-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KjmSCHBrlgGCaW81s+QMa3zrB+MUoNI01RZ9Jjkh3xvzuQBQmqaNBYGRwh2hnFEP OTHM7VjoplJodKp2R/Silg== 0000930661-01-502283.txt : 20020410 0000930661-01-502283.hdr.sgml : 20020410 ACCESSION NUMBER: 0000930661-01-502283 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDGEWATER TECHNOLOGY INC/DE/ CENTRAL INDEX KEY: 0001017968 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 710788538 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20971 FILM NUMBER: 1780561 BUSINESS ADDRESS: STREET 1: 302 EAST MILLSAP ROAD CITY: FAYETTEVILLE STATE: AR ZIP: 72703 BUSINESS PHONE: 5019736000 MAIL ADDRESS: STREET 1: 302 EAST MILLSAP ROAD CITY: FAYETTEVETTE STATE: AR ZIP: 72703 FORMER COMPANY: FORMER CONFORMED NAME: STAFFMARK INC DATE OF NAME CHANGE: 19960702 10-Q 1 d10q.txt FORM 10-Q - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ================================================================================ FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2001 [ ] Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the transition period from ________ to ________ Commission file number: 0-20971 Edgewater Technology, Inc. (Exact Name of Registrant as Specified in its Charter) Delaware 71-0788538 - ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 20 Harvard Mill Square Wakefield, MA 01880-3209 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (781) 246-3343 - -------------------------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- The number of shares of Common Stock of the Registrant, par value $.01 per share, outstanding at November 9, 2001 was 11,607,736. ================================================================================ 1 EDGEWATER TECHNOLOGY, INC. -------------------------- FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001 -------------------------------------------------- INDEX -----
Page ---- PART I -- FINANCIAL INFORMATION Item 1 -- Financial Statements Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 3 Consolidated Statements of Operations for the Three and Nine Months Ended 4 September 30, 2001 and 2000 Consolidated Statements of Cash Flows for the Nine Months Ended 5 September 30, 2001 and 2000 Notes to Consolidated Financial Statements 6 Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations Business Overview 11 Discontinued Operations 12 Background 13 Financial Information 13 Results for the Three and Nine Months Ended September 30, 2001 Compared to Results for the Three and Nine Months Ended September 30, 2000 13 Liquidity and Capital Resources 15 Special Note Regarding Forward Looking Statements 16 Item 3 -- Quantitative and Qualitative Disclosures About Market Risk 16 PART II - OTHER INFORMATION Item 1 -- Legal Proceedings 17 Item 2 -- Changes in Securities and Use of Proceeds 17 Item 4 -- Submission of Matters to a Vote of Security Holders 17 Item 6 -- Exhibits and Reports on Form 8-K 17 (a) Exhibits (b) Reports on Form 8-K Signatures 18
2 EDGEWATER TECHNOLOGY, INC. -------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- (In Thousands, Except Shares)
September 30, December 31, 2001 2000 ------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 32,197 $ 145,581 Short-term investments 19,930 - Accounts receivable, net 3,665 5,875 Income tax receivable 800 16,121 Deferred income taxes 491 900 Prepaid expenses and other current assets 611 6,842 ------------- ------------- Total current assets 57,694 175,319 Property and equipment, net 2,091 2,174 Intangible assets, net 32,966 36,530 Deferred income taxes 22,133 25,728 Other assets 83 118 Net assets from discontinued operations (Note 4) - 14,831 ------------- ------------- Total Assets $ 114,967 $ 254,700 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 1,374 $ 2,833 Other liabilities including restructuring and discontinued operations 5,358 10,819 Payroll and related liabilities 1,195 3,195 Current portion of capital lease obligations 340 318 ------------- ------------- Total current liabilities 8,267 17,165 Long-term liabilities 98 290 Stockholders' equity: Preferred stock, $.01 par value; no shares issued or outstanding - - Common stock, $.01 par value; 11,603,611 and 28,692,766 shares issued and outstanding as of September 30, 2001 and December 31, 2000, respectively 296 296 Paid-in capital 217,774 217,838 Treasury stock, at cost (140,202) (6,158) Retained earnings 28,734 25,269 ------------- ------------- Total stockholders' equity 106,602 237,245 ------------- ------------- Total liabilities and stockholders' equity $ 114,967 $ 254,700 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 3 EDGEWATER TECHNOLOGY, INC. -------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- (In Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (Unaudited) Revenues $ 6,003 $ 8,360 $ 20,453 $ 23,416 Cost of services 3,703 4,111 11,989 11,207 ---------- ---------- ---------- ---------- Gross profit 2,300 4,249 8,464 12,209 Operating expenses: Selling, general and administrative 2,243 3,564 8,296 10,363 Depreciation and amortization 1,351 1,104 4,109 3,261 ---------- ---------- ---------- ---------- Operating income (loss) (1,294) (419) (3,941) (1,415) Interest income (expense) and other, net 376 1,773 1,753 1,138 ---------- ---------- ---------- ---------- Income (loss) before income taxes and extraordinary item (918) 1,354 (2,188) (277) Income tax provision 90 614 492 77 ---------- ---------- ---------- ---------- Net income (loss) from continuing operations (1,008) 740 (2,680) (354) Discontinued operations (Note 4): Income (loss) from operations of discontinued divisions 1,062 (8,895) (341) (106,471) Gain on sale of division - 69,733 6,514 63,558 Extraordinary item, net of applicable taxes (Note 5) 16 - (27) - ---------- ---------- ---------- ---------- Net income (loss) $ 70 $ 61,578 $ 3,466 $ (43,267) ========== ========== ========== ========== Basic earnings per share: Continuing operations $ (0.09) $ 0.03 $ (0.20) $ (0.01) ========== ========== ========== ========== Discontinued operations $ 0.10 $ 2.08 $ 0.46 $ (1.46) ========== ========== ========== ========== Extraordinary item $ - $ - $ - $ - ========== ========== ========== ========== Net income (loss) $ 0.01 $ 2.11 $ 0.26 $ (1.47) ========== ========== ========== ========== Diluted earnings per share: Continuing operations $ (0.09) $ 0.03 $ (0.20) $ (0.01) ========== ========== ========== ========== Discontinued operations $ 0.10 $ 2.08 $ 0.46 $ (1.46) ========== ========== ========== ========== Extraordinary item $ - $ - $ - $ - ========== ========== ========== ========== Net income (loss) $ 0.01 $ 2.11 $ 0.26 $ (1.47) ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 4 EDGEWATER TECHNOLOGY, INC. -------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (In Thousands)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 --------- --------- --------- --------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 70 $ 61,578 $ 3,466 $ (43,267) (Income) loss from operations of discontinued divisions (1,062) 8,895 341 106,471 Gain on sale of division - (69,733) (6,514) (63,558) Extraordinary item, net of applicable taxes (16) - 27 - --------- --------- --------- --------- Net (loss) income from continuing operations (1,008) 740 (2,680) (354) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,351 1,104 4,109 3,261 Provision for bad debts 30 6 160 6 Deferred income taxes and other, net 90 - 492 16 Change in operating accounts, net of effects of dispositions: Accounts receivable 1,936 (1,182) 2,113 (3,115) Prepaid expenses and other current