<PAGE>
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, 2000
[ ] 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)
302 East Millsap Road
Fayetteville, AR 72703
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (501) 973-6000
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 13, 2000 was 28,692,766.
<PAGE>
EDGEWATER TECHNOLOGY, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Index
-----
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1 -- Financial Statements
Consolidated Financial Statements
Consolidated Statements of Income 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations
Background 14
Discontinued Operations 14
Edgewater Strategy 15
Overview 16
Results for the Three and Nine Months Ended September 30, 2000 Compared to
Results for the Three and Nine Months Ended September 30, 1999 17
Liquidity and Capital Resources 20
Special Note Regarding Forward Looking Statements 21
Item 3 -- Quantitative and Qualitative Disclosures
About Market Risk 22
PART II - OTHER INFORMATION
Item 1 -- Legal Proceedings 22
Item 2 -- Changes in Securities and Use of Proceeds 22
Item 4 -- Submission of Matters to a Vote of Security Holders 22
Item 6 -- Exhibits and Reports on Form 8-K 23
(a) Exhibits
(b) Reports on Form 8-K
Signatures 23
</TABLE>
2
<PAGE>
EDGEWATER TECHNOLOGY, INC.
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
2000 1999 2000 1999
--------- -------- -------- -------
<S> <C> <C> <C> <C>
Service revenues $15,547 $11,490 $ 43,969 $30,413
Cost of services 9,003 6,841 25,491 19,286
------- ------- --------- -------
Gross profit 6,544 4,649 18,478 11,127
------- ------- --------- -------
Operating expenses:
Selling, general and administrative 5,055 3,838 14,656 9,953
Depreciation and amortization 1,246 405 3,724 870
Nonrecurring restructuring charge 2,803 - 2,803 -
------- ------- --------- -------
Operating (loss) income (2,560) 406 (2,705) 304
------- ------- --------- -------
Other expenses:
Interest income (expense), net 957 (553) 35 (1,040)
Other, net 817 - 817 -
------- ------- --------- -------
Loss before income taxes (786) (147) (1,853) (736)
Income tax benefit (356) (46) (710) (258)
------- ------- --------- -------
Loss from continuing operations (430) (101) (1,143) (478)
Discontinued operations (Note 6):
(Loss) income from operations of
discontinued divisions (7,725) 7,923 (105,637) 25,476
Gain on sale of divisions 69,733 - 63,513 -
------- ------- --------- -------
Net income (loss) $61,578 $ 7,822 ($43,267) $24,998
======= ======= ========= =======
Basic earnings per share - continuing
operations ($0.01) $ 0.00 ($0.04) ($0.02)
======= ======= ========= =======
Diluted earnings per share - continuing
operations ($0.01) $ 0.00 ($0.04) ($0.02)
======= ======= ========= =======
Basic earnings per share $ 2.11 $ 0.27 ($1.47) $ 0.85
======= ======= ========= =======
Diluted earnings per share $ 2.11 $ 0.27 ($1.47) $ 0.85
======= ======= ========= =======
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
EDGEWATER TECHNOLOGY, INC.
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $100,226 $ 10,594
Accounts receivable, net 12,374 9,312
Prepaid expenses and other 6,681 4,314
Income tax receivable - 1,549
Deferred income taxes 1,484 7,469
-------- --------
Total current assets 120,765 33,238
PROPERTY AND EQUIPMENT, net 2,154 3,659
INTANGIBLE ASSETS, net 49,390 51,563
DEFERRED INCOME TAXES 51,646 -
OTHER ASSETS 164 142
NET ASSETS HELD FOR SALE 39,710 525,000
-------- --------
$263,829 $613,602
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 14,107 $ 12,434
Payroll and related liabilities 3,946 2,537
Income tax payable 501 -
-------- --------
Total current liabilities 18,554 14,971
LONG TERM DEBT - 291,090
OTHER LONG TERM LIABILITIES 238 6,255
DEFERRED INCOME TAXES - 8,237
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; no shares issued - -
or outstanding
Common stock, $.01 par value; 28,652,841 and 29,401,022
shares issued and outstanding as of September 30, 2000
and December 31, 1999 296 294
Treasury stock (6,127) -
Paid-in capital 217,604 216,279
Retained earnings 33,264 76,476
-------- --------
Total stockholders' equity 245,037 293,049
-------- --------
$263,829 $613,602
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
4
<PAGE>
EDGEWATER TECHNOLOGY, INC.
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -----------------------
2000 1999 2000 1999
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 61,578 $ 7,822 ($43,267) $ 24,998
Net loss (income) from discontinued operations 7,725 (7,923) 105,637 (25,476)
Gain on sale of divisions (69,733) - (63,513) -
-------- -------- -------- --------
Net loss from continuing operations (430) (101) (1,143) (478)
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Depreciation and amortization 1,246 405 3,724 870
Provision for bad debts 15 - 15
Deferred income taxes (3,853) (3) (3,853) 3,160
Common stock in lieu of board fees - - 70 -
Stock option compensation expense 231 - 231 -
Change in operating assets and liabilities,
net of acquisitions:
Accounts receivable (1,416) (388) (3,078) 5,493
Prepaid expenses and other 995 1,413 1,883 (1,046)
Other assets 3 (21) (20) (551)
Accounts payable and other accured liabilities 4,032 (2,915) (2,541) 5,756
Payroll and related liabilities 723 (1,531) 2,425 (5,324)
Income taxes payable (580) 359 5,303 (124)
Other long term liabilities 52 28 (6,017) (538)
Other, net 30 8 1,875 37
-------- -------- -------- --------
Net cash provided by (used in) continuing operating activities 1,048 (2,746) (1,126) 7,255
-------- -------- -------- --------
Net cash used in discontinued operating activities (4,045) (2,786) (1,062) (9,321)
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses 198,774 - 402,895 -
Acquisition of businesses, net of cash acquired (237) (26,134) (4,236) (55,408)
Capital expenditures (421) (164) (941) (492)
-------- -------- -------- --------
Net cash provided by (used in) continuing investing activities 198,116 (26,298) 397,718 (55,900)
-------- -------- -------- --------
Net cash used in discontinued investing activities (2,064) (3,899) (5,970) (73,936)
-------- -------- -------- --------
</TABLE>
5
<PAGE>
EDGEWATER TECHNOLOGY, INC.
