<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 June 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)
234 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 August 11, 2000 was 29,470,306.
1
<PAGE>
EDGEWATER TECHNOLOGY, INC.
FORM 10-Q FOR THE QUARTER ENDED JUNE 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
Overview 12
Results for the Three and Six Months Ended June 30, 2000 Compared to Results for the Three
and Six Months Ended June 30, 1999 14
Liquidity and Capital Resources 16
Discontinued Operations 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 19
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 21
</TABLE>
2
<PAGE>
EDGEWATER TECHNOLOGY, INC.
--------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Service Revenues $ 65,040 $86,095 $ 136,241 $ 162,943
Cost of Services 45,302 59,173 95,587 113,548
--------- --------- --------- ---------
Gross Profit 19,738 26,922 40,654 49,395
--------- --------- --------- ---------
Operating Expenses:
Selling, General and Administrative 17,903 16,192 35,304 30,449
Depreciation and Amortization 3,711 2,992 7,699 5,639
Nonrecurring Impairment Charge 150,000 - 150,000 -
--------- --------- --------- ---------
Operating (Loss) Income (151,876) 7,738 (152,349) 13,307
--------- --------- --------- ---------
Other Expenses:
Interest Expense 2,999 2,519 6,099 4,301
Other, Net 147 182 (477) 211
--------- --------- --------- ---------
(Loss) Income Before Income Taxes (155,022) 5,037 (157,971) 8,795
Income Taxes (Benefit) Provision (52,709) 1,813 (53,650) 3,226
--------- --------- --------- ---------
(Loss) Income From Continuing
Operations (102,313) 3,224 (104,321) 5,569
Discontinued Operations (Note 6):
Income from Operations of
Discontinued Divisions 1,711 7,536 5,650 11,597
Loss on Sale of Commercial Segment (6,175) - (6,175) -
--------- --------- --------- ---------
Net (Loss) Income ($106,777) $ 10,760 ($104,846) $ 17,166
========= ========= ========= =========
Basic Earnings Per Share - Continuing
Operations ($3.47) $ 0.11 ($3.54) $ 0.19
========= ========= ========= =========
Diluted Earnings Per Share - Continuing
Operations ($3.46) $ 0.11 ($3.53) $ 0.19
========= ========= ========= =========
Basic Earnings Per Share ($3.62) $ 0.37 ($3.55) $ 0.59
========= ========= ========= =========
Diluted Earnings Per Share ($3.61) $ 0.37 ($3.55) $ 0.58
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
EDGEWATER TECHNOLOGY, INC.
--------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- --------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash $ 313 $ 8,669
Accounts receivable, net 49,068 57,055
Prepaid expenses and other 6,942 5,191
Income tax receivable - 1,487
Deferred income taxes 51,375 5,986
-------- --------
Total current assets 107,698 78,388
PROPERTY AND EQUIPMENT, net 6,778 7,748
INTANGIBLE ASSETS, net 138,277 290,925
OTHER ASSETS 1,986 2,275
NET ASSETS HELD FOR SALE 57,003 247,199
-------- --------
$311,742 $626,535
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities $ 15,239 $ 17,243
Payroll and related liabilities 12,857 10,574
Income tax payable 1,082 -
Reserve for workers' compensation claims 250 120
-------- --------
Total current liabilities 29,428 27,937
LONG TERM DEBT 91,000 291,090
OTHER LONG TERM LIABILITIES 152 6,222
DEFERRED INCOME TAXES 2,098 8,237
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; no shares issued
or outstanding - -
Common stock, $.01 par value; 29,544,633 and
29,401,022 shares issued and outstanding as of
June 30, 2000 and December 31, 1999 295 294
Paid-in capital 217,083 216,279
Retained earnings (28,314) 76,476
-------- --------
Total stockholders' equity 189,064 293,049
-------- --------
$311,742 $626,535
======== ========
</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 Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ($106,777) $ 10,760 ($104,846) $ 17,166
Net income from discontinued operations (1,711) (7,536) (5,650) (11,597)
Loss on disposal of assets 6,175 - 6,175 -
---------- ---------- ---------- ----------
Net (loss) income from continuing operations (102,313) 3,224 (104,321) 5,569
Adjustments to reconcile net (loss) income to net cash
Provided by (used in) operating activities:
Depreciation and amortization 3,711 2,992 7,699 5,639
Provision for bad debts 371 61 1,142 61
Deferred income taxes (51,485) 1,476 (51,528) 3,977
Impairment of intangible assets 150,000 - 150,000 -
Change in operating assets and liabilities,
net of acquisitions:
Accounts receivable 3,689 5,096 6,580 (11,503)
Prepaid expenses and other 3,960 2,852 (1,751) 1,522
Other assets 1,182 (584) 1,297 (841)
Accounts payable and other accrued liabilities (2,121) (3,195) (7,163) (9,107)
Payroll and related liabilities 3,016 (2,410) 3,008 7,462
Payment of nonrecurring merger expenses (160) (4,575) (565) (13,633)
Reserve for workers' compensation claims 129 (10) 130 (263)
Income taxes payable (1,654) (2,100) (381) (1,469)
Other long term liabilities 51 (9) 133 (551)
Other, net - 59 (651) (652)
---------- ---------- ---------- ----------
Net cash provided by (used in) continuing
operating activities 8,376 2,877 3,629 (13,789)
---------- ---------- ---------- ----------
Net cash provided by discontinued operating
activities 1,624 5,047 20,709 17,254
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of businesses 204,122 - 205,052 -
Acquisition of businesses, net of cash acquired (2,344) (18,498) (3,810) (73,037)
Capital expenditures (810) (760) (1,382) (1,616)
---------- ---------- ---------- ----------
Net cash provided by (used in) continuing
investing activities 200,968 (19,258) 199,860 (74,653)
---------- ---------- ---------- ----------
Net cash used in discontinued investing activities (1,267) (5,746) (3,837) (24,986)
---------- ---------- ---------- ----------
</TABLE>
5
<PAGE>
EDGEWATER TECHNOLOGY, INC.