assets -- 442 848 5,172 Other assets (552) 5 (552) 104 Accounts payable and accrued liabilities (148) 3,778 188 4,512 Payroll and related liabilities (10) (118) (1,688) 598 --------- --------- --------- --------- Net cash provided by (used in) operating activities 1,689 4,775 2,990 10,200 --------- --------- --------- --------- Net cash provided by (used in) discontinued operating activities 15,975 (11,858) 5,355 (902) --------- --------- --------- --------- Net cash (used in) provided by extraordinary items (51) - (431) - --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of businesses - 198,757 35,246 402,878 Purchases of businesses, net of cash acquired - - (1,200) (1,122) Capital expenditures (92) (118) (622) (246) Purchases of Short-term investments (19,930) - (19,930) - --------- --------- --------- --------- Net cash (used in) provided by investing activities (20,022) 198,639 13,494 401,510 --------- --------- --------- --------- Net cash provided by (used in) discontinued investing activities - 3,862 (33) (7,346) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings - - - 58,996 Payments on borrowings - (91,042) - (350,176) Payments on capital lease obligations (83) (57) (164) (132) Proceeds from stock option exercises - 231 143 297 Repurchases of stock (297) (6,127) (134,738) (6,127) --------- --------- --------- --------- Net cash (used in) provided by financing activities (380) (96,995) (134,759) (297,142) --------- --------- --------- --------- Net cash (used in) provided by discontinued financing activities - (3,118) - (14,407) --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents (2,789) 95,305 (113,384) 91,913 CASH AND CASH EQUIVALENTS, beginning of period 34,986 1,154 145,581 3,718 CASH AND CASH EQUIVALENTS, discontinued operations - 3,402 4,230 --------- --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period $ 32,197 $ 99,861 $ 32,197 $ 99,861 ========= ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 12 $ 867 $ 44 $ 10,044 ========= ========= ========= ========= Income taxes paid $ - $ 79 $ 180 $ 919 ========= ========= ========= ========= Borrowings on capital leases $ - $ 272 $ 68 $ 531 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 5 EDGEWATER TECHNOLOGY, INC. -------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Unaudited) 1. ORGANIZATION: ------------ Founded in 1992, Edgewater Technology is an award-winning strategic consulting firm that specializes in providing technical consulting, custom software development and system integration services to middle-market clients. We develop scalable technology solutions, which expedite business processes and provide competitive advantages for our clients. Our consultants collaborate with our clients to translate business goals into technology-driven strategies. Headquartered in Wakefield, Massachusetts, Edgewater Technology has developed a partnership approach with its clients, targeting strategic, mission-critical applications. With over 160 strategic, technical consulting professionals, Edgewater Technology services our client base by leveraging a combination of leading-edge technologies and proven reengineering techniques provided by our network of strategically positioned solutions centers in Massachusetts, New Hampshire, Arkansas, Minnesota, and North Carolina. Our full range of consulting and systems services offer exceptional advantages to our clients. We focus on business processes and long-term technology solutions to customize software applications through a multidisciplinary approach, which provides our clients with a strong return on investment and reduced operational cost. Our consultants partner with each client to design, develop and implement scalable applications that support future growth. Revenues pursuant to time and materials contracts are generally recognized as services are provided. Revenues pursuant to fixed-price contracts are generally recognized as services are rendered using the percentage-of-completion method of accounting. Revenues and earnings may fluctuate from quarter to quarter based on the number, size and scope of projects in which we are engaged, the contractual terms and degree of completion of such projects, any delays incurred in connection with a project, employee utilization rates, the adequacy of provisions for losses, the use of estimates of resources required to complete ongoing projects, general economic conditions and other factors. Certain significant estimates include percentage of completion estimates used for fixed-price contracts and the allowance for doubtful accounts. These items are frequently monitored and analyzed by management for changes in facts and circumstances and material changes in these estimates could occur in the future. Gross profit reflects revenues less direct consultant expenses whether or not the consultant's time is billed to a client. Gross margin is affected by the number of workdays in a period and consultant utilization. Any significant decline in fees billed to clients or the loss of, or any material reduction in services performed for a significant client would adversely affect our revenues, gross margins and net earnings. Selling, general and administrative expenses consist of sales and marketing, recruiting, human resources, administration salaries, commissions and related expenses, office facilities, computer system expenditures, professional fees, promotional expenses, and other general corporate expenses. On December 21, 2000, we commenced an issuer tender offer (the "Tender Offer"), which expired on January 23, 2001. As a result of the Tender Offer, we acquired (effective January 30, 2001) 16.25 million shares of our common stock at $8.00 per share for aggregate consideration of $131.1 million including fees, and common stock subject to certain vested in-the-money stock options for aggregate consideration of $0.2 million. In addition, during the first nine months of 2001, we repurchased 892,600 shares of our common stock for an average price of $4.07 per share. 2. BASIS OF PRESENTATION: --------------------- The accompanying interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to ensure the information presented is not misleading. The accompanying interim financial statements reflect all adjustments (which were of a normal, recurring nature) that, in the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows as of and for the interim periods presented. All significant intercompany transactions have been eliminated in the accompanying consolidated financial statements. Additionally, certain reclassifications have been made to prior period balances in order to 6 conform with the current period presentation. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in our 2000 Edgewater Technology, Inc. Annual Report on Form 10-K as filed with the SEC on March 30, 2001. The results of operations for the three and nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for any future period or the full fiscal year. Our revenue and earnings may fluctuate from quarter to quarter based on factors within and outside our control including variability in demand for Internet related professional services, the length of the sales cycle associated with our service offerings, the number, size and scope of our projects, and the efficiency with which we utilize our employees. 