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
-------------------------------------------------
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2000 1999 2000 1999
------------ -------------- -------------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings $ 1,545 $ 62,770 $ 59,145 $ 232,519
Payments on borrowings (92,545) (31,420) (350,235) (118,649)
Proceeds from stock option exercises - 90 66 1,078
Purchases of treasury stock (6,127) - (6,127) -
-------- -------- --------- ---------
Net cash (used in) provided by continuing financing activities (97,127) 31,440 (297,151) 114,948
-------- -------- --------- ---------
Net cash (used in) provided by discontinued financing activities - (4,784) - 6,441
-------- -------- --------- ---------
Effect of foreign currency translation on cash and cash - 198 - (1,517)
equivalents
Net increase (decrease) in cash and cash equivalents 95,928 (8,875) 92,409 (12,030)
CASH AND CASH EQUIVALENTS, beginning of period 313 9,656 3,832 12,811
CASH AND CASH EQUIVALENTS, discontinued operations 3,985 (427) 3,985 (427)
-------- -------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $100,226 $ 354 $ 100,226 $ 354
======== ======== ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 867 $ 3,819 $ 10,044 $ 17,202
======== ======== ========= =========
Income taxes paid $ 79 $ 1,071 $ 919 $ 1,438
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
EDGEWATER TECHNOLOGY, INC.
--------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. ORGANIZATION:
------------
We (Edgewater Technology, Inc. and our subsidiaries) provide human resource
and business solutions through two segments. Our eSolutions segment consists of
Edgewater Technology (Delaware), Inc. ("Edgewater"), an eSolutions consulting
firm acquired effective April 1, 1999. The remaining business in our
Professional/Information Technology ("Professional/IT") segment is ClinForce,
Inc. ("ClinForce"), which provides clinical trials support services. As
discussed in Note 6, we sold our interests in our Commercial staffing segment,
Robert Walters (finance and accounting staffing services) and Strategic Legal
Resources (legal staffing). We have signed a non-binding letter of intent to
sell our IntelliMark division (information technology staffing and
solutions). Robert Walters, Strategic Legal Resources and IntelliMark were
previously components of our Professional/IT segment. As a result of these
transactions, the operating results for these divisions have been included in
discontinued operations in the accompanying financial statements.
In our Edgewater segment, revenues pursuant to time and materials contracts
are generally recognized as services are provided. Revenues pursuant to fixed-
fee contracts are generally recognized as services are rendered using the
percentage-of-completion method of accounting. Revenues and earnings may
fluctuate from quarter to quarter based on the number, size and scope of
projects in which we are engaged, the contractual terms and degree of completion
of such projects, any delays incurred in connection with a project, employee
utilization rates, the adequacy of provisions for losses, the use of estimates
of resources required to complete ongoing projects, general economic conditions
and other factors. Certain significant estimates include percentage of
completion estimates used for fixed price contracts and the allowance for
doubtful accounts. These items are frequently monitored and analyzed by
management for changes in facts and circumstances and material changes in these
estimates could occur in the future. Gross profit reflects revenues less
consultant expenses whether or not the consultant's time is billed to a client.
Gross margin is affected by the number of workdays in a period and trends in
client billings. Any significant decline in fees billed to clients or the loss
of a significant client would adversely affect Edgewater's gross margins.
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.
In our ClinForce segment, revenues are recognized upon the performance of
services. We generally compensate our consultants and associates only for hours
actually worked and, therefore, wages of consultants and associates are a
variable cost that increase or decrease as revenues increase or decrease.
However, we do have consultants and associates that are full-time, salaried
employees who are paid even when not engaged in consulting or staffing. Cost of
services primarily consists of wages paid to consultants and associates, payroll
taxes, workers' compensation, insurance and other related employee benefits.
Selling, general and administrative expenses are comprised primarily of
administrative salaries and benefits, marketing, rent, recruitment, training,
computer systems and communications expenses.
2. BASIS OF PRESENTATION:
---------------------
The accompanying interim financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (the
"Commission"). 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.
7
<PAGE>
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 1999 StaffMark, Inc.
Annual Report on Form 10-K as filed with the Commission on March 20, 2000.
The results of operations for the three month and nine months ended
September 30, 2000 are not necessarily indicative of the results to be expected
for any future period or the full fiscal year. Our revenue and earnings may
fluctuate from quarter to quarter based on factors within and outside our
control including: variability in demand for Internet and for Internet
professional services, the length of the sales cycle associated with our service
offerings, the number, size and scope of our projects, and the efficiency with
which we utilize our employees.
3. NEW PRONOUNCEMENTS:
------------------
In December 1999, the Commission issued Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB 101"). This bulletin, as amended, established
guidelines for revenue recognition and originally was effective for periods
beginning after March 15, 2000. In June 2000, the Commission announced that the
effective date of SAB 101 was being delayed until no later than the quarter
ending December 31, 2000. We do not expect that the adoption of SAB 101 will
have a material impact on our financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - an interpretation of APB Opinion No. 25," ("FIN 44"). FIN 44
clarifies the application of APB Opinion 25 and, among other issues, clarifies
the following: (a) the definition of an employee for purposes of applying APB
Opinion 25, (b) the criteria for determining whether a stock ownership plan
qualifies as noncompensatory, (c) the accounting implications of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for the exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000 and the effects of applying FIN
44 are recognized on a prospective basis. We do not expect the adoption will
have a material impact on our financial condition or results of operations.
4. BUSINESS TRANSACTIONS:
---------------------
Effective April 1, 1999, we acquired Edgewater, a full-service provider of
eSolutions located in Boston's Route 128 technology corridor. Edgewater applies
its eStrategy, eSolutions and Internet outsourcing services to vertical markets
such as retail, financial and asset management, healthcare, government, CRM and
agriculture. Edgewater brings mission-critical eSolutions to clients primarily
in the middle market.
For the three and nine months ended September 30, 1999, consideration paid
with respect to acquisitions included cash consideration paid for Edgewater, as
well as contingent consideration paid to the former owners of companies acquired
in previous periods. The aggregate consideration paid was $0.2 million and $4.2
million in cash for the three and nine months ended September 30, 2000,
respectively, and $26.1 million and $55.4 million during the three months and
nine months ended September 30, 1999, respectively. The remaining earnout for
our acquisition of Edgewater has been determined as $1.2 million and will be
paid in the first quarter of 2001. As this amount is fixed and determinable, it
has been accrued in goodwill and accounts payable and other liabilities in the
accompanying balance sheets.
5. NONRECURRING COSTS:
------------------
We periodically review the recorded value of our long-lived assets to
determine if the future cash flows to be derived from these assets will be
sufficient to recover the remaining recorded values. During the second quarter
of 2000, in accordance with Statement of Financial Accounting Standards ("SFAS")
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
8
<PAGE>
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 our estimates of fair value, which were based on market comparables for
companies operating in similar industries. Results for both the IntelliMark and
Strategic Legal Resources divisions are included in discontinued operations in
the accompanying financial statements.
