BUSINESS COMBINATIONS

12 Months Ended

Dec. 31, 2011

BUSINESS COMBINATIONS

4. BUSINESS COMBINATIONS:

Acquisition of Meridian Consulting International:    On May 17, 2010, the Company acquired substantially all of the assets and liabilities of Meridian, pursuant to the terms of an Asset Purchase Agreement (the “Meridian Acquisition”). Headquartered in Chicago, Illinois, Meridian is a specialty solution provider of Oracle’s Hyperion Strategic Finance (“HSF”) product which encompasses strategic planning and forecasting, scenario modeling and mergers and acquisitions analysis. Meridian has delivered its services to organizations across various vertical markets including Energy, Higher Education, Retail and Healthcare. The acquisition of Meridian continues the investment in EPM-related service offerings and aligns with the Company’s product-centric service offering model.

The Company initially estimated total fair value of the purchase price consideration to be $2.8 million. The initial cash consideration paid at close was $1.6 million. The cash paid at closing consisted of the $1.75 million purchase price less $164 thousand attributable to a net working capital adjustment. The initial cash consideration paid by the Company was increased by $1.2 million, representing the adjusted fair value estimate of additional contingent earnout consideration that may be earned by the former stockholders of Meridian, which is described in more detail below.

In May 2011, Meridian completed its first twelve-month earnout period, during which the required performance measurements were not achieved. The former Meridian stockholders did not receive any additional contingent consideration related to the first earnout period. The Company, as of December 31, 2011, has accrued $231 thousand in potential future contingent earnout consideration payable to the former Meridian stockholders related to the completion of the second and third twelve-month earnout periods. As of December 31, 2011, the maximum amount of contingent earnout consideration that the former stockholders of Meridian can earn during the final two earnout periods is capped at $1.8 million.

In addition to the above payments, the Company incurred approximately $394 thousand in direct transaction costs, which was expensed (within selling, general and administrative expense on the consolidated statement of operations) as incurred.

The Meridian measurement period was completed by December 31, 2010. Accordingly, subsequent adjustments to the original fair value estimates are reported as a periodic operating expense. In connection with its routine periodic assessment of performance against contractually defined earnout criteria, the Company recognized credits of $400 thousand and $1.1 million (reported within selling, general and administrative expenses) relating to the changes in fair value of contingent earnout consideration, due to the underperformance of Meridian during the first and second earnout periods.

The Company allocated the purchase price between assets, liabilities and identified intangible assets based upon their estimated fair value. The allocation of the purchase price was as follows:

	Total			Life (In Years)
	(In Thousands)
Net fair value of accounts receivable	$	175
Net fair value of other assets		26
Net fair value of liabilities		(91	)
Acquired intangible assets		550			5 Years
Goodwill (deductible for tax purposes)		2,126
Total purchase price	$	2,786

The Meridian Acquisition was accounted for as a purchase transaction, and accordingly, the results of operations, commencing May 18, 2010, are included in the Company’s accompanying consolidated statement of operations.

The Company recorded total revenues of $601 thousand and a net loss of $(274) in its statement of operations for the year ended December 31, 2010 related to the Meridian business.

The following table sets forth supplemental pro forma financial information that assumes the acquisition of Meridian was completed at the beginning of 2010. The information for the year ended December 31, 2010 includes the historical results of Edgewater and Meridian. The pro forma results include estimates and assumptions regarding the amortization of intangible assets recognized as part of the acquisition and income taxes. The pro forma results, as presented, are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated, or that may result in the future.

	For the Year Ended December 31, 2010
	(In Thousands)
Pro forma revenue	$	88,820
Pro forma net loss	$	(23,678	)
Pro forma diluted net loss per share	$	(1.94	)

Acquisition of Fullscope, Inc.    In December 2009, the Company acquired all the outstanding stock of Fullscope for approximately $15.1 million cash paid at closing increased by $1.2 million representing the fair value estimate of additional contingent earnout consideration which may be earned by the former Fullscope stockholders. The Fullscope Acquisition provides Edgewater with ERP integration and related consulting service capabilities, discrete and process manufacturing expertise and extends the reach of the Company’s strategic data and analytics offerings into the upper middle market.

An earnout agreement was entered into in connection with the Fullscope Acquisition under which the former Fullscope stockholders are eligible to receive additional contingent consideration. Contingent earnout consideration to be paid, if any, to the former Fullscope stockholders will be based upon the generation of positive, after-tax income, which will be determined, periodically, over an eighteen-month period from the date of acquisition and concluding on June 30, 2011. The Company has increased total purchase price consideration described above by $1.2 million, which represents our initial fair value estimate of the contingent consideration to be paid under the earnout agreement. In connection with the routine periodic assessment of actual performance against contractually defined earnout criteria, the Company recognized $1.2 million and $300 thousand of expense in 2011 and 2010, respectively (reported as a part of selling, general and administrative expenses), relating to the change in fair value of the contingent earnout consideration, due to the performance of Fullscope during the earnout period.

During the years ended December 31, 2011 and 2010, we incurred certain non-routine professional service-related expenses associated with our identification of embezzlement activities at Fullscope, one of our wholly-owned subsidiaries (the “Fullscope Embezzlement Issue”). We incurred the majority of our embezzlement-related expenses during fiscal 2010 in connection with our identification and investigation of the embezzlement activity.

During the fourth quarter of 2011, the Company made a cash payment, in full settlement of the Fullscope contingent earnout, of $2.7 million. The payment was made to an escrow account established to facilitate the finalization of the earnout. No amounts are expected to be released to the former Fullscope stockholders prior to the conclusion of the Fullscope Embezzlement Issue and the related escrow reimbursement claims filed by the Company.

Following is a summary of the potential contingent consideration the Company may be required to pay in connection with completed acquisitions as of December 31, 2011:

		Maximum Contingent Consideration Due As of December 31, 2011
Acquisition	Original Range of Potential Undiscounted Payments	2012		2013		Total
	(In Thousands)
Meridian	$  0-$2,750	$	917	$	917	$	1,834

Following is a summary of the changes in the recorded amount of contingent consideration liabilities from December 31, 2010 to December 31, 2011 for each acquisition:

Acquisition	Beginning Balance December 31, 2010		2011 Additions/ (Payments)			Changes in Fair Value of Contingent Consideration			Ending Balance December 31, 2011
(In Thousands)
Fullscope	$	1,500	$	(2,713	)	$	1,213		$	-
Meridian		1,300		-			(1,069	)		231
Total	$	2,800	$	(2,713	)	$	144		$	231