3. BUSINESS TRANSACTIONS: --------------------- Effective April 1, 1999, we acquired Edgewater Technology (Delaware), Inc. ("Edgewater"), a full-service provider of technical consulting, custom software development and system integration services located in Boston's Route 128 technology corridor. Edgewater was acquired for aggregate consideration of $ 44.6 million, of which $1.2 million was paid during the nine months ended September 30, 2001. No further payments are required under the Edgewater purchase agreement. 4. DISCONTINUED OPERATIONS: ----------------------- On June 28, 2000, pursuant to a Purchase Agreement dated May 16, 2000 with Stephens Group, Inc., we sold all of our subsidiaries, and the assets and liabilities of our Commercial staffing segment to affiliate entities of Stephens Group, Inc. As consideration, we received gross proceeds of $190.1 million in cash before fees, expenses and taxes. As part of the transaction, we sold the name "StaffMark" as that was the name used by the Commercial staffing segment. On July 13, 2000, we sold, through two indirect wholly-owned subsidiaries, all of our equity interests in Robert Walters through an initial public offering on the London Stock Exchange. Robert Walters had previously been the finance and accounting platform within our Professional/Information Technology ("IT") segment. Our two subsidiaries sold 67.2 million ordinary shares at a price of 170 pence per share (or $2.57 at then current exchange rates). The shares began trading on a conditional basis on the London Stock Exchange on July 6, 2000. On July 14, 2000, the underwriters exercised the over-allotment of 10.4 million ordinary shares. Our share of offering gross proceeds, including the exercise of the over-allotment option, was $199.2 million prior to offering commissions, fees and expenses. During the second quarter of 2000, in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," we recorded a $150 million non-cash charge for the write-down of the goodwill in our IntelliMark and Strategic Legal Resources divisions to estimated realizable values. This write-down was largely due to a decline in the revenues, gross profit and cash flow of these divisions and the overall decrease in market values within these industries. Accordingly, the carrying values of these assets were written down to management's estimates of fair value, which were based on market comparables for companies operating in similar industries. On September 22, 2000, we sold all of the outstanding stock of Strategic Legal Resources, the legal staffing platform within our Professional/IT segment, to a company owned by a group of investors including MidMark Capital II, L.P. and Edwardstone & Company for $13.25 million, of which $4.25 million was represented by a promissory note. The balance of this note was collected in January 2001. On November 16, 2000, we sold all of the outstanding shares of stock of our subsidiaries that comprised IntelliMark, our IT staffing and solutions division, to IM Acquisition, Inc., an affiliate of Charlesbank Equity Fund V Limited Partnership, for $40.2 million in cash, which consisted of $42.7 million paid at the closing date less a $2.5 million post-closing working capital adjustment paid to IM Acquisition, Inc. in April 2001. In connection with this sale, we recorded a $53.9 million non-cash charge for the write-down of the goodwill in our IntelliMark division to estimated realizable values. On December 15, 2000, we entered into a Stock Purchase Agreement to sell all of our outstanding stock in ClinForce, our clinical trials support services division, to Cross Country TravCorps, Inc. for $31.0 million in cash, before fees and expenses and subject to potential upward or downward post-closing adjustment (the "Transaction"). We held a Special Stockholders' Meeting on March 14, 2001 to approve the Transaction. After receiving approval from stockholders, the Transaction was closed on March 16, 2001. We recorded an after-tax gain of $6.5 million related to the Transaction during 7 the first quarter of 2001. On July 18, 2001, we received approximately $1.4 million from Cross Country TravCorps, Inc. pursuant to a post-closing working capital adjustment provision that was negotiated as a part of the Transaction. During the third and fourth quarters of 2000, as a result of the impending sale of our remaining businesses unrelated to our technology strategy and solutions division, we recorded nonrecurring expenses totaling approximately $3.8 million relating to our divestiture process and costs related to the closing of our former corporate headquarters (in Fayetteville, Arkansas). The move of the corporate headquarters to Wakefield, Massachusetts, where Edgewater is located, was complete during the third quarter of 2001. The restructuring expense includes future contractual obligations to certain employees, which extend through December 2001. The following is a summary of our restructuring accrual, which has been included in other liabilities including restructuring and discontinued operations in the accompanying consolidated balance sheets: (In Thousands) Restructuring expenses: Severance $ 3,003 Facility 613 Relocation 160 -------- 3,776 Less cash outlays 3,435 -------- Accrual at September 30, 2001 $ 341 ======== As a result of the completion of the transactions described above, the operating results for the Commercial staffing segment, Robert Walters, Strategic Legal Resources, IntelliMark and ClinForce have been included in discontinued operations in the accompanying consolidated financial statements. Revenues from discontinued operations were $0.0 and $7.7 million for the three and nine months ended September 30, 2001 and were $61.2 million and $635.7 million for the three and nine months ended September 30, 2000, respectively. Operating loss from discontinued operations was $0.0 and $1.6 million for the three and nine months ended September 30, 2001 and was $3.0 million and $141.0 million for the three and nine months ended September 30, 2000, respectively. Net assets from discontinued operations in the accompanying balance sheets represent the net assets of the discontinued operations for ClinForce as of December 31, 2000. (In Thousands) Accounts receivable, net $ 4,689 Prepaid expenses and other current assets (857) Property and equipment, net 404 Intangible assets, net 11,779 Other assets 30 Accounts payable and accrued liabilities (67) Payroll and related liabilities (1,147) --------- Net assets from discontinued operations $ 14,831 ========= 8 5. EXTRAORDINARY ITEM - WAKEFIELD TRAGEDY: -------------------------------------- On December 26, 2000, a tragedy occurred at our Wakefield, Massachusetts office, where seven employees were murdered. As a result of this tragedy, the Wakefield office was closed during the last week of December 2000. From December 2000 through the first nine months of 2001, we incurred expenses totaling approximately $1.0 million for items such as legal fees, foundation costs, family and employee counselors, and property and facility expenses. These costs are presented as an extraordinary item, net of insurance proceeds of $0.3 million and the applicable tax effect, in the accompanying consolidated statements of operations. 6. EARNINGS PER COMMON SHARE: ------------------------- A reconciliation of net income (loss) and weighted average shares used in computing basic and diluted earnings per share is as follows:
Three Months Nine Months Ended September 30, Ended September 30, 2001 2000 2001 2000 -------- -------- --------- -------- (In Thousands, Except Per Share Data) Basic earnings per share: Net income (loss) applicable to common shares $ 70 $ 61,578 $ 3,466 $ (43,267) ========= ========= ========= ========= Weighted average common shares outstanding 11,629 29,175 13,275 29,387 ========= ========= ========= ========= Basic earnings (loss) per share of common stock $ 0.01 $ 2.11 $ 0.26 $ ( 1.47) ========= ========= ========= ========= Diluted earnings per share: Net income (loss) applicable to common shares $ 70 $ 61,578 $ 3,466 $ (43,267) ========= ========= ========= ========= Weighted average common shares outstanding 11,629 29,175 13,275 29,387 Dilutive effect of stock options - 58 - 105 --------- --------- --------- --------- Weighted average common shares, assuming dilutive effect of stock options 11,629 29,233 13,275 29,492 ========= ========= ========= ========= Diluted earnings (loss) per share of common stock $ 0.01 $ 2.11 $ 0.26 $ ( 1.47) ========= ========= ========= =========
Options to purchase approximately 4.5 million shares of common stock (at prices ranging from $4.00 to $39.63 per share) were outstanding during the three and nine months ended September 30, 2001, respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of our common shares. These options were still outstanding as of September 30, 2001. Options to purchase approximately 3.1 million shares of common stock (at prices ranging from $6.30 to $40.31 per share) and 3.0 million shares of common stock (at prices ranging from $7.18 to $40.31 per share) were outstanding during the three and nine months ended September 30, 2000, respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of our common shares. Options outstanding under the Amended and Restated 1996 Edgewater Stock Option Plan (the "Plan") vested 100% upon the closing of the Transaction as this constituted a "Change in Control" as defined in the Plan, except for 1.1 million stock options granted under the Plan to officers of our technology strategy and solutions division in August 2000. Although most options expire ten years from the date of grant, approximately 1.4 million options held by employees of the Commercial segment and IntelliMark were terminated on April 16, 2001, which was 30 days following the "Change in Control." Employees of ClinForce held approximately 0.1 million options, which were terminated on June 14, 2001, which was 90 days following the "Change in Control." 9 7. SEGMENT INFORMATION: ------------------- As a result of the divestiture transactions described in Note 4, Edgewater Technology, the consulting and systems integration division, now represents our only segment of business; therefore no segment data has been provided. 8. RELATED PARTY: ------------- Synapse Group, Inc., a significant customer, which accounted for 45.0% and 37.9% of our revenues for the three and nine months ended September 30, 2001, is considered a related party as their President and Chief Executive Officer Michael Loeb is also a member of our Board of Directors. 9. NEW ACCOUNTING PRONOUNCEMENTS: ----------------------------- In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", which improves the transparency of the accounting and reporting for business combinations by requiring that all business combinations be accounted for under the purchase method of accounting. This statement is effective for all business combinations initiated after June 30, 2001. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement applies to intangibles and goodwill acquired after June 30, 2001, as well as goodwill and intangibles previously acquired. Under this statement, goodwill, as well as other intangibles determined to have an infinite life, will no longer be amortized; however, these assets will be reviewed for impairment on a periodic basis. This statement becomes effective January 1, 2002. As a result of these accounting pronouncements, at the end of our fiscal year December 31, 2001, we will discontinue amortizing intangible assets related to goodwill and will periodically review the assets for impairment. Our goodwill amortization expense for first nine months of 2001 totaled $3.1 million, of which $1.0 million related to the three months ended September 30, 2001. Our total unamortized goodwill as of September 30, 2001 was $31.4 million. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", and the accounting and reporting provisions of APB No. 30. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and is effective for fiscal years beginning after December 15, 2001, and interim periods with those fiscal years. The Company is currently reviewing this statement to determine its effect on the Company's financial statements. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Business Overview Founded in 1992, Edgewater Technology is an award-winning strategic consulting firm that specializes in providing technical consulting, custom software development and system integration services to middle-market clients. We develop scalable technology solutions, which expedite business processes and provide competitive advantages for our clients. Our consultants collaborate with clients to translate business goals into technology-driven strategies. Headquartered in Wakefield, Massachusetts, Edgewater Technology has developed a partnership approach with our clients, targeting strategic, mission-critical applications. With over 160 strategic, technical consulting professionals, Edgewater Technology services our client base by leveraging a combination of leading-edge technologies and proven reengineering techniques provided by our network of strategically positioned solutions centers in Massachusetts, New Hampshire, Arkansas, Minnesota, and North Carolina. Edgewater Technology offers an end-to-end platform of technology-driven business solutions to assist organizations tackle the barriers of technology transition, including: (1) Strategy -- Our consulting services aid customers in translating business goals into technology-driven strategies by taking full advantage of Internet and other technologies. Strategy services include analyzing a customer's market, business processes and existing technology infrastructure, evaluating both packaged and custom alternative solutions and formulating recommendations for a solution or strategy. Edgewater then provides a tactical road map that customers can implement immediately. (2) Solutions -- We design, build, and deploy large-scale enterprise-wide systems. Edgewater Technology's solutions services include developing and implementing custom applications as well as "blend-in" packaged applications to create flexible, scalable custom solutions that integrate a customer's Web presences, customer service and back-office legacy systems into technology-driven applications. (3) Support -- We provide a spectrum of post-deployment support services, including Internet application outsourcing, site maintenance and 7x24 hour monitoring. Since our inception in 1992, Edgewater Technology has focused on five key core values that differentiates it from the competition: (1) Delivery Excellence -- We have an enviable delivery history that is built upon nine years of proven methodology and processes. Our delivery excellence is a derivative of a well-defined business plan, highly trained professionals, strong technical expertise, established implementation and support methodologies and most importantly, effective and continued communication throughout the entire process. (2) Strong Operational Metrics - Since our founding in 1992, Edgewater Technology's original management team has built an organization that is defined by a record of operational excellence, using electronic processes and systems to manage our consultant resources, and disciplined financial practices