--------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
-------------------------------------------------
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 28,855 67,304 69,440 237,062
Payments on borrowings (223,005) (61,080) (269,530) (152,660)
Proceeds from stock purchase plan and stock option exercises 63 40 125 988
Deferred financing costs - (66) - (585)
---------- ---------- ---------- ----------
Net cash (used in) provided by
continuing financing activities (194,087) 6,198 (199,965) 84,805
---------- ---------- ---------- ----------
Net cash (used in) provided by
discontinued financing activities (3,118) 11,506 (9,360) 9,928
---------- ---------- ---------- ----------
Effect of foreign currency translation on cash and cash (3,402) (324) (5,432) (1,715)
equivalents
Net increase (decrease) in cash and cash equivalents 9,094 300 5,604 (3,156)
CASH AND CASH EQUIVALENTS, beginning of period 228 9,356 3,718 12,812
CASH AND CASH EQUIVALENTS, discontinued operations (9,009) (4,070) (9,009) (4,070)
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 313 $ 5,586 $ 313 $ 5,586
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 3,431 $ 2,384 $ 6,836 $ 3,957
========== ========== ========== ==========
Income taxes paid $ 476 $ 4,040 $ 834 $ 9,864
========== ========== ========== ==========
</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, formerly known as
StaffMark, Inc.) provide human resource and business solutions through two
segments. Our eSolutions segment consists of Edgewater Technology (Delaware),
Inc. ("Edgewater"), an eBusiness consulting firm acquired effective April 1,
1999. Our Professional/Information Technology ("Professional/IT") segment is
made up of three platforms: IntelliMark information technology ("IT") staffing
and solutions; ClinForce clinical trials support services; and Strategic Legal
Resources legal staffing. Revenues are recognized upon the performance of
services. We generally compensate our associates and consultants only for hours
actually worked and, therefore, wages of associates and consultants are a
variable cost that increase or decrease as revenues increase or decrease.
However, we do have associates and consultants that are full-time, salaried
employees who are paid even when not engaged in staffing or consulting. Cost of
services primarily consists of wages paid to associates and consultants, 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, IT
systems and communications expenses.
As of June 30, 2000, we operated 49 offices in 23 states. We extend trade
credit to customers representing a variety of industries. There are no
individual customers that account for more than 10% of our service revenues in
any of the periods presented.
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.
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 Annual Report on
Form 10-K as filed with the Commission on March 20, 2000.
3. SEASONALITY:
-----------
The timing of certain holidays, weather conditions and seasonal vacation
patterns can cause our results of operations to fluctuate. We generally expect
to realize higher revenues, operating income and net income during the second
and third quarters and relatively lower revenues, operating income and net
income during the first and fourth quarters. Accordingly, the results of
operations for an interim period are not necessarily indicative of the results
of operations for a full fiscal year.
7
<PAGE>
4. BUSINESS TRANSACTIONS:
---------------------
Effective April 1, 1999, we acquired Edgewater, a full-service provider of
eBusiness solutions located in Boston's Route 128 technology corridor.
Edgewater applies its eStrategy, eSolutions and Internet outsourcing services to
vertical markets such as retail eCommerce, financial and asset management,
healthcare, government and agriculture. Edgewater brings mission-critical
eSolutions to clients primarily in the middle market.
For the three and six months ended June 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 $18.5 million and $73.0
million in cash for the three and six months ended June 30, 1999, respectively,
and $2.3 million and $3.8 million during the three months and six months ended
June 30, 2000, 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 of our Professional/IT segment to estimated
realizable values. This write-down is largely due to a decline in the revenues
of this segment and an overall decrease in market values within the industry.
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. We are planning to sell the remaining lines of
business constituting the Professional/IT segment; however, we are also
evaluating alternatives in which certain of these lines of business could be
retained. Our estimates of fair value could vary significantly positively or
negatively from the amounts which may ultimately be realized in the event these
assets are sold.