During the third quarter of 1999, we recorded restructuring expenses
totaling approximately $3.0 million relating to the restructure of our
IntelliMark division. This charge arose from our decision, during the third
quarter of 1999, to redesign the sales strategy and resulting management
organization. Our plan, which was completed during the first quarter of 2000,
was to separate the sales and management functions between the IT staffing and
end-user solutions services. As a result of this plan, approximately 80
employees were severed or reassigned in the restructuring process, which also
involved the hiring of about 25 new IT salespeople, service specialists and
managers. Additionally, IntelliMark closed 12 offices and implemented a
satellite branch structure to serve certain markets where a full branch office
was not required. We also implemented a new front-end system throughout the IT
offices which altered branch staff requirements and reduced the need for certain
positions. As a result of the above, expenses of approximately $2.2 million for
severance costs, approximately $0.3 million for office closing costs, and
approximately $0.5 million for other costs including legal and travel expenses
were recorded in the third quarter of 1999. In addition to costs that have been
incurred, the restructuring expense also includes future contractual obligations
to certain severed employees which extend through September 2001. As it relates
to discontinued operations, the remaining restructuring accrual of approximately
$0.5 million has been included in net assets held for sale in the accompanying
consolidated balance sheet.
During the third quarter of 2000, we recorded restructuring expenses
totaling approximately $2.8 million relating to our divestiture process and
costs related to the consolidation and transfer of our corporate headquarters
from Fayetteville, Arkansas to Wakefield, Massachusetts, where our eSolutions
segment, Edgewater, is located. The move of the corporate headquarters is
expected to be completed during the second quarter of 2001. Approximately 25
employees have been or will be severed as a result of this restructuring. The
restructure expense included future contractual obligations to certain employees
which extend through October 2001. As a result of the above, expenses of
approximately $2.4 million for severance costs, $0.2 million for relocation
costs and $0.2 million for facility costs were recorded in the third quarter of
2000. The following is a summary of our restructuring accrual, which has been
included in accounts payable and other accrued liabilities in the accompanying
consolidated balance sheet:
(In thousands)
Total restructuring expenses $ 2,803
Cash outlays (18)
---------
Accrual at September 30, 2000 $ 2,785
=========
6. DISCONTINUED OPERATIONS:
-----------------------
On June 29, 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 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 to "Edgewater Technology, Inc." and our
stock symbol to "EDGW."
On July 13, 2000, we sold, through two indirect wholly-owned subsidiaries,
all of our equity interests in Robert Walters plc ("Robert Walters") through an
initial public offering ("IPO") on the London Stock Exchange. Robert Walters had
previously been our finance and accounting platform within our Professional/IT
segment. Our two subsidiaries sold 67,200,000 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 10,400,000
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.
9
<PAGE>
On September 25, 2000, we sold all of the outstanding stock of Strategic
Legal Resources, our 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 is
represented by a promissory note payable in January 2001.
We have signed a non-binding letter of intent to sell our IntelliMark
division, which is our IT staffing and solutions platform within our
Professional/IT segment.
During the third quarter of 2000, relating to IntelliMark and in accordance
with Accounting Principles Bulletin ("APB") No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," we
recorded a $53.9 million non-cash charge for the write-down of the goodwill in
our IntelliMark division to estimated realizable values. The effect of this
adjustment is included in gain on sale of divisions in the accompanying
statements of income.
Revenues from discontinued operations were $54.0 million and $614.6 million
for the three and nine months ended September 30, 2000, respectively, and were
$307.7 million and $873.3 million for the three and nine months ended September
30, 1999, respectively. Operating (loss) income from discontinued operations
was ($3.7) million and ($142.6) million for the three and nine months ended
September 30, 2000, respectively, and was $15.7 million and $50.6 million for
the three and nine months ended September 30, 1999, respectively.
Net assets held for sale in the accompanying balance sheets represent
discontinued operations for IntelliMark as of September 30, 2000 and the
Commercial segment, Robert Walters, IntelliMark and Strategic Legal Resources as
of December 31, 1999. Components are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 2000 1999
---------------- ---------------
<S> <C> <C>
Cash and cash equivalents ($3,985) $ (6,876)
Accounts receivable, net 34,506 181,880
Prepaid expenses and other 2,282 12,722
Property and equipment, net 5,514 25,384
Intangible assets, net 14,077 383,824
Other assets 1,281 2,641
Accumulated translation adjustment - 2,572
Accounts payable and other accrued liabilities (5,895) (28,543)
Payroll and related liabilities (7,819) (23,602)
Reserve for workers' compensation claims (251) (9,597)
Income taxes payable - (3,751)
Deferred tax liability - (2,330)
Long term debt - (9,324)
-------- --------
Total $ 39,710 $525,000
======== ========
</TABLE>
10
<PAGE>
7. EARNINGS PER COMMON SHARE:
-------------------------
A reconciliation of net (loss) income and weighted average shares used in
computing basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands except per share data) 2000 1999 2000 1999
----------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income (loss) applicable to common shares $61,578 $ 7,822 ($43,267) $24,998
================= ================== ================ ================
Weighted average common shares outstanding 29,175 29,302 29,387 29,266
================= ================== ================ ================
Basic earnings per share of common stock $ 2.11 $ 0.27 ($1.47) $ 0.85
================= ================== ================ ================
Diluted earnings per share:
Net income (loss) applicable to common shares $61,578 $ 7,822 ($43,267) $24,998
================= ================== ================ ================
Weighted average common shares outstanding 29,175 29,302 29,387 29,266
Dilutive effect of stock options 58 217 105 229
----------------- ------------------ ---------------- ----------------
Weighted average common shares including
dilutive effect of stock options 29,233 29,519 29,492 29,495
================= ================== ================ ================
Diluted earnings per share of common stock $ 2.11 $ 0.27 ($1.47) $ 0.85
================= ================== ================ ================
</TABLE>
Options to purchase approximately 3.1 million shares of common stock (at
prices ranging from $6.3032 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 to purchase approximately 2.4 million shares of common
stock (at prices ranging from $10.06 to $40.75 per share) and 2.3 million shares
of common stock (at prices ranging from $11.66 to $40.75 per share) were
outstanding during the three and nine months ended September 30, 1999,
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, which expire ten years from the date
of grant, were still outstanding as of September 30, 2000.
8. SEGMENT INFORMATION:
-------------------
As a result of our IT restructuring plan in late 1999, as discussed in Note
5, we determined that our eSolutions business was fundamentally different than
the other components of our Professional/IT segment and we began managing the
eSolutions segment as an autonomous business unit beginning in 2000.
Accordingly, in January 2000, we began disaggregating the results of our
eSolutions business unit and reviewing those results separately. These
operations had previously been included in our Professional/IT segment. As a
result of this change in operating strategy, we reevaluated the estimated useful
life for the intangibles associated with our acquisition of Edgewater. Based on
an independent valuation at that time, we reduced the amortization period from
30 years to 10 years for these intangibles. This change was effective January
1, 2000 and resulted in increased quarterly amortization expense of
approximately $0.6 million. A valuation of the remaining intangibles and its
components is still pending and is expected to be finalized during the fourth
quarter. Any resulting change in estimated useful life for these intangibles
and the effect on amortization expense will recorded at that time.