resulting in above average utilization, gross profit and a strong balance sheet. (3) Technology Excellence - We extend proven key strategic technologies through the focus of vertical business practices to build scalable custom solutions providing a solid return on the investment and thereby competitive advantage to the clients. Edgewater's area of technical expertise include Web-based solutions, architectural strategy, Internet/Intranet/Extranet; e-commerce; computer telephony, transaction processing and legacy systems integration. (4) Middle-Market Focus -- We are positioned to serve the technology needs of the middle-market through our strategy of positioning solutions centers in the second-tier cities in which middle-market enterprises typically reside. The middle-market, defined as companies and/or subsidiaries of large corporations with $50 million to $1 billion in revenue, is a large growing segment of the economy. (5) Vertical Expertise -- We bring vertical industry knowledge together with a broad base of key strategic technologies. Edgewater uses an iterative development methodology, with a focus on quality assurance and project management, to achieve rapid deployment capability and success in assisting organizations move through the barriers of technology transition. The primary vertical markets where we have developed core competencies and deliver our products and services include Financial Services (retail banking; insurance; portfolio/asset management); 11 Health Care; Transportation/Logistics (eTail/Retail; Trucking Transportation) and Emerging Markets (food/agriculture; education). Discontinued Operations Our financial statements reflect discontinued operations arising as a result of the following sale transactions: . On June 28, 2000, pursuant to a Purchase Agreement dated May 16, 2000 with Stephens Group, Inc., we sold all of our subsidiaries, and the assets and liabilities of our Commercial segment to affiliate entities of the Stephens Group, Inc. As consideration, we received gross proceeds of $190.1 million in cash before fees, expenses and taxes. As part of the transaction, we sold the name "StaffMark" as that was the name used by the Commercial segment. As a result of the transaction, we changed our name from "StaffMark, Inc." to "Edgewater Technology, Inc." and our stock symbol from "STAF" to "EDGW." The proceeds from this transaction were used to repay a portion of our outstanding borrowings under our credit facility. . On July 13, 2000, we sold, through two indirect wholly-owned subsidiaries, all of our equity interest in Robert Walters through an initial public offering on the London Stock Exchange. Robert Walters had previously been the finance and accounting placement and staffing consultancy platform within our Professional/IT segment. Our two subsidiaries sold 67.2 million ordinary shares at a price of 170 pence per share (or $2.57 at then current exchange rates). The shares began trading on a conditional basis on the London Stock Exchange on July 6, 2000. On July 14, 2000, the underwriters exercised the over-allotment of 10.4 million ordinary shares. Our share of offering gross proceeds, including the exercise of the over-allotment option, was $199.2 million prior to offering commissions, fees and expenses. After repaying the remaining outstanding borrowings under our credit facility, approximately $90 million was invested in short-term securities. . On September 22, 2000, we sold all of the outstanding stock of Strategic Legal Resources, the legal staffing division within our Professional/IT segment, to a company owned by a group of investors including MidMark Capital II, L.P. and Edwardstone & Company for $13.25 million, of which $4.25 million was represented by a promissory note that was collected in January 2001. . On November 16, 2000, we sold all of the outstanding shares of stock of our subsidiaries that comprised IntelliMark, our IT staffing and solutions division, to IM Acquisition, Inc., an affiliate of Charlesbank Equity Fund V Limited Partnership, for $40.2 million in cash, which consisted of $42.7 million paid at the closing date less a $2.5 million post-closing adjustment paid to IM Acquisition, Inc. in April 2001. . On December 15, 2000, we executed a definitive agreement to sell ClinForce, our clinical trials support services division, to Cross Country TravCorps for approximately $31.0 million in cash, subject to potential upward or downward post-closing adjustments (the "Transaction"). As the closing of the Transaction was conditioned upon our receipt of stockholder approval and the satisfaction of other customary conditions to closing, we held a Special Stockholders' Meeting on March 14, 2001, where our stockholders approved the Transaction. We consummated the Transaction and received proceeds on March 16, 2001. On July 18, 2001, we received approximately $1.4 million from Cross Country TravCorps, Inc. with respect to the post-closing working capital purchase price adjustment. In accordance with Emerging Issues Task Force No. 95-18, we have reported ClinForce's operating results in discontinued operations for the periods presented. In addition, nonrecurring restructuring charges relating to the closing of our corporate headquarters (in Fayetteville, Arkansas) have been included, as a result of the sale of ClinForce and consistent with the treatment of ClinForce results, as a part of discontinued operations. As a result of the completion of the above sale transactions, the operating results for the Commercial staffing segment, Robert Walters, Strategic Legal Resources, IntelliMark and ClinForce have been included in discontinued operations in the accompanying consolidated financial statements. Revenues from discontinued operations were $0.0 and $7.7 million for the three and nine months ended September 30, 2001 and were $61.2 million and $635.7 million for the three and nine months ended September 30, 2000, respectively. Operating loss from discontinued operations was $0.0 and $1.6 million for the three and nine months ended September 30, 2001 and was $3.0 million and $141.0 million for the three and nine months ended September 30, 2000, respectively. 12 Background Revenues pursuant to time and materials contracts are generally recognized as services are provided. Revenues pursuant to fixed-price contracts are generally recognized as services are rendered using the percentage-of-completion method of accounting. Revenues and earnings may fluctuate from quarter to quarter based on the number, size and scope of projects in which we are engaged, the contractual terms and degree of completion of such projects, any delays incurred in connection with a project, employee utilization rates, the adequacy of provisions for losses, the use of estimates of resources required to complete ongoing projects, general economic conditions and other factors. Certain significant estimates include percentage of completion estimates used for fixed-price contracts and the allowance for doubtful accounts. These items are frequently monitored and analyzed by management for changes in facts and circumstances and material changes in these estimates could occur in the future. Gross profit reflects revenues less direct consultant expenses whether or not the consultant's time is billed to a client. Gross margin is affected by the number of workdays in a period and consultant utilization. Any significant decline in fees billed to clients or the loss of, or any material reduction in services performed for, a significant client would adversely