During the third quarter of 1999, we recorded restructuring expenses
totaling approximately $3.0 million relating to the restructure of our
Professional/IT segment. 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, our IT platform in the Professional/IT segment 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 $280,000 for
office closing costs, and approximately $457,000 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. 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 $ 2,981
Cash outlays (2,333)
-------
Accrual at June 30, 2000 $ 648
=======
8
<PAGE>
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 the Stephens
Group, Inc. As consideration, we received gross proceeds of $190.1 million in
cash before fees, expenses and taxes which were used to repay a portion of
borrowings under our Credit Facility (as defined below). 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 interest in Robert Walters plc ("Robert Walters") through an
initial public offering ("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. A portion of the proceeds were used to repay borrowings on our
Credit Facility (as defined below). The remaining proceeds will be used for
general corporate purposes, to repurchase shares of our common stock and to
provide capital to our eSolutions segment.
Revenues from discontinued operations were $229.7 million and $452.8 million
for the three and six months ended June 30, 2000, respectively, and were $218.2
million and $421.7 million for the three and six months ended June 30, 1999,
respectively. Operating income from discontinued operations was $1.7 million and
$5.7 million for the three and six months ended June 30, 2000, respectively, and
was $7.5 million and $11.6 million for the three and six months ended June 30,
1999, respectively.
Net assets held for sale in the accompanying balance sheets represent
discontinued operations for Robert Walters as of June 30, 2000 and Robert
Walters and the Commercial segment as of December 31, 1999. Components are as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 2000 1999
-------- -----------
<S> <C> <C>
Cash and cash equivalents $ 9,009 $ (4,951)
Accounts receivable, net 50,472 134,137
Prepaid expenses and other 5,005 11,845
Property and equipment, net 4,933 21,295
Intangible assets, net 9,148 144,462
Other assets 1,340 509
Accumulated translation adjustment 8,562 2,572
Accounts payable and other accrued liabilities (20,048) (23,738)
Payroll and related liabilities (7,173) (15,565)
Reserve for workers' compensation claims - (9,507)
Income taxes payable (4,001) (3,689)
Deferred tax liability (244) (847)
Long term debt - (9,324)
-------- -----------
Total $ 57,003 $ 247,199
======== ===========
</TABLE>
9
<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 Six Months
Ended June 30, Ended June 30,
(In thousands except per share data) 2000 1999 2000 1999
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net (loss) income applicable to common shares ($106,777) $10,760 ($104,846) $17,166
========= ======= ========= =======
Weighted average common shares outstanding 29,526 29,174 29,494 29,211
========= ======= ========= =======
Basic earnings per share of common stock ($3.62) $ 0.37 ($3.55) $ 0.59
========= ======= ========= =======
Diluted earnings per share:
Net (loss) income applicable to common shares ($106,777) $10,760 ($104,846) $17,166
========= ======= ========= =======
Weighted average common shares outstanding 29,526 29,174 29,494 29,211
Dilutive effect of stock options 30 170 78 228
--------- ------- --------- -------
Weighted average common shares including
dilutive effect of stock options 29,556 29,344 29,572 29,439
========= ======= ========= =======
Diluted earnings per share of common stock ($3.61) $ 0.37 ($3.55) $ 0.58
========= ======= ========= =======
</TABLE>
Excluding the nonrecurring impairment charge of $150 million, both basic and
diluted earnings per share were ($0.26) for the three months ended June 30, 2000
and were both ($0.20) for the six months ended June 30, 2000.
Options to purchase approximately 3.1 million shares of common stock (at
prices ranging from $6.38 to $40.75 per share) and 2.4 million shares of common
stock (at prices ranging from $7.63 to $40.75 per share) were outstanding during
the three and six months ended June 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 $9.94 to $40.75 per share) and 1.7 million shares of common stock
(at prices ranging from $12.47 to $40.75 per share) were outstanding during the
three and six months ended June 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 June 30, 2000.
8. SEGMENT INFORMATION:
-------------------
As a result of our 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, we have 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.