11
<PAGE>
We segment our operations based upon differences in services provided. The
remaining business in our Professional/IT segment is ClinForce, which provides
clinical trial support services. Edgewater, our eSolutions segment, provides
eCommerce software solutions, consulting and development services. The
"corporate" column includes general corporate expenses, headquarters facilities
and equipment, internal-use software, and other expenses not allocated to the
segments.
The accounting policies used in measuring segment assets and operating
results are the same as those described in Note 2 to our audited financial
statements and notes thereto included in our 1999 StaffMark, Inc. Annual Report
on Form 10-K as filed with the Commission on March 20, 2000. We evaluate
performance of the segments based on segment operating income, excluding
corporate overhead. We do not have any significant intersegment sales or
transfers. Revenues and property and equipment for all periods presented are
from operations in the United States.
The results of the business segments as of and for the three and nine months
ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Consolidated
(In thousands) ClinForce Edgewater Corporate Totals
--------- --------- ---------- -------------
<S> <C> <C> <C> <C>
Three Months Ended September 30, 2000
Service revenues $ 7,187 $ 8,360 $ - $ 15,547
Earnings before interest, taxes,
depreciation and amortization 1,122 1,531 (3,967) (1,314)
Depreciation and amortization 142 1,104 - 1,246
Operating income 980 427 (3,967) (2,560)
Capital expenditures 6 390 25 421
Total assets of continuing operations 15,690 48,596 159,833 224,119
Three Months Ended September 30, 1999
Service revenues $ 6,418 $ 5,072 $ - $ 11,490
Earnings before interest, taxes,
depreciation and amortization 900 1,254 (1,343) 811
Depreciation and amortization 136 255 14 405
Operating income 764 999 (1,357) 406
Capital expenditures 30 49 85 164
Total assets of continuing operations 16,922 46,184 7,033 70,139
Nine Months Ended September 30, 2000
Service revenues $20,554 $23,415 $ - $ 43,969
Earnings before interest, taxes,
depreciation and amortization 2,824 4,412 (6,217) 1,019
Depreciation and amortization 418 3,261 45 3,724
Operating income 2,406 1,151 (6,262) (2,705)
Capital expenditures 85 781 75 941
Nine Months Ended September 30, 1999
Service revenues $20,382 $10,031 $ - $ 30,413
Earnings before interest, taxes,
depreciation and amortization 2,651 2,805 (4,282) 1,174
Depreciation and amortization 386 453 31 870
Operating income 2,265 2,352 (4,313) 304
Capital expenditures 226 49 217 492
</TABLE>
12
<PAGE>
9. SIGNIFICANT CUSTOMERS:
---------------------
The following table summarizes the revenue and accounts receivable from
customers in excess of 10% of reported amounts for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------- ---------
2000 1999 2000 1999
---------- -------------- ---------- ---------
<S> <C> <C> <C> <C>
Revenue
Synapse Group, Inc. 14.1% 20.7% 14.6% 16.4%
Pfizer 11.9% 15.1% - -
HomeRuns.com 10.9% - 10.7% -
American Student Assistance - - 10.5% -
September 30 December 31,
2000 1999
----------------------------
Accounts Receivable
Synapse Group, Inc. 24.0% 22.2%
Pfizer - -
HomeRuns.com - -
American Student Assistance - -
</TABLE>
10. RELATED PARTY
-------------
Mr. Michael R. Loeb is the President and Chief Executive Officer of Synapse
Group, Inc., a significant customer. Mr. Loeb is an outside member of our Board
of Directors.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Background
During the first quarter of 1999, market values for publicly traded staffing
companies began to decline. For many staffing companies, this trend
subsequently continued or deteriorated further and was compounded by a slowdown
in demand for IT staffing. These circumstances contributed to depressed market
valuations for staffing-based companies like us. In response to these
developments and with guidance from our financial advisors, Credit Suisse First
Boston, we began to explore strategic alternatives for each of our business
platforms in an effort to maximize stockholder value.
Our current operations and services are now provided through two segments:
Edgewater and ClinForce. Edgewater, our eSolutions segment, provides eCommerce
software solutions, consulting and web development, as well as outsourcing to
help companies convert to an Internet business model. ClinForce provides
clinical trials support services.
In our Edgewater segment, revenues pursuant to time and materials contracts
are generally recognized as services are provided. Revenues pursuant to fixed-
fee contracts are generally recognized as services are rendered using the
percentage-of-completion method of accounting. Revenues and earnings may
fluctuate from quarter to quarter based on the number, size and scope of
projects in which we are engaged, the contractual terms and degree of completion
of such projects, any delays incurred in connection with a project, employee
utilization rates, the adequacy of provisions for losses, the use of estimates
of resources required to complete ongoing projects, general economic conditions
and other factors. Certain significant estimates include percentage of
completion estimates used for fixed price contracts and the allowance for
doubtful accounts. These items are frequently monitored and analyzed by
management for changes in facts and circumstances and material changes in these
estimates could occur in the future. Gross profit reflects revenues less
consultant expenses whether or not the consultant's time is billed to a client.
Gross margin is affected by the number of workdays in a period and trends in
client billings. Any significant decline in fees billed to clients or the loss
of a significant client would adversely affect Edgewater's gross margins.
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.
In our ClinForce segment, revenues are recognized upon the performance of
services. We generally compensate our consultants and associates only for hours
actually worked and, therefore, wages of consultants and associates are a
variable cost that increase or decrease as revenues increase or decrease.
However, we do have consultants and associates that are full-time, salaried
employees who are paid even when not engaged in consulting or staffing. Cost of
services primarily consists of wages paid to consultants and associates, payroll
taxes, workers' compensation, insurance and other related employee benefits.
Selling, general and administrative expenses are comprised primarily of
administrative salaries and benefits, marketing, rent, recruitment, training,
computer systems and communications expenses.
Discontinued Operations
On June 29, 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 to "Edgewater Technology, Inc."
and our stock symbol to "EDGW."
14
<PAGE>
On July 13, 2000, we sold, through two indirect wholly-owned subsidiaries,
all of our equity interest in Robert Walters through an IPO on the London Stock
Exchange. Robert Walters had previously been a platform within our
Professional/IT segment. Our two subsidiaries sold 67,200,000 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
10,400,000 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. The remaining proceeds will be used for
general corporate purposes, to repurchase shares of our common stock, to provide
capital to our eSolutions segment and to return value to our stockholders
through an issuer tender offer or some other form of distribution.
On September 25, 2000, we sold all of the outstanding stock of Strategic
Legal Resources, our 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 is
represented by a promissory note payable in 120 days.
We have signed a non-binding letter of intent to sell our IntelliMark
division, which is our IT staffing and solutions platform.