affect our revenues, gross margins and net earnings. Selling, general and administrative expenses consist of sales and marketing, recruiting, human resources, and administration salaries, commissions and related expenses, office facilities, computer system expenditures, professional fees, promotional expenses, and other general corporate expenses. Financial Information The financial information provided below has been rounded in order to simplify its presentation. The amounts and percentages below have been calculated using the detailed financial information contained in the audited financial statements, the notes thereto and the other financial data included in this Quarterly Report on Form 10-Q. Earnings before interest, taxes, depreciation and amortization ("EBITDA") is included in the following discussion because we believe the year-to-year change in EBITDA is a meaningful measure since the non-cash expenses of depreciation and amortization have a significant impact on operating income (loss) and operating margins. EBITDA should not be construed as an alternative measure of the amount of our income or cash flows from operating activities as EBITDA excludes certain significant costs of doing business. Results For The Three and Nine Months Ended September 30, 2001 Compared To Results For The Three and Nine Months Ended September 30, 2000 Revenues. Revenues for the three months ended September 30, 2001 decreased $2.4 million, or 28%, to $6.0 million compared to $8.4 million for the three months ended September 30, 2000. Revenues decreased $2.9 million, or 13%, to $20.5 million for the nine months ended September 30, 2001 compared to $23.4 million for the nine months ended September 30, 2000. Revenues decreased primarily due to an economic slowdown that has affected spending for information technology services resulting in postponed or delayed projects. For the three months ended September 30, 2001 and 2000, one and three customers each contributed more than 10% of revenues. For the nine months ended September 30, 2001 and 2000, one and three customers each contributed more than 10% of revenues. Our project backlog as of September 30, 2001 was $17.3 million, an increase of 37% over the same period last year and includes $11.9 million of services to be delivered in 2002. Cost of Services. Project personnel costs consist principally of salaries, payroll taxes, employee benefits and un-reimbursed travel expenses for personnel dedicated to client projects. These costs represent the most significant expense we incur in providing our services. Project personnel costs decreased $0.4 million, or 10%, to $3.7 million for the three months ended September 30, 2001 compared to $4.1 million for the three months ended September 30, 2000. For the nine months ended September 30, 2001 project personnel costs increased $0.8 million, to $12.0 million compared to $11.2 million during the same period a year ago. Utilization is a function of our ability to utilize our billable professionals and generate revenues. Our utilization rates have been historically above 80%, but have declined to 69% during the current quarter, resulting in lower gross profit and gross margin as compared to previous periods. This decrease is primarily the result of lower revenues and the planned retention of our non-utilized consultant base in order to effectively respond to increased demand for the consulting, software development and integration services we provide. 13 Gross Profit. Gross profit for the three months ended September 30, 2001 decreased $1.9 million, or 46%, to $2.3 million compared to $4.2 million for the three months ended September 30, 2000. Gross profit decreased $3.7 million, or 31%, to $8.5 million for the nine months ended September 30, 2001 compared to $12.2 million for the nine months ended September 30, 2000. The decrease in gross profit directly relates to the decrease in revenues and utilization during the period. Gross profit margin for the three and nine months ended September 30, 2001 was 38.3% and 41.4%, respectively, compared to 50.8% and 52.1% during the same periods one year ago. SG&A. Selling, general and administrative expenses ("SG&A") decreased $1.4 million, or 39%, to $2.2 million for the three months ended September 30, 2001 compared to $3.6 million for the three months ended September 30, 2000. SG&A decreased $2.1 million, or 20%, to $8.3 million for the nine months ended September 30, 2001 compared to $10.4 million for the nine months ended September 30, 2000. SG&A as a percentage of revenue was 37.4% and 42.6% for the three months ended September 30, 2001 and 2000, respectively, and was 40.6% and 44.3% for the nine months ended September 30, 2001 and 2000, respectively. SG&A decreased primarily as a result of our scheduled reduction in corporate staff, which was due to the divestiture of our businesses unrelated to our technology strategy and solutions division. EBITDA. EBITDA decreased $.6 million to $0.1 million for the three months ended September 30, 2001 as compared to $0.7 million for the same period in 2000. EBITDA decreased $1.6 million to $0.2 million for the nine months ended September 30, 2001 as compared to $1.8 million for the comparable period in 2000. EBITDA as a percentage of revenues was 1.0% and 8.2% for the three months ended September 30, 2001 and 2000, respectively, and was .8% and 7.9% for the nine months ended September 30, 2001 and 2000, respectively. The decrease in EBITDA and EBITDA margins is primarily the result of the economic slowdown, which resulted in lower revenues, and higher project personnel costs associated with our planned retention of non-utilized consultant base which were in part offset by decreased SG&A as described above. As our consultant costs are relatively fixed, the loss of revenue resulting from the Wakefield tragedy directly affected our gross profit, EBITDA and operating loss results. Depreciation and Amortization Expense. Depreciation and amortization expense increased $0.3 million to $1.4 million for the three months ended September 30, 2001 as compared to $1.1 million for the same period last year. Depreciation and amortization expense increased $.8 million to $4.1 million for the nine months ended September 30, 2001 as compared to $3.3 million for the nine months ended September 30, 2000. These increases are a result of our reallocation of Edgewater's purchase price between goodwill and intangible assets during the fall of 2000. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under this statement, goodwill, as well as other intangibles determined to have an infinite life, will no longer be amortized; however, these assets will be reviewed for impairment on a periodic basis. This statement is effective beginning January 1, 2002. Accordingly, at the end of our fiscal year December 31, 2001 we will discontinue amortizing our intangible assets related to goodwill and will periodically review the assets for impairment. Our goodwill amortization expense for first nine months of 2001 totaled $3.1 million, of which $1.0 million related to the three months ended September 30, 2001. Our unamortized goodwill as of September 30, 2001 was $31.4 million. Operating Loss. Operating loss increased $0.9 million to $1.3 million for the three months ended September 30, 2001 compared to $0.4 million for the same period last year. Operating loss increased $2.5 million to $3.9 million for the nine months ended September 30, 2001 compared to $1.4 million for the comparable period in 2000. Operating losses increased from the prior year primarily due to lower revenues, gross profit and higher amortization expense as discussed above. Interest Income (Expense), Net. We earned net interest income of $0.4 million and $1.7 million for the three and nine months ended September 30, 2001, respectively, as compared to net interest income of $1.0 million and $0.3 million for the three and nine months ended September 30, 2000, respectively. Historically, interest expense was primarily related to borrowings on our credit facility to fund working capital requirements, the cash portion of our acquisitions and additions to property and equipment. Using the proceeds from the sale of our various divisions, all borrowings were repaid in July 2000 and excess cash amounts were placed in cash and short-term investments, used to fund the Tender Offer, repurchase shares of our common stock under our stock purchase program and for general corporate purposes. 