10
<PAGE>
We segment our operations based upon differences in services provided. Our
Professional/IT segment provides staffing, consulting, technical and support
services primarily in the areas of finance, accounting, information technology
and legal services. 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 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 six months
ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Professional/
Information Consolidated
(In thousands) Technology eSoltuions Corporate Totals
-------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Three Months Ended June 30, 2000
Service revenues $ 57,072 $ 7,968 $ - $ 65,040
Earnings before interest, taxes,
depreciation and amortization (146,062) 1,460 (3,563) (148,165)
Depreciation and amortization 2,568 1,090 53 3,711
Operating income (148,630) 370 (3,616) (151,876)
Capital expenditures 507 235 68 810
Total assets of continuing operations 148,814 48,085 57,480 254,379
Three Months Ended June 30, 1999
Service revenues $ 81,136 $ 4,959 $ - $ 86,095
Earnings before interest, taxes,
depreciation and amortization 11,195 1,551 (2,016) 10,730
Depreciation and amortization 2,569 198 225 2,992
Operating income 8,626 1,353 (2,241) 7,738
Capital expenditures 408 - 352 760
Total assets of continuing operations 310,459 19,797 41,491 371,747
Six Months Ended June 30, 2000
Service revenues $ 121,186 $15,055 $ - $ 136,241
Earnings before interest, taxes,
depreciation and amortization (141,247) 2,881 (6,284) (144,650)
Depreciation and amortization 5,226 2,157 316 7,699
Operating income (146,473) 724 (6,600) (152,349)
Capital expenditures 781 391 210 1,382
Six Months Ended June 30, 1999
Service revenues $ 157,984 $ 4,959 $ - $ 162,943
Earnings before interest, taxes,
depreciation and amortization 20,389 1,551 (2,994) 18,946
Depreciation and amortization 5,032 198 409 5,639
Operating income 15,357 1,353 (3,403) 13,307
Capital expenditures 901 - 715 1,616
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Our services are provided through two segments: eSolutions and
Professional/IT. Our eSolutions segment provides eCommerce software solutions,
consulting and web development, as well as outsourcing to help companies convert
to an Internet business model. The Professional/IT segment provides staffing,
recruitment (placement), consulting, technical support and solutions services
primarily in the areas of IT, finance, accounting, pharmaceutical, and legal
services. Our services are provided through our network of 49 offices located in
23 states.
Revenues are recognized upon the performance of services. In the
Professional/IT segment, we generally compensate our associates and consultants
only for hours actually worked and, therefore, wages of associates and
consultants are a variable cost that increase or decrease as revenues increase
or decrease. However, we do have associates and consultants in our eSolutions
and Professional/IT segments that are full-time, salaried employees who are paid
even when not engaged in staffing or consulting. Cost of services primarily
consists of wages paid to associates and consultants, 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, IT systems and
communications expenses.
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 companies like StaffMark. In response to these developments and
with guidance from our financial advisor Credit Suisse First Boston, we began to
explore strategic alternatives for each of our business platforms in an effort
to maximize stockholder value.
After evaluating our traditional businesses, our eSolutions business and our
debt levels, management and the Board of Directors chose to focus future growth
initiatives on our eSolutions business, Edgewater. To further these objectives,
we sold our Commercial segment (including assets, liabilities and the
"StaffMark" name) to Stephens Group, Inc. for approximately $190.1 million in
cash before fees, expenses and taxes on June 29, 2000. Simultaneous with the
closing of this sale, we changed our name to "Edgewater Technology, Inc." and
our stock symbol to "EDGW."
On July 6, 2000, an IPO of our former indirectly wholly-owned subsidiary,
Robert Walters, was completed on the London Stock Exchange. As a result of the
IPO, we received approximately $199.2 million in total gross proceeds before
offering commissions, fees and expenses. We no longer have any equity interest
in Robert Walters.
We continue to work with Credit Suisse First Boston in evaluating strategic
alternatives for each of the three non-eSolutions platform companies that
comprise our Professional/IT segment: IntelliMark (providing traditional IT
staffing and solutions), ClinForce (providing staffing services for clinical
trial clients, especially pharmaceutical companies), and Strategic Legal
Resources (providing legal staffing support for corporations and legal firms).
We have also retained Banc of America Securities to evaluate and recommend an
optimal capital structure for Edgewater (as a pure-play eSolutions company) and
to advise us on its positioning relative to its eSolutions peer group. We
believe our initiatives should position 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. Assuming a
successful completion of the Professional/IT divestitures, the corporate offices
will be resized appropriately and moved to Edgewater's existing operations in
Wakefield, Massachusetts with the eSolutions business being our only operating
platform.
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Edgewater is a full-service provider of eBusiness solutions and has
developed a solid service model and approach which includes: (1) eStrategy -
consulting services that aid clients in translating business goals into
eSolutions strategies that take full advantage of Internet technologies to
maximize market share and profitability; (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 - provide a
spectrum of services ranging from enhanced site hosting through semi-custom and
custom integrated Application Service Provision ("ASP"), completed with total
Internet application outsourcing.
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 that just now is contemplating an Internet strategy; (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.
In our eSolutions segment, our eSolutions subsidiary, Edgewater, adopted a
stock option plan for employees and consultants of Edgewater (the "Subsidiary
Plan"). The purpose of the Subsidiary Plan is 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 may be granted under the Subsidiary Plan may not exceed 5.0 million
shares of Edgewater common stock. Currently, options for approximately 2.7
million shares of Edgewater common stock have been granted under the Subsidiary
Plan. Edgewater has 20 million shares of common stock outstanding, of which we
own one hundred percent (100%) of such outstanding shares.
During the second quarter 2000, we recorded a $150 million non-cash charge
for the write-down of certain of the asset values of our Professional/IT segment
to estimated realizable values. This write-down is largely due to a decline in
the revenues of this segment and an overall decrease in market values of
companies within the industry. 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.