Revenues from discontinued operations were $54.0 million and $614.6 million
for the three and nine months ended September 30, 2000, respectively, and were
$307.7 million and $873.3 million for the three and nine months ended September
30, 1999, respectively. Operating (loss) income from discontinued operations
was ($3.7) million and ($142.6) million for the three and nine months ended
September 30, 2000, respectively, and was $15.7 million and $50.6 million for
the three and nine months ended September 30, 1999, respectively.
Edgewater Strategy
We have retained Banc of America Securities to evaluate and recommend an
optimal capital structure for our company as a pure-play eSolutions company, to
advise us on its positioning Edgewater relative to our eSolutions peer group and
to identify our best strategic alternatives going forward. We believe our
initiatives should better enable Edgewater to effectively execute its growth
plan, enhance Edgewater's branding and recruiting efforts and allow it to
compete more effectively with its pure-play public competitors.
Edgewater is a full-service provider of eBusiness solutions and has
developed a service model and approach which includes: (1) eStrategy -
consulting services that aid clients in translating business goals into
eSolutions strategies taking full advantage of Internet technologies; (2)
eSolutions - development of customer eSolutions applications that fully
integrate the client's Web presences, customer service and back-office legacy
systems including fulfillment, procurement and financial; and (3) Internet
Outsourcing - providing a spectrum of services ranging from enhanced site
hosting through semi-custom and custom integrated Application Service Provision,
completed with total Internet application outsourcing.
15
<PAGE>
To best take advantage of the current market growth and to set the company
apart from service providers in the industry, Edgewater has focused its strategy
around five principles: (1) Middle Market - targeting the under-served middle
market; (2) Emerging Internet Businesses - assisting venture stage and emerging
Web enterprises; (3) Internet Outsourcing - offering post-deployment support,
maintenance and 24x7 hour monitoring; (4) Second-Tier City Presence -
supplementing our recruiting strategy by tapping into technical talent that is
not necessarily found in major metropolitan areas. Edgewater has already begun
to expand nationally and has set up solution centers in several second-tier
cities and plans to leverage Internet and telecommunication technologies to
create a "virtual development" capability; and (5) B2B and B2C Market - building
and deploying high-volume, highly scalable systems along with integrating a host
of legacy systems.
Overview
In February 2000, we adopted a subsidiary stock option plan (the "Subsidiary
Plan") for employees and consultants of Edgewater, our eSolutions segment. The
purpose of the Subsidiary Plan was to aid Edgewater in attracting and retaining
employees and consultants in the very competitive pure-play eSolutions space.
The total amount of Edgewater common stock for which stock options could be
granted under the Subsidiary Plan could not exceed 5.0 million shares of
Edgewater common stock. In August 2000, the Subsidiary Plan and the 2.9 million
options that had been granted under this Subsidiary Plan were terminated. We
created a new parent company stock option plan (the "Parent Plan") which
excludes grants for directors and officers and for which stock option grants may
not exceed 4.0 million shares of our common stock. On August 31, 2000, we
granted 1.8 million stock options under the Parent Plan to employees and
consultants that previously had been granted options under the Subsidiary Plan
and we granted 1.1 million stock options under our Amended and Restated 1996
Edgewater Stock Option Plan to officers that previously had been granted options
under the Subsidiary Plan. As a result of these grants, we recorded a one-time
compensation expense charge of $0.2 million.
During the third quarter of 2000, we recorded restructuring expenses
totaling approximately $2.8 million relating to our divestiture process and
costs related to the consolidation and transfer of our corporate headquarters
from Fayetteville, Arkansas to Wakefield, Massachusetts, where our eSolutions
segment, Edgewater, is located. The move of the corporate headquarters is
expected to be completed during the second quarter of 2001. Approximately 25
employees have been or will be severed as a result of this restructuring. The
restructure expense included future contractual obligations to certain employees
which extend through October 2001. As a result of the above, expenses of
approximately $2.4 million for severance costs, $0.2 million for relocation
costs and $0.2 million for facility costs were recorded in the third quarter of
2000.
As a result of our change in operating strategy in late 1999, we reevaluated
the estimated useful life for the intangibles associated with our acquisition of
Edgewater. Based on an independent valuation in late 1999, we reduced the
amortization period from 30 years to 10 years for these intangibles. This change
was effective January 1, 2000 and resulted in increased quarterly amortization
expense of approximately $0.6 million. A valuation of the remaining intangibles
and its components is still pending and is expected to be finalized during the
fourth quarter. Any resulting change in estimated useful life for these
intangibles and the effect on amortization expense will recorded at that time.
16
<PAGE>
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 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.
The financial results for all periods presented have been restated to
present the Commercial segment, Robert Walters, IntelliMark and Strategic Legal
Resources as discontinued operations. The financial information provided below
has been rounded in order to simplify its presentation. The amounts and
percentages below have been calculated using the detailed financial information
contained in the financial statements, the notes thereto and the other financial
data included in this Quarterly Report on Form 10-Q.
Results For The Three and Nine Months Ended September 30, 2000 Compared To
Results For The Three and Nine Months Ended September 30, 1999
Consolidated Results
--------------------
Revenues. Consolidated revenues increased $4.0 million, or 35.3%, to $15.5
million for the three months ended September 30, 2000 compared to $11.5 million
for the three months ended September 30, 1999. Consolidated revenues increased
$13.6 million, or 44.6%, to $44.0 million for the nine months ended September
30, 2000 compared $30.4 million for the nine months ended September 30, 1999.
The primary reason for these increases is higher revenues at Edgewater, our
eSolutions division, which we acquired effective April 1, 1999.
Gross Profit and SG&A. For the three months ended September 30, 2000 versus
the same period in 1999, gross profit as a percentage of revenue increased from
40.5% to 42.1%. Gross profit as a percentage of revenue increased from 36.6%
for the nine months ended September 30, 1999 to 42.0% for the nine months ended
September 30, 2000. The primary reason for the increased gross margins was
increased permanent placement fees and the inclusion of Edgewater for the entire
period in 2000. Excluding the $2.8 million nonrecurring restructure charge
incurred during the third quarter 2000, selling, general and administrative
expenses ("SG&A") as a percentage of revenue was 32.5% and 33.4% for the three
months ended September 30, 2000 and 1999, respectively, and was 33.3% and 32.7%
for the nine months ended September 30, 2000 and 1999, respectively. Including
the $2.8 million nonrecurring restructure charge, SG&A as a percentage of
revenue was 50.5% and 39.7% for the three and nine months ended September 30,
2000. Unallocated corporate SG&A was $1.2 million ($4.0 million with the
restructure charge) and $1.3 million for the three months ended September 30,
2000 and 1999, respectively, and $3.5 million ($6.3 million with the restructure
charge) and $4.3 million for the nine months ended September 30, 2000 and 1999,
respectively. The decrease in unallocated corporate SG&A was primarily a result
of decreased headcount, decreased staff health costs associated with our self-
insurance plan, decreased rent, utilities and telephone and equipment lease
costs associated with our corporate headquarters and lower professional fees.