14 Net (Loss) Income From Continuing Operations. We recognized a net loss from continuing operations of $1.0 million for the three months ended September 30, 2001 compared to net income from continuing operations of $0.7 million for the three months ended September 30, 2000. Net loss from continuing operations increased $2.3 million to $2.7 million for the nine months ended September 30, 2001 as compared to net loss of $0.4 million for the comparable period in 2000. Net margin from continuing operations was (16.8%) and 8.9% for the three months ended September 30, 2001 and 2000, respectively, and was (13.1%) and (1.5%) for the nine months ended September 30, 2001 and 2000, respectively. In addition to the matters discussed above, the net losses from continuing operations in the current year were negatively affected by the tax provisions of $0.1 million and $0.5 million for the three and nine months ended September 30, 2001, respectively, which is the result of non-deductible goodwill amortization. The federal taxes are not expected to be paid out in cash, as we plan to utilize net operating loss carryforwards to offset taxable income. Our tax losses relate to the sale of our businesses unrelated to our technology strategy and solutions division and resulted in a deferred tax asset of $22.6 million for use to offset taxable income in future years and a current tax receivable of approximately $0.8 million for VAT tax claims related to the sale of Robert Walters. A Look Ahead. Our project backlog, as of October 24, 2001 was $18.9 million, of which $13.1 million relates to 2002 revenues. We will maintain our focus on developing new client relationships and will continue to provide impeccable delivery while being diligent with our business practices. We plan to grow both organically and through strategic acquisition opportunities that would augment our vertical businesses and/or increase our geographic presence. Liquidity and Capital Resources Our primary historical sources of funds are from operations, the proceeds from securities offerings and borrowings under our former credit facility with a consortium of banks. Our principal historical uses of cash have been to fund acquisitions, working capital requirements and capital expenditures. We generally pay our consultants and associates bi-weekly for their services, while receiving payments from customers 30 to 60 days from the date of the invoice. The gross proceeds from the Commercial segment and Robert Walters transactions were used to repay our outstanding borrowings under the credit facility of approximately $288 million. The remaining transaction proceeds were invested in cash and short-term marketable securities and were used to fund the Tender Offer, repurchase shares of our common stock under our stock purchase program and for general corporate purposes. In July 2000, the Board of Directors authorized management, subject to legal requirements, to use up to $30 million to repurchase our common stock over a twelve month period (unless shortened or extended by the Board of Directors). Our repurchase program was again extended by the Board of Directors on August 23, 2001 for an additional twelve months for repurchases of up to $20.0 million. Repurchases have been and will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. Under this program during 2000, we repurchased 944,000 shares of our common stock for approximately $6.2 million. From January 1, 2001 through September 30, 2001, we repurchased 892,600 shares of our common stock for approximately $3.6 million. The credit facility was secured by all of the issued and outstanding capital stock of our domestic subsidiaries and 65% of the issued and outstanding capital stock of our first-tier foreign subsidiaries. Interest on any borrowings was computed at our option of either the bank group's prime rate or the London InterBank Offering Rate, incrementally adjusted based on our operating leverage ratios. We paid a quarterly facility fee determined by multiplying the total amount of the credit facility by a percentage, which varied based on our operating leverage ratios. Under the credit facility, we had net payments of $91.0 million and $291.2 million for the three and nine months ended September 30, 2000, respectively. In July 2000, we paid-off all of our outstanding borrowings under the credit facility and terminated the credit facility. Net cash provided by continuing operating activities was $1.7 million and $4.8 million for the three months ended September 30, 2001 and 2000, respectively, and was $3.0 million and $10.0 million for the nine months ended September 30, 2001 and 2000, respectively. The net cash provided by continuing operating activities for the periods presented was primarily attributable to net (loss) income and changes in operating assets and liabilities. Net cash provided by (used in) continuing investing activities was ($20.0) million and $198.6 million for the three months ended September 30, 2001 and 2000, respectively, and was $13.5 million and $401.5 million for the nine months ended September 30, 2001 and 2000, respectively. Cash provided by continuing investing activities was primarily attributable to the proceeds from the sale of our various businesses unrelated to our technology strategy and solutions 15 division. Cash used in continuing investing activities was primarily attributable to cash paid for contingent consideration for acquisitions completed during prior periods as well as capital expenditures. Net cash used in continuing financing activities was $0.4 million and $97.0 million for the three months ended September 30, 2001 and 2000, respectively, and was $134.8 million and $297.1 million for the nine months ended September 30, 2001 and 2000, respectively. For the nine months ended September 30, 2001, cash used in continuing financing activities was primarily related to the Tender Offer in January 2001 to repurchase 16.25 million shares of common stock for approximately $131.1 million. For the three and nine months ended September 30, 2000, cash used in financing activities was primarily related to repayments on our credit facility. Net cash provided by discontinued operations was $16.0 million and $5.4 million for the three months and nine months ended September 30, 2001, respectively. These amounts relate to expenses incurred or accrued related to discontinued operations and tax refunds received during the third quarter. As a result of the above, and as a result of cash flows from discontinued operations, our combined cash and cash equivalents decreased $2.8 million and $113.4 million for the three and nine