During the third quarter of 1999, we recorded restructuring expenses
totaling approximately $3.0 million relating to the restructure of our
Professional/IT segment. This change arose from management's decision during
the third quarter of 1999 to redesign their sales strategy and resulting
management organization. Management separated 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, our IT platform in
the Professional/IT segment 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, non-recurring expenses of approximately $2.2 million for
severance costs, approximately $280,000 for office closing costs, and
approximately $457,000 for other costs including legal and travel expenses were
recorded. In addition to costs that have been incurred, the restructure expense
also includes future contractual obligations to certain severed employees which
extend through September 2001.
In conjunction with this restructuring plan, we decided to operate our
eSolutions business unit as a distinct operating unit as opposed to an
integrated component of the Professional/IT segment, as had been originally
planned. 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, we have 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.
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Earnings before interest, taxes, depreciation and amortization ("EBITDA") is
included in the following discussion because we believe the year-to-year change
in EBITDA is a meaningful measure since we have historically been an acquisitive
company and 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 and Robert Walters as discontinued operations.
The loss on the sale of the Commercial segment is included within discontinued
operations; however, the sale of Robert Walters and its estimated pretax gain of
approximately $120 million will not be recognized until the third quarter of
this year since that transaction was not completed until July. 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 Six Months Ended June 30, 2000 Compared To Results For
The Three and Six Months Ended June 30, 1999
Consolidated Results
--------------------
Revenues. Consolidated revenues decreased $21.1 million, or 24.4%, to $65.0
million for the three months ended June 30, 2000 compared to $86.1 million for
the three months ended June 30, 1999. Consolidated revenues decreased $26.7
million, or 16.4%, to $136.2 million for the six months ended June 30, 2000
compared to $162.9 million for the six months ended June 30, 1999. The primary
reason for the lower revenues is the decline in demand for traditional IT
staffing as companies completed preparation for Y2K and delayed spending on
traditional IT projects. Demand in 2000 has moved away from the legacy systems
and toward new skill sets in the Internet and in browser based systems.
Gross Profit and SG&A. For the three months ended June 30, 2000 versus the
same period in 1999, gross profit as a percentage of revenue decreased from
31.3% to 30.3%, while selling, general and administrative expenses ("SG&A") as a
percentage of revenue increased from 18.8% to 27.5%. For the six months ended
June 30, 2000 compared to the same period in 1999, gross profit as a percentage
of revenue decreased from 30.3% to 29.8% while SG&A as a percentage of revenue
increased from 18.7% to 25.9%. Unallocated corporate SG&A was $3.6 million and
$1.9 million for the three months ended June 30, 2000 and 1999, respectively,
and $6.1 million and $3.2 million for the six months ended June 30, 2000 and
1999, respectively. The increase in unallocated corporate SG&A was primarily a
result of increased staff health costs associated with our self-insurance plan,
increased rent, utilities and telephone and equipment lease costs associated
with our corporate headquarters and increased professional fees primarily
associated with international and domestic business and tax restructurings. We
believe that many of these professional fees are one-time in nature and should
yield benefits by reducing future costs.
EBITDA. EBITDA for the three and six months ended June 30, 2000 includes
the $150 million non-cash impairment charge recorded pursuant to SFAS 121, as
previously discussed. EBITDA decreased $158.9 million to ($148.2) million for
the three months ended June 30, 2000 as compared to $10.7 million for the three
months ended June 30, 1999. EBITDA decreased $163.6 million to ($144.7) million
for the six months ended June 30, 2000 as compared to $18.9 million for the six
months ended June 30, 1999. EBITDA as a percentage of revenues was (227.8%) and
12.5% for the three months ended June 30, 2000 and 1999, respectively, and was
(106.2%) and 11.6% for the six months ended June 30, 2000 and 1999,
respectively.
EBITDA Excluding the Impairment Charge. The following financial results
exclude the $150 million non-cash impairment charge of $150 million for the
three and six months ended June 30, 2000. EBITDA was $1.8 million and $5.3
million for the three and six months ended June 30, 2000, respectively. EBITDA
as a percentage of revenues was 2.8% and 3.9% for the three and six months ended
June 30, 2000, respectively. The decrease in EBITDA is primarily the result of
the decrease in revenues and gross profit in our IntelliMark platform, as well
as increased employee expenses such as staff health costs. EBITDA was also
effected by our planned increase in both sales and marketing expense and
recruiting expense to support our eSolutions growth plans.
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Depreciation and Amortization Expense. Depreciation and amortization
expense increased $718,000, or 24.0%, to $3.7 million for the three months ended
June 30, 2000 as compared to $3.0 million for the three months ended June 30,
1999. Depreciation and amortization expense increased $2.1 million, or 36.5%,
to $7.7 million for the six months ended June 30, 2000 as compared to $5.6
million for the six months ended June 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 for the three and six
months ended June 30, 2000 includes the $150 million non-cash impairment charge.