EBITDA. EBITDA decreased $2.1 million to ($1.3) million for the three
months ended September 30, 2000 as compared to $0.8 million for the three months
ended September 30, 1999. EBITDA decreased $0.2 million to $1.0 million for the
nine months ended September 30, 2000 as compared to $1.2 million for the nine
months ended September 30, 1999. EBITDA as a percentage of revenues was (8.5%)
and 7.1% for the three months ended September 30, 2000 and 1999, respectively,
and was 2.3% and 3.9% for the nine months ended September 30, 2000 and 1999,
respectively.
EBITDA Excluding the Restructure Charge. The following financial results
exclude the $2.8 million restructure charge for the three and nine months ended
September 30, 2000, as previously discussed. EBITDA was $1.5 million and $3.8
million for the three and nine months ended September 30, 2000, respectively.
EBITDA as a percentage of revenues was 9.6% and 8.7% for the three and nine
months ended September 30, 2000, respectively. The increase in EBITDA over the
prior year is primarily the result of the increased revenues at Edgewater, our
eSolutions division, which was acquired effective April 1, 1999. EBITDA as a
percentage of revenue reduced in the current year as a result of our planned
increase in consultants as well as planned increases in sales, marketing and
recruiting expenses to support our eSolutions growth plans.
17
<PAGE>
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $0.8 million, or 207.7%, to $1.2 million for the three months
ended September 30, 2000 as compared to $0.4 million for the three months ended
September 30, 1999. Depreciation and amortization expense increased $2.8
million, or 328.2%, to $3.7 million for the nine months ended September 30, 2000
as compared to $0.9 million for the nine months ended September 30, 1999. This
increase is primarily attributable to a change in goodwill life for Edgewater.
Effective January 1, 2000, the goodwill associated with the Edgewater
acquisition began being amortized over a 10 year period, as opposed to the 30
year life that was established in April 1999 when Edgewater was acquired and
operated as part of the Professional/IT segment. This change, which resulted in
increased quarterly amortization expense of approximately $0.6 million, was made
as the result of an independent valuation when we separated eSolutions as a
separate business segment.
Operating (Loss) Income. Operating (loss) income decreased $3.0 million to
($2.6) million for the three months ended September 30, 2000 compared to $0.4
million for the same period last year and decreased $3.0 million to ($2.7)
million for the nine months ended September 30, 2000 compared to $0.3 million
for the nine months ended September 30, 1999. Operating margins were (16.5%)
and 3.5% for the three months ended September 30, 2000 and 1999, respectively,
and were (6.2%) and 1.0% for the nine months ended September 30, 2000 and 1999,
respectively.
Operating (Loss) Income Excluding the Restructure Charge. The following
financial results exclude the $2.8 million restructure charge for the three and
nine months ended September 30, 2000, as previously discussed. Operating income
was $0.2 million and $0.1 million for the three and nine months ended September
30, 2000, respectively. Operating margins were 1.6% and 0.2% for the three and
nine months ended September 30, 2000, respectively. Operating income and
operating margins declined from prior year due to higher SG&A and higher
depreciation and amortization expense.
Interest Income (Expense), Net. We received net interest income of $1.0
million for the three months ended September 30, 2000 as compared to interest
expense of $0.6 million for the three months ended September 30, 1999. Net
interest income (expense) was $0.1 million and ($1.0) million for the nine
months ended September 30, 2000 and 1999, respectively. Interest expense in all
periods is primarily related to borrowings on our Credit Facility (as defined
below) to fund working capital requirements, the cash portion of our
acquisitions and additions to property and equipment. Using the proceeds from
the sale of our various divisions, all borrowings were repaid in July 2000 and
excess cash amounts have been placed in short-term investments.
Net Income (Loss) From Continuing Operations. Net loss from continuing
operations decreased $0.3 million to ($0.4) million for the three months ended
September 30, 2000 as compared to ($0.1) million for the same period last year.
Net margin from continuing operations was (2.8%) for the three months ended
September 30, 2000 as compared to (0.9 %) for the three months ended September
30, 1999. Net loss from continuing operations decreased $0.7 million to ($1.1)
million for the nine months ended September 30, 2000 as compared to ($0.5)
million for the same period in 1999. Net margin from continuing operations was
(2.6%) for the nine months ended September 30, 2000 as compared to (1.6%) for
the nine months ended September 30, 1999. Exclusive of the restructure charge,
net income from continuing operations was $1.1 million (7.1% of revenue) and
$0.6 million (1.3% of revenue) for the three and nine months ended September 30,
2000, respectively.
Net Income (Loss) Including Discontinued Operations. Net income increased
$53.8 million to $61.6 million for the three months ended September 30, 2000 as
compared to $7.8 million for the same period last year. We recognized a loss of
$43.3 million for the nine months ended September 30, 2000 as compared to net
income of $25.0 million for the same period in 1999. Results for discontinued
operations for the three months ended September 30, 2000 include an after tax
gain of $124.0 million for the sale of our interest in Robert Walters, an after
tax loss of $6.1 million on our sale of Strategic Legal and a $53.9 million
goodwill impairment charge relating to the discontinued accounting treatment of
IntelliMark. Results for discontinued operations for the nine months ended
September 30, 2000 include the items mentioned above as well as an after tax
loss of $8.0 million on our sale of the Commercial segment and a goodwill
impairment charge of $150 million relating to the discontinued operations in our
Professional/IT segment.
18
<PAGE>
Results for Edgewater Segment
-----------------------------
Revenues. Our eSolutions segment, Edgewater, was acquired effective April 1,
1999, therefore, operating results for the first quarter of 1999 are not
included in the results for the nine months ended September 30, 1999. Revenue
for the eSolutions segment increased $3.3 million, or 64.8%, to $8.4 million for
the three months ended September 30, 2000 compared to $5.1 million for the three
months ended September 30, 1999. Revenues increased due to increased customers
and billable headcount. Revenues for the eSolutions segment were $23.4 million
and $10.0 million for the nine months ended September 30, 2000 and 1999,
respectively.
EBITDA. EBITDA increased $0.3 million to $1.5 million for the three months
ended September 30, 2000 as compared to $1.2 million for the three months ended
September 30, 1999. EBITDA was $4.4 million and $2.8 million for the nine
months ended September 30, 2000 and 1999, respectively. EBITDA as a percentage
of revenues was 18.3% and 24.7% for the three months ended September 30, 2000
and 1999, respectively, and was 18.8% and 28.0% for the nine months ended
September 30, 2000 and 1999, respectively. The increase in EBITDA is due to
increased revenues, while the reduction in EBITDA as a percentage of revenue is
due to our planned increase in consultants as well as planned increases in
sales, marketing and recruiting expenses to support our eSolutions growth plans.
