Investors Want Edgewater Cash

Clete Brewer said his company, Edgewater Technology Inc., has been fair to its shareholders.

Some shareholders, however, say Brewer, 35, is stiffing them by hoarding $67 million for operation of the Edgewater Technology division in Wakefield, Mass., and paying himself about $1 million in severance before he turns the company over to a new CEO this summer.

Some shareholders say the company needs $5 million to $10 million to operate the Edgewater division, an Internet-solutions business. Brewer said part of the $67 million may be returned to investors in a tender offer or as a dividend this year. Currently, the company has $20 million in cash.

The company purchased the entire Edgewater Technology division for $47 million in April 1999. And word of a new, 12,000-SF house Brewer recently built in Fayetteville, where Edgewater was based, has further infuriated some investors who have lost money on the stock.

“Clete had the skills to ride a lawn mower, and his daddy gave him a Ferrari,” said Bill Owens of Shawnee, Kan., referring to Jerry Brewer, who co-founded the company in 1996 along with his son, Clete.

Owens said he personally lost $9 million on the company’s stock after Edgewater (then StaffMark Inc.) purchased Enterprise Systems Associates Inc. of Kansas City, Kan., through a stock transaction in August 1998. Owens was co-owner of ESA, an IT staffing company, along with Wendell Maness.

“Not only did he get paid well while he was overseeing the implosion of the company, but I estimate they’re paying him close to $1 million to leave,” Robert Chapman, managing member of Chapman Capital LLC, a Los Angeles-based hedge fund, said of Clete Brewer. “Where’s the justice in that?”

“I’m not going to comment on anything Bob Chapman says,” Brewer said when asked for a response.

That’s a lot more polite than J. Michael Wilson was when Chapman accused him of not returning seven of his telephone calls over a one-week period earlier this year.

According to the Feb. 12 issue of Barron’s, Wilson, who runs American Community Properties Trust of Maryland, finally called Chapman back and said, “You’re a f—-ing pain in the ass, and we don’t want to talk to you” just before hanging up the phone.

Chapman owns 9.5 percent of American Community Properties stock and says the stock, which is selling at about $5 per share would be going for $30 per share if management would just follow his advice, according to Barron’s.

Despite Chapman’s strong-arm tactics, he said many shareholders have called to say they agree with his complaints about Edgewater. And similar complaints fill Edgewater’s Yahoo! Finance message board on the Internet, although the people posting those messages can do so anonymously so it’s difficult to tell how many investors are really grousing there.

IntelliMark Loss

Chapman concedes that the staffing industry has taken a beating on Wall Street since 1998, but he said Brewer made the matter worse by buying information technology staffing businesses when they were selling for a premium, just before the Y2K dud hit on millennium eve and a flurry of layoffs sent computer nerds wonking off the job in early 2000.

Edgewater apparently lost about $112 million on the sale of it’s IntelliMark IT division alone, according to its year-end financial numbers and comments Brewer made to a reporter from the Northwest Arkansas Business Journal. Edgewater sold the IntelliMark division this past fall for $47 million. Initially, StaffMark thought IntelliMark would be the primary revenue vehicle for the company.

“He sold it all for a fraction of what he paid for it at the bottom,” Chapman said. “It appears he has a history of buying high and selling low.”

But Brewer said he did the right thing by selling off the staffing divisions.

“By selling these businesses,” he said, “our stock has performed better than our peer group during the same time period. Frankly, I think we sold our staffing businesses at the right time. I don’t think it would be good for our shareholders if we still had all that debt [$288 million] and the staffing companies.”

Brewer owned 675,250 shares of Edgewater (5.4 percent) when the Feb. 5 proxy statement was drafted for the March 14 shareholders meeting. Edgewater currently has 12.5 million outstanding shares. The largest institutional holder of Edgewater stock is T. Rowe Price Associates with 1.9 million shares.

Chapman said Brewer should have waited another three months until the sale of Edgewater’s ClinForce clinical trials division was complete to have the tender offer so that it could have included the $31 million that will be raised from the sale.

“Shareholders have been waiting for years to get this money back,” Chapman said. “What’s another couple of months?”

Other investors, like Rami Sasson, an analyst with Ladenburg Tahalmann & Co. in New York City, say it’s too early for Chapman to make such accusations. Most of that $67 million may be returned to shareholders.

“We could do a tender offer,” Brewer said of $31 million expected soon from the sale of ClinForce and a $16 million income tax return. “We could do a dividend. … Or we could keep it and make ourselves more valuable and attractive.”

Chapman said the company has said it may try to grow the Edgewater division through acquisition, so Brewer may want the money. Owens said the company needs to try to concentrate on growing the Edgewater division before acquiring any other businesses.