Operating (loss) income decreased $159.6 million to ($151.9) million for the
three months ended June 30, 2000 compared to $7.7 million for the same period
last year and decreased $165.7 million to ($152.3) million for the six months
ended June 30, 2000 compared to $13.3 million for the six months ended June 30,
1999. Operating margins were (233.5%) and 9.0% for the three months ended June
30, 2000 and 1999, respectively, and were (111.8%) and 8.2% for the six months
ended June 30, 2000 and 1999, respectively.
Operating (Loss) Income Excluding the Impairment Charge. The following
financial results exclude the $150 million non-cash impairment charge for the
three and six months ended June 30, 2000. Operating losses were ($1.9) million
and ($2.3) million for the three and six months ended June 30, 2000,
respectively. Operating margins were (2.9%) and (1.7%) for the three and six
months ended June 30, 2000, respectively. Operating (loss) income and operating
margin declined due to higher SG&A and higher depreciation and amortization
expense as discussed above.
Interest Expense. We incurred interest expense of $3.0 million for the
three months ended June 30, 2000 as compared to $2.5 million for the three
months ended June 30, 1999. Interest expense was $6.1 million and $4.3 million
for the six months ended June 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.
Net (Loss) Income From Continuing Operations. Net (loss) income for the
three and six months ended June 30, 2000 includes the $150 million non-cash
impairment charge, as previously discussed. Net (loss) income from continuing
operations decreased $105.5 million to ($102.3) million for the three months
ended June 30, 2000 as compared to $3.2 million for the same period last year.
Net margin from continuing operations was (157.3%) for the three months ended
June 30, 2000 as compared to 3.7% for the three months ended June 30, 1999. Net
income from continuing operations decreased $109.9 million to ($104.3) million
for the six months ended June 30, 2000 as compared to $5.6 million for the same
period in 1999. Net margin from continuing operations was (76.6%) for the six
months ended June 30, 2000 as compared to 3.4% for the six months ended June 30,
1999. Exclusive of the impairment charge, net loss from continuing operations
was ($3.3) million and ($5.3) million for the three and six months ended June
30, 2000, respectively. Excluding the impairment charge, net margin was (5.1%)
and (3.9%) for the three and six months ended June 30, 2000, respectively.
Net (Loss) Income Including Discontinued Operations. Net (loss) income
decreased $117.5 million to ($106.8) million for the three months ended June 30,
2000 as compared to $10.8 million for the same period last year. Net income
decreased $122.0 million to ($104.8) million for the six months ended June 30,
2000 as compared to $17.2 million for the same period in 1999. Exclusive of the
impairment charge, net loss from continuing operations was ($7.8) million and
($5.8) million for the three and six months ended June 30, 2000, respectively.
Results for eSolutions Segment
------------------------------
Revenues. Our eSolutions segment consists of Edgewater, which was acquired
effective April 1, 1999, and as previously mentioned, beginning January 1, 2000
has been managed as a separate unit as a result of the Professional/IT
restructuring initiated in the third quarter of 1999. Accordingly, this
business unit has been reported as a separate segment. Revenue for the
eSolutions segment increased $3.0 million, or 60.7%, to $8.0 million for the
three months ended June 30, 2000 compared to $5.0 for the three months ended
June 30, 1999. Revenues for the eSolutions segment were $15.1 million for the
six months ended June 30, 2000.
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EBITDA. EBITDA decreased $91,000 to $1.5 million for the three months ended
June 30, 2000 as compared to $1.6 million for the three months ended June 30,
1999. EBITDA was $2.9 million for the six months ended June 30, 2000. EBITDA
as a percentage of revenues was 18.3% and 31.2% for the three months ended June
30, 2000 and 1999, respectively, and was 19.1% for the six months ended June 30,
2000. The reduction in EBITDA and EBITDA margins was due to a planned increase
in both sales and marketing expense and recruiting expense to support
Edgewater's growth plans.
Operating Income. Operating income for the eSolutions segment decreased
$983,000, or 72.7%, to $370,000 for the three months ended June 30, 2000 as
compared to $1.4 million in the same period last year. 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. Operating income for the
eSolutions segment was $724,000 for the six months ended June 30, 2000. The
operating margin decreased from 27.3% for the three months ended June 30, 1999
to 4.6% for the three months ended June 30, 2000. The operating margin was 4.8%
for the six months ended June 30, 2000.
Results for Professional/IT Segment
-----------------------------------
Revenues. Revenues for the Professional/IT segment decreased $24.1 million,
or 29.7%, to $57.1 million for the three months ended June 30, 2000 compared to
$81.1 million for three months ended June 30, 1999. Revenues for the
Professional/IT segment decreased $36.8 million, or 23.3%, to $121.2 million for
the six months ended June 30, 2000 compared to $158.0 million for six months
ended June 30, 1999. The primary cause of the decline was the 33.4% second
quarter 2000 decline in revenue for IntelliMark, the traditional IT staffing and
solutions platform, compared to the same period in the prior year, which
resulted from a decrease in consultant headcount due to decreased demand for IT
staffing.