Operating Income. Operating income for the eSolutions segment decreased
$0.6 million, or 57.3%, to $0.4 million for the three months ended September 30,
2000, as compared to $1.0 million in the same period last year. Operating
income for the eSolutions segment was $1.2 million and $2.4 million for the nine
months ended September 30, 2000 and 1999, respectively. The operating margin
decreased from 19.7% for the three months ended September 30, 1999 to 5.1% for
the three months ended September 30, 2000. The operating margin was 4.9% and
23.4% for the nine months ended September 30, 2000 and 1999, respectively.
Operating income and margins were primarily affected by increased quarterly
amortization of approximately $0.6 million resulting from a change in goodwill
life from 30 years to 10 years effective January 1, 2000 and planned growth
expenditures as discussed above.
Results for ClinForce Segment
-----------------------------
Revenues. Revenues for the ClinForce segment increased $0.8 million, or
12.1%, to $7.2 million for the three months ended September 30, 2000 compared to
$6.4 million for three months ended September 30, 1999. Revenues for the
ClinForce segment increased $0.2 million, or 0.9%, to $20.6 million for the nine
months ended September 30, 2000 compared to $20.4 million for nine months ended
September 30, 1999.
EBITDA. EBITDA increased $0.2 million to $1.1 million for the three months
ended September 30, 2000 as compared to $0.9 million for the three months ended
September 30, 1999. EBITDA increased $0.2 million to $2.8 million for the nine
months ended September 30, 2000 as compared to $2.6 million for the same period
in the prior year. EBITDA as a percentage of revenues was 15.6% and 14.0% for
the three months ended September 30, 2000 and 1999, respectively, and was 13.7%
and 13.0% for the nine months ended September 30, 2000, respectively. The
EBITDA increase is primarily the result of increased revenues offset by slightly
higher SG&A.
Operating Income. Operating income for the ClinForce segment increased $0.2
million to $1.0 million for the three months ended September 30, 2000 as
compared to $0.8 million for the three months ended September 30, 1999.
Operating income for the ClinForce segment increased $0.1 million to $2.4
million for the nine months ended September 30, 2000 as compared to $2.3 million
for the nine months ended September 30, 1999. The operating margin increased
from 11.9% for the three months ended September 30, 1999 to 13.6% for the three
months ended September 30, 2000 and increased from 11.1% for the nine months
ended September 30, 1999 to 11.7% for the nine months ended September 30, 2000.
The increases in operating income are primarily the result of increased revenues
offset slightly by higher SG&A.
19
<PAGE>
Liquidity and Capital Resources
Our primary historical sources of funds are from operations, the proceeds
from securities offerings, if any, and borrowings under our former credit
facility with a consortium of banks (the "Credit Facility"). Our principal
historical uses of cash have been to fund acquisitions, working capital
requirements and capital expenditures. We generally pay our consultants and
associates 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 of
approximately $90 million were invested in cash and short-term marketable
securities. The Board of Directors authorized management, subject to legal
requirements, to initially use up to $30 million to repurchase our common stock
over the course of the next twelve months (unless shortened or extended by the
Board of Directors). Repurchases have been and will be made from time to time on
the open market at prevailing market prices or in negotiated transactions off
the market. Under this program, we have repurchased 944,000 shares of our
common stock for approximately $6.1 million.
The Credit Facility was secured by all of the issued and outstanding capital
stock of our domestic subsidiaries and 65% of the issued and outstanding capital
stock of our first-tier foreign subsidiaries. Interest on any borrowings was
computed at our option of either the bank group's prime rate or the London
interbank offered rate, incrementally adjusted based on our operating leverage
ratios. We paid a quarterly facility fee determined by multiplying the total
amount of the Credit Facility by a percentage which varied based on our
operating leverage ratios. In May 1999, we expanded the Credit Facility from
$300 million to $325 million. Additionally, during December 1999, we obtained a
commitment from two members of our Credit Facility to increase our borrowing
capacity for an additional $10 million through January 2000 as a buffer for
unexpected Year 2000 issues. This $10 million borrowing increase was not
utilized by us. On March 31, 2000, the maximum amount of borrowings under the
Credit Facility reverted back to $300 million. In April 2000, we obtained a
commitment from one member of our Credit Facility to increase our borrowing
capacity for an additional $7.5 million through May 2000 as a buffer for
unexpected costs. This $7.5 million borrowing increase was never utilized by
us. The $300 million portion of the Credit Facility was scheduled to mature in
August 2003. We had net payments on the Credit Facility of approximately $91.0
million and $291.1 million for the three and nine months ended September 30,
2000, respectively, and net borrowings of approximately $30.4 million and $113.4
million for the three and nine months ended September 30, 1999, respectively.
The majority of our borrowings were used to pay the cash consideration for
several of our acquisitions and for general corporate purposes. In July 2000,
we paid-off all of our outstanding borrowings under the Credit Facility and
terminated the Credit Facility at the same time.
In 1998, we entered into fixed interest rate swap agreements with a notional
amount of $60.0 million related to borrowings under the Credit Facility to hedge
against increases in interest rates which would increase the cost of variable
rate borrowings under the Credit Facility. In May 2000, we terminated the
agreements and recognized the proceeds as an asset to be amortized over the
original life of the contracts. These swaps did not have a material impact on
recorded interest expense during the periods presented. In July 2000, in
conjunction with the repayment and termination of the Credit Facility, we wrote
off the unamortized balance and recognized a gain of approximately $1.0 million
on these swaps in the accompanying financial statements.
Net cash provided by (used in) continuing operating activities was $1.0
million and ($2.7) million for the three months ended September 30, 2000 and
1999, respectively, and ($1.1) million and $7.3 million for the nine months
ended September 30, 2000 and 1999, respectively. The net cash provided by (used
in) 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 $198.1
million and ($26.3) million for the three months ended September 30, 2000 and
1999, respectively. Net cash provided by (used in) investing activities was
$397.7 million and ($55.9) million for the nine months ended September 30, 2000
and 1999, respectively. Cash provided by continuing investing activities was
primarily attributable to the proceeds from the sale of our various divisions
and cash used in continuing investing activities was primarily attributable to
cash paid for acquisitions and for additional contingent consideration paid for
acquisitions completed during prior periods.
20
<PAGE>
Net cash (used in) provided by continuing financing activities was ($97.1)
million and $31.4 million for the three months ended September 30, 2000 and
1999, respectively. Net cash (used in) provided by financing activities was
($297.2) million and $114.9 million for the nine months ended September 30, 2000
and 1999, respectively. Cash used in continuing financing activities was
primarily related to the repayment of borrowings under our Credit Facility.
Cash provided by financing activities was primarily related to borrowings under
our Credit Facility to finance several of the acquisitions and contingent
consideration payments completed during these periods.
