investing activities
during the three and six months ended June 30, 2002 was primarily attributable
to cash received from and paid for short-term investments. In 2001, cash
provided by continuing investing activities was primarily attributable to the
proceeds from the sale of our various businesses unrelated to our solutions
division.
Net cash used in continuing financing activities was $0.08 million and $0.2
million for the three and six months ended June 30, 2002, respectively, while
net cash used in continuing financing activities was $1.3 million and $134
million for the three and six months ended June 30, 2001. For the three and six
months ended June 30, 2002, cash used in continuing financing activities was
primarily related to repayments on our capital lease obligations. For the three
and six months ended June 30, 2001, cash used in continuing financing activities
was primarily related to the repurchase of stock and the Tender Offer in January
2001 to repurchase 16.25 million shares of common stock for approximately $131.1
million, including fees.
Net cash used by discontinued operations was $0.8 million and $3.0 million
for the three and six months ended June 30, 2002, respectively. Net cash used by
discontinued operations was $8.6 million and $10.7 million for the three and six
months ended June 30, 2001. These amounts relate to expenses incurred or accrued
related to discontinued operations.
17
As a result of the above, and as a result of cash flows from discontinued
operations, our combined cash and cash equivalents increased (decreased) $9.0
million and ($6.1) million for the three and six months ended June 30, 2002,
respectively, while decreasing ($9.0) and ($110.6) million for the three and six
months ended June 30, 2001. As of June 30, 2002 cash and marketable securities
amounted to $47.7 million compared to $51.5 million as of December 31, 2001.
We believe that our cash flows from operations and available cash will
provide sufficient liquidity for our existing operations for the foreseeable
future. We periodically reassess the adequacy of our liquidity position, taking
into consideration current and anticipated operating cash flow, anticipated
capital expenditures, business combinations, and public or private offerings of
debt or equity securities.
New Accounting Pronouncements
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 adopted this new
pronouncement during the first quarter of 2002, the adoption of which did not
have a material impact upon the Company's consolidated results of operations,
financial position or cash flows.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
SFAS 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections". SFAS 145 rescinds Statement No. 4, "Reporting Gains and Losses
from Extinguishments of Debt", and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements". SFAS 145 also rescinds FASB Statement No. 44, "Accounting for
Intangible Assets of Motor Carriers". SFAS 145 amends FASB Statement No. 13,
"Accounting for Leases", to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to sale
leaseback transactions. SFAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provision of SFAS 145
related to the rescission of Statement No. 4 shall be applied in fiscal year
beginning after May 15, 2002. The provisions of SFAS 145 related to Statement
No. 13 should be for transactions occurring after May 15, 2002. Early
application of the provisions of this Statement is encouraged. The Company does
not expect the adoption of SFAS 145 will have a significant impact on its
consolidated results of operations, financial position or cash flows.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146 nullifies EITF No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity," which required a liability be recognized at the commitment date to an
exit plan. The Company is required to adopt the provisions of SFAS No. 146
effective for exit or disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of SFAS 146 will have a significant impact
on its consolidated results of operations, financial position or cash flows.
Legal Proceedings
We are pursuing a claim against Stephens Group, Inc. and Staffmark
Investment, LLC with respect to the purchase agreement in June 2000 in Delaware
Superior Court. Stephens Group, Inc. and Staffmark Investment, LLC are pursuing
a counterclaim against our Company in connection with the same purchase
agreement for the sale of our commercial staffing segment in the same court.
This matter is described and detailed in "Part II, Item 1, Legal Proceedings",
of this Form 10-Q with our claim being referenced as the Delaware Action and the
Stephens Group, Inc. and Staffmark Investment, LLC counterclaim being referenced
as the Counterclaim.
Special Note Regarding Forward Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q (this "10-Q")
constitute forward-looking statements under Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, including statements made with respect to significant customers,
revenues, backlog, competitive and strategic initiatives, growth plans,
potential stock repurchases, future results, tax consequences, liquidity needs
and litigation matters. These statements
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involve known and unknown risks, uncertainties and other factors that may cause
results, levels of activity, growth, performance, tax consequences or
achievements to be materially different from any future results, levels of
activity, growth, performance, tax consequences or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed below, as well as those further set forth under the heading
"Business - Factors Affecting Finances, Business Prospects and Stock Volatility"
in our 2001 Annual Report on Form 10-K as filed with the SEC on March 27, 2002.
The forward-looking statements included in this Form 10-Q relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "believe," "enable"
"will," "provide," "anticipate," "future," "could," "growth," "increase,"
"modifying," "reacting," or the negative of such terms or comparable
terminology. These forward-looking statements inherently involve certain risks
and uncertainties, although they are based on our current plans or assessments
which are believed to be reasonable as of the date of this 10-Q. Factors that
may cause actual results, financial statement effects, disposition plans or
proceeds, goals, targets, objectives or repurchases to differ materially from
those contemplated, projected, forecast, estimated, anticipated, planned or
budgeted in such forward-looking statements include, among others, the following
possibilities: (1) inability to effect a business combination, execute upon
growth objectives, pay a dividend or repurchase shares in the future on terms
acceptable to us; (2) changes in industry trends, such as a decline in the
demand for Solutions services or delays in industry-wide IT spending, whether on
a temporary or permanent basis and/or delays by customers in initiating new
projects or continuing new project milestones; (3) costs or savings from
workforce reductions; (4) failure of our backlog to be recorded as revenue; (5)
inability of increased sales to result in increased revenues and/or increased
consultant utilization rates; (6)adverse developments and volatility involving
debt, equity, currency or technology market conditions; (7) the occurrence of
lawsuits or adverse results in litigation matters, including but not limited to
the Staffmark Investment, LLC and the Stephens Group, Inc. litigation; (8)
failure to obtain new customers or retain significant existing customers; (9)
loss of key executives; (10) general economic and business conditions (whether
foreign, national, state or local) which include, but are not limited to,
changes in interest or currently exchange rates; (11) failure of the
middle-market and the needs of middle-market enterprises for business services
to develop as anticipated; (12) inability to recruit and retain professionals
with the high level of information technology skills and experience needed to
provide our services; (13) expanding outsourcing services to generate additional
revenue; and/or (14) any changes in ownership that would result in a limitation
on the use of the net operating loss carry-forward under applicable tax laws,
which is referred to as a deferred tax asset of approximately $23.2 million. In
evaluating these statements, you should specifically consider various factors
described above as well as the risks outlined under Item I "Business - Factors
Affecting Finances, Business Prospects and Stock Volatility" in our 2001 Form
10-K filed with the SEC on March 27, 2002. These factors may cause our actual
results to differ materially from those contemplated, projected, anticipated,
planned or budgeted in any such forward-looking statements.