EBITDA. EBITDA for the three and six months ended June 30, 2000 excludes
the $150 million non-cash impairment charge recorded pursuant to SFAS 121, as
previously discussed. EBITDA decreased $7.3 million to $3.9 million for the
three months ended June 30, 2000 as compared to $11.2 million for the three
months ended June 30, 1999. EBITDA decreased $11.6 million to $8.8 million for
the six months ended June 30, 2000 as compared to $20.4 million for the same
period in the prior year. EBITDA as a percentage of revenues was 6.9% and 13.8%
for the three months ended June 30, 2000 and 1999, respectively, and was 7.2%
and 12.9% for the six months ended June 30, 2000, respectively. The EBITDA
decrease is primarily the result of the decrease in revenues and gross profit
from the IT staffing sector as well as SG&A remaining relatively flat on a
smaller revenue base.
Operating (Loss) Income. Including the nonrecurring $150 million impairment
charge, operating (loss) income for the Professional/IT segment decreased $157.3
million to ($148.6) million for the three months ended June 30, 2000 as compared
to $8.6 million for the three months ended June 30, 1999. Operating (loss)
income for the Professional/IT segment decreased $161.8 million to ($146.5)
million for the six months ended June 30, 2000 as compared to $15.4 million for
the six months ended June 30, 1999. The operating margin for the
Professional/IT segment decreased from 10.6% for the three months ended June 30,
1999 to (260.4%) for the three months ended June 30, 2000 and decreased from
9.7% for the six months ended June 30, 1999 to (120.9%) for the six months ended
June 30, 2000. Excluding the nonrecurring impairment charge of $150 million,
operating income was $1.4 million (2.4% of segment revenues) and $3.5 million
(2.9% of segment revenues) for the three and six months ended June 30, 2000.
The reduction in operating income results from the decreased IT headcount due to
reduced demand for IT staffing, as well as, higher depreciation and amortization
expenses.
Liquidity and Capital Resources
Our primary historical sources of funds are from operations, the proceeds
from securities offerings, if any, and borrowings under our 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 associates and consultants weekly for their
services, while receiving payments from customers 30 to 60 days from the date of
the invoice.
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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. Subsequent to the closing of these transactions, the Board of
Directors authorized management 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). The repurchases will be made from time to
time on the open market at prevailing market prices or in negotiated
transactions off the market.
Although all borrowings under the Credit Facility were ultimately repaid in
July with proceeds from the Robert Walters transaction and the Credit Facility
was terminated at that time, borrowings outstanding under the Credit Facility at
June 30, 2000 were $91 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 $194.2
million and $200.1 million for the three and six months ended June 30, 2000,
respectively, and net borrowings of approximately $6.2 million and $84.4 million
for the three and six months ended June 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 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.
Net cash provided by (used in) continuing operating activities was $8.4
million and $2.9 million for the three months ended June 30, 2000 and 1999,
respectively, and $3.6 million and ($13.8) million for the six months ended June
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 $201.0
million and ($19.3) million for the three months ended June 30, 2000 and 1999,
respectively. Net cash provided by (used in) investing activities was $199.9
million and ($74.7) million for the six months ended June 30, 2000 and 1999,
respectively. Cash provided by continuing investing activities was primarily
attributable to the proceeds from the sale of the Commercial segment and cash
used in continuing investing activities was primarily attributable to cash paid
for acquisitions and for additional contingent consideration paid for
acquisitions completed during prior periods.
Net cash (used in) provided by continuing financing activities was ($194.1)
million and $6.2 million for the three months ended June 30, 2000 and 1999,
respectively. Net cash (used in) provided by financing activities was ($200.0)
million and $84.8 million for the six months ended June 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.
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As a result of the above, and as a result of cash flows from discontinued
operations, our combined cash and cash equivalents increased $9.1 million and
$5.6 million for the three and six months ended June 30, 2000, respectively, and
increased $300,000 and decreased $3.2 million for the three and six months ended
June 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
possible stock repurchases as described above. 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.
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 which were used to repay a portion of
borrowings under our Credit Facility. 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 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. A portion of the proceeds were used to repay
borrowings on our Credit Facility. The remaining proceeds will be used for
general corporate purposes, to repurchase shares of our common stock and to
provide capital to our eSolutions segment.
Revenues from discontinued operations were $229.7 million and $452.8 million
for the three and six months ended June 30, 2000, respectively, and were $218.2
million and $421.7 million for the three and six months ended June 30, 1999,
respectively. Operating income from discontinued operations was $1.7 million and
$5.7 million for the three and six months ended June 30, 2000, respectively, and
was $7.5 million and $11.6 million for the three and six months ended June 30,
1999, respectively.