As a result of the above, and as a result of cash flows from discontinued
operations, our combined cash and cash equivalents increased $95.9 million and
$92.4 million for the three and nine months ended September 30, 2000,
respectively, and decreased $8.9 million and $12.0 million for the three and
nine months ended September 30, 1999, respectively.
We believe that our cash flows from operations and available cash will
provide sufficient liquidity for our existing operations taking into account the
possible issuer tender offer or some other form of distribution as referenced
below. We periodically reassess the adequacy of our liquidity position, taking
into consideration current and anticipated operating cash flow, anticipated
capital expenditures, acquisition plans, and public or private offerings of debt
or equity securities.
As of November 13, 2000, we have approximately $105 million in cash and no
debt. During the fourth quarter, we plan to announce a formal program to return
value to stockholders, which we expect to structure as an issuer tender offer or
some other form of distribution.
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 the anticipated return of
value to our stockholders through an issuer tender offer or other form of
distribution, planned Edgewater unit positioning, the corporate headquarters
move, competitive and strategic initiatives, potential stock repurchases, and
future liquidity needs. These statements involve known and unknown risks,
uncertainties and other factors that may cause results, levels of activity,
growth, performance, earnings per share or achievements to be materially
different from any future results, levels of activity, growth, performance,
earnings per share or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, those listed below, as
well as those listed under "Business - Factors Affecting Finances, Business
Prospects and Stock Volatility" and elsewhere in our 1999 Annual Report on Form
10-K as filed with the Commission on March 20, 2000.
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) the inability to consummate a transaction involving the sale
of IntelliMark; (2) inability to consummate or complete an issuer tender offer
or other form of distribution to our stockholders relating to a portion of our
cash; (3) potential miscalculations of the capital requirements, competitive and
strategic positioning and growth of Edgewater; (4) inability to repurchase
common stock on terms acceptable to us; (5) changes in industry trends, such as
decline in the demand for or supply of clinical trials support services, whether
on a temporary or permanent basis, or e-solutions services; (6) adverse
developments involving debt, equity, currency or technology market conditions;
(7) adverse results in litigation matters; (8) failure to obtain new customers
or retain significant existing customers; (9) loss of key executives; and/or
(10) general economic and business conditions (whether foreign, national, state
or local) which include but are not limited to changes in interest or currency
exchange rates. Actual
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events or results may differ materially. These factors may cause our actual
results to differ materially from any forward-looking statements.
Although we believe that the expectations in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance, growth, earnings per share or achievements. However, neither we
nor any other person assumes responsibility for the accuracy and completeness of
such statements. We are under no duty to update any of the forward-looking
statements after the date of this Form 10-Q to conform such statements to actual
results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the three months ended September 30, 2000, we did not enter into new
arrangements, or modify existing arrangements, concerning market risk and we
repaid all of our borrowings under our Credit Facility.
PART II
Item 1. Legal Proceedings
From March 12, 1999 through April 22, 1999, John A. Jennen, Richard A.
Watson, Rick W. Johnson, Edward D. LaFrance and Trust Equity Advisors Plus, LLC,
each purporting to act on behalf of a class of our stockholders, filed
complaints against us in the United States District Court for the Eastern
District (in the case of each plaintiff except Mr. LaFrance) and Western
District (in the case of Mr. LaFrance) of Arkansas, alleging that StaffMark (now
known as Edgewater Technology, Inc.), one of its officer/directors and one of
its officers, violated the federal securities laws, and seeks unspecified
compensatory and other damages. By order entered May 6, 1999, the four cases
pending in the Eastern District of Arkansas were consolidated into one action,
and on July 15, 1999, the LaFrance action in the Western District of Arkansas
was transferred to the Eastern District to be consolidated with the other four
cases. On November 10, 1999, the Court appointed lead plaintiff and approved
lead counsel, and the lead plaintiffs filed their consolidated complaint on
January 11, 2000, which supercedes all other complaints. The consolidated
complaint names us and one of our officer/directors as defendants. It purports
to be filed on behalf of all purchasers of our securities between February 3,
1998 and March 2, 1999, and alleges violations of the federal securities law and
seeks unspecified damages. We filed a motion to dismiss the consolidated
complaint on March 31, 2000 and on May 31, 2000, the lead plantiffs filed a
response to our motion to dismiss. On June 29, 2000, the Court issued a
Memorandum Opinion and Order (the "Order") dismissing most of the allegations in
the consolidated complaint. As to the remaining allegations in the consolidated
complaint following the Order, on July 12, 2000, we filed a motion for partial
reconsideration to dismiss the remaining allegations. The lead plantiffs filed
a response to our partial reconsideration motion on July 24, 2000 and we filed a
reply motion to the response by the lead plantiffs on July 26, 2000. The Court
has not yet ruled on this motion. Our answer to the consolidated complaint was
filed on August 14, 2000, although no discovery has taken or will take place
until the Court rules on our pending motion for partial reconsideration. We
believe that this complaint is without merit and deny all of the allegations of
wrongdoing and are vigorously defending the suit.
We also are a party to litigation incidental to our business. We believe
that these routine legal proceedings will not have a material adverse effect on
the results of operations or financial condition. We maintain insurance in
amounts, with coverages and deductibles, that we believe are reasonable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
11.1 Statement re: computation of per share earnings, reference is made to Note 7 of the
Edgewater Technology, Inc. Consolidated Financial Statements contained in this Form
10-Q.
10.37 Edgewater Technology, Inc. Amended and Restated 1996 Stock Option Plan.
27.1 Financial Data Schedule for the three months ended September 30, 2000, submitted to
the Commission in electronic format.
</TABLE>
(b) Reports on Form 8-K
1. A Form 8-K was filed with the Commission on July 14, 2000 relating to
the sale of our Commercial segment.
2. A Form 8-K was filed with the Commission on July 26, 2000 relating to
the consummation of the sale of our interest in Robert Walters.
3. A Form 8-K was filed with the Commission on August 2, 2000 relating to
the Share Rights Purchase Plan approved by our Board of Directors on
July 20, 2000.
4. A Form 8-K was filed with the Commission on September 26, 2000 relating
to our press release which was disseminated publicly on September 25,
2000 for the sale of our Strategic Legal Resources division.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDGEWATER TECHNOLOGY, INC.
Date: November 13, 2000 /s/ CLETE T. BREWER
-------------------------
Clete T. Brewer
Chief Executive Officer and Chairman
Date: November 13, 2000 /s/ TERRY C. BELLORA
--------------------------
Terry C. Bellora
Chief Financial Officer
23
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
10.37 Edgewater Technology, Inc. Amended and Restated 1996 Stock
Option Plan.
27.1 Financial Data Schedule for the three months ended September 30,
2000, submitted to the Commission in electronic format.
24