Metamorphosis

StaffMark Inc. was formed through an initial public offering and merger of six staffing companies in October 1996.

StaffMark grew rapidly, devouring 40 companies in three years and spreading its reach to more than 220 offices in 30 states, Canada, South Africa, Thailand and the United Kingdom before investors turned against the staffing industry in early 1999.

A year ago, on the advice of Credit Suisse First Boston, StaffMark began divesting itself of all its staffing business with the intent of keeping only the Edgewater Technology division in Wakefield.

Since then, the company sold three of its six divisions and spun another off, bringing in a total of $445 million. Of that amount, $228 million went to retire debt last year. On June 29, the corporation also changed its name from StaffMark Inc. to Edgewater Technology Inc. (EDGW on the Nasdaq exchange).

The divestitures include: Robert Walters financial and accounting division in London, was spun off bringing in $199.2 million on the London Stock Exchange; the StaffMark commercial staffing division of Fayetteville was sold for $190.1 million, to Stephens Group Inc. of Little Rock; Strategic Legal Resources, the legal support division, was sold to a company owned by a group of investors including MidMark Capital II LP and Edward Stone & Co., for $13.25 million; and IntelliMark was sold to an affiliate of Charlesbank Equity Fund V LP for about $42.7 million.

The sale of ClinForce to Cross Country TravCorps Inc. was announced on Dec. 15 and is expected to be approved by shareholders at a March 14 meeting in McLean, Va.

After the ClinForce sale, the staffing company that brought in revenue of $1.2 billion in 1999 will have been transformed into an Internet-solutions business that had sales of $31 million in 2000.

With the changes, many StaffMark investors found that they owned something other than what they had initially bought. But Brewer said the changes took place over time, and anyone paying attention would have seen this coming.

In January, Edgewater, the corporation, spent $130 million to buy 16.25 million shares of stock back from shareholders who wanted to abandon ship before the lights are turned out for the last time in the Fayetteville office and all the boxes are shipped to Wakefield, where the company will be headquartered after a vote by shareholders, also on March 14. That left the company with $20 million in cash, which Brewer said is needed to run the Edgewater Technology division.

The tender offer amounted to $8 per share. That’s twice the current selling rate of $4 per share, but only a fraction of the stock’s high price in 1998 of $44 per share. The stock was priced at $12 per share for StaffMark’s initial public offering in 1996. The price bottomed out on Feb. 20 of this year at $3.69.

Brewer, the current CEO and chairman of the board, will keep his board position after the changes, but he will relinquish the CEO job to Shirley Singleton, 48, who is currently CEO of the Edgewater Technology division in Wakefield.

The pro rata tender offer was made for 67 percent of the shares, so at least some shareholders who wanted to divest themselves entirely of Edgewater stock had to sell the remaining 33 percent at the going rate. The blended value, then, for someone who sold out completely would have been $6.56 per share.

Chapped Investor

Chapman, a self-proclaimed “shareholder activist” who says he’s often described as a “corporate raider,” has been a major shareholder of Edgewater stock and a vocal critic of Brewer. But it’s unclear whether he’s still a shareholder in the company and he refused to comment about that.

Chapman hasn’t lost money on Edgewater’s stock. In fact, he says he’s made “millions of dollars” on it.

A Jan. 22 filing with the Securities and Exchange Commission indicated Chapman had 1,076,300 shares of Edgewater.

On Dec. 28, Chapman filed a form 13D with the SEC (required because he owned 5.2 percent of Edgewater’s stock) in which he said he told Brewer “repeatedly” that “all but $5 million to $10 million of the issuer’s cash and equivalents should be distributed to … shareholders as soon as practical.”

“I use my rights as a citizen to influence management to do the right thing for shareholders,” Chapman said in a Feb. 26 interview.

Chapman sold 500,000 shares of Edgewater, lowering his stake to 3.8 percent. But he got the opportunity to blast the company again in a 13D amendment filed with the SEC on Jan. 22.

According to SEC filings, Chapman has used similar tactics against other companies in which he’s a shareholder, including American Community Properties.

When asked if he had purchased shares of Edgewater so he could file the 13D form and criticize the company, Chapman said he filed the form as a result of the purchase, not the other way around.

When asked if he was trying to manipulate the price of the stock by criticizing Edgewater’s management, Chapman replied, “That’s the stupidest question I’ve ever heard.”

Chapman then said the Business Journal should stick to the “facts” as he sees them, and if Brewer’s side of the story appeared in this report, Chapman said he wouldn’t speak to the publication in the future.