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 our future liquidity, our IT
business model and organization, Year 2000 compliance matters, operations,
future growth opportunities, stock repurchases and/or the possible sale of
entities comprising our Professional/IT segment. 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," "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
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may cause actual results, goals, targets or objectives to differ materially from
those contemplated, projected, forecast, estimated, anticipated, planned or
budgeted in such forward-looking statements include, among others, the following
possibilities: (1) inability to execute and close a sale of IntelliMark,
ClinForce and/or Strategic Legal Resources to a buyer or buyers (in general or
on terms acceptable to us); (2) potential miscalculations of the capital
requirements, competitive and strategic positioning and growth of the eSolutions
business; (3) inability to repurchase common stock on terms acceptable to us;
(4) declines in demand for placement (permanent or temporary) of staffing or
solutions services; (5) changes in industry trends, such as changes in the
demand for or supply of professional/information technology staffing or e-
solutions personnel, whether on a temporary or permanent placement basis; (6)
adverse developments involving debt, equity, currency or technology market
conditions; (7) failure to obtain new customers or retain significant existing
customers; (8) loss of key executives; (9) 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; (10) adverse results
in litigation matters; and/or (11) changes in industry trends and technologies
such as changes in the conduct of the business through the Internet and other
similar mediums of exchange and changes in demand for commercial or professional
IT staffing personnel, whether on a temporary or permanent placement basis.
Actual events or results may differ materially. These factors may cause our
actual results to differ materially from any forward-looking statements.
Although we believe that the expectations in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance, growth, earnings per share or achievements. However, neither we
nor any other person assumes responsibility for the accuracy and completeness of
such statements. We are under no duty to update any of the forward-looking
statements after the date of this Form 10-Q to conform such statements to actual
results.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For the three months ended June 30, 2000, we did not enter into new
arrangements, or modify existing arrangements, concerning market risk. For a
description of such existing arrangements, see Notes 8 and 9 to our audited
financial statements filed as part of our 1999 Annual Report on Form 10-K as
filed with the Commission on March 20, 2000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Foreign Currency Translation."
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, 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
plaintiffs on July 26, 2000. The Court has not yet ruled on this motion. Pending
the outcome of this motion, our answer to the consolidated complaint as to the
remaining allegations is due on August 14, 2000. We believe that this complaint
is without merit and deny all of the allegations of wrongdoing and are
vigorously defending the suit.
19
<PAGE>
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
We held our 2000 Annual Meeting of Stockholders on May 22, 2000 (the
"Meeting"). Our stockholders elected eight (8) Directors to serve until the
2001 Annual Meeting or until their successors are duly elected and qualified and
ratified and approved the StaffMark, Inc. (n/k/a Edgewater Technology, Inc.)
1999 Employee Stock Purchase Plan. Of the 29,475,842 shares of outstanding
common stock entitled to vote at the Meeting, 22,780,498 shares, or
approximately 77% of the shares entitled to vote, were represented either in
person or by proxy at the Meeting. The stockholders voted on and approved the
matters described below, with the voting results therein noted at the Meeting:
<TABLE>
<CAPTION>
Matter 1. - Election of Directors
------------------------------------------------------------------------
Authority
Name For Withheld
------------------------ ------------ ------------
<S> <C> <C>
W. David Bartholomew 20,904,876 1,875,622
Clete T. Brewer 20,701,124 2,079,374
Stephen R. Bova 20,879,594 1,900,904
Michael R. Loeb 21,069,686 1,710,812
William J. Lynch 21,070,601 1,709,897
Bob L. Martin 21,069,201 1,711,297
R. Clayton McWhorter 21,085,503 1,694,995
Charles A. Sanders, 21,080,206 1,700,292
M.D.
</TABLE>
<TABLE>
<CAPTION>
Matter 2. - Ratification and Approval
of the StaffMark, Inc. 1999 Employee Stock
Purchase Plan
-----------------------------------------------
<S> <C>
Shares Voted For 21,002,200
Shares Voted Against 1,607,427
Abstentions 150,871
</TABLE>
No other matters to be voted upon were brought before the Meeting. On July
5, 2000, Mr. Bartholomew resigned from our Board of Directors. Following the
sale of the Commercial segment, Mr. Bartholomew became the President and Chief
Executive Officer of the Commercial segment that is now owned by affiliate
entities of Stephens Group, Inc. Following Mr. Bartholomew's resignation, the
number of Director seats on our Board was reduced to seven, which are held by
the other seven Directors elected at the Meeting.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
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.
27.1 Financial Data Schedule for the three months ended June 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 April 27, 2000 relating to
our press release which was disseminated publicly on April 27, 2000.
2. A Form 8-K was filed with the Commission on May 17, 2000 relating to
our press release which was disseminated publicly on May 17, 2000.
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, 2000 /s/ CLETE T. BREWER
------------------------------------
Clete T. Brewer
Chief Executive Officer and Chairman
Date: August 14, 2000 /s/ TERRY C. BELLORA
------------------------------------
Terry C. Bellora
Chief Financial Officer
21
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
<TABLE>
<S> <C>
27.1 Financial Data Schedule for the three months ended June 30, 2000, submitted to the
Commission in electronic format.
</TABLE>
22