months ended September 30, 2001, respectively, and increased $95.3 million and $91.9 million in the three and nine months ended September 30, 2000, respectively. We believe that our cash flows from operations and available cash will provide sufficient liquidity for our existing operations for the foreseeable future. We periodically reassess the adequacy of our liquidity position, taking into consideration current and anticipated operating cash flow, anticipated capital expenditures, business combinations, and public or private offerings of debt or equity securities. Special Note Regarding Forward Looking Statements Some of the statements in this Quarterly Report on Form 10-Q (this "10-Q") constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements made with respect to significant customers, revenues, backlog, competitive and strategic initiatives, growth plans, potential stock repurchases, future results, tax consequences liquidity needs and litigation matters. These statements involve known and unknown risks, uncertainties and other factors that may cause results, levels of activity, growth, performance, tax consequences or achievements to be materially different from any future results, levels of activity, growth, performance, tax consequences or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed below, as well as those further set forth (A) under the headings "Summary - Risks of Not Approving the Transaction", "Summary - Recent Events", " Edgewater Following Completion of the Transaction", "Factors Affecting Edgewater Following the Transaction" and "Forward Looking Statements" in our Proxy Statement filed with the Securities and Exchange Commission on February 6, 2001 and (B) under the heading "Business - Factors Affecting Finances, Business Prospects and Stock Volatility" in our 2000 Annual Report on Form 10-K as filed with the SEC on March 30, 2001. The forward-looking statements included in this Form 10-Q relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "believe," "enable" "will," "provide," "anticipate," "future," "could," "growth," "increase," "modifying," "reacting," or the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on our current plans or assessments which are believed to be reasonable as of the date of this 10-Q. Factors that may cause actual results, financial statement effects, disposition plans or proceeds, goals, targets, objectives or repurchases to differ materially from those contemplated, projected, forecast, estimated, anticipated, planned or budgeted in such forward-looking statements include, among others, the following possibilities: (1) inability to execute upon growth objectives; (2) changes in industry trends, such as decline in the demand for Solutions, Strategy and Support services; (3) failure to obtain new customers or successfully retain significant existing customers; (4) loss of key executives; (5) general economic and business conditions (whether foreign, national, state or local) which include, but are not limited to, slowdown in information technology services spending; (6) failure of the general economy or IT services spending to rebound or otherwise improve; (7) lack of attractive growth opportunities; (8) the inability to grow revenues, backlog, utilization or market share; (9) the strength or visibility of the company's backlog of business; (10) inability to recruit and retain professionals with the high level of information technology skills and experience needed to provide our services; (11) any changes in ownership that would result in a limitation on the use of the net operating loss carry-forward under applicable tax laws, which is referred to as a deferred tax asset of approximately $22.1 million in this Form 10-Q; and (12) an adverse finding, outcome or result with respect to the matter described in Part II, Item I, "Legal Proceedings" of this 10-Q involving our company, Staffmark Investment, LLC and affiliates of Staffmark Investment, LLC. Actual events or results may differ materially. These factors may cause our actual results to differ materially from any forward-looking statements. 16 Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, growth, earnings per share or achievements. However, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our primary financial instruments include investments in money market funds, short-term municipal bonds, commercial paper and U.S. government securities that are sensitive to market risks and interest rates. The investment portfolio is used to preserve our capital until it is required to fund operations or to fund strategic acquisitions. None of our market-risk sensitive instruments are held for trading purposes. We do not purchase derivative financial instruments. PART II Item 1. Legal Proceedings On August 15, 2001, we filed a lawsuit in Delaware Chancery Court (the "Delaware Action") against Staffmark Investment, LLC and a number of its Delaware subsidiaries (collectively, the "LLC"). The LLC is a majority owned subsidiary of Stephens Group, Inc. (the "Stephens Group"), which purchased our company's commercial staffing business on June 28, 2000 (the "Commercial Sale") pursuant to a purchase agreement dated May 16, 2000 (the "Purchase Agreement") involving our company and the Stephens Group. In the Delaware Action, we are requesting the Delaware Chancery Court to interpret the Purchase Agreement and agree with our conclusion that our company has no contractual or other responsibility to the LLC under or in connection with the Purchase Agreement. In the Delaware Action, we also request the court to prohibit and otherwise enjoin any claims by the LLC under or in connection with the Purchase Agreement, which is governed by Delaware law. On August 23, 2001, the LLC and the Stephens Group filed a lawsuit in Washington County Circuit Court in Arkansas against our company (the "Arkansas Action"), seeking in excess of $13 million of alleged actual, incidental and consequential damages and not less than $25 million of alleged punitive damages concerning alleged breaches and alleged misrepresentations, respectively, under and in connection with the Purchase Agreement. We believe that the Arkansas Action is without merit and deny all of the allegations involving breach of contract and misrepresentation in the Arkansas Action. Our company will vigorously pursue the Delaware Action and vigorously defend the Arkansas Action. The parties in both the Delaware Action and the Arkansas Action, with the concurrence of both courts, have agreed to a motion and briefing calendar to determine the forum for these litigation matters in the near future. We are also a party to litigation incidental to our business. We believe that these routine legal proceedings will not have a material adverse effect on the results of operations or financial condition of our company. We maintain insurance in amounts, with coverages and deductibles that we believe are reasonable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11.1 Statement re: computation of per share earnings, reference is made to Note 6 of the Edgewater Technology, Inc. Consolidated Financial Statements contained in this Form 10-Q. (b) Reports on Form 8-K None 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EDGEWATER TECHNOLOGY, INC. Date: November 9, 2001 /s/ CLETE T. BREWER ------------------------------ Clete T. Brewer Chairman and Chief Executive Officer Date: November 9, 2001 /s/ TERRY C. BELLORA ------------------------------ Terry C. Bellora Chief Financial Officer 18 -----END PRIVACY-ENHANCED MESSAGE-----