Although we believe that the expectations in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance, growth, earnings per share or achievements. However, neither we nor
any other person assumes responsibility for the accuracy and completeness of
such statements. We are under no duty to update any of the forward-looking
statements after the date of this Form 10-Q to conform such statements to actual
results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary financial instruments include investments in money market
funds, short-term municipal bonds, commercial paper and U.S. government
securities that are sensitive to market risks and interest rates. The investment
portfolio is used to preserve our capital until it is required to fund
operations or to fund strategic acquisitions. None of our market-risk sensitive
instruments are held for trading purposes. We do not purchase derivative
financial instruments.
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PART II
ITEM 1. LEGAL PROCEEDINGS
On August 15, 2001, we filed a lawsuit in Delaware Chancery Court (the
"Delaware Action") against Staffmark Investment, LLC and a number of its
Delaware subsidiaries (collectively, the "LLC"). The LLC is a majority owned
subsidiary of Stephens Group, Inc. (the "Stephens Group"), which purchased our
company's commercial staffing business on June 28, 2000 (the "Commercial Sale")
pursuant to a purchase agreement dated May 16, 2000 (the "Purchase Agreement")
involving our company and the Stephens Group. In the Delaware Action, we
requested the Delaware Chancery Court to interpret the Purchase Agreement and
agree with our conclusion that our company has no contractual or other
responsibility to the LLC under or in connection with the Purchase Agreement. In
the Delaware Action, we also requested the court to prohibit and otherwise
enjoin any claims by the LLC under or in connection with the Purchase Agreement,
which is governed by Delaware law. On January 10, 2002, the Delaware Chancery
Court transferred the Delaware Action to Delaware Superior Court, which is a
court that adjudicates legal claims, as opposed to equitable claims.
On August 23, 2001, the LLC and the Stephens Group filed a lawsuit in
Washington County Circuit Court in Arkansas against our company (the "Arkansas
Action"), seeking in excess of $13 million of alleged actual, incidental and
consequential damages and not less than $25 million in punitive damages
concerning alleged breaches and alleged misrepresentations, respectively, under
and in connection with the Purchase Agreement. On December 21, 2001, the Judge
in the Washington County Circuit Court in Arkansas granted our motion to stay
the Arkansas Action in favor of the Delaware Action. On March 8, 2002, the
Stephens Group and the LLC dismissed the Arkansas Action and on the same day
filed an answer to the Delaware Action and a counterclaim in Delaware Superior
Court against our company alleging misrepresentations and breaches under and in
connection with the Purchase Agreement and requesting damages in an amount to be
proved at the trial (the "Counterclaim"). We believe that the Counterclaim is
without merit and we will vigorously pursue the Delaware Action, while
vigorously defending against the Counterclaim. Discovery is in process with
respect to the Delaware Action and the Counterclaim. A trial date of November
18, 2002 has been set for the Delaware Action and the Counterclaim.
We are also a party to litigation incidental to our business. We believe
that these routine legal proceedings will not have a material adverse effect on
the results of operations or financial condition of our company. We maintain
insurance in amounts, with coverage 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
We held our 2002 Annual Meeting of Stockholders on May 22, 2002 (the
"Meeting"). Our stockholders elected six (6) directors to serve until the 2003
Annual Meeting or until their successors are duly elected and qualified. Of the
11,660,816 shares of outstanding common stock entitled to vote at the Meeting,
8,237,679 shares, or approximately 71% of the shares entitled to vote, were
represented either in person or by proxy at the Meeting. The stockholders voted
on and approved the matter described below, with the voting results therein
noted at the Meeting:
Election of Directors
- ----------------------------------------------
Authority
Name For Withheld
- ------------------ --------- ---------
Clete T. Brewer 7,616,912 620,767
Shirley Singleton 7,805,872 431,807
William J. Lynch 7,831,529 406,150
Charles A. Sanders 7,830,429 407,250
Bob L. Martin 7,832,434 405,245
Michael R. Loeb 7,745,676 492,003
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification Letter
10.50 Employment Agreement dated as of July 19, 2002, by and between Kevin
R. Rhodes, Chief Financial Officer, and Edgewater Technology, Inc.
(b) Reports on Form 8-K
1. A Form 8-K was filed with the SEC on June 28, 2002 relating to the
announcement of our change in certifying accountants.
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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: August 14, 2002 /s/ SHIRLEY SINGLETON
-------------------------------------
Shirley Singleton
President and Chief Executive Officer
Date: August 14, 2002 /s/ KEVIN R. RHODES
-------------------------------------
Kevin R. Rhodes
Chief Financial Officer
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